If you invested $1,000 in Lovesac (LOVE) at the end of December 2021, today, you’d have $360 left of your investment in the furniture company best-known for its beanbag chairs (SACs) and Sactionals.
I usually don’t write about companies this small -- it has a current market cap of $369 million -- but after Lovesac delivered excellent results on Sep. 8, I felt compelled to send a little LOVE the company’s way.
Its business is performing exceptionally well, yet investors have put its stock in the penalty box. I don’t think that’s right. Here’s why.
The Glass Is Half Full
The pessimist will rightly view Lovesac stock’s 69% decline in 2022 as an indication that its business model is flawed. However, Wayfair (W), a much larger peer in the consumer furniture space, is down 75% year-t0-date. And it doesn’t make money. Rarely has since going public in October 2014.
On the other hand, Lovesac’s business is growing briskly, and operating profits follow this growth. Not by massive amounts, mind you, but enough to show its products aren’t some fad or gimmick. Consumers are buying what they’re selling. Eventually, investors will come around to the fact.
As I said in the intro, Lovesac released its Q2 2023 results on Sep. 8. They included a 45% increase in sales to $148.5 million with an operating profit of $9.90 million, 9.8% higher than a year earlier. In the first six months of 2023, revenues are up 40% year-over-year, with an 11.3% increase in operating profits.
For comparison, it had operating losses of $12.4 million in the first six months of fiscal 2019, $14.3 million in 2020, $9.4 million in 2021, and an operating profit of $11.3 million in 2022.
However, it’s had eight consecutive quarters with operating profits, starting in Q3 2021. And, sure, you could say that some of these gains were pandemic-related, but that wouldn’t tell the entire story.
The reality is that in each of the last eight quarters, Lovesac’s latest 12-month operating profit has increased, starting with $15.1 million in Q4 2021, and finishing with $39.7 million in its most recent quarter.
That’s real and tangible progress.
What’s the Future Look Like?
In October 2021, Lovesac launched the Sactionals StealthTech Sound + Charge in partnership with Harmon Kardon, one of the world’s leading audio specialists.
“We wanted to give customers an alternative to surround sound that didn’t mean unsightly speakers and wires all around the room,” said Lovesac founder and CEO Shawn Nelson. “We solved that problem by embedding the speakers inside our Sactionals.”
In the company’s Q2 2023 conference call, Nelson reminded analysts that the company is no longer viewed in the marketplace as a beanbag or couch company but also as a home electronics company and brand.
To date, it’s spent $40 million on TV commercials for Stealthtech, and while the company doesn’t break out the revenue for the product line, it’s confident the next 5-10 years will deliver significant growth.
As Nelson pointed out in the Q3 2023 press release, the total addressable couch + home audio market is $46.2 billion. Lovesac’s success in less than a year in the market is just the tip of the iceberg.
In fiscal 2022 (January year-end), the company opened 28 showrooms, two mobile concierges, eight kiosks, and 18 Best Buy shop-in-shops. It finished January with 162 retail locations and more to follow.
In 2023, it’s looking to open 25 new showrooms. It opened 12 in Q2 2023 alone, so it shouldn’t have trouble meeting that goal.
Lastly, the company continues to make progress in its internet sales. In the first six months of 2023, Lovesac’s internet sales were up 22.2%, to $66.8 million. That’s 24.0% of sales.
Every little bit helps.
Nelson is very optimistic about Lovesac’s future.
“The significant runway we have with our strategic initiatives combined with our focus on disciplined execution gives me confidence in our ability to drive our share gains in any type of macro environment while also accelerating our growth investments as we continue to scale the business,” Lovesac’s CEO stated in its Q2 2023 press release.
The Valuation Proposition
Despite all the good things going on with Lovesac’s business, it currently trades at 0.66x sales, its lowest multiple since going public. Yet, its business is considerably stronger than where it was when it went public in October 2018.
According to Barchart’s analyst ratings, Wall Street doesn’t give LOVE much coverage. However, of the eight that do, all six rate it a buy, with a mean target price of $69, 176% higher than where it is currently trading.
Lovesac is for real. It’s time for retail investors to get off the couch and show LOVE stock some love.
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