The Lovesac pany(LOVE) - 2024 Q4 - Annual Report

Part I Business Lovesac is a technology-driven furniture retailer specializing in modular Sactionals and Sacs, sold via an omni-channel platform Net Sales by Product (Fiscal Years 2022-2024) | Product | FY 2024 Sales % | FY 2023 Sales % | FY 2022 Sales % | | :--- | :--- | :--- | :--- | | Sactionals | 91.0% | 89.8% | 87.6% | | Sacs | 7.4% | 8.5% | 10.5% | Net Sales by Channel (Fiscal Years 2022-2024) | Channel | FY 2024 Sales % | FY 2023 Sales % | FY 2022 Sales % | | :--- | :--- | :--- | :--- | | Showrooms | 62.5% | 61.2% | 60.0% | | Ecommerce | 28.5% | 27.1% | 30.2% | | Other | 9.0% | 11.7% | 9.8% | - The company's supply chain is globally diversified, with manufacturing partners in the United States, China, Vietnam, Malaysia, Mexico, Taiwan, Indonesia, and India to mitigate concentration risk[37] - As of February 4, 2024, the company had 909 full-time and 1,082 part-time associates. The workforce was 55% female, with women holding 46% of leadership roles[56] - Lovesac has set long-term environmental goals, including reaching zero waste and zero emissions by 2040 and repurposing 1 billion plastic bottles in its products[47] Risk Factors The company faces significant risks including growth management, supply chain reliance, internal control weaknesses, and cybersecurity threats - Business risks include the inability to manage growth, potential declines in discretionary consumer spending due to macroeconomic factors, and intense competition from a wide range of retailers[66][71][78] - The company is dependent on a small number of third-party suppliers, with manufacturing facilities located in countries like China, Vietnam, Malaysia, and Mexico, exposing it to supply chain, tariff, and geopolitical risks[88][93][94] - Significant financial risks stem from a restatement of prior financial statements due to material weaknesses in internal controls. This has led to an ongoing, non-public SEC investigation and a putative securities class action lawsuit filed in December 2023[138][143][144] - The company is subject to legal and regulatory risks, including unauthorized disclosure of sensitive data through security breaches, compliance with evolving data privacy laws (e.g., CCPA), and the need to protect its intellectual property[86][149][153] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[182] Cybersecurity Lovesac manages cybersecurity risk through a formal strategy overseen by the CIO and Board's Audit Committee - The company's cybersecurity risk management program involves annual reviews of its IT control environment and engages third-party experts for risk assessments and penetration testing[184] - Oversight is provided by the Board of Directors and its Audit Committee, which receives quarterly updates from senior management, including the Chief Information Officer, on cybersecurity risks and initiatives[186][187][188] - The Chief Information Officer, with over 35 years of experience, leads the assessment and management of cybersecurity risks[185] Properties The company leases all its properties, including corporate offices and 230 showrooms across the U.S - The company's principal executive offices are leased in Stamford, CT (22,480 sq ft) and St. George, UT (10,696 sq ft)[189] - Lovesac leases retail space for 230 showrooms throughout the majority of U.S. states[189] Legal Proceedings This section refers to Note 7 of the financial statements for a description of the company's legal proceedings - Information regarding legal proceedings is detailed in Note 7 to the financial statements[190] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[191] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "LOVE"; it retains earnings for growth and does not pay dividends - The company's common stock is traded on Nasdaq under the symbol "LOVE"[194] - The company has never paid cash dividends and does not intend to pay them in the foreseeable future, retaining earnings for growth[195] Cumulative Total Stockholder Return Comparison (2/1/2019 - 2/4/2024) | Company/Index | Feb 1, 2019 | Feb 4, 2024 | | :--- | :--- | :--- | | The Lovesac Company | $100.00 | $96.97 | | Russell 2000 | $100.00 | $139.82 | | S&P 500 | $100.00 | $199.42 | [Reserved] This item is reserved and not applicable - Not applicable[200] Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes the company's financial condition and results, highlighting sales growth, gross margin improvement, and decreased operating income Results of Operations (Fiscal 2024 vs. 2023) Fiscal 2024 saw net sales increase by 7.5% to $700.3 million, gross margin improve by 450 basis points, but operating income declined due to higher expenses Key Financial Results (Fiscal 2024 vs. 2023) (in thousands) | Metric | Fiscal 2024 (in thousands) | Fiscal 2023 (in thousands) | Change % | | :--- | :--- | :--- | :--- | | Total Net Sales | $700,265 | $651,179 | 7.5% | | Gross Profit | $401,043 | $343,651 | 16.7% | | Gross Margin | 57.3% | 52.8% | +450 bps | | Operating Income | $30,076 | $36,966 | (18.6)% | | Net Income | $23,861 | $26,488 | (9.9)% | - The increase in net sales was driven by new showroom openings, with 46 openings and 11 closures during fiscal 2024, resulting in 230 total showrooms[224][226] - The 450 basis point increase in gross margin was primarily driven by a 670 basis point decrease in inbound transportation costs, partially offset by a 100 basis point decrease in product margin from higher promotional discounting[229] - SG&A expenses increased by $48.3 million (22.4%), driven by higher employment costs ($21.3M), increased overhead including professional fees for the financial restatement ($18.6M), and higher selling-related expenses ($6.0M)[230] Liquidity and Capital Resources The company's liquidity is strong, with cash and equivalents at $87.0 million driven by operating cash flow, and an undrawn $40.0 million credit facility Cash Flow Summary (in thousands) | Cash Flow Activity | Fiscal 2024 | Fiscal 2023 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $76,441 | $(21,375) | | Net cash used in investing activities | $(29,211) | $(25,549) | | Net cash used in financing activities | $(3,727) | $(1,935) | | Cash and cash equivalents at end of period | $87,036 | $43,533 | - The company believes cash from operations, its credit facility, and existing cash balances are sufficient to meet working capital and capital expenditure needs for at least the next 12 months[235] - As of February 4, 2024, the company had no outstanding borrowings under its $40.0 million credit