It’s not everyday you stumble across a company that emerged from bankruptcy and has enormous upside potential, but Lovesac (NASDAQ:LOVE) is one such firm.
Lovesac is a furniture manufacturer with a twist. Unlike most manufacturers who give up margin throughout the distribution chain to third party middlemen, Lovesac’s sales model is direct-to-consumer (DTC).
After exiting Chapter 11 bankruptcy, Lovesac discovered that modular couches and beanbag chairs were popular items that it could sell online and in its 140+ showrooms.
Soaring Sales & Profits
Top line sales at Lovesac are up 56% year-over-year while earnings beat consensus estimates handsomely.
Wall Street forecast an earnings loss of $0.12 per share whereas the company actually reported a profit of $0.12 per share. This most recent quarterly beat follows the prior quarter’s 87% beat against consensus estimates. Indeed over the past 3 years, LOVE has grown earnings per share at a compound rate of over 51% annually.
What Special Sauce Does LOVE Have?
How High Can LOVE Go?
We ran the numbers on Lovesac and were pleasantly surprised on two counts:
- A discounted cash flow forecast analysis reveals upside to $46 per share
- Our target price is significantly below Wall Street’s forecast which sits in a range from $95 to $110
If the most pessimistic Wall Street analysts are right, LOVE share price has upside of 170% and if the optimists are right, the stock could soar as much as 213%. Even if they’re both wrong and our numbers are closer to fair value, the stock still has north of 30% upside potential.
Other metrics confirm that the company is somewhat undervalued. It is trading at a price-to-sales ratio just north of 1 and a price-to-earnings ratio of around 11x.
Wayfair, Ikea and Competition
Lovesac has shown a remarkable ability to innovate in a relatively “boring” space. Beyond modular sofas, it has rolled out speaker systems that can be integrated into its sofas. This kind of innovation allows the company to “up-sell” existing customers on new features to drive further revenues.
But make no mistake about it, Lovesac sits in a competitive landscape with well-capitalized competitors chomping at the bit to steal its market share. Wayfair and Ikea are regarded as selling sofas of similar standard and have broader product selections from which customers can choose.
The challenge for Lovesac is to continually innovate in a world where the gorillas of the industry are well aware of its traction and can rapidly keep pace with its new rollouts.
Another challenge both today and for the foreseeable future is the threat of inflation. As consumers tighten their pocketbooks due to rising oil prices, many will hold off on a discretionary sofa purchase or opt for less expensive alternatives.
So, Will LOVE Make You Rich?
The company has grown rapidly over the past few years and is forecast to top $1 billion in sales by 2026. If it can maintain its margins as it should, the company could certainly rise to its intrinsic value about 30% higher or overshoot closer to Wall Street analysts’ estimates targets in the $95 to $110 range.
That will depend to some extent on the traction the company enjoys with consumers. Will they adopt new innovations like speakers in sofas and select other add-on products post-sale?
Perhaps. But it’s not needed for the company to still grow handsomely over the next 3-5 years.
While the company doesn’t yet have a brand moat, it’s likely to acquire one during that time frame. These combined tailwinds should offset inflation risks. And certainly if the Fed were to backtrack or pause their current policy of interest rate hikes, expect Lovesac share price to respond very favorably.