Lovesac Stock: Overlooked Value Opportunity (NASDAQ: LOVE)

Scott Olson

This year has done a lot of damage to growth stocks, and the news of lingering inflation and falling consumer confidence hasn’t really helped the consumer goods sector either. Lovesac (NASDAQ: LOVE), a manufacturer of Eclectic furniture, known for its modularity (customers can mix and match different elements to create their custom furniture set), has been a major victim of this weakened sentiment.

Since the start of the year, this unique high-flying growth stock has lost 50% of its value. In my view, investors sold the stock primarily on expectations of a macroeconomic slowdown and waning confidence in growth stocks in general, rather than Lovesac’s own fundamentals. This is the right time, in my opinion, for us to reassess Lovesac’s bullish case.

Chart
Data by YCharts

Lovesac is a rare consumable stock that performs admirably well

Since I last wrote about Lovesac in February, the stock has only continued to fall (from the $40s at the time) while releasing a succession of earnings beats. I am monitoring Lovesac’s valuation, in particular its new low P/E ratio, and I remain fairly bullish on the stock’s prospects of outperforming the S&P 500 should a broader market rally occur later this year.

One of the main reasons I remain excited about Lovesac is that its story has diverged from other grower furniture competitors like Wayfair (W). Now, Wayfair has seen a huge increase in revenue in 2020 (thanks to the COVID trend of moving away from the city and into the suburbs, Wayfair has seen a one-time big increase in furniture orders), but this growth quickly subsided and Wayfair saw negative comps in 2021 and 2022. This is not the case for Lovesac, however. The company continued to aggressively push for growth – and it wasn’t just the addition of new stores that boosted its revenue. E-commerce sales continue to grow and same-store sales (excluding the contribution of new locations) are also progressing well.

For more recent investors in the stock, here are the main reasons I’m bullish on Lovesac:

  • Grow well even on a large scale. Even on a same-store basis, excluding growth driven by store expansions, Lovesac is growing at a rate of approximately 40% year-on-year. Analysts expect 27% year-over-year growth for Lovesac in FY23 (corresponding to most of the 2022 calendar), although Lovesac has a tendency to “beat and rise” – expectations of Growth for FY22 started closer to the mid-30s and ended just under 50% y/y.
  • Willingness to spend on home improvement and comfort. Furniture companies, home improvement stores and other home-related businesses have all been big winners from the pandemic, not only due to the volume of moves, but also due to a higher propensity to spend. for comfort. Longer term, this benefits high-end furniture makers like Lovesac, whose typical sectional sofas are in the upper-middle $2,000-$3,000 range.
  • Impressive profitability despite macro headwinds. Lovesac’s problems are shared with other consumer products companies – Chinese tariffs and higher transportation costs. Yet despite this, the company’s gross margins of over 50% are high for a consumer products maker, and its ability to generate positive adjusted EBITDA and GAAP net income sets it apart from other small caps.
  • Omnichannel expert. Lovesac’s retail store fleet is now open to some extent, and we expect Lovesac to continue its retail expansion strategy in 2022. These smaller format stores are a great way for Lovesac to spread its brand and generate more online traffic.
  • Possibility of cancellation of rates. As a consumer products company primarily from China, Lovesac is heavily impacted by Trump’s tariffs on products imported from China, which hurt gross margins by about nine points. According to a report from early July, the Biden administration is considering cutting some tariffs at a modest pace. Given the heavy impact of these tariffs on Lovesac’s bottom line, news of any follow-up to this legislation could produce a large increase in stock.

Valuation report

Next, let’s talk about evaluation. For the current fiscal year (FY23, the year ending for Lovesac in January 2023), Wall Street analysts expect Lovesac to deliver 27% year-over-year revenue growth to $2.96 in pro forma EPS (3% year-on-year earnings growth, pegged behind top line growth due to the gross margin impact of this year’s logistics tightening). The outlook for next year (FY24) is optimistic, with revenue growth of 22% YoY and pro forma EPS of $4.12 (earnings growth YoY 39%; consensus data from Yahoo Finance ).

If we take these consensus estimates at face value, Lovesac’s valuation stands at:

  • 10.9x FY23 P/E
  • 7.9x FY24 P/E

Needless to say, this is a massive discount to the broader market and a pretty cheap multiple for a company whose revenue is currently growing north of >50% y/y. The discount reflects the fact that investors generally don’t believe in Lovesac’s ability to achieve these consensus goals, but I would say trust the numbers and trends the company has already released rather than project macro concerns. in the future.

Summary of the 1st quarter

Now let’s talk more about Lovesac’s latest Q1 results. The first quarter revenue summary is shown below:

Lovesac first quarter results

Lovesac first quarter results (Lovesac first quarter results release)

Lovesac’s first-quarter revenue grew at an incredible 56% year-over-year to $129.4 million, beating Wall Street expectations of $114.8 million (+38% year-on-year) with a massive margin of eighteen points. Note that the company has placed a strong emphasis reduce promotional discounts to mitigate the impacts of the current inflationary environment, the fact that Lovesac has been able to achieve this level of growth without significant consumer incentives is quite impressive.

As mentioned earlier, sales growth was driven not only by the expansion of the number of stores, but also by an increase in same-store sales. You will see in the table below that Lovesac ended the first quarter with 162 total stores in its fleet.

Lovesac Comparable Store Sales

Lovesac Comparable Store Sales (Lovesac first quarter results release)

E-commerce also continues to thrive with 24% year-over-year growth – again, this invokes a comparison with Wayfair, which saw e-commerce revenue decline post-pandemic. Management also mentioned that its partnership with Costco (COST) has also been extremely successful, with the company performing successful “roadshows” on Costco.com.

Lovesac has not been immune to the tough supply chain conditions, but it has navigated them well. According to remarks prepared by CEO Shawn Nelson on the first quarter earnings call:

Next, regarding the supply chain update. In the first quarter, we continued to benefit from our diversified supply chain and inventory strategies, which allowed us not only to over-achieve net sales in the first quarter, but also to end the quarter in a position strong planned inventory with end of quarter inventory in the 90s. expected strong position heading into the second quarter with our evergreen inventory.

Our on-time delivery customers continue to be best in class, and we remain committed to that performance. As we look to the second quarter, we expect continued operational progress despite continued headwinds in the global supply chain. Our active inventory management strategy and diverse sourcing has resulted in a stronger and more consistent sourcing performance thus far, and we will continue to manage the current environment while achieving our expected margins.

We are also pleased with the progress we are making as we continue to ease some of the tariffs in China and increase North American production, which will create and strengthen redundancy to ensure our industry leading stock position. . »

Lower promotions, as mentioned earlier, helped offset raw material inflation, but higher logistics costs were the main driver of gross margin declines of 450 basis points to 51.1% (still impressive). for a consumer products company). The company was able to partially offset this impacted gross margin by reducing selling, general and administrative expenses by 230 basis points as a percentage of revenue.

Overall, Adjusted EBITDA was up another 20% year-on-year to $6.4 million, while pro forma EPS was relatively flat at $0.12 and well above Wall Street expectations for a loss of -$0.25. These results demonstrate that even under difficult supply chain conditions and inflationary pressures, Lovesac remains a highly profitable business.

Key points to remember

Good profitability, robust growth and, so far, a proven resilience to difficult macroeconomic conditions – these are the main strengths of Lovesac that the market seems to be ignoring at the moment. I would gladly take the opportunity to invest in this overlooked name at just

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