LoveSac: What Investors Need to Know

For many investors, LoveSac (LOVE 1.77%) may conjure images of stained bean bags or low-end malls, but this reformed retailer of "sacs" and "sactionals" has completely reinvented its image and business over the past few years. In this episode of Industry Focus: Consumer Goods, join Fool analyst Asit Sharma and host Emily Flippen as they discuss if they love LoveSac enough to add it to their watch list.

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This video was recorded on February 9, 2021.

Emily Flippen: Welcome to Industry Focus. Today is Tuesday, February 9th, and I am your host Emily Flippen. Today, Asit Sharma and I are going to be looking at an old company that has completely reinvented itself over the past few years, Lovesac. Asit, thanks for joining.

Asit Sharma: Emily, thanks so much for having me. I have to say, for some reason, the name of this company reminds me of a classic new wave hit from the B-52's, it must have been the early '80s, Love Shack. I can't get the course out of my head now. I apologize for anyone who's ever heard that song because now you won't be able to get it out of your head for the next, I don't know, few hours, few days.

Flippen: I was about to chastise you because you sent along the YouTube link for this song before we taped today's episode, and all morning I've just been internally singing Love Shack to myself. It's funny because I feel like that tune almost provides a good basis for this company. I can see somebody enjoying LoveSac's products, which are these big, comfy sacs and couches listening to some B-52's. I mean, the whole feeling fits really nicely into what is LoveSac's brand.

Sharma: You got it. Emily, we've talked about some other companies that have a retail model and manufacturer of products that's related to relaxation. Of course, I'm going to talk about Sleep Number (SNBR -7.05%) because we put that in our consumer goods basket. But this one was so interesting. I don't want to give anything away. When I looked at it, I was wondering, maybe a future basket. There's always a lot to look out on both sides of the equation with the company like this. But having said that, what is LoveSac? Emily, more importantly, how did this hit your radar screen? [laughs]

Flippen: I actually looked at LoveSac back in June 2019, pretty shortly after the company went public. So when you came to me with the idea of doing an episode on LoveSac, I immediately was like, man, I forgot that I had looked at this business just a year or two ago. What I will provide before I get into some of the history here, I want to put the caveat that every week when we do Industry Focus, I allocate a certain amount of time, it's usually on Mondays, hopefully the week prior if I have enough time, to spending time digging into the businesses that we're talking about and I will just be upfront. I wasted a ton of my time because when I started looking into LoveSac, I immediately found their YouTube channel with their CEO and the new brand team, and they put out a lot of really fun content. I spent a lot of time researching, and by researching I mean watching YouTube videos and learning a lot about the history of the business, but maybe less about the fundamentals, so you luckily came through and provided a lot of the details there.

But one of the things I do know a lot about now, probably too much about, is the history of LoveSac. When I did this report back in June 2019, I liked it, but I noted what a weird company it was. I was a little bit worried about the fact that they had filed for bankruptcy. So back in 2006, they declared Chapter 11 bankruptcy, which put the company in a bit of a turnaround stage when they went to go public. They are really in this process of reinventing the LoveSac brand from this kind of, what I call, your '70s basement feel to what is now like a modern chic company and have it be more of an aspirational lifestyle brand with much better distribution, and that's exactly what they did. If you rewind back to LoveSac's business, they've, since 1995, been a manufacturer and retailer of these big bean bags that they call sacs. The company actually got started when the CEO and founder, Shawn Nelson, at age 18 decided he wanted to make the world's largest bean bag. He was literally just watching TV, saw a commercial for bean bags, and thought to himself, hey, it'd be super cool if I could just make a giant version of that. Lo and behold, he went out, he did it, and they got in production for these sacs that people just absolutely loved. There's a great story that goes into more detail about the founding and the business on their YouTube channel and I'll let the interested parties watch it. But the long story short is --

Sharma: Wait a minute. One second here, Emily. I got to interrupt you here. I had this idea that I would get into the Guinness Book of World Records when I was a teenager, and I can't remember. Maybe I was trying to make the world's biggest enchilada. I think I got one bigger than the plate that I usually eat my enchilada on. What is the difference between me and Shawn Nelson, this guy with his huge bean bag, and I'm sure he's super-rich. I made a mess in the kitchen that my mom got really upset about. Anyway, sorry for that interruption.