facility and had $36.0 million of availability[245] Critical Accounting Policies and Estimates Management identifies critical accounting policies involving significant estimates, including Barter Arrangements, Impairment of Long-Lived Assets, and Merchandise Inventories - The company has a barter arrangement to exchange open-box inventory for media credits. In fiscal 2024, it recognized $12.3 million in barter sales. Estimating the fair value of these credits is a critical estimate[249] - Long-lived assets, primarily showroom property and equipment, are reviewed for impairment if events indicate the carrying amount may not be recoverable. No impairment charges were recognized in fiscal 2024 or 2023[250][251] - Merchandise inventories are carried at the lower of cost or net realizable value, with cost determined on a weighted-average basis. The company adjusts for obsolescence based on historical trends and future sales estimates[252] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks, primarily from interest rate fluctuations and inflation, which it mitigates through pricing and cost controls - The primary interest rate risk is from the floating-rate revolving line of credit, though no material impact on results is anticipated[259] - The company experienced inflationary pressures in fiscal 2024 and monitors its effects, using pricing strategies and cost reductions to minimize impact[260] Financial Statements and Supplementary Data This section presents the company's audited financial statements and notes, with an unqualified audit opinion on both financials and internal controls Balance Sheet Summary (in thousands) | Account | Feb 4, 2024 | Jan 29, 2023 | | :--- | :--- | :--- | | Total Assets | $482,180 | $408,626 | | Total Current Assets | $214,448 | $187,715 | | Merchandise Inventories, net | $98,440 | $119,627 | | Total Liabilities | $264,684 | $215,532 | | Total Current Liabilities | $106,356 | $82,041 | | Total Stockholders' Equity | $217,496 | $193,094 | Statement of Operations Summary (in thousands) | Account | Fiscal 2024 | Fiscal 2023 | Fiscal 2022 | | :--- | :--- | :--- | :--- | | Net Sales | $700,265 | $651,179 | $498,239 | | Gross Profit | $401,043 | $343,651 | $273,532 | | Operating Income | $30,076 | $36,966 | $40,578 | | Net Income | $23,861 | $26,488 | $47,488 | | Diluted EPS | $1.45 | $1.66 | $2.96 | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure The company reports that there have been no changes in or disagreements with its accountants on any matter of accounting principles or practices, or financial statement disclosure - None[262] Controls and Procedures Management concluded that disclosure controls and procedures were effective, having successfully remediated previously identified material weaknesses as of February 4, 2024 - Management concluded that disclosure controls and procedures were effective as of the end of the period covered by this report (February 4, 2024)[264] - The previously disclosed material weaknesses related to an ineffective control environment have been fully remediated as of February 4, 2024[267][268] - Remediation actions included enhancing the accounting function with experienced hires, updating the reporting structure, and implementing improved controls over manual journal entries and the transportation accrual process[268] - The independent registered public accounting firm, Deloitte & Touche LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting as of February 4, 2024[271] Other Information CEO Shawn D. Nelson adopted a Rule 10b5-1 trading plan for the potential sale of up to 42,000 shares of common stock, expiring December 11, 2024 - CEO Shawn D. Nelson adopted a Rule 10b5-1 trading plan for the sale of up to 42,000 shares of common stock, effective from December 12, 2023, to December 11, 2024[277] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[278] Part III Directors, Executive Officers and Corporate Governance This section provides information on the company's executive officers; further details will be incorporated by reference from the 2024 Proxy Statement Executive Officers (as of April 11, 2024) | Name | Age | Position | | :--- | :--- | :--- | | Shawn Nelson | 47 | Chief Executive Officer and Director | | Mary Fox | 51 | President and Chief Operating Officer | | Keith Siegner | 49 | Executive Vice President and Chief Financial Officer | - Additional required information will be incorporated by reference from the 2024 Proxy Statement[282] Executive Compensation Information regarding executive compensation will be incorporated by reference from the company's definitive 2024 Proxy Statement - The information required by this Item will appear in the 2024 Proxy Statement and is incorporated by reference herein[284] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section details securities authorized for issuance under equity compensation plans, with 996,749 securities remaining available Equity Compensation Plan Information (as of February 4, 2024) | Plan Category | Securities to be Issued Upon Exercise | Weighted-Average Exercise Price | Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by shareholders | 1,567,306 | $38.10 | 996,749 | - The remaining information required by this Item will be incorporated by reference from the 2024 Proxy Statement[287] Certain Relationships and Related Transactions, and Director Independence Information regarding related party transactions and director independence will be incorporated by reference from the company's definitive 2024 Proxy Statement - The information required by this Item will appear in the 2024 Proxy Statement and is incorporated by reference herein[288] Principal Accounting Fees and Services Information regarding principal accounting fees and services will be incorporated by reference from the company's definitive 2024 Proxy Statement - The information required by this Item will appear in the 2024 Proxy Statement and is incorporated by reference herein[289] Part IV Exhibits, Financial Statement Schedules This section lists the documents filed as part of the Form 10-K report, including financial statements, audit reports, and an index of all exhibits - This section lists the financial statements and exhibits filed with the report. Financial statement schedules are omitted as they are not required, not applicable, or the information is included elsewhere[292][293] Form 10-K Summary This optional disclosure section was not included in the Annual Report on Form 10-K - Optional disclosure not included in this Annual Report on Form 10-K[294]