What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-04-10 compared with 2024-04-11 · 68 added, 71 removed, 183 unchanged (43% of the section changed)

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The fiscal year ended February 2, 2025 consisted of 52 weeks.

Fiscal year 2023 and 2022 each consisted of 52 weeks.

Fiscal years 2024 and 2023 consisted of 53 weeks and 52 weeks, respectively.

We are a technology driven company that designs, manufactures and sells unique, high quality furniture derived through our 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.

Our current product offering is comprised of modular couches called Sactionals, premium foam beanbag chairs called Sacs, the immersive surround sound home theater system called StealthTech, and the

most recently launched PillowSac TM Accent Chair and Sactionals Reclining Seat.

Innovation is at the center of our design philosophy with all of our core products protected by a robust portfolio of utility patents.

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Macroeconomic Factors

There are a number of macroeconomic factors and uncertainties affecting the overall business environment and our business, including increased inflation, rising interest rates, housing market conditions, consumer debt and available credit, global conflicts and uncertainties in the global financial markets.

These factors may have a negative impact on markets in

which we operate, including the potential for an economic recession, a continued downturn in the housing market, and a reduction in consumer discretionary spending.

There are a number of macroeconomic factors and uncertainties affecting the overall business environment and our business, including increased inflation, elevated interest rates, housing market conditions, consumer debt and available credit, increased tariffs and trade restrictions, global conflicts and uncertainties in the global financial markets.

These factors may have a negative impact on markets in which we operate, including the potential for an economic recession, a continued downturn in the housing market, and a reduction in consumer discretionary spending.

We believe that these macroeconomic factors have contributed to the slowdown in demand that we have experienced in our business which may continue in future periods.

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Net sales reflect our sale of merchandise plus shipping and handling revenue less returns and discounts.

Sales made at Company operated showrooms, including shop-in-shops and pop-up-shops, and via the web are recognized, typically at the point of transference of title when the goods are shipped.

Net sales made at Company operated showrooms, including shop-in-shops and pop-up-shops, and via the web are recognized, typically at the point of transference of title when the goods are shipped.

Omni-channel Comparable Net Sales

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Comparable net sales includes sales at all retail locations and online, open greater than 12 months (including remodels and relocations) and excludes closed stores.

Comparable net sales is intended only as supplemental information and is not a substitute for net sales presented in accordance with GAAP.

In fiscal year 2024, we updated how we calculate comparable sales to better reflect our business, store growth and omni-channel sales approach.

Comparable net sales is intended only as supplemental information and is not a substitute for net sales presented in accordance with U.S.

We define a customer as new when the customer has completed a transaction at Lovesac either at a showroom or internet channel only for the first time.

In fiscal 2024, we updated how we calculate new and repeat customers to better reflect business across all of our channels as well as the purchase cycle of the categories in which we compete.

Repeat customers accounted for approximately 46.8% of all transactions in fiscal 2025 compared to 43.6% in fiscal 2024.

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inbound freight;

all freight costs to ship merchandise to our showrooms, and warehousing and all logistics costs associated with shipping product to our customers.

Certain of our competitors and other retailers may report gross profit differently than we do, by excluding from gross profit some or all of the costs related to their distribution network and instead including them in selling, general and administrative expenses.

freight costs to ship merchandise to our showrooms, and warehousing and all logistics costs associated with shipping product to our customers.

Certain competitors and other retailers may report gross profit differently than we do, by excluding from gross profit some or all of the costs related to their distribution network and instead including them in selling, general and administrative expenses.

As a result, the reporting of our gross profit and profit margin may not be comparable to other companies.

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We expect gross profit to increase to the extent that we successfully grow our net sales and continue to realize scale economics with our manufacturing partners.

We review our inventory levels on an

ongoing basis in order to identify slow-moving merchandise and use product markdowns to efficiently sell these products.

We review our inventory levels on an ongoing basis in order to identify slow-moving merchandise and use product markdowns to efficiently sell these products.

The timing and level of markdowns are driven primarily by customer acceptance of our merchandise.

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Selling, General and Administrative Expenses

Selling, general and administrative expenses include all operating costs, other than advertising and marketing expense, not included in cost of merchandise sold.

Selling, general and administrative expenses include all operating costs, other than advertising and marketing expense and depreciation and amortization, not included in cost of merchandise sold.

