One of the more interesting companies reporting fresh financials during this otherwise quiet week for earnings is Lovesac (LOVE 1.30%). The furniture maker initially became known for plush luxury beanbag chairs that can be big enough to seat an entire young family. It then scored a hit with premium-priced next-generation sectionals that have home theater equipment buried comfortably in the cushions. Lovesac will announce its fiscal 2024 first-quarter results on Wednesday morning.
Lovesac isn't likely on your investing radar. It certainly isn't on Wall Street's radar. Lovesac hasn't been an active participant in this year's rally for growth stocks. The shares are barely above where they were at the beginning of the year, and a painful 76% off the all-time high they hit two springtimes ago.
This could be a good time to start paying attention. The stock has been volatile following earnings reports, and there are a few reasons why Lovesac could make waves this time around.
1. Slowing growth is still growth
It would be easy to dismiss Lovesac as a luxury brand in an otherwise cutthroat market. There is no shortage of companies creatively marketing gargantuan beanbags at lower price points. Its "Sactionals" line of modular furniture -- which comes complete with wireless charging features and can be ordered with thin Harman Kardon speakers and subwoofers tucked deep inside the sectional pieces -- isn't priced for the masses. The average order value approaches $9,000, three times higher than the average sectional order value.
It would also be easy to dismiss Lovesac as a pandemic-era novelty. When folks were hunkering down at home in 2020 with a fair amount of money saved up and fewer ways to spend it than usual, it was understandable that more of them would splurge on high-end furniture to make their surroundings more comfortable.
Reality is far kinder for Lovesac. The company has rattled off six consecutive fiscal years of delivering better than 30% top-line growth. Its guidance back in March called for revenue gains to decelerate to a 7% to 14% increase here in its fiscal 2024, but it could be worse. One of its rivals, the country's leading online furniture retailer, has posted eight straight quarters of year-over-year declines in sales.
Lovesac's outlook for slowing growth wasn't a deal breaker for investors when it was revealed during its last financial update in late March. The stock still rose 13% on the news. However, it has more than given back those gains with a 14% slide since its well-received earnings report, setting the stage for a potential repeat performance on Wednesday. The question will be whether or not it can sustain that possible pop this time around.
Image source: Lovesac.
2. Bottom-line beats are the norm
Unlike the profitless online furniture retailer with two years of quarterly revenue declines, Lovesac is profitable. It's actually very profitable. Back in March, it was modeling for net income per share of $1.83 to $2.24 for this fiscal year.
Even better, Lovesac management is routinely conservative when it comes to its bottom-line guidance. Wall Street pros fall for it, and the premium furniture company has rarely failed to exceed analysts' consensus earnings expectations. Take a look at just the last four quarterly updates.
| Quarter | EPS estimate | EPS actual | Surprise |
|---|---|---|---|
| Q1 fiscal 2023 | ($0.21) | $0.12 | 157% |
| Q2 fiscal 2023 | $0.41 | $0.45 | 10% |
| Q3 fiscal 2023 | ($0.76) | ($0.55) | 28% |
| Q4 fiscal 2023 | $1.72 | $1.74 | 1% |
Data: Yahoo! Finance. EPS = earnings per share.
Last quarter's beat on earnings wasn't much to write home about -- a modest 1% ahead of where the pros were perched during the seasonally potent fiscal quarter ending in January. The magnitude of its beats may seem to be shrinking, but, as noted, the stock still rose 13% the day that report came out. With the shares lower now than they were the day before its last financial update, it may not take much to send them higher again.
3. Lovesac is cheap
Most of the growth stocks that continue to trade now at less than a quarter of their all-time highs are either broken or profitless. Lovesac checks neither of those boxes. The company is still growing, and hopefully, if it refreshes its full-year guidance, it will keep doing so. The stock is also cheap by most popular investing metrics.
Lovesac's market cap is just a little more than half of its $651 million in trailing revenue. You wouldn't actually expect a furniture maker to carry a high revenue multiple, but 0.5 times revenue for a growing company with three consecutive years of respectable and positive net margins is still pretty cheap. At the other end of the income statement, Lovesac is trading for just 12 times trailing earnings and 11 times the midpoint of this fiscal year's earnings guidance. It's also trading for less than 8 times Wall Street's consensus earnings target for next year.
A lot can still go wrong for this largely ignored growth stock. Rising interest rates and an iffy economy make it harder for people to justify paying a premium for high-end furniture, even if it's nicely differentiated from cheaper alternatives. And investors should start factoring into their big-picture calculations the fact that the three-year moratorium on student loan payments will come to an end later this summer. For Lovesac, that will mean that a lot of potential customers will have to reroute money they could have spent on furniture toward their previously financed college educations. All that said, I still like Lovesac's chances to stand out as a cheap, growing, and innovative growth stock this week and beyond.
