GlobeNewswire Inc | Sep 9, 2020 07:00AM EDT

September 09, 2020

Second Quarter Net Sales Increased 28.7%; Comparable Sales Increased 72.4%Net Loss Improves to $1.1 million; Adjusted EBITDA Improves to $2.2 million

STAMFORD, Conn., Sept. 09, 2020 (GLOBE NEWSWIRE) -- The Lovesac Company (Nasdaq: LOVE) (Lovesac or the Company) today announced its financial results for the second quarter of fiscal 2021, which ended August 2, 2020.

Shawn Nelson, Chief Executive Officer, stated, I am very pleased with our teams resiliency and ability to adapt as we continued to serve our customers in a rapidly changing operating environment. Our operational pivot to focus on digital channels while showrooms were closed or operating in a limited fashion, as well as our efficient marketing efforts, were very effective. We successfully positioned ourselves to capitalize on strong demand tailwinds resulting in second quarter sales growth of nearly 29% and comparable sales growth of approximately 72% versus the prior year period. Importantly, with operational discipline, we successfully managed both our top line as well as our bottom line, in a pandemic disrupted environment, driving an almost 28% increase in gross profit dollars, positive Adjusted EBITDA1of $2.2 million and free cash flow of $9.9 million.

Mr. Nelson continued, The environment remains uncertain and we will continue to be disciplined and flexible as we navigate a dynamic marketplace while remaining focused on advancing the initiatives that underpin our long-term growth strategy. We are working to deliver an elevated and more seamless omni-channel experience for our customers, making select strategic infrastructure investments to support our growth and creating efficiencies across the business as we continue to innovate and expand the Lovesac brand and our universe of loyal customers.

Key Measures for the Second Quarter and First Half of Fiscal 2021 Ending August 2, 2020:(Dollars in millions, except per share amounts)

Quarter Quarter First First Ended Ended % Inc Half Half % Inc August August (Dec) Ended Ended (Dec) 2, 2020 4, 2019 August 2, August 4, 2020 2019Net Sales $61.9 $48.1 28.7% $116.3 $89.1 30.5%Gross Profit^1 $31.1 $24.3 27.9% $58.3 $45.3 28.8%Gross Margin^1 50.1% 50.4% (31) 50.2% 50.8% (66) bps bpsTotal Operating Expense $32.1 $29.2 9.8% $67.8 $59.5 13.8%SG&A $23.4 $22.0 6.5% $49.2 $45.8 7.4%SG&A as % of Net Sales 37.7% 45.6% (785) 42.3% 51.4% (911) bps bpsAdvertising & Marketing $7.2 $6.1 18.1% $15.4 $11.5 34.1%Advertising & Marketing as 11.6% 12.6% (104) 13.2% 12.9% 35 bps% of Net Sales bpsBasic and Diluted EPS Loss ($0.08) ($0.33) (75.6%) ($0.65) ($0.99) (34.1%)Net loss ($1.1) ($4.8) (76.8%) ($9.5) ($13.9) (31.8%)Adjusted EBITDA^2 $2.2 ($3.3) 166.2% ($3.5) ($8.0) (55.8%)Cash Provided by (Used in) $12.6 ($14.9) 184.6% $12.1 ($23.0) 152.4%Operating Activities

1 Estimated gross 25% tariff impact for the second quarter of fiscal 2021 to Gross Profit and Gross Margin was $2.4 million and 387 bps, respectively. Estimated gross 25% tariff impact for the first half of fiscal 2021 to Gross Profit and Gross Margin was $4.8 million and 415 bps, respectively. Estimated gross blended 10% to 25% tariff impact for the second quarter of fiscal 2020 to Gross Profit and Gross Margin was $1.4 million and 295 bps, respectively. Estimated gross blended 10% to 25% tariff impact for the first half of fiscal 2020 to Gross Profit and Gross Margin was $2.4 million and 273 bps, respectively.2Adjusted EBITDA is a non-GAAP measure. See Non-GAAP Information and Reconciliation of Non-GAAP Financial Measures included in this press release.

