Furniture company Lovesac Co. LOVE has recorded a 40% decline in its stock price in the past year. However, I think it has turnaround potential due to its online growth strategy, product innovation and its increasing number of showrooms.
Online growth potential
The company is investing in its website to improve the online shopping experiences of its customers. For example, in its fiscal 2020 third quarter it launched a page on its website that is designed to mimic its mobile app. This could make it easier for the company’s customers to order products online and lead to an increase in the number of customer downloads of Lovesac’s mobile app in the third quarter.
Lovesac is also increasing the amount it spends on online advertising. This could boost its financial performance due to its average sales per online customer of over $4,000 being higher than its in-store average sales per customer.
Product innovation
The retailer launched new products in the third quarter that have resonated with its customers. For example, it released a new storage seat and a power hub in its Sactionals customizable furniture range. They provide additional storage and mobile phone charging facilities, respectively.
The company reported that the two new products have driven its average customer order value $150 higher compared to the same quarter of the previous year. The new products can also easily be fitted to furniture previously sold by the company. This could mean that they appeal to Lovesac’s existing and new customers, which may catalyze the retailer’s future sales.
Store prospects
Lovesac’s continuing investment in expanding its number of showrooms could strengthen its financial prospects. It opened four new showrooms in the third quarter and it expects to open a further seven showrooms in the fourth quarter. Its new showrooms cost around $350,000 per location and it takes them just two years to recoup that initial investment in profit.
In addition, the retailer launched four small showrooms within existing Macy’s stores in the third quarter. They are staffed by Lovesac’s employees and carry the same digital technology as its larger showrooms. They have received positive customer responses, according to the company’s third quarter update, and could help the business to acquire new customers.
Potential threats
The trade war between the U.S. and China has negatively impacted Lovesac’s profitability. Its gross margin has fallen 3.7 percentage points in the first three quarters of fiscal 2020 compared to the same period of the previous year. The company now expects to report a loss in fiscal 2020. Should there be additional tariffs placed on imports from China, it could cause investor sentiment towards the company to deteriorate.
In response, the company is relocating its production from China to countries such as Vietnam and Malaysia. It expects to manufacture the majority of its goods outside of China by the end of fiscal 2021, and stated in its third quarter update that its gross margin will gradually improve over the medium term.
In addition, Lovesac is investing in automation in its distribution centers to reduce the number of tasks that are completed manually. This should reduce its costs and make the business more efficient. It also plans to open two new distribution centers in fiscal 2021. This could improve its product availability and help it to expand into new regions where it currently does not have any stores.
Outlook
Market analysts forecast that the company will reduce its loss per share from $1.08 in 2020 to $0.74 in 2021. Its growth strategy suggests that this trend could continue, which may catalyze its stock price performance in the upcoming years.
Disclosure: the author has no position in any stocks mentioned.
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