These expenses include all payroll and payroll-related expenses;

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Selling, general and administrative expenses as a percentage of net sales is usually higher in lower volume quarters and lower in higher volume quarters because a significant portion of the costs are relatively fixed.

Our recent revenue growth has been accompanied by increased selling, general and administrative expenses.

Historically, our revenue growth has been accompanied by increased selling, general and administrative expenses.

The most significant components of these increases are payroll and rent costs.

We expect these expenses, as well as rent expense associated with the opening of new showrooms, to increase as we grow our business.

We expect these expenses to increase as we grow our business.

We expect to leverage total selling, general and administrative expenses as a percentage of net sales as net sales volumes continue to grow.

We expect to continue to invest in infrastructure to support the Company’s growth.

Our continued infrastructure investments will include research and development costs on our existing and future products and foundational technology investments to support our continued growth.

Our continued infrastructure investments include research and development costs on our existing and future products and foundational technology investments to support our continued growth.

These investments will lessen the impact of expense leveraging during the period of investment with the greater impact of expense leveraging happening after the period of investment.

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Advertising and marketing expense include digital, social, and traditional advertising and marketing initiatives, that cover all of our business channels.

Advertising and marketing expense is expected to continue to increase as a percentage of net sales as we continue to invest in advertising and marketing which has accelerated net sales growth.

Advertising and marketing expenses are projected to rise as the Company drives net sales growth, supported by ongoing investments in these areas and careful monitoring to ensure efficient resource allocation..

Basis of Presentation and Results of Operations

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A discussion of our results of operations and changes in financial condition for fiscal 2024 compared to fiscal 2023 has been excluded from this report, but can be found in Part II, Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2023 Annual Report on Form 10-K, as amended by Amendment No.

1 and Amendment No.

2 on Form 10-K/A filed on November 2, 2023 and November 30, 2023, respectively.

Management’s Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2024 Annual Report on Form 10-K.

Results of Operations

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Operating expenses:

Selling, general and administration expenses 264,314 215,979 160,017 37.7 % 33.2 % 32.1 %

Selling, general and administrative expenses 281,450 264,314 215,979 41.4 % 37.7 % 33.2 %

Advertising and marketing 88,027 94,050 79,864 12.9 % 13.4 % 12.3 %

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Operating income 13,648 30,076 36,966 2.0 % 4.4 % 5.6 %

Interest income (expense), net 1,747 (117) (179) 0.2 % — % — %

Interest and other income (expense), net 2,801 1,747 (117) 0.4 % 0.2 % — %

Net income before taxes 16,449 31,823 36,849 2.4 % 4.6 % 5.6 %

(Provision for) benefit from income taxes (7,962) (10,361) 7,089 (1.1) % (1.6) % 1.4 %

Income tax expense 4,893 7,962 10,361 0.7 % 1.1 % 1.6 %

Net income $ 11,556 $ 23,861 $ 26,488 1.7 % 3.5 % 4.0 %

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Showroom Count:

February 4, 2024 January 29, 2023

February 2, 2025 February 4, 2024

Showrooms open at beginning of period

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Showroom remodels

(1) Showrooms open at the end of the period include 6 kiosks and 2 mobile concierges as of fiscal 2024, and 13 kiosks and 2 mobile concierges as of fiscal 2023.

(1) Showrooms open at the end of the period include 1 kiosk and 2 mobile concierges as of fiscal 2025, and 6 kiosks and 2 mobile concierges as of fiscal 2024.

Fiscal 2025 Compared to Fiscal 2024

Net sales increased $49.1 million , or 7.5%, in fiscal 2024 compared to the prior year period .

The increase in overall net sales was driven by new showroom openings, partially offset by a decrease of 4.1% in omni-channel comparable net sales.

New customers increased by 13.3% in fiscal 2024 as compared to 6.5% in the prior year period.

Showroom net sales increased $39.2 million, or 9.8% in fiscal 2024 compared to the prior year period.

Internet sales (sales made directly to customers through our ecommerce channel) increased $23.3 million, or 13.2% , in fiscal 2024 compared to the prior year period driven by strong promotional campaigns.

Other sales, which include pop- up-shop sales, shop-in-shop sales and barter inventory transactions, decreased $13.4 million , or 17.5% in fiscal 2024 compared to the prior year period.

This decrease was principally due to the timing of inventory barter transactions coupled with lower productivity of our temporary online pop-up-shops on Costco.com, partially offset by an increase of 311 Costco in store pop-up-shops compared to the prior year period.

