The Lovesac Company — Q2 fiscal 2024 Form 10-Q
Reporting period: The 13 weeks ended July 30, 2023, compared with the 13 weeks ended July 31, 2022. Six-month figures cover the 26 weeks ended on those dates. Amounts below are in millions unless otherwise stated. The company designs and sells modular furniture, primarily Sactionals and Sacs, through showrooms, ecommerce and other retail touchpoints. Results are unaudited; the company notes that its business is seasonal, with most activity in the fourth quarter.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $154.5 | $148.5 | $295.7 | $277.9 |
| Gross profit / margin | $92.4 / 59.8% | $79.1 / 53.3% | $163.0 / 55.1% | $145.1 / 52.2% |
| Operating income (loss) | $(1.0) | $8.1 | $(6.7) | $10.6 |
| Net income (loss) | $(0.6) | $5.8 | $(4.8) | $7.6 |
| Diluted EPS | $(0.04) | $0.37 | $(0.31) | $0.48 |
| Adjusted EBITDA | $5.3 | $12.3 | $3.2 | $18.5 |
Q2 sales rose 4.0% year over year; first-half sales rose 6.4%. Gross margin improved in both periods, but operating results deteriorated as selling, general and administrative expense and advertising grew faster than sales. Q2 SG&A was $63.8 million (41.3% of sales), up 30.8%; marketing was $26.5 million (17.2% of sales), up 39.0%. First-half SG&A was $120.4 million and marketing was $43.4 million. Management attributed higher SG&A to hiring, overhead and professional fees, selling costs, and showroom rent; marketing investment supported growth. Lower inbound freight costs and related distribution/tariff expense helped gross margin, partly offset by promotional discounting and higher outbound freight and warehousing costs.
Cash, liquidity and obligations
- Cash was $54.7 million at July 30, 2023, versus $43.5 million at January 29, 2023. Working capital was $86.3 million, down from $105.7 million.
- First-half operating cash flow was positive $27.3 million, compared with negative $62.9 million a year earlier. The current-period inflow included a $14.7 million inventory reduction and a $5.5 million increase in customer deposits; the prior period included significant inventory and prepaid-asset build.
- Investing cash outflow was $12.5 million, primarily capital spending; financing cash outflow was $3.6 million, mostly taxes on net share settlement of equity awards. Cash increased $11.2 million over the half year.
- No line-of-credit borrowings were outstanding; reported availability was $36.0 million under a facility with a $40.0 million maximum commitment, subject to borrowing-base and availability limits. The facility matures September 2024.
- Operating lease liabilities totaled $165.5 million, including $16.1 million current and $149.4 million long term. The filing states cash, operating cash flows and available credit are expected to cover working-capital needs and anticipated capital expenditures for at least 12 months.
Business trends, outlook and risks
- Q2 showroom sales increased 6.3% to $98.2 million and internet sales increased 16.6% to $41.4 million. Other-channel sales declined 27.7% to $14.9 million, principally reflecting barter-transaction timing and lower productivity of online pop-ups. First-half internet sales increased 22.3%.
- Showroom productivity weakened: retail sales per selling square foot fell 24.7% in Q2 and 27.8% in the first half. Management cited inflation-related consumer concerns and lower point-of-sale unit volumes. The company had 223 showrooms, including kiosks and mobile concierges, and opened 34 while closing three showrooms and three kiosks in the first half.
- Management cited inflation, higher interest rates, housing-market conditions and reduced discretionary spending as factors contributing to slower demand, which may continue. It is monitoring inflation and pursuing pricing, productivity and cost measures. The filing provides no specific financial guidance.
- The company reported $30.2 million of unused media credits from barter transactions at July 30, 2023, with no impairment recorded. Barter sales were $2.8 million in Q2 and $6.9 million in the first half; these transactions exchange returned open-box inventory for advertising credits.
- The company disclosed an ongoing, non-public SEC investigation related to the accounting matters that led to restatements of previously issued financial statements. It is cooperating; potential penalties or other relief cannot be predicted.
- Management concluded disclosure controls were not effective at July 30, 2023 because previously reported material weaknesses in internal control had not been remediated. Remediation work includes finance staffing, consultants, journal-entry controls and controls over transportation accruals. Remediation requires significant resources and costs.
Important facts for investors to verify
- Progress on remediation of material weaknesses and any developments in the SEC investigation or related restatements.
- Whether sales growth and improved gross margin can offset elevated operating and marketing expenses, particularly given weaker showroom productivity.
- The sustainability and composition of operating cash flow, including the contribution from inventory reductions and customer deposits.
- The recoverability and use of the $30.2 million media-credit balance, and the effect and timing of barter transactions on reported sales.
- Liquidity against substantial lease commitments and the September 2024 credit-facility maturity.