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Robert Stephens, CFA
Robert Stephens, CFA
Articles (197) 

Why Further Growth Is Ahead for Lovesac

The retailer’s strategy could improve its future performance

June 12, 2019 | About:

Continued investment in technology and the omnichannel experience could boost the performance of Lovesac (NASDAQ:LOVE).

The furniture designer, manufacturer and retailer is rolling out a variety of new features to its online and in-store operations to improve efficiency and the customer experience. It is also becoming increasingly focused on sustainability, which could resonate with customers and help to improve its differentiation versus sector peers.

Although it has surged 42% in the last six months, and faces threats from further tariffs, the stock appears to offer long-term investment appeal.

Investing in technology

The company’s investment in technology could enhance its competitive advantage through an improved customer experience. For example, its app, launched in December 2018, allows customers to design their own products, while providing in-room sizing and 360-degree visualization.

In the most recent quarter, it implemented the podium SMS platform. This enables staff members to request Google Reviews from new customers, which is expected to boost its search ranking, while also enhancing the communication experience between in-store customers and sales teams.

Lovesac is also investing in improved infrastructure. For example, last year it added point-of-sale iPads and chip card payments in all of its stores. It has completed the first phase of its data warehouse implementation, as well as the deployment of a showroom communication portal. This will allow near real-time online sales reporting for all channels, which is expected to improve efficiency, as well as enhance communication between stores and the company’s headquarters.

Growth strategy

In fiscal 2020, Lovesac plans to open between 15 and 20 new showrooms. It also intends to continue with store remodels in order to improve the shopping experience. As part of this, it is conducting consumer research on the customer journey, with remodels designed to enhance the omnichannel shopping experience. The number of its shop-in-shops, which showcase a limited offering of products in high-traffic locations, is expected to further expand after almost doubling in fiscal 2019. An increase in the number of pop-up shops of around 25% in fiscal 2020 could also improve its financial outlook.

With consumers becoming increasingly conscious of the environmental impact of the goods they purchase, the company’s efforts in sourcing and manufacturing to use even more sustainable inputs could resonate with customers. For example, last year it revised its core Sactionals product to use yarn spun from 100% recycled plastic water bottles. This has diverted over 17 million plastic water bottles from the waste stream. Further improvements that are focused on sustainability and the environment are in the pipeline and could strengthen customer loyalty.

Threats

The continuing trade war between the U.S. and China is set to negatively impact Lovesac’s near-term financial performance. The company expects a decline in gross margin for fiscal 2020 when compared to the previous year. The potential for additional tariffs on all imports from China could further hurt investor sentiment toward the stock. This comes at a time when retail sales growth in the U.S. has been weak, with growth of just 1.2% being recorded in the last nine months.

In response to the prospect of increasing tariffs, the company has begun resourcing much of its overseas production to Vietnam. It is now shipping goods from third-party manufacturing operations in the country, with the amount likely to increase over the medium term. It is also seeking to become more efficient in order to reduce overall costs. For example, it is investing $2.8 million in a vertically integrated manufacturing operation in Utah to stuff foam-filled products. This is due to reduce delivery costs, although the efficiencies from the investment are not expected to be experienced until fiscal 2021.

Outlook

Lovesac’s loss per share is forecast to narrow to 22 cents in fiscal 2020 from $3.28 in fiscal 2019. In fiscal 2021, the company is expected to move into a profit, with an earnings per share figure of 7 cents anticipated by the market.

Although its near-term prospects may be uncertain, the strategy it is pursuing could lead to long-term growth in profitability. For example, the investment it is making in improved technology, as well as in enhancing the in-store experience, could lead to a wider economic moat. Likewise, its focus on sustainability and efficiency may provide it with an enhanced competitive position versus its industry peers.

Even though it has gained 42% in the last six months versus a rise of 8% for the S&P 500, the stock could deliver further capital growth.

Disclosure: The author has no position in any stocks mentioned.

Read more here: 

Why Alarm.com Is Set to Post Further Gains 

Why American Eagle Outfitters Has Investment Appeal 

Why Crocs Is Set to Post a Successful Recovery 

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