Flippen: The difference is you stopped too soon, Asit. You could have the enchilada sac right now if you just kept making giant enchiladas for people. I know I would be a customer.

Sharma: Persistence, chasing great ideas.

Flippen: Persistence.

Sharma: Yeah, OK. Go on, this is an interesting story.

Flippen: Well, speaking of that persistence, this is definitely a company and a founder that I would describe as persistent. It took a long time from that first bean bag that he made in his living room to where the business is today, but they got started by filling out a big unexpected order form from The Limited, that popular retailer, before they went bankrupt.

Sharma: I remember them. [laughs]

Flippen: That was a throwback. But they found that when they filled the order for The Limited, they weren't really making money. Nelson decided to change their strategy to be more of a direct-to-consumer retail strategy, which led the business to build out a lot of direct-to-consumer retail stores in areas like malls, and part of this expansion effort included taking on a bunch of franchises and franchisees and expanding their product offerings beyond just sacs into a bunch of ancillary products. As you can expect, that really quickly became unwieldy. It was really hard for LoveSac to keep a consistent brand name, while also spinning out these new products, many of which had this really high level of seasonality, which left LoveSac with a ton of excess inventory that wouldn't sell through and had largely been funded by debt, millions and millions of dollars of debt. Things really started to change for LoveSac when their CEO, Shawn Nelson, went on reality TV on a show called The Rebel Billionaire to compete for $1 million, and he actually won that show. Spoiler alert, I guess I should have said it at the beginning. But this is old, this is back from 2006. So if you haven't seen it already, you're probably missed your opportunity. [laughs] But he went on, he won, and a PE firm actually saw Nelson on the show and took an interest in reforming LoveSac. They came in as an equity sponsor, helped broaden this outside capital, helped the company declare Chapter 11 bankruptcy, and then reorganized LoveSac. They closed their unprofitable stores, which are mostly in sub-tier malls. They cut back product offerings and they vertically integrated their process of manufacturing, which really just improved a lot of the fundamentals of the business. I've been droning a lot, I promise I'll stop here in a second. But what really came out of all of this restructuring and all of this reorganizing wasn't how great sacs were, but how great one of these ancillary products was, which is called Sactionals. You can't make this stuff up, [laughs] but there are these modular couches that have just really come to redefine what LoveSac does. Definitely a really interesting business, which brings us to today with LoveSac, great ticker, LOVE, and even better products, sacs and Sactionals.

Sharma: Emily, I love this. It's a colorful story, a colorful CEO. Personally in investing, I've been drawn to companies that emerge out of bankruptcy. Sometimes they're much stronger, and sometimes venture capital firms or private-equity firms in this case, come in and they make a company more sound. They find that part of the business model that they can see has potential that can work out. Of course, I've been burned doing this as well. Let me go into some detail here on what they sell so that Emily can rest her voice some. They are still selling those bean bag chairs called sacs. That's about 17% of revenue if you look at the last fiscal year, which ended in February of 2020, but Sactionals have really taken over the business, they're now 81% of revenue. Emily, I think when we were trading notes, you mentioned that, when you first did your report, Sactionals were only 40% of sales. This is obviously the item that the company's equity sponsors along with the CEO decided to place bets on, and it's working out quite well. These Sactionals were around before the bankruptcy. But as they've started to gain traction, partly because of the rebranding and the savvy marketing that you alluded to, they're really just taking off. If you've heard of sectional furniture or sectional sofas or modular sofas, they're like that, but they've got their own unique characteristics. They're unique because they come in just two components, seats and sides. You can buy as many pieces of each as you want and quickly assemble or disassemble them to create couch configurations that will suit your needs. Now, the numbers get exponential the more piece you buy. I think there are thousands of combinations. I think that's what makes it so interesting as a product. It's not just one couch that you walk into the showroom and point to and have delivered it to your house. We'll talk about this in a moment, the actual structure of the couch.

