What happened

Shares of The Lovesac Company (NASDAQ:LOVE) soared on Tuesday morning, after the company reported strong earnings for the first quarter of fiscal 2021 that easily topped Wall Street's expectations. As of 11:30 a.m. EDT, the stock was trading 35% higher, but had traded even higher earlier in the session.

Given the strength of the Q1 report, it's fair to wonder how much longer The Lovesac Company stock will stay down. It's still down over 30% from highs reached in 2019. But as we'll see, shareholders should consider one ongoing concern.

LOVE Chart

LOVE data by YCharts

So what

E-commerce furniture retailers, like Overstock and Wayfair, have done well during the COVID-19 pandemic. Maybe it's logical to have assumed Lovesac would well, too. However, Lovesac isn't a pure-play on e-commerce. It has 91 showrooms as part of its direct-to-consumer model, all of which were closed for half of Q1.

Perhaps this contributed to short-sellers betting against Lovesac stock prior to the release of Q1 results. According to data from Nasdaq, short interest increased 20% from the end of March to mid-May. And 31% of shares are sold short, making this a company with low expectations from the investing community. These expectations were shattered with its Q1 results.

All told, Lovesac's Q1 net sales grew 33% year over year to $54.4 million. But e-commerce is what really shined. Quarterly e-commerce sales soared an astounding 255%. This sales growth helped the company gain a little operating leverage, with its net loss improving to $8.3 million from $9.1 million last year.

A businessman rides a rocket expelling cash exhaust over a multi-colored bar chart.

Image source: Getty Images.

Now what

When the market crashed earlier this year, shares of The Lovesac Company fell to just $4. Anyone who bought at the bottom is certainly happy with its multi-bagger returns in a matter of weeks. But while the recent run has been spectacular, and Q1 results were solid, shareholders should remember this stock was falling pre-coronavirus for a valid reason.

Lovesac sources its products from China. Tariffs on Chinese imports have hurt profitability, and the company was already unprofitable. It's shifting its sourcing from China to Malaysia and Vietnam, but this will be an ongoing concern for now. For a small-cap stock, little things add up faster. Thus, Lovesac will probably remain a volatile stock going forward. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.