Description

Summary

Lovesac (LOVE) is narrow 2-product furniture company (primarily modular Sactionals) where pandemic tailwinds have driven impressive topline acceleration and a profitability inflection that have dampened historical skepticism around business model and shifted sentiment in favor of bullish “disruptor” narrative. Stock’s up 4x since start of 2020 on beat/raise cycle and bulls see more upside on sustained momentum dynamics. 

Bull case reflected in current price is LOVE is a pandemic winner with initial in-stock and DTC advantages accelerating brand awareness/exposure and driving enhanced appreciation of Sactional value prop/utility (i.e. expensive but worth it, designed for life, endlessly configurable etc). And sustainability of consumer spending shifts in favor of homegoods/furniture driven initially by SIP then WFH/nesting trends likely prove more durable than expected even in the face of increasing consumer mobility and reopening retaking wallet share. 

While demand incl triple-digit 2-year growth YTD incl F3Q guide is impressive and execution notable, bear case is LOVE is more pandemic lottery winner than sustained beneficiary and advantages prove more transitory up and down the P&L. Both timing and improved r/r now lining up as spike on recent better F2Q print/topline guide takes market cap back above $1B just as LOVE now begins lapping completely benign promo dynamics (nearly 50% of last year's F2Q sales from -40% off Heroes promo). 

Weak F3Q profitability guide incl GMs -560bps (2-yr -70bps) largely attributable to supply chain but increasing promos likely a large component. Given cont’d perception Sactionals are “expensive” customers had been conditioned pre-pandemic to purchase the product on sale and this pattern is likely beginning to reassert itself as both consumer urgency and availability advantage fade. In addition to unprecedented laps and diminishing full-price selling, add’l profitability pressure likely from diminishing AUR and mix-shift benefits (Sactionals as well as high-margin accessories). Sactional shift has been driving higher CLV despite rising CAC which is expected to persist esp as showroom growth accelerating (+26% y/y) and marketing intensity increasing (adv & marketing +82% y/y in F2Q). Delayed new product intro this qtr also likely to usher in incremental costs. While Street likely expects guide remains sandbagged as has been pattern in recent qtrs, F3Q guide for ($3)-(7)M EBITDA loss vs $6M EBITDA a year ago notably weak. And even on peak F1H demand LOVE burnt ($6)M vs $7M FCF a year ago.  

On the topline, pandemic-induced +mid-teens% category growth is ~4x pre-pandemic levels and appears likely to begin to mean-revert esp on combo of cont’d steady albeit delayed reopening spending shifts and stimulus laps. Relative in-stock advantage also likely already fading despite industrywide supply chain issues and B&M competition increasingly relevant vs year-ago e-comm advantage. Suspect diminishing productivity of older showrooms while largely offset by accelerating new unit growth this year may become more of an issue. And after F2Q20 spike to +225% y/y customer deposit growth continues to decelerate.

Thesis 

LOVE is asymmetric to the downside as requisite need to continue exceeding expectations for sustained rapid growth will likely feature increasing trade-off with profitability as comps now feature unique combo of pandemic-driven full-price selling, consumer urgency/price inelasticity, enhanced utility and favorable relative in-stock position. Also suspect pandemic-boosted elevated category spend set to decelerate on challenging comps as post-pandemic spending shifts steadily continue to reassert in favor of experiences vs goods. 

Potential 1x pandemic-beneficiary/demand pull-forward overhang, historical skepticism around both underlying value proposition and distribution model and fad risk likely continue to keep sentiment fragile despite recent F3Q topline guide-induced bullish shift. Stock appears rich on any metric ex P/S and LOVE burnt cash in each of 5 years prior to pandemic so any erosion in bullish narrative likely puts 50% downside in play.

Catalysts

Catalysts incl 1/ downward revisions to extrapolated F22-23 est’s caused by deteriorating profitability on peak laps, rising CAC and mean-reversion in purchase behavior/diminished full-price selling highlighting 1x nature of pandemic lift, 2/ decelerating topline growth/inability to continue to guide above Street as category and co-specific tailwinds subside against unprecedented tough laps and/or 3/ increasing evidence of mean-reversion in pandemic-elevated hardgoods spending in gen’l. 

Risks 

Primary risks are 1/ beat/raise dynamics persist as pandemic benefits prove more durable, 2/ sustained higher CLV supports cont’d rise in CAC, and/or 3/ investor focus remains primarily on topline growth.  

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Catalyst

Deteriorating profitability on peak laps, rising CAC and mean-reversion in purchase behavior/diminished full-price selling

Decelerating growth as pandemic category and co-specific tailwinds subside