The Lovesac Company — Q2 FY2019 Form 10-Q
Reporting period: Thirteen and twenty-six weeks ended August 5, 2018; comparative periods ended July 30, 2017. Interim financial statements are unaudited. Lovesac designs and sells modular Sactionals furniture, Sacs, and accessories through showrooms, e-commerce, and wholesale/shop-in-shop channels. It reported 72 showrooms at quarter-end.
Financial results
| Metric | 13 weeks ended Aug. 5, 2018 | Year-over-year change | 26 weeks ended Aug. 5, 2018 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $33.25 million | +60.3% | $60.02 million | +56.4% |
| Gross profit / margin | $17.84 million / 53.7% | Margin down 1.9 pts | $32.49 million / 54.1% | Margin up 0.4 pts |
| Operating loss | $(6.82) million | Prior-year $(2.33) million | $(12.44) million | Prior-year $(5.52) million |
| Net loss | $(6.97) million | Prior-year $(2.41) million | $(12.65) million | Prior-year $(5.75) million |
| Basic and diluted loss per share | $(3.71) | Prior-year $(0.45) | $(5.29) | Prior-year $(1.01) |
- For the first half, net cash used in operations was $13.29 million, versus $8.78 million a year earlier; investing cash use was $6.28 million versus $3.09 million. Operating cash use included an $8.60 million increase in inventory.
- Financing provided $58.61 million in the first half, principally from approximately $59.2 million of net IPO proceeds. Cash rose to $48.21 million from $9.18 million at February 4, 2018.
- At August 5, current assets were $78.28 million and current liabilities $21.54 million; working capital was $56.74 million. Total liabilities were $22.86 million and stockholders’ equity $72.23 million.
- The Wells Fargo secured revolving facility allows borrowings up to $25 million, subject to borrowing-base limits; disclosed borrowing availability was $10.5 million. A short-term borrowing under the facility was repaid June 4, 2018. The balance sheet reports no line-of-credit balance at quarter-end.
Changes and operating drivers
- Sales growth reflected more customers and units, higher average order volume, showroom expansion and comparable-showroom gains, stronger e-commerce, and greater Costco shop-in-shop activity. First-half showroom sales were $41.57 million, internet sales $10.08 million, and other sales $8.36 million.
- Quarterly gross margin declined as lower-margin shop-in-shop sales increased to 14% of sales from 6%, and freight costs rose as a share of sales. First-half margin improved year over year, principally from sourcing cost savings on product fills, partly offset by channel mix and freight.
- First-half SG&A rose 71.0% to $43.50 million and increased to 72.5% of sales from 66.3%. Management attributed the increase to marketing, employment and showroom costs, sales-related expenses, stock compensation, sponsor fees, and IPO-related costs. Depreciation and amortization also increased with showroom investment.
Outlook, risks, and unusual items
- Management expects fiscal 2019 annual gross margin not to differ materially from fiscal 2018, expects continued sales growth and e-commerce to increase as a share of sales, and anticipates higher operating expenses as the business grows. It expects to leverage SG&A annually while increasing marketing investment.
- Management stated it expected positive Adjusted EBITDA for fiscal 2019 to improve on fiscal 2018, despite increased marketing. However, first-half Adjusted EBITDA was a loss of $6.02 million, compared with a loss of $3.98 million in the prior-year period; this non-GAAP measure should be considered alongside GAAP results.
- The company cited seasonality, with most activity in the second half, and said interim results are not necessarily indicative of full-year results. It believed cash, anticipated operating cash flows, and the credit facility would cover operating needs for at least 12 months.
- The June 2018 IPO generated approximately $59.2 million in net proceeds. Preferred stock converted into common stock at the IPO; preferred dividends and deemed dividends significantly increased the loss attributable to common stockholders and affected reported loss per share. The company also recorded a $1.50 million deemed dividend related to warrant modification.
- First-half operating leases totaled $57.61 million of disclosed contractual obligations, including $8.63 million due within one year; total contractual obligations, including employment agreements, were $60.09 million. Related-party management, monitoring, and platform fees were recorded, and Satori received a 50,000-share stock bonus valued at $741,500.
- Management reported no material change in previously disclosed risk factors. Ordinary-course legal matters were not expected to have a material adverse effect. Disclosure controls were assessed as effective at a reasonable-assurance level.
Important facts for investors to verify
- Whether strong sales growth converts into improved operating performance, given larger losses, elevated SG&A, and greater operating cash use.
- How shop-in-shop expansion, e-commerce freight, and sourcing savings affect gross margin in subsequent periods.
- Inventory levels and seasonal working-capital requirements, as well as actual borrowing and availability under the Wells Fargo facility.
- The implications of preferred-stock conversion, warrants, restricted stock units, and other potential dilution; reported EPS includes substantial preferred and deemed dividends.
- Whether management’s fiscal 2019 outlook is achieved, bearing in mind seasonality and the gap between its Adjusted EBITDA outlook and first-half results.
- The scale and timing of long-term lease commitments and the impact of related-party arrangements and IPO-related expenses.