The Lovesac pany(LOVE) - 2022 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements The company's financial statements for the period ended October 31, 2021, show significant growth in assets, driven by increases in merchandise inventories and operating lease right-of-use assets. Total assets grew to $292.8 million from $171.0 million at the start of the fiscal year. Net sales for the thirty-nine weeks increased by 58.1% year-over-year to $302.0 million, turning a prior-year net loss of ($7.0) million into a net income of $13.3 million. However, cash flow from operations was negative at ($15.2) million, primarily due to a significant build-up in inventory Condensed Consolidated Balance Sheet Highlights (in thousands) | Balance Sheet Item | Oct 31, 2021 (unaudited) (in thousands) | Jan 31, 2021 (in thousands) | | :--- | :--- | :--- | | Cash and cash equivalents | $47,862 | $78,341 | | Merchandise inventories | $94,544 | $50,417 | | Total Current Assets | $163,621 | $143,399 | | Total Assets | $292,833 | $171,019 | | Total Current Liabilities | $81,578 | $56,324 | | Total Liabilities | $172,236 | $63,073 | | Stockholders' Equity | $120,597 | $107,946 | Condensed Consolidated Statements of Operations Highlights (in thousands) | Metric | Thirteen Weeks Ended Oct 31, 2021 (in thousands) | Thirteen Weeks Ended Nov 1, 2020 (in thousands) | Thirty-nine Weeks Ended Oct 31, 2021 (in thousands) | Thirty-nine Weeks Ended Nov 1, 2020 (in thousands) | | :--- | :--- | :--- | :--- | :--- | | Net sales | $116,678 | $74,742 | $302,041 | $191,060 | | Gross profit | $58,616 | $41,308 | $163,724 | $99,647 | | Operating income (loss) | $2,971 | $2,534 | $14,237 | ($6,884) | | Net income (loss) | $2,752 | $2,479 | $13,260 | ($6,976) | | Diluted EPS | $0.17 | $0.16 | $0.83 | ($0.48) | Condensed Consolidated Statement of Cash Flows Highlights (in thousands) | Cash Flow Activity | Thirty-nine weeks ended Oct 31, 2021 (in thousands) | Thirty-nine weeks ended Nov 1, 2020 (in thousands) | | :--- | :--- | :--- | | Net Cash (Used in) Provided by Operating Activities | ($15,179) | $6,929 | | Net Cash Used in Investing Activities | ($11,841) | ($7,168) | | Net Cash Used in Financing Activities | ($3,459) | ($614) | | Net change in cash and cash equivalents | ($30,479) | ($853) | - The company operates as a single reporting segment, with products aggregated for financial reporting purposes. Over 95% of net sales come from a singular group of products[63] Net Sales by Product (in thousands) | Product | Thirteen Weeks Ended Oct 31, 2021 (in thousands) | Thirty-nine Weeks Ended Oct 31, 2021 (in thousands) | | :--- | :--- | :--- | | Sactionals | $100,374 | $263,558 | | Sacs | $14,195 | $33,053 | | Other | $2,109 | $5,430 | | Total | $116,678 | $302,041 | Net Sales by Channel (in thousands) | Channel | Thirteen Weeks Ended Oct 31, 2021 (in thousands) | Thirty-nine Weeks Ended Oct 31, 2021 (in thousands) | | :--- | :--- | :--- | | Showrooms | $69,694 | $181,274 | | Internet | $35,542 | $90,198 | | Other | $11,442 | $30,569 | | Total | $116,678 | $302,041 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes the strong performance to growth across all sales channels, particularly a significant rebound in showroom sales post-COVID-19 restrictions. Net sales for the third quarter increased 56.1% YoY to $116.7 million, and for the thirty-nine weeks, they grew 58.1% to $302.0 million. Gross margin for the quarter decreased by 510 basis points to 50.2% due to higher transportation and tariff costs, though this was partially offset by lower promotional discounting. For the thirty-nine-week period, gross margin improved by 200 basis points to 54.2%. The company continues to invest in marketing and infrastructure to support growth, leading to higher operating expenses, but achieved leverage in SG&A as a percentage of sales. Cash used in operations was primarily for inventory investment to support demand and mitigate supply chain risks Results of Operations - Thirteen weeks ended October 31, 2021 vs. November 1, 2020 - Net sales increased by $42.0 million, or 56.1%, to $116.7 million, driven by growth across all channels. Showroom sales saw a significant increase of 67.8% to $69.7 million, with comparable sales up 53.3%. Internet sales grew 38.2% to $35.5 million[103] - Gross margin decreased by 510 basis points to 50.2% from 55.3%. This was primarily driven by a 748 basis point increase in distribution and tariff expenses, partially offset by a 238 basis point improvement in product margin from lower promotional discounting[104] - Selling, general and administrative (SG&A) expenses increased by $12.2 million (46.8%) to $38.1 million, mainly due to higher employment costs (+$6.4 million), rent (+$2.7 million), and infrastructure investments (+$1.3 million). However, as a percentage of net sales, SG&A improved, decreasing from 34.7% to 32.6%[105][106] - Advertising and marketing expenses increased by $4.8 million (44.3%) to $15.8 million to support sales growth. As a percentage of net sales, these expenses decreased from 14.7% to 13.6% due to improved media performance[107] Results of Operations - Thirty-nine weeks ended October 31, 2021 vs. November 1, 2020 - Net sales increased by $110.9 million, or 58.1%, to $302.0 million. This was driven by a 150.0% increase in showroom sales to $181.3 million, which more than offset an 11.4% decrease