The retail industry has experienced a turbulent year thus far, undergoing a significant deceleration in sales in the spring. One company defying the odds is Lovesac (NASDAQ:LOVE), a small-cap growth stock specializing in modular furniture, specifically, its “Sactionals,” which makes up 90% of its total sales. The company’s recent earnings report surpassed top-and-bottom-line expectations. However, management guidance for a softer-than-anticipated Q2 has led to a downturn in the stock, post-earnings announcement.
Projections for the industry, however, remain optimistic. Expected growth is between 2.5% and 3.5% by the end of 2024, and Lovesac is well-positioned to participate. The stock trades at a relative discount to the industry, making it an intriguing option for contrarian-oriented value investors.
Lovesac Primed For Growth
The Lovesac Company is a technology-oriented firm dedicated to designing, producing, and selling distinct, high-quality furniture. Its diverse product offerings include modular couches or “Sactionals,” premium foam beanbag chairs or “Sacs.” The company utilizes a direct-to-consumer model, marketing its products primarily online, with additional physical showrooms, shop-in shops, and pop-up shops.
Lovesac currently occupies a small slice of the sizable market, indicating substantial room for growth and expansion. With furniture expenditures anticipated to increase annually by 4.96% until 2025, the market is primed for growth and offers promising prospects for the popular brand.
Lovesac’s Recent Financials & Future Outlook
Lovesac’s financial results for Q1 of Fiscal 2025 surpassed analysts’ estimates, with revenue of $132.64 million compared to an estimated $128.07 million. Gross profit increased by $1.4 million (2.1%) in Q1 of fiscal 2025 year-over-year, leading to gross margin expansion of 430 basis points to 54.3%, primarily due to a decrease in inbound transportation costs.
This positive was somewhat offset by increased transportation and warehousing costs and higher promotional discounting, reducing product margin. Earnings per share (EPS) also remained above consensus estimates at -$0.83 compared to the anticipated -$0.96. At quarter-end, cash and cash equivalents stood at $72.4 million, an increase from $45.1 million as of April 30, 2023.
Management has given guidance for the second quarter and full 2025 fiscal year, anticipating Q2 net sales between $152 million and $160 million, an adjusted EBITDA loss between $2 million and $5 million, a net loss between $6 million and $8 million, and a basic loss per common share between $0.37 and $0.53.
For the full fiscal year, projected net sales are in the range of $700 million to $770 million, adjusted EBITDA to go between $46 million and $60 million, a net income between $18 million and $27 million, and a diluted income per common share in the range of $1.06 to $1.59.
What Is the Price Target for LOVE Stock?
Analysts following the company have been bullish on the stock. For example, DA Davidson analyst Michael Baker recently raised the price target on the shares from $24 to $32 while maintaining a Buy rating. He noted that the company’s sales had rebounded in March and April, implying a significant second-half jump.
The Lovesac Company is rated a Strong Buy overall, based on the recommendations and price targets recently assigned by six analysts. The average price target for LOVE stock is $33.67, representing a potential upside of 53.74% from current levels.
The stock has been volatile, with a beta of 2.01. It currently trades in the middle of its 52-week price range of $14.18 – $29.81 and demonstrates negative price momentum, trading below its 20-day (25.00) and 50-day (24.84) moving averages. Yet, the stock appears relatively undervalued based on an EV to EBITDA ratio of 8.40x compared to the Furnishings, Fixtures, & Appliances industry average of 12.11x.
Bottom Line on LOVE
Lovesac warrants consideration. Their recent earnings report saw them beating top-and-bottom-line estimates, underscoring its solid financial performance. Even with a softer Q2 predicted by management, the company’s strong position in a growing market and relative undervaluation compared to industry peers persist as enticing factors, making it an attractive opportunity for value investors seeking upside potential.
