The Lovesac Company — Q3 FY2024 Form 10-Q
Reporting period: The 13 weeks ended October 29, 2023; year-to-date figures cover the 39 weeks ended that date. The company sells modular Sactionals, Sacs and related products through showrooms, ecommerce and other retail touchpoints. It operated 230 showrooms, including kiosks and mobile concierges. Results are seasonal, with most activity in the fiscal fourth quarter.
Financial performance
| Metric | Q3 FY2024 | Q3 FY2023 | 39 weeks FY2024 | 39 weeks FY2023 |
|---|---|---|---|---|
| Net sales | $154.0 million | $134.8 million | $449.8 million | $412.7 million |
| Gross profit / margin | $88.4 million / 57.4% | $64.9 million / 48.2% | $251.4 million / 55.9% | $210.0 million / 50.9% |
| Operating income (loss) | $(3.6) million | $(10.1) million | $(10.3) million | $0.5 million |
| Net income (loss) | $(2.3) million | $(7.4) million | $(7.1) million | $0.3 million |
| Diluted EPS | $(0.15) | $(0.48) | $(0.46) | $0.02 |
| Adjusted EBITDA (non-GAAP) | $2.5 million | $(6.9) million | $5.7 million | $11.7 million |
Growth and margins: Q3 sales rose 14.3%, driven by new showrooms and 2.0% omni-channel comparable sales growth. Year-to-date sales rose 9.0%, despite comparable sales declining 3.6%. Gross margin expansion mainly reflected lower inbound transportation costs; higher promotional discounting reduced product margin. SG&A rose 26.4% in Q3 and 27.7% year to date, outpacing sales growth; reported SG&A was 43.9% and 41.8% of sales, respectively.
Channels and demand: Q3 showroom sales rose 18.9% to $98.7 million and internet sales rose 20.1% to $40.0 million; other sales fell 17.1% to $15.4 million. Year-to-date showroom and internet sales increased 9.3% and 21.5%, while other sales fell 14.9%. Sactionals generated 91.1% of Q3 sales. Management reported Q3 retail sales per selling square foot down 14.5% and point-of-sale units down about 5.8%; year-to-date, those measures declined 21.0% and about 12.6%.
Cash, liquidity and obligations: Cash was $37.7 million at October 29, 2023, versus $43.5 million at January 29, 2023. Year-to-date operating cash flow was positive $20.1 million, compared with negative $68.4 million a year earlier; investing cash outflow was $22.2 million, primarily capital expenditures, and financing cash outflow was $3.7 million. The company had no revolver borrowings and reported $35.7 million of availability under its $40 million asset-based credit facility, which matures in September 2024. Current liabilities were $105.9 million. Operating lease liabilities totaled $161.8 million, including $17.0 million current. Management stated that cash, expected operating cash flows and credit availability should meet working-capital needs and anticipated capital expenditures for at least 12 months.
Material changes and notable items
- Q3 and year-to-date gross margins improved substantially, largely due to lower inbound transportation and distribution costs. Management also cited increased outbound transportation and warehousing costs and promotional pressure.
- Higher overhead, professional fees, hiring, showroom growth and selling costs drove SG&A increases. Year-to-date capital expenditures were $22.2 million, up from $18.3 million.
- Adjusted EBITDA includes adjustments for equity compensation, asset-disposal losses and certain other items. Q3 FY2024 included $1.7 million of other non-recurring expenses; year-to-date other non-recurring expenses were $3.3 million, principally professional fees related to the financial-statement restatement, partly offset by insurance-settlement proceeds.
- Unused media credits from barter transactions were $31.7 million at quarter-end, versus $25.2 million at fiscal year-end; the company reported no impairment.
Outlook, risks and controls
The filing provides no specific revenue, earnings or margin guidance. Management said inflation, higher interest rates, housing-market conditions and reduced discretionary spending contributed to slower demand and may continue to affect the business. Other disclosed risks include supply-chain and import dependence, tariffs, showroom execution, inventory management, technology and cybersecurity, and the company’s ability to sustain growth and profitability.
Management concluded disclosure controls were ineffective as of October 29, 2023 because previously reported material weaknesses in internal control over financial reporting had not been remediated. Remediation efforts include additional finance staff, consultants, improved journal-entry and transportation-accrual controls, and related training. The company had restated prior financial statements and voluntarily self-reported the accounting matter to the SEC; an ongoing, non-public SEC investigation could result in penalties or other relief, which the company said could not be predicted.
Important facts for investors to verify
- Progress and timing of remediation of the material weaknesses, and any subsequent SEC investigation developments or financial-statement changes.
- Whether gross-margin gains from lower transportation costs persist as promotional discounting and outbound freight and warehousing costs evolve.
- Whether comparable-sales and showroom productivity trends improve, particularly given year-to-date declines in comparable sales, sales per selling square foot and point-of-sale units.
- Cash-flow and capital-expenditure needs, lease commitments, and renewal or replacement of the revolving credit facility before its September 2024 maturity.
- Valuation, utilization and expiry terms for the $31.7 million of unused barter media credits.