The Lovesac Company — FY2021 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended January 31, 2021, compared with the fiscal year ended February 2, 2020; both were 52-week years. Lovesac designs and sells modular Sactionals, foam-filled Sacs and related accessories through ecommerce, 108 showrooms, and third-party retail touchpoints. The business is seasonal: the fourth fiscal quarter generated 40.4% of FY2021 sales.
Financial and operating performance
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $320.7 million | $233.4 million |
| Gross profit / margin | $174.8 million / 54.5% | $116.7 million / 50.0% |
| Operating income (loss) | $14.9 million | $(15.8) million |
| Net income (loss) | $14.7 million | $(15.2) million |
| Diluted earnings (loss) per share | $0.96 | $(1.07) |
| Cash from (used in) operations | $40.5 million | $(11.2) million |
| Capital expenditures | $9.1 million | $10.7 million |
- Sales growth and mix: Net sales rose 37.4%. Ecommerce sales increased 170.8% to $151.1 million, or 47.1% of total sales, compared with 23.9% in FY2020. Showroom sales declined 1.3% to $146.2 million; other-channel sales declined 20.5% to $23.5 million.
- Products: Sactionals generated $271.0 million, about 84.5% of sales, versus $188.4 million and 80.7% in FY2020. Sacs contributed $45.0 million, about 14.0%, compared with $39.6 million and 17.0%.
- Margins and expenses: Gross margin improved 450 basis points, reflecting fewer promotional discounts, richer Sactional mix, lower inventory reserves, tariff mitigation and distribution-cost leverage. SG&A was $111.4 million, up 13.5% but down as a share of sales to 34.7% from 42.1%. Marketing expense rose 43.6% to $41.9 million, or 13.1% of sales.
- Cash, liquidity and obligations: Cash and equivalents were $78.3 million at year-end, up from $48.5 million. Current assets were $143.4 million and current liabilities $56.3 million. No revolving-credit borrowings were outstanding; borrowing availability was $15.9 million. The company reported $92.4 million of future minimum operating lease payments, which are contractual lease commitments, not reported debt.
Material changes versus FY2020
- The company moved from a $15.2 million net loss to $14.7 million net income, while operating cash flow improved by $51.7 million to $40.5 million.
- Revenue growth was driven by ecommerce and increased new-customer transactions; total units sold nevertheless fell 18.4% year over year. Showroom point-of-sale transactions at comparable locations were nearly flat.
- Customer acquisition cost increased to $434.61 from $391.71. The disclosed FY2021 new-customer cohort first-year value was $2,044; the reported CLV/CAC ratio was 4.70 versus 4.68.
- The company opened 19 showrooms and closed two, ending the year with 108. It hosted 153 Costco in-store pop-ups versus 756 the prior year and said it did not expect further Costco in-store pop-up contribution. Macy’s shop-in-shop test ended in January 2021; Lovesac had expanded shop-in-shops to Best Buy.
Outlook, commentary and risks
- Management said cash, expected operating cash flow and available credit were expected to meet working-capital needs and anticipated capital expenditures for at least 12 months. The filing does not provide numeric sales or earnings guidance. Management expected annual marketing investment to remain around 12%–14% of sales and anticipated CAC could continue to rise as it targets Sactional customers.
- Management attributed strong demand partly to pandemic-related home spending and the shift online, but cautioned that ecommerce demand may recede as pandemic effects subside. Showrooms were temporarily closed in FY2021, then reopened; further closures were possible.
- Key exposures include reliance on a small number of suppliers, including a single Texas manufacturer for Sacs; international sourcing, tariffs, freight capacity and raw-material costs; inventory management; ecommerce and cybersecurity disruptions; consumer-spending weakness; competition; and showroom lease commitments.
- Adoption of lease accounting in FY2022 was expected to add approximately $92 million of lease liabilities and corresponding right-of-use assets to the balance sheet, including about $14 million short-term and $78 million long-term.
- The company recorded a $0.2 million impairment charge for an underperforming retail location. It reported no goodwill impairment and said ordinary-course legal matters were not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Whether ecommerce growth and customer demand remain durable after pandemic-related shifts, and how sales evolve across ecommerce, showrooms and partner channels.
- Whether gross-margin improvement persists amid freight, sourcing and tariff pressures, and whether higher marketing spend continues to support customer lifetime value relative to acquisition cost.
- Inventory levels, supplier concentration and fulfillment performance as demand and shipping conditions change.
- The cash-flow and balance-sheet effects of the approximately $92 million lease-liability recognition under the new lease standard.
- Potential dilution from outstanding warrants, options and equity awards; the company reported 15.0 million common shares outstanding at January 31, 2021 and no planned dividends in the foreseeable future.