Percent Increase (Decrease), except showroom count Quarter Quarter First Half First Half Ended Ended Ended Ended August 2, August 4, August 2, August 4, 2020 2019 2020 2019Total Comparable Sales^ 72.4% 43.0% 62.1% 43.1%(3)(4)Comparable Showroom Sales (45.3%) 34.1% (39.0%) 33.0%^(4)Internet Sales 387.2% 73.4% 325.0% 78.1%Ending Showroom Count 97 80 97 80

3Total comparable sales include showroom transactions through the point of sale and internet net sales.4Comparable sales reflect transactions through the point of sale and not necessarily product that has shipped to the customer. Product that has shipped to the customer is what is included in Net Sales. Showrooms were closed as required by local and state laws as a result of the COVID-19 pandemic effective March 18, 2020 but have since reopened in some format. We are abiding with federal, state, and local guidelines with respect to the operating status of our showrooms. During the second quarter, we operated our showrooms with limited openings, by appointment only and/or virtual demonstrations.

Highlights for the Quarter Ended August 2, 2020:

-- The net sales increase of 28.7% was driven by an increase in internet sales of 387.2%, partially offset by a decrease in showroom sales of (58.9%) due to the impact of showroom closures related to COVID-19 and a decrease of (59.3%) in Other sales (which includes shop-in-shops and pop-up shops) related to the impact of COVID-19. -- The gross profit increase of 27.9% was primarily due to the increase in net sales, partially offset by the impact of tariffs. The approximately 31 basis point decrease in gross margin versus the prior year period reflects an increase of approximately 198 basis points in distribution and tariff related expenses, partially offset by improvements of approximately 167 basis points in product costs as a result of vendor negotiations associated with tariff mitigation and continued shift of product sourcing outside of China. -- SG&A expense in the second quarter of fiscal 2021 and second quarter of fiscal 2020 included less than $0.3 million of other non-recurring expenses related to financing initiatives. SG&A expense as a percent of net sales decreased 785 basis points primarily due to leverage of employment costs, rent, and selling related expenses such as credit card fees and pop-up shop fees, partially offset by increases in insurance costs, equity compensation and computer expense related to infrastructure investments. -- Advertising and marketing expense in the second quarter of fiscal 2021 increased approximately 18.1% over the prior year quarter principally due to increased media and direct-to-consumer program spend which contributed to the second quarter sales increase over the prior year period. -- Operating loss was $1.0 million in the second quarter of fiscal 2021 compared to $4.9 million in the second quarter of fiscal 2020. Operating margin decreased to (1.7%) of net sales in the second quarter of fiscal 2021 from (10.3%) of net sales in the second quarter of fiscal 2020. -- Net loss was $1.1 million in the second quarter of fiscal 2021 compared to $4.8 million in the second quarter of fiscal 2020.

Highlights for the First Half Ended August 2, 2020:

-- The net sales increase of 30.5% was driven by an increase in internet sales of 325%, partially offset by a decrease in showroom sales of (46.8%) due to the impact of showroom closures related to COVID-19 and a decrease of (29.2%) in Other sales (which includes shop-in-shops and pop-up shops). -- The gross profit increase of 28.8% was primarily due to the increase in net sales, partially offset by the impact of tariffs. The approximately 66 basis point decrease in gross margin versus the prior year period reflects an increase of approximately 247 basis points in distribution and tariff related expenses, partially offset by improvements of approximately 181 basis points in product costs as a result of vendor negotiations associated with tariff mitigation and continued shift of product sourcing outside of China. -- SG&A expense in the first half of fiscal 2021 and first half of fiscal 2020 included less than $0.1 million and $0.5 million of other non-recurring expenses related to financing and executive recruitment fees, respectively. SG&A expense as a percent of net sales decreased 911 basis points primarily due to leverage of employment costs, rent, selling related expenses such as credit card fees and pop-up shop fees and equity-based compensation, partially offset by increases in insurance and computer expense related to infrastructure investments. -- Advertising and marketing expense in the first half of fiscal 2021 increased approximately 34.1% over the prior year period principally due to increased media and direct-to-consumer program spend which contributed to the first half sales increase over the prior year period. -- Operating loss was $9.4 million in the first half of fiscal 2021 compared to $14.3 million in the first half of fiscal 2020. Operating margin decreased to (8.1%) of net sales in the first half of fiscal 2021 from (16.0%) of net sales in the first half of fiscal 2020. -- Net loss was $9.5 million in the first half of fiscal 2021 compared to $13.9 million in the first half of fiscal 2020.

