The Lovesac Hyper-Growth Story Hits New High

Lovesac Is A Couch Every Parent Should Own 

We began to fall in love with the Lovesac (NASDAQ: LOVE) hyper-growth story last year. The company’s robust double-digit growth was unfazed by the pandemic and was in fact accelerating in the second half of the year. Since then we’ve learned more about the company and what it’s selling and we must say that we are impressed. Called “Sactionals”, Lovesac’s foam-fill furniture is customizable, washable, and rearrangeable making them perfect for families of all sizes and need. With Best Buy on board as a national retailer, we see a long road of growth ahead for this company. 

“As we look past this unprecedented year, we are confident that Lovesac’s unyielding commitment to sustainable products that are built to last a lifetime and designed to evolve is a distinct and compelling competitive advantage. We expect that adherence to this ‘Designed for Life’ philosophy will not only drive continued growth and profitability, but will also help us reach our newly stated goal: to operate a 100% circular and sustainable business model, reaching targets of zero waste and zero emissions by 2040," says CEO Shawn Nelson. 

Lovesac, There’s Nothing To Hate About It 

Lovesac is one of those growth stocks that has nothing wrong with it, at least not that we can detect, except maybe the lack of dividend but we digress. Starting at the top line, the Q4 revenue grew more than 66% sequentially to $129.68 million to post a stunning 40.7% YOY growth. And that is a comparison to a pandemically impacted quarter, albeit one in which growth slowed from 43% to only 33%. More importantly, the revenue beat the consensus by $13.55 million or more than 1150 basis points on strength in eCommerce, showroom sales, and pop-up stores in Costco and Best Buy. 

Comp sales are up 45% on a consolidated basis with eCommerce up 87% and showroom sales up 28.4%. We’re not surprised by the strength in eCommerce and pleased by the company’s focus in that area. The Other category is the only area of weakness with sales down 18% but it might have been worse if not for the Costco and Best Buy oriented revenue streams, both of which are growing. The Other category was impacted by contract negotiations with vendors and should bounce back over the next quarter or two and help to drive additional growth. 

Moving down to margins and earnings, the news gets even better. The company was able to leverage sales and SG&A expenses to full effect despite a near 50% increase in ad spending. The ad-spending is obviously paying off so naturally, we don’t mind. More to the point, the 890 basis point improvement in margin helped drive a 300+ basis point gain in adjusted EBITDA and profits well ahead of the consensus. The GAAP  $1.33 beat by $0.79 and the adjusted $1.37 beat by $0.77 and includes a 38% increase in inventory. As for the balance sheet and liquidity, Lovesac grew its cash balance 62% to $78 million from last year and has no debt. 

The Analysts Aren’t Bullish Enough On Lovesac 

The analysts rate Lovesac as a solid buy with 7 of 7 holding a Buy or equivalent rating. The problem, if it is one, is that the consensus price target is still trailing the actual price by 7%. The high price target of $80 was set the day before the Q4 release and is more in line with the company’s true value. It implies a 27% upside but even that may too cautious. There’ve been no upgrades or price targets hikes since the release but we are expecting to see them start very soon. 

The Technical Outlook: Lovesac Falls To Comfortable Support 

Shares of Lovesac moved higher in the pre-market action but have fallen since the open. The price action is surprising given the strength of the results but is setting up a buying opportunity in our view. Support is evident at the short-term moving average that is consistent with a previous zone of resistance. If confirmed as support, the moving average should continue lifting prices up to new highs above $70 before moving up to and past the $80 level.