The Lovesac Company — Q1 FY2023 Form 10-Q
Reporting period: Thirteen weeks ended May 1, 2022; comparative period ended May 2, 2021. Lovesac designs and sells modular furniture, primarily Sactionals, through showrooms, e-commerce, and third-party retail touchpoints. Results are seasonal, with most activity typically in the fourth quarter.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net sales | $129.4 million | $82.9 million |
| Gross profit / margin | $66.1 million / 51.1% | $46.1 million / 55.6% |
| Operating income | $2.6 million | $2.3 million |
| Net income | $1.9 million | $2.1 million |
| Diluted EPS | $0.12 | $0.13 |
| Operating cash flow | $(21.8) million | $(9.6) million |
| Capital expenditures and other investing outflows | $(6.0) million | $(3.1) million |
Sales increased 56.0%. Showroom sales rose 65.9% to $81.3 million, internet sales rose 24.1% to $31.3 million, and other-channel sales rose 92.7% to $16.9 million. Sactionals generated $115.0 million, about 88.9% of sales. Gross margin contracted 450 basis points, chiefly because distribution and tariff costs increased; inbound transportation costs alone added approximately 630 basis points of pressure, partly offset by improved product margin. SG&A increased 46.2% to $44.9 million, while advertising and marketing increased 48.9% to $15.9 million. Net income declined despite higher sales, with income tax expense increasing to $0.7 million from $0.2 million.
Financial position and liquidity
At May 1, 2022, cash was $64.4 million, inventory $123.0 million, working capital $106.3 million, and total assets $366.6 million. Cash decreased $28.0 million from the start of the fiscal year. Operating cash use reflected inventory growth of $14.5 million, lower accounts payable and accrued expenses of $10.4 million, and lower customer deposits of $5.7 million, among other movements.
No revolving-credit borrowings were outstanding. The amended asset-based facility provides up to $40.0 million, subject to borrowing-base restrictions; reported availability was $31.2 million. It matures in March 2024 and includes a minimum-availability covenant. The company reported operating lease liabilities of $121.0 million, including $17.5 million current and $103.5 million long-term. Management said cash, expected operating cash flows, and credit availability should cover working capital and planned capital expenditures for at least 12 months.
Management commentary, outlook, and risks
Management attributed growth to performance across channels, more showrooms, higher showroom transactions, a strong Easter campaign, and lower promotional discounting. It cited employment, rent, infrastructure, and selling costs as drivers of higher SG&A, and said it expects continued investment in marketing, infrastructure, and showroom growth. The filing provides no specific earnings or revenue guidance.
Risks include freight and tariff costs, supply-chain disruption, inflation, shifts in consumer spending, competitive pressure, and effects of COVID-19 and geopolitical events. The business is seasonal. Legal matters are described as ordinary-course proceedings whose outcomes management cannot predict; management does not expect their resolution to materially adversely affect the company. Potential executive severance exposure was $5.6 million if covered executives were terminated without cause and full benefits became payable.
A previously identified material weakness in IT general controls concerned user access and segregation of duties. Management implemented remediation steps during the quarter, but concluded disclosure controls and procedures were not effective as of May 1, 2022 solely because of that material weakness.
Important facts to verify
- Balance-sheet inconsistencies: The primary balance sheet reports January 30, 2022 cash of $92.4 million and total assets of $371.6 million, while the selected financial information elsewhere in the filing shows different comparative figures. Confirm the correct comparative data in the filed financial statements.
- Track whether freight, tariffs, and other distribution costs continue to compress gross margin.
- Assess operating cash use, inventory levels, customer deposits, and seasonal borrowing needs against the company’s liquidity outlook and credit-facility availability.
- Confirm whether remediation of the IT-control material weakness is completed and whether controls are deemed effective in subsequent filings.
- Consider equity compensation: adjusted EBITDA was $6.4 million versus $5.3 million, and the company excluded equity-based compensation and other items from this non-GAAP measure.