The Lovesac Company (Nasdaq: LOVE) — Form 10-Q
Reporting period: Fiscal second quarter and first half ended August 4, 2019 (13 and 26 weeks, respectively); comparisons are to the periods ended August 5, 2018. Lovesac designs and sells modular Sactionals furniture, Sacs and accessories through showrooms, online sales and other channels. It operated 80 U.S. showrooms at quarter-end.
Financial performance
| Metric | 13 weeks ended Aug. 4, 2019 | 13 weeks ended Aug. 5, 2018 | 26 weeks ended Aug. 4, 2019 | 26 weeks ended Aug. 5, 2018 |
|---|---|---|---|---|
| Net sales | $48.1 million | $33.2 million | $89.1 million | $60.0 million |
| Gross profit / margin | $24.3 million / 50.4% | $17.8 million / 53.7% | $45.3 million / 50.8% | $32.5 million / 54.1% |
| Operating loss | $(4.9) million | $(7.0) million | $(14.3) million | $(12.6) million |
| Net loss | $(4.8) million | $(7.0) million | $(13.9) million | $(12.7) million |
| Basic and diluted loss per share | $(0.33) | $(3.71) | $(0.99) | $(5.29) |
| Adjusted EBITDA (non-GAAP) | $(3.3) million | $(2.0) million | $(8.0) million | $(6.2) million |
For the first half, operating cash flow was $(23.0) million, investing cash flow $(4.1) million and financing cash flow $22.2 million. Cash declined $4.9 million to $44.2 million. The operating cash outflow included a $14.5 million increase in inventory. Capital expenditures were $4.1 million.
At August 4, cash was $44.2 million, current assets $97.5 million and current liabilities $27.1 million. The company had no borrowings on its Wells Fargo revolving credit facility, with $15.8 million available under the borrowing base; the facility permits up to $25 million, subject to restrictions. Total liabilities were $28.7 million. Operating lease commitments totaled $58.6 million.
Changes and operating drivers
- Second-quarter sales grew 44.8% year over year; first-half sales grew 48.5%. Management attributed growth to higher unit sales and average order volume, showroom expansion and comparable-sales gains, and stronger online and pop-up activity.
- For the quarter, showroom sales rose 35.8% to $31.3 million, Internet sales rose 71.5% to $9.5 million, and other sales, including pop-ups, rose 57.7% to $7.4 million. Sactionals generated $38.3 million in quarterly sales, versus $25.3 million a year earlier.
- Gross margin declined 3.2 percentage points in the quarter and 3.3 points for the first half, primarily due to 10% China tariffs. Lower sourcing costs, including a shift of manufacturing to Vietnam, partly offset the pressure.
- Operating expenses increased in dollars as the company invested in marketing, personnel, showrooms and infrastructure. SG&A as a share of sales improved, partly because prior-year IPO-related and equity-compensation expenses were higher. First-half net loss nevertheless increased year over year.
- First-half financing included approximately $25.6 million of net proceeds from the May 2019 offering of 750,000 newly issued shares; selling stockholders sold additional shares but those proceeds went to them.
Outlook, risks and notable items
- Management forecast fiscal 2020 sales growth of 40%–45% over fiscal 2019 and expected positive Adjusted EBITDA dollars for the year. The filing does not provide a specific dollar target for Adjusted EBITDA.
- Management expected fiscal 2020 gross margin to be below fiscal 2019, citing product mix, tariffs and investment in warehousing and distribution. It was evaluating the impact of a possible increase in tariffs to 25%; if it remained in effect, management did not expect the incremental 15% tariff to affect gross margin until the end of the third quarter.
- Management planned continued annual advertising and marketing investment of 10%–12% of sales and infrastructure investment over the following 18 months. It expected those investments to temper near-term SG&A leverage.
- The business is seasonal, with most activity in the second half; interim results may not indicate full-year performance. Management stated cash, expected operating cash flows, offerings and credit availability were sufficient for working capital and anticipated capital expenditures for at least 12 months.
- Senior executive equity awards accelerated vesting after market-capitalization and lock-up conditions were met, resulting in $2.9 million of equity-based compensation. The filing reports $3.4 million of equity-based compensation for the first half.
- The company had $530,196 of unused media credits from a quarter barter transaction involving inventory. It reported ordinary-course legal matters that management did not expect to have a material adverse effect, and no material changes to previously disclosed risk factors.
- The company adopted ASC 606 in fiscal 2020 with no material impact on reported financial results. It expected the upcoming lease accounting standard to materially affect the balance sheet because of its operating leases.
Important facts for investors to verify
- Whether sales growth and management’s 40%–45% full-year outlook are sustained, particularly given seasonality and ongoing showroom and marketing investment.
- How tariffs, product mix and distribution investments affect gross margin, including any change in tariff rates or mitigation measures.
- Whether operating cash use and inventory growth moderate; first-half operating cash outflow increased from $13.3 million to $23.0 million year over year.
- The availability and borrowing-base limitations of the revolving facility, and the cash impact of $58.6 million in lease commitments.
- The effects of equity compensation, share issuance and non-GAAP adjustments on per-share results and Adjusted EBITDA.