Other Financial Highlights as of August 2, 2020:

-- The cash and cash equivalents balance as of August 2, 2020 was $54.8 million as compared to $44.2 million as of August 4, 2019. There was no debt outstanding on the Companys line of credit as of August 2, 2020 and August 4, 2019, respectively. The Companys availability under the line of credit was $9.9 million as of August 2, 2020 and $15.8 million as of August 4, 2019. -- Total inventory was $41.0 million as of August 2, 2020 as compared to $40.7 million as of August 4, 2019.

Outlook:

Given the impact of the COVID-19 pandemic and the resulting response by the Company, including cost savings and deferral measures, the Company is providing the following outlook commentary for fiscal 2021:

Mr. Nelson concluded, Coming off a very strong Labor Day, we feel really good about our ability to deliver overall sales growth in the third quarter that is in line with second quarter growth rates. For the full year, we are well-positioned to drive positive Adjusted EBITDA1, coming entirely in the fourth quarter as the third quarter will be pressured by expense shifts and significant marketing increases that are in large part due to COVID-19-driven deferrals from the second quarter. With gross margins that are expected to be down approximately 200 basis points year-over-year in the third quarter, and the aforementioned expense shifts, we expect an Adjusted EBITDA1 loss of $10 million to $11 million in the third quarter. Importantly, we will continue to be nimble and flexible and will remain disciplined in our approach to running the business as we head into the seasonally high volume period of the year.

For its current fiscal 2021 year, the Company continues to expect to generate cash from working capital, to open 15-18 new showrooms, to add two additional regional distribution facilities by the end of the fiscal year, andto have capital expenditures in the $12 million to $14 million range.

Conference Call Information:A conference call to discuss the second quarter of fiscal 2021 financial results is scheduled for today, September 9, 2020, at 8:30 am Eastern Time. Investors and analysts interested in participating in the call are invited to dial 877-407-3982 (international callers please dial 201-493-6780) approximately 10 minutes prior to the start of the call. A live audio webcast of the conference call will be available online at investor.lovesac.com.

A recorded replay of the conference call will be available within two hours of the conclusion of the call and can be accessed online at investor.lovesac.com for 90 days.

Notes

1 Adjusted EBITDA is a non-GAAP measure. See Non-GAAP Information and Reconciliation of Non-GAAP Financial Measures included in this press release.

About The Lovesac CompanyBased in Stamford, Connecticut, The Lovesac Company is a technology driven company that designs, manufactures and sells unique, high quality furniture derived through its proprietary Designed for Life approach which results in products that are built to last a lifetime and designed to evolve as our customers lives do. Our current product offering is comprised of modular couches called Sactionals, premium foam beanbag chairs called Sacs, and their associated home decor accessories. Innovation is at the center of our design philosophy with all of our core products protected by a robust portfolio of utility patents. We market and sell our products primarily online directly at www.lovesac.com, supported by direct-to-consumer touch-feel points in the form of our own showrooms as well as through shop-in-shops and pop-up-shops with third party retailers.

Non-GAAP InformationThis press release includes certain non-GAAP financial measures that are supplemental measures of financial performance not required by, or presented in accordance with, GAAP, including Adjusted EBITDA. We define Adjusted EBITDA as earnings before interest, taxes, depreciation and amortization, adjusted for the impact of certain non-cash and other items that we do not consider in our evaluation of ongoing operating performance. These items include management fees, equity-based compensation expense, write-offs of property and equipment, deferred rent, financing expenses and certain other charges and gains that we do not believe reflect our underlying business performance. We have reconciled this non-GAAP financial measure with the most directly comparable GAAP financial measure within the schedules attached hereto.