We also opened 22 additional Best Buy shop-in-shop locations compared to the prior year period.

Gross profit increased $57.3 million, or 16.7% , in fiscal 2024 compared to the prior year period .

Gross margin increased to 57.3% of net sales in fiscal 2024 from 52.8% of net sales in the prior year period.

The increase in gross margin percentage of 450 basis points was primarily driven by a decrease of approximately 550 basis points in total distribution and related tariff expenses, partially offset by a decrease of 100 basis points in product margin driven by higher promotional discounting.

The decrease in total distribution and related tariff expenses over prior year is principally related to the positive impact of 670 basis points decrease in inbound transportation costs partially offset by 120 basis points in higher outbound transportation and warehousing costs.

Net sales decreased $19.7 million , or 2.8%, in fiscal 2025 compared to fiscal 2024 driven by a decrease of 9.3% in omni-channel comparable net sales, partially offset by new showroom openings.

New customers increased by 1.4% in fiscal 2025 as compared to 13.3% in fiscal 2024.

Showroom net sales decreased $11.5 million, or 2.6% in fiscal 2025 compared to fiscal 2024.

Internet sales (sales made directly to customers through our ecommerce channel) decreased $3.5 million, or 1.7% , in fiscal 2025 compared to fiscal 2024.

Other sales, which include pop- up-shop sales, shop-in-shop sales and barter inventory transactions, decreased $4.6 million , or 7.4% in fiscal 2025 compared to fiscal 2024.

The decrease was primarily driven by a reduction in barter transactions coupled with lower productivity of our temporary online pop- up-shops on Costco.com, partially offset by an increase in Best Buy shop-in-shop sales.

We opened 5 additional Best Buy shop-in-shop locations compared to the prior year.

Gross profit decreased $3.2 million, or 0.8% , in fiscal 2025 compared to fiscal 2024.

Gross margin increased 120 basis points to 58.5% of net sales in fiscal 2025 from 57.3% of net sales in fiscal 2024.

The increase was primarily driven by a decrease of 240 basis points in inbound transportation costs, partially offset by a decrease of 80 basis points in product margin driven by higher promotional discounting and an increase of 40 basis points in outbound transportation and warehousing costs.

Selling, general and administrative expenses

Selling, general and administrative expenses increased $48.3 million, or 22.4% , in fiscal 2024 compared to the prior year period .

The increase in selling, general and administrative expenses was primarily related to an increase in employment costs, overhead expenses, selling related expenses and rent.

Employment costs increased by $21.3 million driven by an increase in new hires.

Overhead expenses increased $18.6 million mainly consisting of an increase of $13.2 million in investments in the business to support current and future growth and $11.7 million in professional fees primarily related to the restatement of previously issued financial statements, partially offset by a $6.3 million decrease in equity-based compensation.

Selling related expenses increased $6.0 million principally due to credit card fees related to the increase in net sales and an increase in credit card rates.

Rent increased by $2.4 million related to a $6.1 million increase in rent expense from our net addition of 35 showrooms partially offset by a $3.7 million reduction in percentage rent.

Selling, general and administrative expenses were 37.7% of net sales in fiscal 2024, an increase of 450 basis points as compared to 33.2% of net sales in the prior year period.

SG&A expenses increased $17.2 million, or 6.5% , in fiscal 2025 compared to fiscal 2024.

The increase was primarily related to increases of $15.8 million in payroll, $3.7 million in equity-based compensation, $1.7 million in rent, $1.5 million related to a settlement with the SEC, and $1.1 million in professional fees, partially offset by decreases of $5.0 million in credit card fees and $1.6 million in other overhead costs.

As a percentage of net sales, SG&A was 41.4% in fiscal 2025, compared to 37.7% in fiscal 2024.

Advertising and marketing expenses

Advertising and marketing expenses increased $14.2 million, or 17.8% , in fiscal 2024 compared to the prior year period.

The increase in advertising and marketing costs relates to ongoing investments in marketing spends to support our net sales growth.

Advertising and marketing expenses decreased $6.1 million, or 6.4% , in fiscal 2025 compared to fiscal 2024.

Advertising and marketing expenses were 12.9% and 13.4% of net sales in fiscal 2025 and 2024, respectively.

