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Why Lovesac Stock Plummeted Today

By Steve Symington – Updated Jun 11, 2019 at 6:43PM

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The specialty furniture retailer is feeling the pinch of tariffs. But could it be a buy after the drop?

What happened

Shares of Lovesac (LOVE -4.37%) plunged 23.2% on Tuesday after the modular furniture retailer announced mixed results for the 2020 first quarter and warned that tariffs will hurt earnings.

Specifically, Lovesac's quarterly net sales climbed 53% year over year to $41 million, thanks to new locations and a whopping 43.5% increase in comparable-showroom sales as the company accelerated marketing investments to increase brand awareness. At the same time, that translated to an adjusted (non-GAAP) net loss of $9.1 million, or $0.67 per share, worsening from a loss of $0.41 per share in the same year-ago period. 

Analysts, on average, were expecting a narrower net loss of $0.59 per share on revenue closer to $39 million.

Man in suit watching a red arrow line crash through a concrete floor.

Image source: Getty Images.

So what

For perspective, Lovesac opened five new showrooms, closed two locations, and remodeled three this quarter, bringing its showroom base to 78 locations (up 15% year over year) in 30 states.

CEO Shawn Nelson said the company is "very pleased" with its performance, noting that the 22.3% increase in marketing spend significantly lagged the 53% increase in sales.

"From an operational standpoint, our teams continued to execute," Nelson said, "and we made good progress against all of our strategic initiatives, which are centered around: traditional, digital and social marketing; investing in our infrastructure; growing and improving our showroom footprint; and expanding our shop in shop presence." 

Now what

Lovesac also warned that while it will continue investing in key infrastructure and marketing initiatives, it will need to adjust its operations to offset the impact of tariffs on goods imported from China.

During the subsequent conference call, Nelson called the tariffs a "short-term issue for us -- a speed bump as it were," adding that the company plans to exit China as a manufacturing source almost completely over the next 18 months unless the tariffs are suspended. In the meantime, he said, it will also implement strategic price increases in a way that's virtually "invisible to the customer."

As such, the company reiterated its annual guidance for revenue growth of 40% to 45%, as well as for positive adjusted EBITDA this year -- albeit with a moderate level of "temporary degradation" in gross margin as it works to mitigate the cost of tariffs.

That's not to say its long-term story is broken. To the contrary, it seems the company's message is resonating with consumers, and I believe it's an astute move to forsake near-term profitability with the goal of driving revenue growth and taking market share in these early stages of its life as a public company.

But with shares having more than doubled from their IPO price of $16 just under a year ago, it was no surprise to see the stock pull back hard in response today. And this could be an intriguing chance for patient, long-term investors to open or add to their positions.

Steve Symington has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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