There hasn't been a lot of love for Lovesac (LOVE -4.11%) these days. Shares of the furniture maker tumbled 21% on Wednesday after it posted poorly received financial results. The company that makes high-end beanbag chairs and high-tech modular sectionals has seen its stock plummet 73% this year, off a blistering 81% since last year's all-time high.
The downticks may seem extreme for a company growing sales at a double-digit percentage clip, gaining market share along the way. However, with guidance pointing to continuing deceleration, an uptick in promotional activity, and general concerns about where the economy and real estate market are heading in the near future, investors are moving to the sidelines. It could be a mistake.
Take a seat
There's no shortage of companies selling beanbags and sectionals, but Lovesac's innovative twists make it stand out. It dabbles in the high end of the beanbag chair market, such as with gargantuan models that are big enough for an entire young family to rest on together. Its introduction of StealthTech products into its sectional beanbags last year turned heads.
Lovesac partnered with Harman Kardon to create thin speakers with wireless charging and even a subwoofer to be tucked inside the sectional pieces. The end product is a surround-sound experience that will be the envy of your friends with home theaters. It's a big-ticket purchase, as "Sactionals" with StealthTech command an average order value of nearly $9,000, roughly triple the average sectional order value.
The company has an an omnichannel approach to selling its goods. You can buy any of its products online, and Lovesac has made sure it gets noticed by ramping up its marketing spend at a compound annual growth rate of 53% over the past four years. It also has a growing reach at brick-and-mortar stores, currently at 210 showrooms with seasonal pop-up shops and kiosks to demonstrate why folks pay a premium for its cozy chairs and couches.
Lovesac was thriving before the pandemic, but it naturally got a boost when folks were sheltering in place and put a premium on comfortable furniture. Heading into this week's report, Lovesac had rattled off 17 consecutive quarters of net sales rising at least 25% -- including a 45% year-over-year jump in its previous quarter. Guidance three months ago was calling for the top line slowing to a 15% increase. It didn't miss.
Net sales rose 15.5% to $134.8 million, a smidgen ahead of expectations. Lovesac saw a 19% boost in sales at its showrooms, held back by a 6% decline in online sales as more potential customers headed to a physical outlet to kick the tires. Lovesac still fared considerably better than the overall furniture market, which it estimates declined in the mid-teens for the quarter.
Margins contracted. Rising inflationary pressures boosted both component costs and labor, reversing year-ago profitability for the quarter. Lovesac also had to pick up promotional activity compared to a year earlier, when it had no problem getting folks to pay full price for its wares. However, the $0.55-a-share loss it posted was a lot better than the $0.76-a-share deficit analysts were targeting.
The current quarter could prove challenging, and this is why shares sold off despite a beat on both ends of the income statement. Lovesac's outlook sees net sales growth coming in between the high single digits and the mid-teens. Wall Street was holding out for a 20% increase during the seasonally potent fiscal fourth quarter. Instead of accelerating growth, we could be looking at decelerating growth.
You still have to like Lovesac's chances of bouncing back next year. Profit targets should inch lower in the coming days, but for now, Lovesac is trading for just 7 times this year's earnings and only 4 times next year's bottom-line forecast. In a climate of rising rates, it's worth noting that Lovesac is a profitable company with a debt-free balance sheet. Consumer demand for its high-end seating products will take a hit if the economy smacks its head on a recessionary wall next year, but the ceiling is high for this growth stock selling at a single-digit earnings multiple.