We have also presented herein certain forward-looking statements about the Companys future financial performance that include non-GAAP (or as-adjusted) financial measures, including Adjusted EBITDA. This nonGAAP financial measure is derived by excluding certain amounts, expenses or income, from the corresponding financial measures determined in accordance with GAAP. The determination of the amounts that are excluded from this non-GAAP financial measure is a matter of management judgment and depends upon, among other factors, the nature of the underlying expense or income amounts recognized in a given period. We are unable to present a quantitative reconciliation of the aforementioned forward-looking non-GAAP financial measure to its most directly comparable forward-looking GAAP financial measures because management cannot reliably predict all of the necessary components of such GAAP measures, which could be significant in amount.

We believe that these non-GAAP financial measures not only provide its management with comparable financial data for internal financial analysis but also provide meaningful supplemental information to investors. Specifically, these non-GAAP financial measures allow investors to better understand the performance of our business, facilitate a more meaningful comparison of our actual results on a period-over-period basis and provide for a more complete understanding of factors and trends affecting our business. We have provided this information as a means to evaluate the results of our ongoing operations alongside GAAP measures such as gross profit, operating income (loss) and net income (loss). Other companies in tour industry may calculate these items differently than we do. These non-GAAP measures should not be considered as a substitute for the most directly comparable financial measures prepared in accordance with GAAP, such as net income (loss) or net income (loss) per share as a measure of financial performance, cash flows from operating activities as a measure of liquidity, or any other performance measure derived in accordance with GAAP. Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the Companys results as reported under GAAP.

Cautionary Statement Concerning Forward Looking StatementsCertain statements in this press release, other than purely historical information, including estimates, projections and statements relating to our business plans, objectives and expected operating results and outlook, and the assumptions upon which those statements are based, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended which statements involve substantial risk and uncertainties. In some cases, you can identify forward-looking statements because they contain words or phrases such as may, believe, anticipate, could, should, intend, plan, will, aim(s), can, would, expect(s), estimate(s), project(s), forecast(s), positioned, approximately, potential, goal, pro forma, strategy, outlook or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans, or intentions. All statements, other than statements of historical facts, included in this press release regarding strategy, future operations, future financial position or projections, future revenue, projected expenses, prospects, plans and objectives of management are forward-looking statements. These statements are based on managements current expectations and/or beliefs and assumptions that management considers reasonable, which assumptions may or may not prove correct. We may not actually achieve the plans, carry out the intentions or meet the expectations disclosed in the forward-looking statements and you should not place undue reliance on these forward-looking statements. Actual results and performance could differ materially from those projected in the forward-looking statements as a result of many factors. The preliminary financial results included in this press release represent the most current information available to management. Among the key factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements are the effect and consequences of the novel coronavirus public health crisis on matters including U.S. and local economies, our business operations and continuity, our ability to keep our showrooms open, the health and productivity of our associates, the ability of third-party providers to continue uninterrupted service, risks related to tariffs, the countermeasures and mitigation steps that we adopt in response to tariffs and other similar issues, the regulatory environment in which we operate, our ability to sustain recent growth rates, our ability to sustain the recent increase in our Internet sales, our ability to manage the growth of our operations over time, our ability to maintain, grow and enforce our brand and trademark rights, our ability to improve our products and develop new products, our ability to obtain, grow and enforce intellectual property related to our business and avoid infringement or other violation of the intellectual property rights of others, our ability to successfully open and operate new showrooms, and our ability to compete and succeed in a highly competitive and evolving industry, as well as those risks and uncertainties disclosed under the sections entitled Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations in our most recent Form 10-K and in our Form 10-Qs filed with the Securities and Exchange Commission, and similar disclosures in subsequent reports filed with the SEC, which are available on our investor relations website at investor.lovesac.com and on the SEC website at www.sec.gov. Any forward-looking statement made by us in this press release speaks only as of the date on which we make it. We disclaim any intent or obligation to update these forward-looking statements to reflect events or circumstances that exist after the date on which they were made.

