Lovesac Co quarterly report, Q1 FY2021

The Lovesac Company — Q1 FY2021 Form 10-Q

Reporting period: Thirteen weeks ended May 3, 2020; comparisons are to the thirteen weeks ended May 5, 2019. The quarter is seasonal and is not necessarily indicative of full-year results. Lovesac designs and sells modular furniture and accessories through showrooms, its website, and wholesale and pop-up channels.

Financial results and liquidity

Revenue grew 32.8%. Operating expenses were $35.7 million, including $25.8 million of SG&A, $8.2 million of advertising and marketing, and $1.6 million of depreciation and amortization. Operating and net losses narrowed year over year, while gross margin declined 110 basis points. Adjusted EBITDA, a non-GAAP measure, was a loss of $5.7 million versus a loss of $4.7 million.

Cash and cash equivalents were $45.5 million at May 3, down from $48.5 million at February 2, 2020. Working capital was $59.6 million. The company had no line-of-credit borrowings and reported $11.4 million of borrowing availability under its $25 million Wells Fargo revolving facility. Total liabilities were $35.5 million. Cash used in investing was $2.3 million, primarily for property, equipment, patents and trademarks; cash used in financing was $0.2 million. Management said cash, expected operating cash flows and credit availability should meet working capital and anticipated capital needs for at least 12 months.

Material changes and operating trends

• Internet sales rose 255.4% to $30.1 million, or 55.3% of sales, compared with $8.5 million and 20.7% a year earlier. Showroom sales fell 32.7% to $18.1 million, reflecting COVID-19 closures. Other-channel sales were $6.2 million, up 11.0%.
• Sactionals sales increased to $43.8 million from $32.8 million; Sac sales rose to $9.7 million from $5.9 million.
• Gross margin pressure reflected higher distribution and tariff-related costs (about 300 basis points), partly offset by lower product costs from vendor negotiations and sourcing shifts from China to Vietnam and Malaysia (about 190 basis points).
• SG&A increased 8.3% in dollars but declined to 47.5% of sales from 58.3%, reflecting sales leverage and lower equity compensation, partly offset by higher employment, sales-related and infrastructure expenses. Advertising and marketing increased 52.1% and rose to 15.1% of sales from 13.2%.

COVID-19, outlook and other matters

The company closed all 91 showrooms on March 18, 2020, and reported beginning to reopen locations safely under government and health guidance. COVID-19 also led to the closure of shop-in-shops and cancellation of 89 planned Costco pop-up shops during the quarter. The company reduced its workforce by approximately 445 part-time employees, about 57% of total headcount, temporarily cut certain executive and other compensation, and reduced board fees. Management said further measures could be taken to protect liquidity.

Management expected FY2021 gross margin to be slightly above FY2020, citing continued vendor negotiations and sourcing changes; it cautioned that 25% tariffs would continue to affect margin percentage. The company also expected to invest in infrastructure over the next 18 months. No specific revenue or earnings guidance was provided.

Operating lease commitments totaled $74.6 million, including $8.9 million due in the remainder of FY2021; the company expects lease accounting adoption to materially affect its balance sheet. Potential executive severance exposure was $3.2 million if covered executives were terminated without cause. Management did not expect ordinary-course legal proceedings to have a material adverse effect. Related-party fees and transactions included management services and Blueport platform fees. The filing reported a full valuation allowance against deferred tax assets and no material change in previously disclosed risk factors. A June 4, 2020 subsequent event increased the equity plan’s share reserve by 690,000 shares.

Important facts for investors to verify

• Whether the sharp shift to online sales persists as showrooms, shop-in-shops and pop-up channels reopen.
• Whether sales growth can offset distribution, tariff and other cost pressures and support the company’s gross-margin outlook.
• Cash burn, borrowing-base availability and compliance with credit-facility covenants as operating conditions evolve.
• COVID-19 effects on demand, staffing, order fulfillment and customer deposits, alongside the company’s substantial lease commitments.
• The comparability and limitations of Adjusted EBITDA; it is a non-GAAP measure and worsened year over year despite narrower GAAP net losses.