Lovesac Is Growing And Growing Strong
The Lovesac Company (NASDAQ:LOVE) is one of those stocks I just happened to run across one day and am glad I did. To call it a microcap is an overstatement. The company’s newly reported Q3 revenue is a mere $75 million and barely a blip on the radar for the average S&P midcap holding. Lovesac is more accurately described as a nanocap but one with some big gains ahead.
This company is growing by leaps and bounds because of a combination of factors that promise to support growth over the long-term. On the one hand, Lovesac was well-positioned for the pandemic as a maker of affordable, sustainable, foam-filled furniture accessories. On the other, a developing partnership with Best Buy is also expanding the addressable market.
Lovesac Is Immune To COVID
My first reaction to Lovesac’s earnings history was “pandemic? What pandemic”. The company has been delivering solid double-digit growth since it went publish 2.5 years ago and didn’t miss a beat this year. Revenue growth decelerated a bit in the 2nd quarter, don’t get me wrong, but to a robust 29% from a near 36.5% CAGR and the rebound is already on. The company pulled in $74.7 million in the 3rd quarter which is up 20% from the prior quarter and 43.5% from the same quarter last year.
Revenue strength was driven by sales in all categories that resulted in significant earnings leverage. In terms of the analysts and their expectations, the top-line results beat the consensus by a full 1300 basis points. Sales were underpinned by DTC and eCommerce channels which saw YOY growth in excess of 125%.
Moving down the report, the company’s gross margin expanded 487 basis points delivering a solid beat on the bottom line. Margin improvement is due to cost-leverage sales gains along with favorable product mix and higher realized sales prices. At the operating level, SG&A expenses declined 1,200 basis points as a percent of sales. The GAAP earnings came in at $0.16 reversing a loss in the prior year’s quarter and beating consensus by $1.05. Shawn Nelson, chief executive officer said:
“Our business fundamentals are strong, and our recently expanded partnership with Best Buy broadens our audience and expands Sactionals adoption in an agile, capital-efficient manner. In combination with continued progress on our key strategic initiatives, we are well-positioned to capitalize on product demand and as such, we expect a strong year over year increase of 50% to 60% in Adjusted EBITDA1 for the fourth quarter. We look forward to building on our progress and success as we close out the fiscal year.”
The Analysts Like Lovesac
The company is a hyper-growth story that is likely to see revenue grow exponentially for the next five years or more. The average rating is a buy with a consensus near $40 but take that with a grain of salt. The most recent research came out in September after the Q2 report and doesn’t reflect the latest news. Looking forward, I think the analysts are going to start upping their targets for revenue, earrings, and share prices very soon.
On a technical basis, the shares responded favorably to the news. Price action advanced more than 10% before the opening bell to gap up strongly and test a long-term resistance level during Wednesday’s session. The move looks strong and is supported by the indicators so investors should expect to see the resistance test again if not surpassed. A move above resistance, near $40.50, would be bullish and trigger a buy. Longer-term, a move up to new all-time highs looks likely.
