Yet Another Value Podcast - Aurora Financial's Austin Crites on getting comfortable with The Lovesac Company $LOVE

Episode Date: March 3, 2024

Austin Crites, CIO at Aurora Financial Strategies, joins the podcast to discuss his thesis on The Lovesac Company (NASDAQ: LOVE), the home furnishing and technology brand best known for its Sacs, The World's Most Comfortable Seat. For more information about Aurora Financial Strategies, please visit: https://www.aurorafinancialstrategies.com/ Chapters: [0:00] Introduction + Episode sponsor: Tegus [1:35] Overview of Lovesac $LOVE and why are they so interesting to Austin [5:44] Bear case: One product company + cheap knockoffs [12:02] Repeat business / Crocs comparison / Reddit and TikTok Lovesac / Target customers [21:27] Shark Ninja comparison [26:09] Valuation / Competitive analysis (La-Z-Boy, Restoration Hardware) [31:07] Inventory turns [34:56] Short interest [38:48] Management and insider ownership [41:27] Barter revenues [43:43] $LOVE final thoughts Today's episode is sponsored by: Tegus This episode is brought to you by Tegus, the future of investment research. From the beginning, Tegus has been committed to creating efficiencies in the research process by making it easy to access the content that investors need to get to differentiated insights. Today, they’re taking it one step further by bundling qualitative content, quantitative data, and better automation and technology together in the same platform. Instead of piecing together data from fragmented sources, just log in to Tegus to get expert research, company- and industry-specific metrics and KPIs, SEC filings, and more, all under the same license cost. You can even take your work offline with an Excel Add-in that updates almost any model with the latest financial data — keeping all your custom formatting intact. Tegus is the fastest way to learn about a public or private company and the only platform you’ll need for fundamental research. To try it free today, visit Tegus.com/value

This episode is sponsored by TIGIS, the future of investment research. From the beginning, TIGIS has been committed to creating efficiencies in the research process by making it easy to access the content that investors need to get differentiated insights. Today, they're taking it one step further by bundling qualitative content, quantitative data, and better automation and technology together in the same platform. Instead of piecing together data from fragmented sources, just log into TIGIS to get expert research, company and industry specific metrics and KPI's, SEC filings, and more, all under the same

license costs. You can even take a look at your work offline with an Excel add-in that updates almost any model with the latest financial data, keeping all your custom formatting intact. TIGIS is the fastest way to learn about a public or private company and the only platform you'll need for fundamental research. To try it for free today, visit tigis.com slash value. That's Tegus.com All right. Hello, and welcome to the Yet Another Value Podcast. I'm your host, Andrew Walker, also the author of Yet Another Value Blog.com. If you like the show, it mean a lot if you could rate, subscribe, review it wherever you're watching, listening to it. With me today, I'm happy to have on Austin Crites. Austin is over at Oro Management. Austin, how's it going? I'm great. How are you? Doing great. Hey, thank you so much for coming on today. Let me start the podcast, the way I start every podcast. Our reminder to everyone that nothing on this podcast is investing in advice, please. consults a financial advisor, do your own research, all that sort of jazz. Just remember, this isn't financial advice.

Awesome. The stock and company we're going to talk about today is LoveSack. The ticker is L-O-V-E. They make couches. I'm going to turn it over to you, but a quick thing, they were talking about their couches on one of their earnings calls, and they mentioned how they thought their product was getting increasingly sticky with their consumers. And I just laughed my head off because there was something about them describing couches,

is getting sticky. I was like, oh, I don't think that's quite what you mean, but I have rambled and I have joked. I'll turn it over to you. What is Love Sack and why are they so interesting today? Well, can I add on to your joke there a little bit? Because that really plays into their marketing. I mean, you know, they market these couches as something that you can live through, right? It's not something that you're afraid to mess up. So I have kids. I know you have at least one, right and part of their marketing they show this kid with the ice cream cone and he's got this thing dripping all over it normally that would terrify you unless maybe if you have a leather couch you can like wipe it off but they make everything designed to just like easily clean so you can take all

that stuff throw it in the washing machine if it's completely ruined you can just buy a new cover so anyways i thought that was funny actually kind of goes along with it but uh love sack was started in the late 90s. I don't know how much of a history you want, but it's starting the late 90s. Yeah, I think it's actually kind of important here because I do think love sack when people, a lot of people think of it and they do think of the old love sack and it's kind of nice to get to where it is. So quickly, let's do all the history if you can. Yeah, sure. So start in the late 90s, Sean was, I think, either in high school or college and just was bored and thought it to be funny to make a massive beanbag. But he didn't have a bunch of packaging peanuts or, I don't

