The Lovesac Company (NASDAQ:LOVE) is a $362.16 million market cap small-cap furniture firm that released its Q1 2024 earnings report earlier this month. Despite industry obstacles, it has continuously increased its top-line results. Although EPS results have been inconsistent, the business projects to earn between $1.83 and $2.24 per share in the fiscal year 2024. Since coming public in 2018, it has returned 12.90% to investors.

Lovesac is a specialized furniture company with a dedicated customer base that is growing year after year. One of the most notable features is that the items are backward compatible, which encourages repeat and supplement purchases and, eventually, the development of loyal customers in a highly competitive business. Lovesac is adding new customers, has a stable bank sheet, YoY sales have climbed by 9% despite challenges in the furniture market, and management forecasts positive EPS results in FY2024. As a result, investors may choose to take a bullish view of this innovative and founder-led business.

Overview of the Business

The Lovesac is a furniture firm created in 1998 by current CEO Shawn Nelson, shortly after he built the first enormous beanbag chair in his parents’ basement. From humble origins, the company has had a non-traditional growth path, including a million-dollar reward to the CEO for winning Richard Branson’s Rebel Billionaire in 2004. Lovesac became public in 2018 and has expanded its product line to include sectionals, adaptable sofas priced between $2,840 and $10,000, which account for the majority of total revenue, accounting for 90.58% of sales in Q1 2024.

The practical character of the company’s products is one of its primary strengths. The products are meant to be easily shipped, with every part of the furniture removable and offerings that are reverse compatible. This encourages recurring and supplement purchases, which has increased the lifetime value of Lovesac’s clients.

By customizing its showrooms for quick, easy, and independent sales and growing its investment in its digital platform and distribution techniques, the company profits from its direct-to-consumer market approach.

Q1 2024 Earnings

Lovesac reported its Q1 2024 earnings earlier this month. Despite exceeding estimates, earnings per share remained negative at $0.28 per share. Management expects a per-share loss of $0.12 to $0.16 in the second quarter of 2024. Due to rising industry headwinds and a more competitive promotional climate, our projection is lower than the prior year’s Q2.

When we study the quarterly EPS performance, we see that, while there has been a YoY reduction, it has actually increased over a two-year period.

The company’s overall sales for the year are estimated to be in the $700 million to $740 million range, with earnings per share (EPS) ranging from $1.83 to $2.24. The EPS for the fiscal year 2023 was $1.77.

Accounting and Valuation

Since its IPO in 2018, the company has effectively improved its top line year after year. Although its gross profit margin has decreased from 55.20% to 52.83% TTM since FY2017, it remains relatively high in the furniture business, with its items geared at attracting higher-end clients.

When compared to larger competitors such as Wayfair (W) and La-Z-Boy (LZB), Lovesac maintains a respectable margin of 52.83%, compared to 28.62% for Wayfair and 41.28% for La-Z-Boy. Lovesac has also delivered double-digit top-line growth in the short and long term.

In the prior fiscal year, the company generated $8.2 million in positive levered free cash flow, but it had negative free cash flow in the preceding two years. According to the balance sheet, the company now has $45.1 million in cash and a $36 million revolving credit line available, with no borrowings for Q1 2024.

Although the release of Lovesac’s Q1 2024 results had a good impact on its stock price, investors should be wary of the stock’s large short interest, which stands at 32.39%, indicating a negative opinion toward the business. amid outperforming the S&P over the last six months, the stock has an attractive price-to-earnings ratio of 11.37 and displays favorable growth of 21.78% year on year amid a hard environment.

Risks

Lovesac is a tiny player in the highly competitive furniture sector. While the company has benefited from its online and offline direct-to-consumer approach, as well as client loyalty through reverse-compatible products, larger competitors gain from economies of scale and may be able to provide more competitively priced alternatives. It is a consumer discretionary stock that is affected by the health of the economy; while consumers continue to be cautious about where they spend their money, competitive markets such as furnishings continue to cut into gross margins through its promotional market, affecting the company’s growth. Lovesac does not offer a wide range of products; this lack of diversification may have an impact on the company’s long-term growth.

Bottom Line

Lovesac is a specialized furniture firm with an appealing business plan that focuses on generating long-term and recurring consumers through reverse-compatible product choices. It has consistently delivered top-line growth, growing the number of new customers year after year and boosting customer lifetime value through repeat purchases and upgrades. Despite being wary of the business’s competitive nature, Lovesac continues to offer good fundamentals and has an optimistic outlook for FY2024. As a result, investors may wish to take a bullish position in this company.

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