One of the things, Emily, that you had noted that was a big issue with LoveSac before they filed for bankruptcy, is they didn't have patents on that foam bean bag. I remember as a kid we had a bean bag. Of course, those were probably filled with very bad materials, plastic and non-sustainable materials. One thing about the CEO is he is all about sustainability. But every place used to sell a foam bean bag, and you pointed out that that hurt them because they didn't have patents so it was easy for companies to come in and knock them off. They learned their lesson with these Sactionals and they have fully patented their version of the modular sectional sofa. They've also been able to really up the prices of their products, so they have a lot of pricing power.

In 2006 sacs, so the bean bags, were sold for the low hundreds of dollars. The cheapest, smallest sac today is $600. They go all the way up to $1,650. Now, for a beanbag [laughs] to spend $1,650 on a bean bag? An average selling price for Sleep Number, we said a few weeks ago is $4,500. They can go on up to $7,000 or $8,000, so I get it. The more we talk about these companies, there are people out there, not necessarily me, who have the [...] to spend on these products and they enjoy them. Now, the Sactionals are a different animal altogether. They're more pricey. They start at $2,000 and also go up to several thousand dollars range up to $10,000 depending on the set up that you want. The LoveSac stores have also migrated from that 70's basement feel to modern chic. I think that this idea of premium over what's accessible is reflected in the stores. I had never seen a store and I just happened to notice driving by a local mall here, Crabtree Valley Mall, that they have a store. I don't know how it caught my attention, but it was visible. Maybe someone can correct me, who lives in Raleigh, but I want to say it's visible from driving through the parking lot. Maybe I was trying to cut through from one road, which is called 50 North, to the other side. Locals will know what I'm talking about. But they have pretty modern, snazzy looking stores, Emily. This is not a company that is stuck in the past with a retro dated feel. They have a very nice presentation, very contemporary presentation. Lastly, their target demographic is a young demographic, 25-45 years old with annual household income over $100,000. I think, to me, that says young, maybe upwardly mobile, two earner households, you could be each earning 50,000 and then moving up. I think they're targeting a really nice group of potential customers.

Flippen: It's so funny that your experience with LoveSac was driving past this modern store and seeing what is a very aspirational brand targeted at people who have a relatively high household income. In my experience, I remember LoveSac from my, I want to say middle school days, when my parents would drop me off at the local mall, my friends and I would get these smoothies and then go sit in the LoveSac store, which was themed, as I said before, like a 70's basement. The logo was very retro, they're playing music, the whole place was set up like a 70's lounge. It was amazing to me just what a 180 this business has done from what was a relatively low end product. I say relatively because Sacs were never cheap. They were still branded, but they were cheaper than they were today. They were achievable to a larger variety of people than Sactionals are today. But they've completely changed that business model going after high-value customers. They make a point in their annual statements to say, we're not interested in trying to lower our prices. We think that lowering our prices will actually degrade the reputation and the brand that we've created with these customers and a relatively large portion of their customers are repeat customers. They're obviously doing a good job of engaging that target demographic, at least ones that have already purchased before. I love the fact that they've completely reversed their business model. Before doing that report back in June 2019, I was fully expecting to see a business that was still stuck in the past, struggling. That's certainly not what we're seeing today.

Sharma: Yes. As we used to say back in the 80's, they're working on their look. [laughs] Emily, you brought up the word 'brand.' Regular listeners know this is a theme that we've got going on in 2020. I just want to read this from one of their press releases. This is actually from a few years ago, and then let's talk about brands. I think this targeting a younger demographic is going to be obviously powerful over the long term. They call the Sactional "the world's most movable couch." They emphasize how easy these modular sections are to box up, allowing owners, "To effortlessly store, stack, carry, and move Sactional pieces from one apartment to another." This has got to be a great pull for a younger consumer who doesn't want to buy a couch, which is, I don't know, 80-90 inches and is going to be hard to move if you're living in New York City or any number of cities in the U.S. and you're a young professional. This sounds really appealing to me if I'm that type of consumer and I can't help but think that this is not the only way that they are building that brand with a key demographic. What are your thoughts on the strength of the brand in general?

Flippen: Well, I'll just quickly mention, I love the fact that you took that quote and highlighted. That's what sets Sactionals apart from the competition. For people who are watching us tape this live, they can see a giant couch behind me in my apartment. I'm a 26 year old millennial. Coming into my own, I mean this in the nicest way, it's a very comfortable couch, but I hate that couch. The reason why I hate that couch is because a couple of years ago I moved into this apartment. When I ordered my U-Haul, they did not include the dolly that I had so kindly requested. My boyfriend and I had to carry up this couch four flights of stairs up to this apartment today. It was an experience. I never want to do it again. There was lots of sweat, there was lots of tears, there was lots of fighting trying to get the edges in. Point is, I almost feel like when put in that situation again, I would rather throw away this couch, [laughs] than have to transport it. I love the idea of Sactionals, I like the idea of a couch that could be easily disassembled and reassembled so it doesn't need to fit any particular space, you can have it look like whatever you want it to look like, and it can move with you and grow with you. I love the brand from that respect, I think in the future, if and when I upgrade couches, I could be a LoveSac customer myself.

As it comes to the value of their brand, we talk about Yeti (YETI -1.65%), for instance, it's the classic example for us, at least, about a brand that we really missed. Yeti never had a previous brand, a previous association from consumers. LoveSac does. Now, that's mostly with older consumers. We are talking about Gen-Z coming into the market. That's not a generation that's likely to remember the original LoveSac days. But that is a little hurdle that I think they need to overcome. But I think they can overcome it. I mentioned earlier that 35% of their sales come from repeat customers. They, generally speaking, have glowing reviews from people who purchase their products. People who are LoveSac customers are obsessed with the brand, obsessed with the product. I think they have an opportunity to expand that. In the most recent annual report, they cited a study they did about brand awareness in their target demographic and found only around 1% of their target demographic in the United States was aware of the LoveSac brand, which really gives them a lot of opportunity to expand awareness and find new customers. Which to me, while it is a risk, also shows a lot of opportunity for future growth.

Sharma: Yeah, to me I think that the aspect of bringing people in who love the brand and can be advocates is really strong. One thing that had burned me in the Yeti analysis [laughs] that I did a few years ago, and I promise actually for frequent listeners this is the last time [laughs] I'm going to talk about at least for a couple of episodes, my missing out on Yeti? But I underestimated the strength of its Instagram followers. I think when I had first looked at this, they had about half a million Instagram followers. This is a company that encourages people to really be glowing about the brand on social media. They've got 839,000 active followers on Facebook, approaching 500,000 followers on Instagram. They have a statistic on one of their recent presentations, that they had 42 million views in 24 hours on their YouTube channel. I'm not sure when exactly that was. This is something that I think is important to incorporate in consumer goods companies. Newer ones, younger ones, with a bend toward a younger crowd, along with your financial analysis is to see how strong they are on social, because it does make a difference. If we take the proposition that Pinterest is going to be a strong company for years to come, simply because it's the social media entity with a strong pull toward being able to monetize the experience, then we should realize how important social media is to the companies that are trying to get their products seen in the marketplace and move products. I like that about this for the long term. I like that they have already a pretty solid following across the platforms that I mentioned.

Flippen: What I like even more is that the following, unlike brands like Yeti, which is paying influencers to sponsor their products, they noted that a lot of the press they're getting, especially from key media influencers and celebrities, is completely unsolicited press. They're not in the business of going out and paying celebrities to buy their products and post about their products. They had a number of celebrities just doing it for free, which I think just further emphasizes that amazing social media and brand presence that they're establishing. When it comes down to their distribution, I think this is probably their biggest opportunity that we haven't yet mentioned. I mentioned at the offset, they took a direct-to-consumer approach with their retail stores when first setting out. They still have this very direct-to-consumer approach, obviously with some of their showrooms and additionally with their e-commerce operations, which have exploded as expected in 2020. But they also have 91 mall-based showrooms, but more importantly, regular, what they call, pop-up shops and retailers that include Costco, Macy's, and most recently, Best Buy. These pop-up shops were nearly 13% of sales in fiscal year 2020. They are going to come out with their new 2021 report at some point in the relatively near future. I can't wait to see what portion of sales the pop-up shops are for that reporting period. Because that to me seems like a really smart, relatively low cost way to get customers and to get brand recognition.

Sharma: Absolutely. Emily, when you walk into a Costco and you're going around, we no longer have a Costco membership, but I remember this when our kids were younger. They have all those tasting kiosks set up around the store and you're hungry, so you're going to stop and sample things. When you're walking, Costcos are so big, and Best Buys are so big. You see the Lovesac pop-up shop, the first thing you want to do is sit down on the couch. I should point out they have what they call an immersive experience. They will sell you that couch while you're sitting down. You don't have to move because they have an iPad which they bring. They can do the whole process from financing to closing the sale on that iPad. So this is really smart. The other thing that I liked about their distribution model, they've got a pretty high sales per square foot associated with their showrooms. I think their most recent investor presentation pegged that at about $2,083 per square foot of showroom space, which is a high number. It's very impressive.

Flippen: Now that we've covered all the great things for Lovesac, I love it would save their financials here for the end. Because you can hear from our positive tone of voice that maybe despite all of the great things going for Lovesac, there's some room to be made up in terms of their financial performance. It's not terrible, but this is not a business that is consistently profitable despite the fact that they have what I see as a really high lifetime value of their customer. I'll pass it off to you, Asit. But when I looked at their finances, the one thing that stood out to me was the fact that the average value of a customer in their first year was over $1,800, which has steadily climbed over the past five years. That was even more impressive considering their customer acquisition cost for that same customer over the past year was around $320. Theoretically, if those were the only customers, they had no other expenses, they should theoretically be profitable on each new customer brought in. Despite some movement in that ratio, it's a ratio above four times lifetime value to customer acquisition, which is pretty outstanding for any business, nonetheless, manufacturers especially of furniture. But they're still not profitable. When you have margins like that, it makes me wonder what it takes to be a profitable business here.

Sharma: That's a great question, Emily. That 50% mark, that's where their gross margins hover around. That's an important mark if you're a manufacturer with your own retail presence. We talked about Sleep Number being up above 55%, hitting 60%, etc. So, you need to be above that mid-water mark to make money in this business. The idea is that you will scale to size, just like any other fast-growing business, take a software company. The thing that's interesting though, is that before COVID, Lovesac was struggling to operate profitably, even though they were growing at annualized rates of 40% revenue growth for the last couple of years in fiscal 2020. Think back to February 2020, just before the pandemic hit, that was the end of their most recent fiscal year. They're going to report on their fiscal 2021 year in a few months because they'll close it at the end of this month in February. In that fiscal year, Lovesac increased its sales by 31% to $148 million. That's pretty good. Its net loss more than doubled to about $16 million. In that year, its gross margin dropped. Gross profit margin dropped by about 5% to that 50% mark that I was talking about. Very iffy structural equation there, because between your manufacturing costs and the cost that it takes to advertise the product plus staff in the stores and pay the rent and keep the lights on in the stores. That below the line expense burden is pretty high.

Now, we're going to fast forward through three quarters of the current fiscal year. They've done pretty well. Sales have increased by about 35% year-over-year in the first nine months, gross margin has ticked up a couple of percentage points to 52%, and the net loss that Lovesac has generated dwindled to about $7 million versus $21 million in the first three quarters of fiscal 2020. I think all of this is good. A couple of things that I'll point out. They've done a great job this year, in this COVID year, of lowering their general and administrative expenses, that's dropped about 10%. Some would argue that that's due to maybe a little bit of sales acceleration. But what's really going on here is a channel shift. Internet sales are up over 240% this year over last year, like so many other retailers we've talked about. As of this last quarter, customers are also coming back into stores which are now 100% open with some limitations and how you can move around in the stores. They've kept their advertising and marketing expenses fairly steady this period. That's just under 14% of sales in the first nine months of this year.