Investor Relations Contact:Rachel Schacter, ICR(203) 682-8200InvestorRelations@lovesac.com

THE LOVESAC COMPANYCONDENSED CONSOLIDATED BALANCE SHEETS

As of August 2, 2020 February 2, 2020Assets (unaudited) Current AssetsCash and cash $ 54,835,258 $ 48,538,827equivalentsTradeaccounts 6,227,521 7,188,925receivableMerchandise 41,014,621 36,399,862inventoriesPrepaidexpenses and 5,692,646 8,050,122other currentassets Total Current 107,770,046 100,177,736Assets Property andEquipment, 25,741,024 23,844,261Net Other Assets Goodwill 143,562 143,562Intangible 1,541,754 1,352,161assets, netDeferredfinancing 136,006 146,047costs, net Total Other 1,821,322 1,641,770Assets Total Assets $ 135,332,392 $ 125,663,767 Liabilitiesand Stockholders?EquityCurrent LiabilitiesAccounts $ 24,482,861 $ 19,887,611payableAccrued 11,068,235 8,567,580expensesPayroll 2,539,602 887,415payableCustomer 9,095,033 1,653,597depositsSales taxes 858,688 1,404,792payableTotal Current 48,044,419 32,400,995Liabilities Deferred rent 5,468,358 3,108,245 Line of - -Credit Total 53,512,777 35,509,240Liabilities Stockholders? EquityPreferredStock$0.00001 parvalue,10,000,000sharesauthorized, no shares - -issued oroutstandingas of August2, 2020 andFebruary 2,2020.Common Stock$.00001 parvalue,40,000,000sharesauthorized,14,527,579shares issuedand outstanding 145 145as of August2, 2020 and14,472,611shares issuedandoutstandingas ofFebruary 2,2020.Additionalpaid-in 169,436,973 168,317,210capitalAccumulated (87,617,503) (78,162,828)deficit Stockholders? 81,819,615 90,154,527Equity TotalLiabilitiesand $ 135,332,392 $ 125,663,767Stockholders?Equity

THE LOVESAC COMPANYCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(unaudited)

Thirteen weeks ended Twenty-six weeks ended August 2, 2020 August 4, 2019 August 2, 2020 August 4, 2019 Net sales $ 61,945,410 $ 48,146,415 $ 116,317,817 $ 89,104,778 Cost of merchandise 30,889,870 23,861,242 57,978,708 43,827,110 soldGross profit 31,055,540 24,285,173 58,339,109 45,277,668 Operating expenses Selling,general and 23,383,525 21,956,376 49,214,927 45,817,988 administrationexpensesAdvertising 7,166,537 6,069,903 15,362,122 11,459,233 and marketingDepreciation 1,543,902 1,205,796 3,179,562 2,271,413 and amortizationTotal operating 32,093,964 29,232,075 67,756,611 59,548,634 expenses Operating loss (1,038,424 ) (4,946,902 ) (9,417,502 ) (14,270,966 )Interest (expense) ) 169,327 income, net (34,729 21,627 403,890Net loss before (1,073,153 ) (4,777,575 ) (9,395,875 ) (13,867,076 )taxes(Provision for) benefit from income (33,771 ) 6,576 (58,800 ) (5,700 )taxesNet loss $ (1,106,924 ) $ (4,770,999 ) $ (9,454,675 ) $ (13,872,776 ) Net loss per common share:Basic and diluted $ ) $ ) $ ) $ ) (0.08 (0.33 (0.65 (0.99 Weighted averagenumber of common shares outstanding:Basic and diluted 14,518,929 14,331,185 14,499,505 14,000,565

