What happened
Shares of Lovesac (LOVE -0.59%) were down 16% as of 11:40 a.m. ET on Wednesday after the company delivered better-than-expected earnings results for the fiscal third quarter ending Oct. 30.
While the company's earnings and revenue beat analysts' estimates, management took a cautionary tone in providing the outlook for the fourth quarter, which spooked investors and sent the stock tumbling.
So what
Net sales increased by 15.5% year over year, with comparable-sales growth of 8.9%. It was a strong quarter in the context of the economic environment. For example, furniture sales across the industry were down in the mid-teens year over year. Lovesac clearly has a superior brand positioning and is taking significant market share. This is an important green flag for long-term investors.
On the negative side, the company reported a loss of $8.4 million. This compares unfavorably to a year-ago profit of $2.8 million. Lovesac is continuing to experience inflationary costs in transportation, which remains a headwind going into the new year. Product margin also declined due to higher promotional discounting, which helped drive strong sales, but presents another risk to profits in the near term.
Now what
Investors will want to watch sales growth and margins next quarter. While double-digit sales growth looks solid on the surface, the decline in product margin from discounting indicates that Lovesac is not completely immune from lower consumer spending. It's got a strong brand, but if economic conditions worsen in the near term and margins deteriorate, there could be more downside for the stock.
On the other hand, further weakness in the stock would set up a great buying opportunity. The company still has a lot of potential for growth over the long term in a $46 billion market. Lovesac has a healthy balance sheet with no debt and has proven it can generate a profit while investing to expand the business.