in internet sales. The shift reflects customers returning to in-store shopping post-COVID-19 restrictions[111] - Gross margin increased by 200 basis points to 54.2% from 52.2%. The improvement was driven by a 367 basis point increase from lower promotional discounts and favorable vendor negotiations, which offset a 167 basis point negative impact from higher distribution and tariff expenses, particularly escalating inbound container costs[112] - SG&A expenses increased by $29.0 million (38.6%) to $104.2 million, driven by higher employment costs (+$16.3 million), rent (+$6.6 million), and infrastructure investments. As a percentage of net sales, SG&A showed significant leverage, decreasing from 39.3% to 34.5%[114][115] - Advertising and marketing expenses increased by $13.2 million (50.2%) to $39.5 million, reflecting the reinstatement of marketing spend as showrooms fully reopened. As a percentage of net sales, these expenses slightly decreased from 13.8% to 13.1%[116] Liquidity and Capital Resources - The company's primary sources of liquidity are cash from operations and its revolving line of credit. Primary cash needs include advertising, inventory, payroll, rent, and capital expenditures for showrooms and infrastructure[120] Cash Flow Summary (in thousands) | Activity | Thirty-nine weeks ended Oct 31, 2021 (in thousands) | Thirty-nine weeks ended Nov 1, 2020 (in thousands) | | :--- | :--- | :--- | | Net Cash (Used in) Provided by Operating Activities | $(15,179) | $6,929 | | Net Cash Used in Investing Activities | $(11,841) | $(7,168) | | Net Cash Used in Financing Activities | $(3,459) | $(614) | | Net change in cash and cash equivalents | $(30,479) | $(853) | - Net cash used in operating activities was $15.2 million, primarily due to a $44.1 million increase in inventory, which was a strategic investment to support sales growth and mitigate supply chain disruptions[123] - The company has a $25.0 million revolving credit facility with Wells Fargo. As of October 31, 2021, borrowing availability was $22.5 million, with no outstanding borrowings[129] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk exposure is to interest rate fluctuations related to its revolving credit facility, which is tied to LIBOR. Management does not believe this risk is material and does not currently use interest rate hedging instruments. The company is also aware of the upcoming transition away from LIBOR and will pursue alternative interest rate calculations as needed - The company's main market risk is interest rate risk from its borrowing activities under the line of credit with Wells Fargo, which may bear interest at a rate tied to LIBOR[135] - The company acknowledges the planned discontinuation of LIBOR after 2021 and notes that its credit agreement includes provisions for alternative interest rate calculations, such as the Secured Overnight Financing Rate (SOFR)[136] Controls and Procedures Based on an evaluation conducted by management, including the CEO and CFO, the company's disclosure controls and procedures were deemed effective as of October 31, 2021. Additionally, there were no material changes to the company's internal control over financial reporting during the third quarter - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this report[137] - There were no changes in internal control over financial reporting during the thirteen weeks ended October 31, 2021, that have materially affected, or are reasonably likely to materially affect, internal controls[138] PART II. OTHER INFORMATION Legal Proceedings The company reports that it is not currently a party to any legal proceedings that would be expected to have a material adverse effect on its business, financial condition, or results of operations - The company is not presently a party to any legal proceedings that would individually or in aggregate have a material adverse effect on its business, operating results, financial condition, or cash flows[141] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the fiscal year ended January 31, 2021 - No material changes have been made to the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended January 31, 2021[142] Unregistered Sales of Equity Securities and Use of Proceeds This item is not applicable for the reporting period - This item is not applicable[143] Defaults Upon Senior Securities This item is not applicable for the reporting period - This item is not applicable[144] Mine Safety Disclosures This item is not applicable for the reporting period - This item is not applicable[145] Other Information There is no other information to report for this period - None[146] Exhibits This section lists the exhibits filed with the Form 10-Q. Key exhibits include the company's Annual Incentive Compensation Plan, Director Compensation Policy, an employment agreement with Mary Fox, an amendment to the employment agreement with Jack A. Krause, and CEO/CFO certifications as required by the Sarbanes-Oxley Act - The report includes several exhibits, such as: - 10.1: The Lovesac Company Annual Incentive Compensation Plan - 10.2: The Lovesac Company Director Compensation Policy - 10.3: Employment Agreement with Mary Fox - 31.1 & 31.2: Certifications of the CEO and CFO pursuant to Section 302 of the Sarbanes-Oxley Act - 32.1 & 32.2: Certifications of the CEO pursuant to Section 906 of the Sarbanes-Oxley Act[148]