Why Lovesac Is an Easy Buy for Long-term Investors
16 June 2022 - 8:40PM
Finscreener.org
You always read reports and
quotes that say stock markets are irrational. Sometimes, certain
events make you understand why that saying is true. Furniture
retailer The Lovesac Company (NASDAQ:
LOVE) experienced it
first-hand. It delivered excellent numbers for fiscal Q1 of 2023,
but still got pummelled.
The stock has lost 56% in 2022, a
lot more than the 30% that the broader Nasdaq Composite index has
lost this year. In an ideal world, that should not have been the
case. For instance, the company owns barely 1-2% of the highly
fragmented $46 billion couch and home audio markets and is in a
prime position to grow its share but the stock closed lower after
its earnings came out.
Lovesac’s best-selling product is
the Sactional, a modular couch that can be configured in a number
of ways. In FY22, it accounted for 87% of its total
sales.
How did Lovesac perform in Q1 of fiscal
2023?
In fiscal Q1 of fiscal 2023
(ended in April), Lovesac reported revenue of $129.4 million for
the period, up 56% compared to $82.9 million in the corresponding
period in fiscal 2022. However, gross margin fell 450 basis points
to 51.1% compared to 55.6% in the year-ago quarter. Net income came
in at $1.9 million compared to $2.1 million and the stock was
punished because of compressed earnings.
Gross margin was lower due to
higher freight costs but SG&A (selling, general and
administrative) expenses as a percentage of net sales fell 230
basis points to 34.7%. Product margin for the company improved by
190 basis points.
All of these are good numbers.
Freight costs are high because oil prices are high. Once oil prices
moderate to regular levels, Lovesac’s product margins will show
significant improvement.
The company said that macro
headwinds have gotten more intense in the last few months and that
it has observed demand moderation in the last few weeks. This
spooked markets even though the company’s numbers beat
estimates.
Why Lovesac stock remains a buy
Lovesac doesn’t sell furniture
the traditional way. It sells stuff via its website and is a
direct-only seller. It has shop-in-shop partnerships that it
directly operates. The company claims to have powerful insights and
data on each of its consumers. It says this helps it build a
business based on a product platform instead of a business built on
branding.
During the earnings call, CEO
Shawn Nelson Nelson said that almost 1/3rd of its
customers in the purchase phase, “…tell us that they learned about
Lovesac from a friend or family member. Every time we sell a
product, it becomes a marketing asset, is unique to us as our
broadly appealing product is being showcased and demonstrated by
our own customers in their own homes.”
Lovesac’s approach seems to be
working. The press release quoted Nelson saying, “… [the results
marked] our 16th consecutive quarter of at least 25% net sales
growth, and establishing a nearly 50% net sales CAGR since our IPO
four years ago.” This is an incredibly good run.
The company is also known for its
continuous product innovation and its latest offering in the couch
segment is the StealthTech. Lovesac says the product has been
selling well shop-in-shop and on Best Buy
(NYSE: BBY).
Lovesac stock closed trading on
June 13 at $29.5. The average analyst price target for the stock is
$91.29. That’s a potential upside of almost 200%. This is a stock
that has been hit beyond a reasonable level and is valued at an
attractive multiple. As the CEO said, the company still only owns
1-2% of the total market. It has a long way to go. And there’s no
reason why it can’t succeed. It’s an easy buy for long-term
investors.
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