THE LOVESAC COMPANYCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited) Twenty-six weeks ended August 2, 2020 August 4, 2019 Cash Flowsfrom OperatingActivitiesNet loss $ (9,454,675 ) $ (13,872,776 )Adjustmentsto reconcilenet loss tonet cash provided by(used in)operatingactivities:Depreciationandamortization 3,015,012 2,147,743 of propertyandequipmentAmortizationof other 164,550 123,670 intangibleassetsAmortizationof deferred 42,394 36,512 financingfeesNet loss(gain) ondisposal of 5,487 (166,865 )property andequipmentEquity based 1,575,182 3,393,099 compensationDeferred 2,360,113 88,774 rentChanges inoperating assets andliabilities:Tradeaccounts 961,404 (1,625,830 )receivableMerchandise (4,614,759 ) (14,502,594 )inventoriesPrepaidexpenses andother 2,375,126 (1,098,234 )currentassetsAccountspayable and 8,201,988 1,942,148 accruedexpensesCustomer 7,441,436 493,128 depositsNet CashProvided by(Used in) 12,073,258 (23,041,225 )OperatingActivitiesCash Flowsfrom InvestingActivitiesPurchase ofproperty and (4,917,262 ) (4,117,755 )equipmentPayments forpatents and (354,143 ) (257,029 )trademarks Net CashUsed in (5,271,405 ) (4,074,784 )InvestingActivitiesCash Flowsfrom FinancingActivitiesProceedsfrom the issuance of - 25,610,000 commonshares, netTaxes paidfor netshare (455,420 ) (3,343,218 )settlementof equityawardsProceedsfrom the issuance of - 12,000 warrants,netPaydowns of line of - (31,373 )creditPayments ofdeferred (50,000 ) financing -costsNet Cash(Used in)Provided by (505,420 ) 22,247,409 FinancingActivitiesNet Changein Cash and 6,296,433 (4,868,600 )CashEquivalentsCash andCash 48,538,827 49,070,952 Equivalents- BeginningCash andCash $ 54,835,260 $ 44,202,352 Equivalents- Ending SupplementalCash Flow DisclosuresCash paid $ 58,800 $ 5,700 for taxesCash paid $ 37,557 $ 24,045 for interest

THE LOVESAC COMPANYRECONCILIATION OF NON-GAAP FINANCIAL MEASURES(unaudited)

? Thirteen weeks ended ? Twenty-six weeks ended(dollars in August 2, 2020 August 4, 2019 August 2, 2020 August 4, 2019 thousands)Net loss $ (1,107 ) $ (4,771 ) $ (9,455 ) $ (13,873 )Interest expense 35 (169 ) (22 ) (404 )(income), netTaxes ) 34 (7 59 6Depreciation and 1,544 1,206 3,180 2,271 amortizationEBITDA 506 (3,741 ) (6,238 ) (12,000 )Management 125 250 297 fees (a) 133Deferred Rent 872 856 (b) 77 89Equity-based compensation 677 171 1,575 3,394 (c)Net loss(gain) on disposal of 5 (214 ) 5 (167 )property andequipment (d)Othernon-recurring 425 expenses (e) - 275 36(f)Adjusted $ 2,185 $ (3,299 ) $ (3,516 ) $ (7,962 )EBITDA

(a) Represents management fees and expenses charged by our equity sponsors. Represents the difference between rent expense recorded and the amount paid by the Company. In accordance with generally accepted accounting(b) principles, the Company records monthly rent expense equal to the total of the payments due over the lease term, divided by the number of months of the lease terms.(c) Represents expenses associated with stock options and restricted stock units granted to our associates and board of directors(d) Represents the net loss (gain) on disposal of fixed assets.

There were no other non-recurring expenses in the thirteen weeks ended(e) August 2, 2020. Other non-recurring expenses in the thirteen weeks ended August 4, 2019 are made up of (1) $83 in financing fees associated with our secondary offering and (2) $192 in legal and professional fees. Other non-recurring expenses in the twenty-six weeks ended August 2, 2020 are related to $36 in professional and legal fees related to financing initiatives. Other non-recurring expenses in the twenty-six weeks ended(f) August 4, 2019 are made up of (1) $150 in recruitment fees to build the executive management team and Board of Directors; (2) $83 in fees associated with our secondary offering financing expense and (3) $192 in legal and professional fees.