Depreciation and amortization expenses

Depreciation and amortization expenses increased $1.8 million, or 16.2%, in fiscal 2024 compared to the prior year period.

The increase in depreciation and amortization expense is principally related to capital investments for new showrooms in fiscal 2024.

Interest income (expense), net

Interest income was $1.7 million in fiscal 2024 compared to interest expense of $0.1 million in fiscal 2023.

Interest income earned on the Company’s cash and cash equivalents balances was favorable from higher interest rates compared to the prior year period.

Provision for income taxes

Depreciation and amortization expenses increased $2.1 million, or 16.7%, in fiscal 2025 compared to fiscal 2024, primarily driven by assets being placed into service related to leasehold improvements for new showrooms.

Interest and other income, net

Interest and other income, net was $2.8 million in fiscal 2025 compared to $1.7 million in fiscal 2024.

The increase in interest income was primarily the result of higher cash deposits in the Company's interest-bearing bank accounts combined with higher interest rates.

Income tax expense

Income tax expense was $4.9 million in fiscal 2025 compared to $8.0 million in fiscal 2024.

The change in provision is primarily driven by lower net income before taxes, partially offset by a decrease in the effective tax rate.

The decrease is primarily driven by lower net income before taxes, partially offset by an increase in the effective tax rate.

Liquidity and Capital Resources

Our business relies on cash flows from operations, our revolving line of credit (see “Revolving Line of Credit” below) and securities issuances as our primary sources of liquidity.

At February 4, 2024, we had $87.0 million in cash and cash equivalents.

At February 2, 2025, we had $83.7 million in cash and cash

Our primary cash needs are for marketing and advertising, inventory, payroll, showroom rent, capital expenditures associated with opening new showrooms and updating existing showrooms, as well as infrastructure and information technology.

The most significant components of our working capital are cash and cash equivalents, merchandise inventory, prepaid expenses, accounts payable, accrued expenses, other current liabilities and customer deposits.

We periodically use cash to repurchase shares of our common stock under our share repurchase program.

The most significant components of our working capital are cash and cash equivalents, merchandise inventory, prepaid expenses, accounts payable, accrued expenses, customer deposits, and other current liabilities.

We believe that cash expected to be generated from operations, the availability under our revolving line of credit and our existing cash balances are sufficient to meet working capital requirements and anticipated capital expenditures for at least the next 12 months.

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Capital expenditures are anticipated to support our showroom growth, including capital outlays for leasehold improvements, fixtures and equipment, and the construction of new showrooms.

Capital expenditures during fiscal 2025 are projected to be in the range of $22.0 million to $30.0 million.

Capital expenditures were $29.2 million in fiscal 2024.

Cash paid for capital expenditures was $21.5 million in fiscal 2025.

Capital expenditures are projected to be in the range of $22.0 million to $28.0 million for fiscal 2026.

The majority of our operating leases relate to company showrooms.

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Net cash provided by (used in) operating activities

Net cash provided by (used in) operating activities consists primarily of net income adjusted for certain non-cash items, including depreciation, amortization, loss on disposal of property and equipment, impairment of property and equipment, equity based compensation, non-cash operating lease cost, and deferred income taxes, and the effect of changes in working capital and other activities.

Net cash provided by operating activities was $76.4 million in fiscal 2024, an increase from net cash used in operating activities of $21.4 million in the prior year period, primarily driven by changes in working capital related to inventory management actions, timing of payments to vendors, and a decrease in income tax payments.

Net cash provided by (used in) operating activities consists primarily of net income adjusted for certain non-cash items, including depreciation and amortization, equity based compensation, non-cash lease expense, and deferred income taxes, and the effect of changes in working capital and other activities.

Net cash provided by operating activities was $39.0 million in fiscal 2025, a decrease from $76.4 million in the prior year period, primarily driven by lower net income and changes in working capital related to inventory management actions and income taxes paid.

The decrease was partially offset by cash inflows resulting from the timing of payments to vendors.

Net cash used in investing activities

Investing activities consist primarily of investments related to capital expenditures for new showroom openings, the remodeling of existing showrooms, and the acquisition of intangible assets.

Net cash used in investing activities was $29.2 million in fiscal 2024, an increase from $25.5 million in the prior year period, primarily resulting from increased capital expenditures related to new showrooms.

Investing activities consist primarily of investments related to capital expenditures for new showroom openings and the acquisition of intangible assets.