What's the bottom line to all this? It seems iffy. The company couldn't turn a profit when it was increasing sales out of 40% clip year-over-year. Now it's had a channel shift. It's had a bunch more of these higher-margin Internet sales. Just think of the difference in profitability between selling something online versus staffing a store. I'm a little concerned that as COVID fades a little bit into the rearview mirror and sales normalize a bit, are they going to go back into a loss position? Which again, over the long-term, if you've got a great brand and you can keep opening stores and increasing internet sales, maybe that's not so bad. This could be a compelling story, but it's not as clear cut to me.

A couple of things I want to mention and ask your opinion of all this. Their balance sheet's pretty clean. They've got about $64 million in working capital, that's the excess of their current assets like cash and merchandise inventories, receivables over accounts payable and other current liabilities. They turned cash flow positive this year on an operating business, they generated $6.9 million in operating cash flow year-to-date. Of course, they've invested in fixed assets by the same amount, so free cash flow is basically zero. This big picture is iffy. Emily, your thoughts?

Flippen: It's funny because whenever I see businesses, one of the questions I ask myself, especially if they are unprofitable businesses, if I was behind the steering wheel, what would I do? What direction would I take this business? Then, what do you expect management to do? I spend a lot of time thinking about, well, how can I make this business profitable? They had a profitable quarter last quarter, largely as a result of this huge increase of e-commerce sales, which to your point kept their costs relatively, unusually low. I thought to myself, well, I don't know if I like it. There's no way I can see this business being profitable as it exists today. Then I caught myself saying that "as it exists today." I find myself more interested because as I thought about it more deeply, especially that brand penetration, I thought to myself, I think a lot of their growth, it's probably going to be a year from now, two years from now, despite the fact that you may look at the stock price over the past year, I think you've missed the boat. I actually think their penetration is much lower than where it will be in the future, which further highlights the need for their business today to be spending a lot of money on sales and marketing, which they're not spending a ton right now, to be honest with you. But to keep themselves relatively unprofitable for the time being, for the purpose of establishing a much stronger brand with much higher levels of awareness, with a much larger customer base.

 When they get that customer base up, that 35% repeat sales is outstanding for a furniture business. I think it shows a lot of potential for Lovesac to be the next Yeti-esque brand in young consumers' minds. Obviously, I'm aware of the fact that YETIs are much cheaper than a new couch. But this is all to say that I don't mind the fact that they're unprofitable as much as I did when I initially started my research. I can't say that if I was in management's position that I would go out of my way to actually change their strategy. I think I would be very cautious opening new showrooms. I would want to keep as many sales as possible, either in pop-up stores or on their online channel. But I actually like the direction that Shawn and his team are going. I can't say that I can really dock them too badly for it. I actually like this business a lot more than I thought I would.

Sharma: It's interesting. I think one of the things that's really going well for them is they have a very big total addressable market. Everyone gives different figures. But according to management, they think their total market opportunity over a number of years is $31 billion. That's the total market for couches, chairs, and seating. Now, they're only added a couple hundred million dollars in revenue annualized. Even if they crack a couple of percentage points of that market, there's a lot of room for them to grow. To your point, Emily, Lovesac is getting back into the accessories business. Now, that hit them in their first iteration as a company, they were overextended as you so nicely narrated on accessories and built up a lot of excess inventory that way. But I think they are being smarter about it this time around. They have an idea that they are a platform, not just a product. They are gradually extending out accessories that go with these sectionals. I think that's a great move for them. Yeti did the same thing. I mean, they started with the big coolers and they moved on to those small, very expensive thermos cups, etc. This is not a bad model to undertake.

The question I think for me is going to be some of the investments that Lovesac has made. This goes back to the hidden scheme of things. They're investing in their warehouses, in their CRM technology, customer relationship management technology, and their supply chain. I think they can find some margin points there. How good are they going to be at executing that? Then, how good will they be at exploiting. I think what you pointed out, the most important thing about this company is that customer loyalty, that high average spend and lifetime value, if they can do these two things together, those margin points will take care of themselves in the long run. This could be an interesting company, and as you point out, it's nothing to be too terribly scared of. I think and I will check here that their stock has run-up in the last year. They are still trading at maybe two or three times their annual revenues, which is not terribly expensive.

Flippen: Before we move on to some of the risks with this investment, I feel the need to touch on management a little bit deeper, and the reason is because I mentioned I wrote up a research report in June 2019. I actually did it because I was pitching the company for Rule Breakers, which was one of the teams I was working on two years ago under David Gardner. As a team member for Rule Breakers, each of us had one company a month that we would pitch to David and keep our fingers crossed that David picked it, but I actually pitched LoveSac. I admittedly was a little tepid in my pitch because it was a business that I think had a lot of challenges and still does have a lot of challenges and a lack of transparency for what the business may look like in just a few years, but definitely a turnaround story. The other analysts, I think, had a good chuckle of it probably rightfully so. But I remember David's response was, "I actually know their CEO, Shawn Nelson." He is deeply involved with conscious capitalism. It's a cohort of leaders and influencers who are focused on improving capitalism for the conscious good. Shawn has done a lot of talks at conscious capitalism alongside David and many Fools.

I like the fact that his focus is so much on sustainability, and I'll just briefly touch on how that can benefit the business. He knows that one-third of landfills are actually filled with furniture. He said that he was shocked when he heard that number around 30% of all stuff in landfill is furniture, and he thinks that LoveSac and their products being lifetime products, products that they expect for someone to buy and literally keep forever to adjust for their life no matter where it takes them, can really make a tangible good impact on the world. I like listening to him speak. I think he has a vision and a mission for LoveSac and its future, and I respect that.

I also think that can make a tangible business impact for investors because the core demographic for which LoveSac is now trying to sell to, millennials and Gen-Z, as they come into that 25-45 age range, these are people who go out of their way to make conscious decisions wherever they are purchasing, especially making big purchases. I think that has a little bit of power behind it. Nelson is a bit of a character, I will say that. He's not terribly invested in the company, I think he owns around 1.5% of the shares. First half founder, it's not like Elon Musk invested. But he is still invested, and I think he has a clear vision for where he wants LoveSac to be in the future.

Sharma: I have a strong traction for companies that have sustainable bents. This is one of the things, a founder who is still involved in the company. Correct me, Emily, 1.5% ownership?

Flippen: Yeah, exactly.

Sharma: It still is a stake, but not a huge stake. But obviously as a company grows, it's meaningful with this kind of bent to make the world better. That's a really good selling point when you're out trying to choose a big ticket item that you don't buy every day, so that definitely is compelling. We will have to follow this very colorful CEO along with the company for years to come, I think.

Flippen: I guess I'll end off here with a question for you, Asit. Typically I ask some form of are you going to buy the stock, if you're on a desert island and you have to choose between two things. I'll rephrase the question this week though and I'll ask you: if you could go back, I believe it was two weeks ago, when you're forming our consumer goods basket of those five businesses, let me see if I can remember them off the top of my head. We had Grocery Outlet, Peloton, Beyond Meat, Dollar General, and there's one that I'm missing.

Sharma: Sleep Number.

Flippen: Sleep Number, of course.

Sharma: Yeah, that's the five.

Flippen: Sleep Number. [laughs] Which you add LoveSac to that list of five, and if so, which one would you have kicked out?

Sharma: It's a great question.

