Is Lovesac Stock a Buy? Furniture company Lovesac (NASDAQ:LOVE) is a largely overlooked stock that could have surprising upside.
The company, which once filed for chapter 11 bankruptcy, has successfully found a business model that works well and gone on to make a name for itself as a premium furniture retailer. Specifically, Lovesac is a furniture manufacturer and retailer specializing in beanbag chairs, modular couches and other niche furnishings.
The company markets directly to consumers online and also maintains a total of 146 physical showrooms. Though the company markets through multiple channels, all of its sales occur on a direct-to-consumer (DTC) basis.
Lovesac Revenue and Earnings
In the most recent quarter, Lovesac reported total sales of $129.4 million, a gain of 56 percent over the previous year.
Even more impressive were the company’s earnings, which came in at $0.12 per share. This represented a substantial beat, as the consensus estimate for Lovesac’s earnings was a loss of $0.20 per share.
This is the second large earnings beat the company has produced consecutively, following an 87 percent beat last quarter.
These recent earnings reports capped off a solid multiyear run of growth for Lovesac. The company has delivered an average compounded EPS growth rate of nearly 52 percent over the last three years.
This trend, coupled with the notable beats mentioned above, shows Lovesac has at least the potential to continue outperforming when it comes to growth and earnings.
Analysts forecast revenues will reach $653 million in 2023, $777 million by 2024, and $892 million by 2025.
What Sets Lovesac Apart?
While there are many publicly traded furniture companies, Lovesac stands out with its DTC sales model. By marketing directly to consumers, Lovesac can earn higher margins on each product it sells and avoid the complexities of dealing with third-party retailers.
As noted in the most recent earnings call, much of Lovesac’s value is in its branded platform and the fact that customers must directly configure the company’s modular sofas.
This higher degree of customer engagement with the brand leads to word-of-mouth advertising, essentially turning buyers into brand ambassadors.
Lots Of Upside for Lovesac?
Between high growth and relatively low pricing, Lovesac appears quite undervalued. From a discounted cash flow forecast perspective, it has upside to $46.70, representing 31% upside at the time of research.
The stock trades at a forward P/E ratio of 12.0 and a price-to-sales ratio of 1.2. Price-to-book is a bit high at 3.7, but far from outrageous.
Analyst target prices for Lovesac are extremely high compared to its current price level. The median price target for Lovesac stock is $110, 213.3 percent higher than the current trading price of $35.11. Even the lowest estimate of $95 sits 170.6 percent higher.
While it seems unlikely that the stock would jump so far in a single year, analysts are clearly bullish on its prospects long-term. Lovesac could drastically miss these targets and still deliver market-beating returns for investors.
Lovesac could also benefit from short-covering, as the stock has very likely been overexposed to short sellers. 16.6 percent of the company’s floating shares are now represented by short interest. If the price moves higher with future earnings growth, shorts may scramble to buy shares. At the very least, this would support the stock price and could even contribute to even higher prices later on.
What Could Go Wrong For Lovesac?
Although Lovesac has shown some impressive results with its core product line, its offerings are still fairly limited. Recently, the company has rolled out a speaker system that can be installed directly into its sofas, creating an opportunity for new revenues from past customers.
In order to keep growing at its present pace, though, Lovesac will likely need to expand its offerings. The company has succeeded in this so far, but modular couches may have their limits.
Lovesac also faces stiff competition in the furniture space. Sactionals are by no means cheap, giving Lovesac’s target consumers plenty of premium options to choose from in today’s marketplace.
Companies like Wayfair and Ikea offer sofas of similar quality, as well as much larger product lineups for consumers to choose from. Lovesac fills a unique niche with its modular sofas, but the market is far from free of competitors.
Finally, the problem of inflation could present issues for premium furniture companies like Lovesac. With prices rising, consumers may try to delay furniture purchases or opt for cheaper models. It’s not yet clear that this will occur, but sustained inflation could put at least some pressure on Lovesac’s otherwise meteoric earnings growth.
Is Lovesac Stock a Buy?
Lovesac has clocked very high growth for the last three years and expects to grow by 25 percent or more going forward. The company has created a well-branded platform that generates high levels of consumer engagement and invites the possibility of add-on sales as new products are introduced.
The company is undervalued at current levels based on a DCF analysis while consensus analyst price targets give it at least the potential for triple-digit gains over the next 12 months.
The biggest downside for Lovesac is its competition. Better-known furniture brands have much larger moats and a more comprehensive array of products to offer customers. Thanks to its DTC model and somewhat unique twist on premium sofas, however, Lovesac appears to be holding it own.
Lovesac is still young and operating in a highly competitive market. The value and growth prospects of the company, though, could make it worth the risk. Lovesac is far from a sure thing, but there may be substantial rewards ahead for investors who buy before the stock begins moving upward.
Lovesac appears to be a good buy opportunity, provided you’re comfortable with a bit of risk in pursuit of higher returns. Between analyst bullishness and short bearishness, there are some mixed signals associated with this stock. When its likely undervaluation is taken into account, though, Lovesac looks like a reasonable stock to consider adding to a high-growth portfolio.
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