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Can Lovesac Stock Keep Climbing in 2022?

By Cory Renauer – Dec 11, 2021 at 5:44AM

Key Points

  • Lovesac stock shot up recently in response to a highly positive third-quarter earnings report.
  • Investors should be impressed with the company's ability to accelerate growth despite a variety of challenges.
  • By market cap, Lovesac is still small enough to provide enormous returns.

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The recent pop could be just a flash in the pan or the beginning of a long bull run.

Shares of Lovesac (LOVE -3.29%) shot up recently in response to an impressive performance in the company's fiscal third quarter. As is usually the case when a relatively small company makes a big splash, investors want to know if it can continue climbing.

Sales of the company's mix and match Sactional sofas and accessories aren't just climbing, they're accelerating. Let's look under the couch cushions to find out if Lovesac can keep it up long enough to provide market-beating returns for investors.

Person sitting on a sectional sofa.

Image source: Getty Images.

What pandemic?

Lovesac's latest fiscal third quarter, which ended on Oct. 31, 2021, was supposed to be a tough one for making comparisons. Instead of making supply chain excuses, management was able to report another quarter filled with impressive signs of explosive growth.

During the fiscal third quarter, net sales soared 56.1% year over year. That's even faster than sales were rising this time last year. 

Why optionality is important

Fast-growing companies that don't find new ways to make a buck usually have a hard time keeping pace. Lovesac's successful expansions into new channels are the reason its rapidly rising top line keeps accelerating.

A year ago, a lot of families stuck at home discovered a new appreciation for quality seating. Lockdowns drove fiscal third-quarter internet sales 125% higher year over year when the company reported a year ago. During this year's fiscal third quarter, internet sales rose just 38.2% year over year.

Comparable showroom sales rose 53.3% year over year in the third quarter. The company's partnership with retail giant Best Buy (BBY -0.21%) also took another interesting step forward. In October, Lovesac launched fancy new speaker systems that retail for around $3,000 and slide right into existing Sactionals. 

More gains ahead

In September, Lovesac launched a new mobile concierge service that allows customers near Seattle and Washington D.C. to demo Lovesac's Sactionals in their own homes before ordering several thousand dollars' worth of furniture. Add in a new speaker system, drink holders, and a couple of ottomans, and a single Lovesac sale can easily run into the five-figure zone.

Lovesac Sactionals are made with quality materials, but they're still just wood, fabric, and foam. At over $100 for replacement seat cushions, there's more room for profits than you'd expect from a furniture maker.

The company's gross profit margin dipped in the third quarter, possibly due to more Best Buy showroom sales. At more than 50% of net sales, though, the company is more than capable of making ends meet while investing for growth.  . Over the past nine months, adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) reached $23.6 million, an 867% increase over the previous year period. 

A stellar third-quarter earnings call boosted the stock to just a hair below its all-time high. Despite already being up more than 300% over the past three years, this small-cap stock still has a lot of room to grow.

Lovesac's market cap is just $1.2 billion at recent prices. If sales keep growing at their present pace, this is going to be a $10 billion company in just a few years.

Cory Renauer has no position in any of the stocks mentioned. The Motley Fool owns and recommends Best Buy. The Motley Fool has a disclosure policy.

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