Consumer discretionary stocks have been on a roller-coaster ride so far in 2022, in the wake of stubbornly high inflation, rising interest rates, and turbulence from the war in Ukraine. Year to date, the S&P 500 Consumer Discretionary index is down 18.8%, underperforming the broader S&P 500, which has dropped 12.3% in the same time frame. This is rather expected given the questionable economic backdrop, which has prompted consumers to rethink their spending habits of late.
That said, the fresh pullback has created many wonderful buying opportunities for patient, long-term investors. One under-the-radar stock that has caught my attention recently is The Lovesac Company (LOVE 1.00%). The up-and-coming furniture retailer is down 44% since the start of the year, and given its market capitalization of just $568 million today, the stock could reward investors with massive gains in the future.
On that note, let's explore Lovesac's current financial state to help decide whether it's a promising long-term bet.
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Lovesac's sell-off seems unwarranted
Lovesac is a furniture retailer that specializes in modern, high-quality beanbag chairs and sectional couches known as "Sactionals." In late 2021, the company introduced its Sactionals with StealthTech Sound + Charge product line. Its one-of-a-kind technology transforms a traditional couch via invisible embedded speakers (and wireless phone charging), creating an immersive experience for consumers. Today, nearly 88% of its total sales come from Sactionals.
Lovesac's recent stock slump doesn't exactly line up with its financial performance. In the opening quarter of its fiscal 2023, the company's total sales soared 56% year over year to $129.4 million, and diluted earnings per share finished relatively flat at $0.12. Meanwhile, its adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) margin declined 145 basis points to 4.9% versus 6.4% in the same quarter of last year. For the full year, management is guiding for sales growth "in the low 30% range" and for slightly thinner margins than in fiscal 2022, driven by temporarily high freight costs.
The future could be very bright for the already-profitable furniture company. Let's say that Lovesac can generate $1 billion in annual sales by fiscal 2026. That would translate to a five-year compound annual growth rate (CAGR) of roughly 15% from last year. At an EBITDA margin of 10%, the company would generate $100 million in EBITDA, more than double its $46.3 million in fiscal 2022. Assuming an enterprise value-to-EBITDA multiple of 13, which is consistent with today, the company's enterprise value would amount to $1.3 billion. That represents 127% upside from today's levels, offering investors the potential for monstrous gains.
Should investors climb on board today?
Lovesac may not be the flashiest company, but it's a well-run business with a long runway for growth ahead. Recent macroeconomic conditions have clouded investor sentiment about the stock, creating a nice window of opportunity to accumulate shares.
The company has already demonstrated its ability to generate a positive bottom line, and appears like a no-brainer buy at existing valuation levels. I think the furniture retailer could be a multibagger for those who buy at today's lows.