Net cash used in investing activities was $21.5 million in fiscal 2025, a decrease from $29.2 million in the prior year period, primarily attributable to a reduction in capital expenditures, driven by a year-over-year decrease in the number of new showroom openings.

Net cash used in financing activities

Financing activities consists of taxes paid for the net settlement of equity awards and payment of deferred financing costs.

Net cash used in financing activities was $3.7 million in fiscal 2024, an increase from $1.9 million in the prior year period, primarily resulting from an increase in taxes paid for the net settlement of equity awards.

Financing activities consist primarily of repurchases of our common stock, taxes paid for the net settlement of equity awards and payment of deferred financing costs.

Net cash used in financing activities was $20.8 million in fiscal 2025, an increase from $3.7 million in the prior year period, primarily resulting from repurchases of our common stock beginning in fiscal 2025.

Revolving Line of Credit

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On March 24, 2023, the Company amended the credit agreement to extend the maturity date to September 30, 2024.

All other terms of the credit agreement remain unchanged.

On July 29, 2024, we amended the credit agreement to add an uncommitted accordion feature that allows the Company, subject to certain customary conditions, to increase the size of the revolving credit facility by $10 million and, among other things, extend the maturity date of the loans made under the Amendment from September 30, 2024 to July 29, 2029.

For additional information regarding our line of credit with Wells Fargo Bank, see Note 8.

Financing Arrangements in the Notes to the Financial Statements included in Part IV of this report.

As of February 4, 2024 and January 29, 2023, the Company’s borrowing availability under the line of credit was $36.0 million, and there were no outstanding borrowings under our credit facility.

As of February 2, 2025 and February 4, 2024, the Company’s borrowing availability under the line of credit was $32.6 million and $36.0 million, respectively, and there were no outstanding borrowings under our credit facility.

Share Repurchase

On June 11, 2024, our board of directors authorized a share repurchase program for up to $40.0 million of shares of our common stock.

Under the share repurchase program, we may repurchase shares from time to time in the open market, privately negotiated transactions and accelerated share repurchase.

The timing, volume and nature of share repurchases, if any, will be at our sole discretion and will be dependent on market conditions, liquidity, applicable securities laws, and other factors.

We may suspend or discontinue the share repurchase program at any time.

We plan on funding any repurchases in the future with our current cash and cash equivalents and future cash flows.

As of February 2, 2025, we had $20.1 million available to repurchase shares pursuant to the share repurchase program.

For additional information, see Note 9.

Stockholders' Equity in the Notes to the Financial Statements included in Part IV of this report.

Critical Accounting Policies and Estimates

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For fiscal 2025, 2024, and 2023, the Company recognized $9.0 million, $12.3 million, and $21.3 million, respectively, of barter sales in exchange for media credits.

The Company had $32.8 million and $25.2 million of unused media credits as of February 4, 2024, and January 29, 2023, respectively, and did not recognize any impairment.

The Company had $36.7 million and $32.8 million of unused media credits as of February 2, 2025, and February 4, 2024, respectively, and did not recognize any impairment.

Impairment of Long-Lived Assets

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If required, an impairment loss is recorded for that portion of the assets' carrying value in excess of fair value.

In fiscal 2024 and 2023, we did not recognize any impairment charges associated with showroom-level right-of-use assets.

During fiscal 2022, we recorded impairment charges of $0.6 million associated with the assets of an underperforming retail location in selling, general and administrative expenses in our Statements of Operations.

In fiscal 2025, 2024, and 2023, we did not recognize any impairment charges for any long-lived assets.

Merchandise Inventories

Merchandise inventories are comprised of finished goods which are carried at the lower of cost or net realizable value and capitalized freight and warehousing costs.

Merchandise inventories are comprised of finished goods which are carried at the lower of cost or net realizable value, including warehousing and capitalized freight costs.

Cost is determined on a weighted-average method basis.

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The Company records lease liabilities at the present value of the lease payments not yet paid, discounted at the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term.

As the Company's leases do not provide an implicit interest rate, the Company uses an incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments.

As the Company's leases do not provide an implicit interest rate, the Company uses an incremental borrowing rate based on the information available at possession date in determining the present value of lease payments.

We recognize operating lease cost over the estimated term of the lease, which includes options to extend lease terms that are reasonably certain of being exercised, starting when possession of the property is taken from the landlord, which normally includes a construction period prior to the showroom opening.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis