What changed in this filing

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Item 7. Management’s Discussion and Analysis

2026-04-02 compared with 2025-04-10 · 68 added, 56 removed, 195 unchanged (39% of the section changed)

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Each fiscal year generally is comprised of four 13-week fiscal quarters, although in the years with 53 weeks, the fourth quarter represents a 14-week period.

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

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

Fiscal years 2026 and 2025 consisted of 52 weeks, and fiscal year 2024 consisted of 53 weeks.

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, 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.

We market and sell our products through an omni-channel platform that includes direct-to-consumer touch points in the form of our own showrooms, which include our mobile concierge and kiosks, and online directly at www.lovesac.com.

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®, the PillowSac® Chair, the Sactionals Reclining Seat, a recently launched platform of premium seating called Snugg TM , and various accessories.

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

We market and sell our products through an omni-channel platform that includes direct-to-consumer touch points in the form of our own showrooms and online directly at www.lovesac.com.

We believe that our ecommerce centric approach, coupled with our ability to deliver our large upholstered products through express couriers, is unique to the furniture industry.

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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, 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.

There are a number of macroeconomic factors and uncertainties that in recent years have negatively affected the overall business environment and our business, including fluctuations in inflation, elevated interest rates, housing market conditions, consumer debt and available credit, increased tariff and trade restrictions, global conflicts and uncertainties in the global financial markets.

These factors have had and continue to have a negative impact on us and the 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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Omni-channel comparable net sales is a measure that highlights the performance of our existing locations and websites by measuring the change in net sales for a period over the comparable prior-period of equivalent length.

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 U.S.

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

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

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.

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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.

The primary drivers of our cost of merchandise sold are raw materials costs, labor costs in the countries where we source our merchandise, and logistics costs.

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

We are pursuing initiatives to increase domestic manufacturing of Sactional (or certain products) as part of our broader supply chain strategy.

These efforts are intended to enhance supply chain reliability, mitigate tariff and logistics risks, and improve operational efficiency through automation and reduced transportation distances.

Implementation is expected to occur in phases and requires upfront investment and operational execution.

The ultimate impact on our cost structure and operating results will depend on a number of factors, and there can be no assurance that anticipated benefits will be realized.

Gross profit is equal to our net sales less cost of merchandise sold.

Gross profit as a percentage of our net sales is referred to as gross margin.

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

Selling, General and Administrative Expenses

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customer financing fees;

and credit card transaction fees.

credit card transaction fees.

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.

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 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 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.

However, total selling, general and administrative expenses generally will leverage during the periods of investments with the greatest leverage occurring within the fourth quarter.

Historically, our revenue growth has been accompanied by higher selling, general and administrative expenses, primarily related to payroll and rent.

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

As net sales volumes expand, we anticipate leveraging selling, general and administrative expenses as a percentage of net sales.

To support our growth, we continue to invest in infrastructure, including research and development for existing and future products and foundational technology initiatives.

These investments may reduce the degree of expense leverage during the investment period.

We expect to realize greater leverage following these investments, with the most significant impact expected in the fourth quarter.

Advertising and Marketing Expense

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The discussion in this Form 10-K generally focuses on fiscal 2026 compared to fiscal 2025.

Our fiscal 2024 results contain an additional, non-comparable 53rd week when compared to fiscal 2025.

A discussion of our results of operations and changes in financial condition for fiscal 2025 compared to fiscal 2024 has been excluded from this report, but can be found in Part II, Item 7.

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Operating income 5,363 13,648 30,076 0.8 % 2.0 % 4.4 %

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

Interest and other income, net 1,302 2,801 1,747 0.2 % 0.4 % 0.2 %

Net income before taxes 6,665 16,449 31,823 1.0 % 2.4 % 4.6 %

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Showroom Count:

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 1 kiosk and 2 mobile concierges as of fiscal 2025, and 6 kiosks and 2 mobile concierges as of fiscal 2024.

(1) During the second quarter of fiscal 2026, the Company made the decision to repurpose its 2 mobile concierges for marketing related activity and they are included in the showrooms closed within fiscal 2026.

During the fourth quarter of fiscal 2026, the Company also closed its last remaining kiosk.

Showrooms open as of fiscal 2025 include 1 kiosk and 2 mobile concierges.

Fiscal 2026 Compared to Fiscal 2025

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.

Net sales increased $16.5 million, or 2.4%, in fiscal 2026 compared to fiscal 2025 driven by new showroom openings and an increase of 0.5% in omni-channel comparable net sales.

In fiscal 2026, the number of repeat customers increased by 8.8%, partially offset by a 5.6% decline in new customers.

In the prior year, the number of repeat and new customers increased by 15.6% and 1.4%, respectively.

Showroom net sales increased $42.1 million, or 9.9% in fiscal 2026 compared to fiscal 2025.

Internet sales (sales made directly to customers through our ecommerce channel) decreased $4.0 million, or 2.0% , in fiscal 2026 compared to fiscal 2025.

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.

Other sales, which include pop- up-shop sales, shop-in-shop sales, barter inventory transactions, and the Loved by Lovesac program, decreased $21.7 million , or 37.1% in fiscal 2026 compared to fiscal 2025.

The decrease was primarily attributable to the Company’s decision not to engage in any barter transactions during the current period, and the closure of the Company's Best Buy shop-in-shop locations as a result of the discontinuation of its partnership with Best Buy.

Gross profit decreased $4.6 million, or 1.2%, in fiscal 2026 compared to fiscal 2025.

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.

Gross margin decreased 210 basis points to 56.4% of net sales in fiscal 2026 from 58.5% of net sales in fiscal 2025.

The decrease was primarily driven by increases of 180 basis points in inbound transportation and tariff costs and 40 basis points in outbound transportation and warehousing costs, partially offset by an increase of 10 basis points in product margin driven by price increases, cost reduction initiatives and concessions from our vendors in response to changes in the tariff environment, partially offset by higher promotional discounting.

Selling, general and administrative expenses

SG&A expenses increased $2.5 million, or 0.9% , in fiscal 2026 compared to fiscal 2025.

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.

The increase was primarily related to increases of $14.8 million in payroll, due to higher incentive compensation and an out-of-period $1.6 million expense pertaining to prior periods employee benefits, $1.8 million in rent, $1.5 million in impairment charges related to the Best Buy partnership discontinuation, and $1.6 million in other overhead costs.

These increases were partially offset by decreases of $12.9 million in legal and professional fees, $2.4 million in equity-based compensation, and $1.9 million in credit card fees.

As a percentage of net sales, SG&A was 40.7% in fiscal 2026, compared to 41.4% in fiscal 2025.

Advertising and marketing expenses

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

Advertising and marketing expenses increased $0.6 million, or 0.7% , in fiscal 2026 compared to fiscal 2025.

Advertising and marketing expenses were 12.7% and 12.9% of net sales in fiscal 2026 and 2025, respectively.

Depreciation and amortization expenses

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.

Depreciation and amortization expenses increased $0.5 million, or 3.4%, in fiscal 2026 compared to fiscal 2025, primarily driven by capital investments for new showrooms.

Interest and other income, net

Interest and other income, net was $1.3 million in fiscal 2026 compared to $2.8 million in fiscal 2025.

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.

The decrease in interest income was primarily the result of lower cash deposits in the Company's interest-bearing bank accounts.

Income tax expense

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

At February 1, 2026, we had $101.9 million in cash and cash equivalents.

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.

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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.

Our long-term cash needs will depend on, among other things, our profitability and our ability to manage working capital requirements, and if needed, our ability to identify and secure other potential sources to fund future working capital needs and meet capital expenditure requirements.

Capital Expenditures

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in thousands 2026 2025 2024

Net cash provided by (used in) operating activities $ 38,977 $ 76,441 $ (21,375)

Net cash provided by operating activities $ 49,328 $ 38,977 $ 76,441

Net cash used in investing activities (24,020) (21,517) (29,211)

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Cash and cash equivalents at end of period $ 101,853 $ 83,734 $ 87,036

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 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 provided by operating activities

Net cash provided by 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 $49.3 million in fiscal 2026 compared to $39.0 million in the prior fiscal year.

The increase was primarily driven by favorable working capital fluctuations, particularly from inventory management.

Net cash used in investing activities

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 investing activities was $24.0 million in fiscal 2026, primarily driven by one-time capital expenditures related to our new corporate office and continued investments in new showrooms.

For fiscal 2025, net cash used in investing was $21.5 million, primarily driven by the continued investments in new showrooms.

Net cash used in financing activities

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.