Flippen: One that I asked you totally with no preparation by the way, so I apologize. [laughs]

Sharma: Absolutely. Well, to be honest, I have the thought, and this always happens to me right after we wrap that episode. I thought, should I have kicked out Dollar General and offered up Revolve Group? We've done a show on Revolve Group, I think, in December or November, which is an e-tailer that I'm very interested in. [laughs] With the Dollar General, which was the weakest pick in some ways of the group in terms of a flashy investment, but one that's given astounding numbers for Dollar Store over the last five years. It's tough because one or two ideas come to you later. I know which one I probably would have kicked out, and that would be Dollar General just to take some beta buffer. Just to be a little technical, it's Tuesday. [laughs] Take some of that buffer off the table of risks and say, let's go all in because we're investing for the long term anyway. I would probably would've taken out Dollar General. This could've been a candidate for that for sure. I think I would lean Revolve Group, just because I'm more knowledgeable about it and I have a stronger belief in what it's going to do over the next several years. But despite what I feel are the iffy financial equations, I buy your argument that with long-term growth and just penetrating this market with those millennial consumers that have it, you could do pretty well. I would not have a problem if we went back in time. I forget what it's called, the time-turner in Harry Potter. But if we are back now doing that episode right now, yeah, I could see this. It would be one that I would probably be cautioning. Well, this might be one of the more risky ones of the group, but it's got some potential. How about you? Would you have removed any of the five and inserted this one, LoveSac?

Flippen: It's funny that you've cooled down a bit on Dollar General, because I feel like since we aired I've warmed up a bit to Dollar General, and I'm not sure that Dollar General will be at the top of my list to remove from that basket. I actually think Grocery Outlet probably is the one that I have the most questions about. I really love how unique the business is, and I love owning it now because it adds such a unique diversity to my portfolio, but I never would've gotten otherwise. But I could have seen kicking that one and putting in LoveSac or Revolve Group, to your point, both really great businesses.

Sharma: Yes. It's never too late to start thinking of a 2022 basket, [laughs] so we'll see. We're working on ideas for next year. Hopefully they're all don't shoot to the moon in the meantime.

Flippen: I love that.

Sharma: Emily, do we have like time for two bullet risks on this and then we'll head on that at this episode?

Flippen: Yes, please. I apologize. I skipped right over the risks.

Sharma: Okay. You've got a great win here. What's your risk and I'll give mine?

Flippen: Yeah. My biggest risk right now is that with all of these businesses, the pandemic has really accelerated sales and decreased marketing expense, driving people online, driving people to invest in their home and their workspaces at a level that we haven't seen historically, so I wonder what the normal looks like for this business. I worry a little bit about the near to medium term what their sales and margins looked like as people who wanted to buy furniture, had the opportunity to buy furniture, and are no longer making the same purchases throughout 2021, at least not at the rate they were in 2020.

Sharma: Yeah, well considered. For mine, I just think increased competition could be a risk down the road. I believe it caught the attention of some other big retailers. If you actually search for sectional Wayfair, Wayfair won't show you a sactional, I guess they don't have any agreement. But they will show you these sectionals, these modularized sectionals that you can buy. You can find modular couches now at Ikea. They've been drumming up interest in one of their modular sectional couches. I think as time goes on, we'll see some competition in that space. But again, they've got a unique product, they've got patents on the way that they connect, and they're really, really easy to move around and to move, as I said earlier, from apartment to apartment or house to house. That's a risk to consider. I don't think it's a game breaker type risk, but keep it in your purview if you are an investor or a future investor in LoveSac.

Flippen: Good point. Well, Asit, as always, thank you so much for joining.

Sharma: Thank you, Emily. This was really, really fun.

Flippen: This was fun, I love it. [laughs] Listeners, that does it for this episode of Industry Focus. If you have any questions or just want to reach out, you can always shoot us an email at [email protected] or tweet it us @MFIndustryFocus. As always, people on the program may own companies discussed on the show, and The Motley Fool may have formal recommendations for or against any stocks mentioned, so don't buy or sell anything based solely on what you hear. Thanks to Tim Sparks for his work by the screen today. For Asit Sharma, I'm Emily Flippen, thanks for listening and Fool on!