You always read reports and quotes that say stock markets are irrational. Sometimes, certain events make you understand why that saying is true. Furniture retailer The Lovesac Company (NASDAQ: LOVE) experienced it first-hand. It delivered excellent numbers for fiscal Q1 of 2023, but still got pummelled.

The stock has lost 56% in 2022, a lot more than the 30% that the broader Nasdaq Composite index has lost this year. In an ideal world, that should not have been the case. For instance, the company owns barely 1-2% of the highly fragmented $46 billion couch and home audio markets and is in a prime position to grow its share but the stock closed lower after its earnings came out.

Lovesac’s best-selling product is the Sactional, a modular couch that can be configured in a number of ways. In FY22, it accounted for 87% of its total sales.

 

How did Lovesac perform in Q1 of fiscal 2023?

In fiscal Q1 of fiscal 2023 (ended in April), Lovesac reported revenue of $129.4 million for the period, up 56% compared to $82.9 million in the corresponding period in fiscal 2022. However, gross margin fell 450 basis points to 51.1% compared to 55.6% in the year-ago quarter. Net income came in at $1.9 million compared to $2.1 million and the stock was punished because of compressed earnings.

Gross margin was lower due to higher freight costs but SG&ampA (selling, general and administrative) expenses as a percentage of net sales fell 230 basis points to 34.7%. Product margin for the company improved by 190 basis points. 

All of these are good numbers. Freight costs are high because oil prices are high. Once oil prices moderate to regular levels, Lovesac’s product margins will show significant improvement. 

The company said that macro headwinds have gotten more intense in the last few months and that it has observed demand moderation in the last few weeks. This spooked markets even though the company’s numbers beat estimates.

 

Why Lovesac stock remains a buy

Lovesac doesn’t sell furniture the traditional way. It sells stuff via its website and is a direct-only seller. It has shop-in-shop partnerships that it directly operates. The company claims to have powerful insights and data on each of its consumers. It says this helps it build a business based on a product platform instead of a business built on branding.

During the earnings call, CEO Shawn Nelson Nelson said that almost 1/3rd of its customers in the purchase phase, “…tell us that they learned about Lovesac from a friend or family member. Every time we sell a product, it becomes a marketing asset, is unique to us as our broadly appealing product is being showcased and demonstrated by our own customers in their own homes.”

Lovesac’s approach seems to be working. The press release quoted Nelson saying, “… [the results marked] our 16th consecutive quarter of at least 25% net sales growth, and establishing a nearly 50% net sales CAGR since our IPO four years ago.” This is an incredibly good run.

The company is also known for its continuous product innovation and its latest offering in the couch segment is the StealthTech. Lovesac says the product has been selling well shop-in-shop and on Best Buy (NYSE: BBY).  

Lovesac stock closed trading on June 13 at $29.5. The average analyst price target for the stock is $91.29. That’s a potential upside of almost 200%. This is a stock that has been hit beyond a reasonable level and is valued at an attractive multiple. As the CEO said, the company still only owns 1-2% of the total market. It has a long way to go. And there’s no reason why it can’t succeed. It’s an easy buy for long-term investors.

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