For fiscal 2026 and 2025, net cash used in financing activities was $7.2 million and $20.8 million, respectively, mainly due to the repurchase of our common stock and taxes paid for the net share settlement of equity awards.

Revolving Line of Credit

On March 25, 2022, we amended our existing credit agreement providing for an asset-based revolving credit facility with the lenders party thereto, and Wells Fargo Bank, National Association ("Wells Fargo Bank"), as administrative agent.

The maturity date of our credit agreement was extended to March 25, 2024 and, among other things, the maximum revolver commitment was increased from $25.0 million to $40.0 million, subject to borrowing base and availability restrictions.

We are party to a credit agreement providing for an asset-based revolving credit facility with the lenders party thereto, and Wells Fargo Bank, National Association ("Wells Fargo Bank"), as administrative agent, that matures July 29, 2029.

The maximum revolver commitment is $40.0 million, subject to borrowing base and availability restrictions, and also includes an uncommitted accordion feature that allows the Company, subject to certain customary conditions, to increase the size of the revolving credit facility by $10.0 million.

Our credit agreement includes a $1,000,000 sublimit for the issuance of letters of credit and a $4,000,000 sublimit for swing line loans.

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The lower margins described above will apply initially and will adjust thereafter from time to time based on the quarterly average excess availability under the credit facility.

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

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.

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

During fiscal 2026 and 2025, we repurchased $6.0 million and $19.9 million, respectively, of shares of our common stock pursuant to the share repurchase program.

As of February 1, 2026, we had $14.1 million available to repurchase shares pursuant to the share repurchase program.

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Critical Accounting Policies and Estimates

The management's discussion and analysis of financial condition and results of operations is based upon our financial statements, which have been prepared in conformity with U.S.

The management's discussion and analysis of financial condition and results of operations is based upon our financial statements, which have been prepared in conformity with US GAAP.

Certain accounting policies and estimates are particularly important to the understanding of our financial position and results of operations and requires us to make significant estimates and assumptions.

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Barter Arrangements

The Company has a bartering arrangement with a third-party vendor, whereby the Company will provide inventory in exchange for media credits.

Barter sales transaction with commercial substance are recorded at a transaction price based on the estimated fair value of the non-cash consideration of the media credits to be received and the revenue is recognized when control of inventory is transferred, which is when the inventory is picked up in our warehouse.

The Company has a bartering arrangement with a third-party vendor.

The Company has the option to repurpose open-box inventory in exchange for media credits, which are being used to support our advertising initiatives to create brand awareness and drive net sales growth.

Barter transactions with commercial substance are recorded at a transaction price based on the estimated fair value of the non-cash consideration of the media credits to be received and the revenue is recognized when control of inventory is transferred, which is when the inventory is picked up in our warehouse.

Fair value is estimated using various considerations, including the cost of similar media advertising if transacted directly, the expected sales price of product given up in exchange for the media credits, and the expected usage of media credits prior to expiration based on forecasted media spend subject to media credits under the barter arrangement.

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The Company recognizes an asset for media credits which is subsequently evaluated for impairment at each reporting period for any changes in circumstances.

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 did not recognize any barter sales in exchange for media credits in fiscal 2026.

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

The Company had $32.6 million and $36.7 million of unused media credits as of February 1, 2026, and February 2, 2025, respectively, and did not recognize any impairment.

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We estimate fair value based on future discounted cash flow based on our historical operations of the showroom and estimates of future showroom profitability and economic conditions.

These estimates include factors such as sales growth, gross margin, employment costs, lease escalation, and overall macroeconomic conditions, and are therefore subject to variability.

These estimates include factors such as sales growth,

gross margin, employment costs, lease escalation, and overall macroeconomic conditions, and are therefore subject to variability.

Actual future results may differ from those estimates.

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

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

In June 2025, the Company initiated a cost-reduction plan that included the termination of its partnership with Best Buy.

As part of this plan, the Company executed the wind down of its Best Buy shop-in-shop locations (the "Exit"), with closures and related workforce reductions.

This process was completed during the fourth quarter of fiscal 2026.

As a result of the Exit, the Company assessed the recoverability of long-lived assets associated with the affected locations.

For fiscal 2026, the Company recorded an impairment charge of $1.5 million related to property and equipment at the shop-in-shop locations.

For additional information, see Note 2.

Property and Equipment, net in the Notes to the Financial Statements included in Part IV of this report.

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

Merchandise Inventories

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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