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Lovesac (LOVE - Free Report) , a furniture company specializing in modular designs, faces significant challenges as reflected by its Zacks Rank #5 (Strong Sell) and downward trending earnings revisions. Despite a strong Q4 earnings report and previous sales growth, the stock continues to experience downward pressure.
Coupled with a bearish technical chart pattern and changing consumer spending patterns, Lovesac encounters a challenging landscape, warranting a bearish stance. Lovesac's stock has been stuck in a prolonged downtrend and is nearing its IPO price from five years ago.
Image Source: Zacks Investment Research
Earnings
Earnings estimates for Lovesac have been consistently revised lower over the last year, reflecting falling expectations for the furniture retailer. Full year earnings estimates were halved over that period. Q1 earnings have been slashed from $0.03 per share to -$0.39 per share, a painful flip to net negative profitability.
Over the last few years Lovesac has grown sales at an impressive pace, regularly expanding more than 30% annually. However, those rates of growth are not expected to continue. Analysts estimate FY24 sales growth of just 8.2%, and FY25 growth of 14.3%. Even those figures may be challenging if the economy slows more than expected.
Image Source: Zacks Investment Research
Technical Setup
Lovesac stock has been trending down for the better part of two years, with all major rallies meeting a rush of sellers. After consolidating for the last six months and building out a range, LOVE stock is breaking lower again. The bear flag indicated in the chart below identified a level of support at $23 dollars, which has been lost.
Now below the $23 level, LOVE stock may explore much lower prices. Alternatively, if the price can reverse higher immediately, and retake the level of support, it would invalidate the trade setup, although it looks rather unlikely at this point.
Image Source: TradingView
Falling Retail Discretionary Spending
While consumer spending on items like new furniture experienced a surge during the post-COVID boom, there is now a pullback in discretionary expenses. Encouraged by the flood of easy money, consumers spent far more than normal and likely pulled forward several years of consumer spending.
New purchases like home renovations, automobiles, televisions, computers, and furniture like that sold at LOVE are not items that are purchased regularly. As larger discretionary purchases, more akin to a big splurge. Retailers of these products are likely to experience a significant slowdown until the trough of the business cycle.
According to the National Retail Federation “In the first calendar quarter of 2023, significant U.S. retailers announced plans to open about 2,570 new stores, down sharply from about 4,400 announced openings in last year’s first quarter. They announced plans to close about 1,760 stores, nearly three times higher than the approximately 635 store closings announced in the first quarter of 2022.”
The reality is that as the economy continues to slow down, consumer priorities shift, and uncertainties arise, reducing discretionary expenses.
Contrarianism
From its IPO to now, Lovesac has had an incredible story that equity researchers and investors have reasonably become attached to. LOVE has created a differentiated product and enjoyed incredible sales growth. However, optimistic views of the stock at this point in the business cycle is a risky prospect.
In addition to the challenges facing Lovesac, it is worth noting that many Wall Street analysts still maintain a buy rating on the stock. While consensus opinions can carry weight, it is important to recognize the potential pitfalls of herd mentality in the investment world.
When everyone is on one side of the trade, it can create an opportunity for contrarian investors to capitalize on market inefficiencies. Being a contrarian can be an effective strategy when everyone is on one side of the trade, and in this case, it looks like many investors are still bullish while economic fundamentals deteriorate.
Valuation
Lovesac is trading at a one-year forward earnings multiple of 12.5x, which is above the industry average 10.5x, and below its two-year median of 14.9x. While this is a reasonable valuation, it is still above the industry average. And with the possibility of further compression in earnings looming, it may fall further.
Image Source: Zacks Investment Research
Conclusion
Lovesac confronts significant challenges ahead, marked by declining earnings expectations, a bearish technical chart pattern, and economic headwinds. Investors should exercise caution and closely evaluate the company's performance, and future growth prospects going forward.
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Bear of the Day: Lovesac (LOVE)
Lovesac (LOVE - Free Report) , a furniture company specializing in modular designs, faces significant challenges as reflected by its Zacks Rank #5 (Strong Sell) and downward trending earnings revisions. Despite a strong Q4 earnings report and previous sales growth, the stock continues to experience downward pressure.
Coupled with a bearish technical chart pattern and changing consumer spending patterns, Lovesac encounters a challenging landscape, warranting a bearish stance. Lovesac's stock has been stuck in a prolonged downtrend and is nearing its IPO price from five years ago.
Image Source: Zacks Investment Research
Earnings
Earnings estimates for Lovesac have been consistently revised lower over the last year, reflecting falling expectations for the furniture retailer. Full year earnings estimates were halved over that period. Q1 earnings have been slashed from $0.03 per share to -$0.39 per share, a painful flip to net negative profitability.
Over the last few years Lovesac has grown sales at an impressive pace, regularly expanding more than 30% annually. However, those rates of growth are not expected to continue. Analysts estimate FY24 sales growth of just 8.2%, and FY25 growth of 14.3%. Even those figures may be challenging if the economy slows more than expected.
Image Source: Zacks Investment Research
Technical Setup
Lovesac stock has been trending down for the better part of two years, with all major rallies meeting a rush of sellers. After consolidating for the last six months and building out a range, LOVE stock is breaking lower again. The bear flag indicated in the chart below identified a level of support at $23 dollars, which has been lost.
Now below the $23 level, LOVE stock may explore much lower prices. Alternatively, if the price can reverse higher immediately, and retake the level of support, it would invalidate the trade setup, although it looks rather unlikely at this point.
Image Source: TradingView
Falling Retail Discretionary Spending
While consumer spending on items like new furniture experienced a surge during the post-COVID boom, there is now a pullback in discretionary expenses. Encouraged by the flood of easy money, consumers spent far more than normal and likely pulled forward several years of consumer spending.
New purchases like home renovations, automobiles, televisions, computers, and furniture like that sold at LOVE are not items that are purchased regularly. As larger discretionary purchases, more akin to a big splurge. Retailers of these products are likely to experience a significant slowdown until the trough of the business cycle.
According to the National Retail Federation “In the first calendar quarter of 2023, significant U.S. retailers announced plans to open about 2,570 new stores, down sharply from about 4,400 announced openings in last year’s first quarter. They announced plans to close about 1,760 stores, nearly three times higher than the approximately 635 store closings announced in the first quarter of 2022.”
The reality is that as the economy continues to slow down, consumer priorities shift, and uncertainties arise, reducing discretionary expenses.
Contrarianism
From its IPO to now, Lovesac has had an incredible story that equity researchers and investors have reasonably become attached to. LOVE has created a differentiated product and enjoyed incredible sales growth. However, optimistic views of the stock at this point in the business cycle is a risky prospect.
In addition to the challenges facing Lovesac, it is worth noting that many Wall Street analysts still maintain a buy rating on the stock. While consensus opinions can carry weight, it is important to recognize the potential pitfalls of herd mentality in the investment world.
When everyone is on one side of the trade, it can create an opportunity for contrarian investors to capitalize on market inefficiencies. Being a contrarian can be an effective strategy when everyone is on one side of the trade, and in this case, it looks like many investors are still bullish while economic fundamentals deteriorate.
Valuation
Lovesac is trading at a one-year forward earnings multiple of 12.5x, which is above the industry average 10.5x, and below its two-year median of 14.9x. While this is a reasonable valuation, it is still above the industry average. And with the possibility of further compression in earnings looming, it may fall further.
Image Source: Zacks Investment Research
Conclusion
Lovesac confronts significant challenges ahead, marked by declining earnings expectations, a bearish technical chart pattern, and economic headwinds. Investors should exercise caution and closely evaluate the company's performance, and future growth prospects going forward.