A Love/Hate Relationship With The Lovesac Company

Key Points

• The Lovesac Company has a solid quarter and reiterates guidance for the year. 
• The company is outperforming its peers and producing growth in a contractionary environment. 
• Short sellers are pressuring the stock, but a rally could be approaching. 

If you are familiar with The Lovesac Company NASDAQ: LOVE, you know many things to love about it. The furniture is attractive, comfortable, and high-quality, and its modular design is easy to use. You may also know that there are reasons to hate the stock. The brand came out of nowhere and took the market by storm. The pandemic elevated it to hyper-growth status, and the stock traded as such, a hyper-growth name.

The problem is that furniture companies don't tend to trade at growth valuations, more like value valuations, and there is a finite market for furniture. The Lovesac Compan is still growing, but the hyper-growth days are long gone, and now it trades as it should, like a value stock. A new opportunity is emerging now that the value is more aligned with reality. 

The Lovesac Company Beats And Raises 

The Lovesac Company had a good quarter verging on excellent, considering the macroeconomic headwinds entrenched in the marketplace. The company reported $141.19 million in revenue, a gain of 9.1% compared to last year. This is 500 basis points better than the Marketbeat.com consensus and is driven by a 15.1% rise in comp store sales. Showroom net sales rose 2.9%, Others increased 3.1%, and Internet rose 28.7%.

The 28.7% increase in Internet sales is a testament to the company's strategy. The furniture is modular and easily customizable because of the overlapping manufacturing footprint, so adding pieces via the Internet is straightforward once a customer is familiar with the product. 

The margin news is also good. The company's margins contracted versus last year but less than expected. The GAAP loss of $0.28 is $0.13 better than expected, and the company remains well-capitalized. Cash fell compared to last year but remains strong at $45.1 million compared to the quarterly loss of $4.2 million, and the outlook for the year is favorable. 

The Lovesac Company reiterated its guidance for the year which includes GAAP operating profits and a substantial opportunity for outperformance relative to the analysts' consensus. The company expects to post a loss in Q2 but well below the consensus of -$0.44, and the full-year outlook is cautious.

The company reiterated its guidance for EPS of $1.83 to $2.24, a wide range, but the mid-point is below consensus. Given the Q1 strength and expectations for Q2, the 2nd half of the year doesn't need to be all that strong to meet the current targets, and the 2nd half tends to be stronger for the furniture industry. 

How Does The Value Stack Up At Lovesac?

The stock is trading about 11.6X the low-end of its earnings consensus, which is a value compared to prior price points but still high compared to peers. Names like Haverty's NYSE: HVT, Ethan Allen NYSE: ETD, and La-Z-Boy NYSE: LZB all trade at roughly 7.5X their earnings, and they pay dividends. The average yield is 4% for the lot, and Ethan Allen pays the high of 5%. The payouts are relatively safe and growing in some cases.

The Lovesac Company may pay a dividend in the future but is now focused on growth. It delivers market-beating performance in that regard so it may deserve its premium valuation. The other furniture companies have begun to see a contraction that is expected to get worse before it gets better. 

The post-release action is mixed. The stock surged in pre-market trading and then hit resistance and fell. The move suggests range-bound trading will continue until the earnings catch up with the value, which may be in 2024. A high short interest, about 30%, is holding the market back. The eight analysts rating this stock a consensus Buy think it should trade at least 50% higher than it does now, so a solid catalyst could spark a significant rally.