whatever the beans that, I mean, I had a bean bag as a kid, and I loved it, but it would wear out, like, it wasn't that comfortable. So he was just chopping up foam. An interesting thing, like with this company, it's kind of like every new thing was kind of born out of necessity or a problem that they overcame. And so he was chopping up camping, like foam mats and stuff to this thing. It ended up being very comfortable and just kind of a joke, but people loved it, Right. And people just kept asking them. And he didn't really want to just continue on this company. I don't even think he really intended on having a company. Just people wanted it. He tried to shut it down and his customers wouldn't let him, which is just a great sign that, you know, you're hitting on something. Anyways, fast forward. Again, they, I guess, they got turned down by the furniture stores. Didn't really know what to do with this beanbag. And to be honest, like, the beanbag business. It was a cool product, but niche, not that great of a business. But people kept asking for the couch that was in there. And they didn't really, you know, they didn't make

couches, so they'd always say no. In 2007, they filed for bankruptcy after Sean won an entrepreneur challenge on Richard Branson's show. So I think he won a million dollars, but he had a couple million dollars in debt. Some private equity got interested. and they completely changed the business model. So they had a lot of problems like bad franchise agreements. I mean, essentially just he made a lot of mistakes that, you know, first time doing all this stuff. And they completely changed it and built the business model around the Sactional. And the Sactional is really the key to the competitive advantage and what makes the company great, in my opinion.

So fast forward to today, the Sactional's, which are the Couches, the modular couches, make up over. 90% of their revenue and they have all their all of the showrooms you know they own themselves their employees so they control the process really well anyways generates incredible gross margins you know great customer loyalty it should scale a lot in the coming years but maybe that's a good background well no that's a perfect background look so just a few floating thoughts I had when I was researching this like first i guess it is one of the companies i tend to like just because i think a lot of wall street types like i know this was pitched as a short as far back in 2019 and i had in my notes

there were people like it's a short these couches are so ugly or some people were saying it's not a short i think these couches are so ugly but that means i don't understand the market so it can't be but i thought it was just interesting because it's something that I don't know. I actually really like it. My wife and I almost got one a few years ago. They have these innovations inside the couch, right? Like the couch, as you mentioned, you can take the covers off. It's a sectional. So, you know, that's a sectional, but you can rearrange it. So you know, today, if you want it to be a two-seater couch. And then tomorrow, if you want it to be practically a bed, like I really like it. I think it's interesting. But I guess there's a lot

here, but this is basically a one product company right now, right? They sell these sections. And I guess the first thing when I look at this, they come out and they say, hey, you know, our sales per square foot, we do these little almost pop-up stores, even if they're in high-end malls. They're basically, they're very small stores. Because these sectionals, they ship quickly. We can ship them within two weeks.

They charge a very premium price. And because, you know, everything they sell is a sectional, the stores need to be very small. So they say, hey, we're selling that premium price, getting great gross margins. Our stores are doing in square footage, what almost, I think apples and Tiffany's are the only two

that do more sales per square footage than them. So that's like a really nice combination. But when I look at it, my first question is, why, this is a one product company, and it's not like it's crazy. We can talk about the sound system and stuff, but it's not like a satchel is a crazy amount of R&D or moody or anything. Like, why aren't there just cheap, cheap knockoffs, four knockoffs flooding the market and just undercutting them on price and everything here? Yeah, well, and to your point on the short, you know, the short case, it has had a pretty high short interest for a while. And I've not found any reports out there. You know, I wrote a blog recently, you know, kind of guessing why people were negative about the company.

Can you repeat that question again? Oh, the mo. Yeah, so they do have patents on different parts. Like the way the seats and sides connect to each other. And there have been a lot of people try to knock this off, mostly smaller companies, but Joy Bird, which is a brand of Lazy Boy, did come out with a very similar product. So most of them that say they're modular, they're not modular in the same way that LovSack is, and that LovSack will combine the seat and the side, and you can take them apart and rearrange.

Most modular furniture out there has them combined, which severely limits the permutations you can create with this. Now, Joy Bird tried to come out with something similar, and Lovesack filed a suit against them. They settled, and not much was released about it. I talked to some lawyers, but anyways, to ask some questions about it. But the next thing I know, Joy Bird took that product off their website. So that's no longer available. So I don't know what they, you know, in their filings, they reference, you know, getting

paid something in a settlement. I can't imagine it's terribly much. But I was impressed that they were able to defend that against a much larger company like Lazy Boy. So, no, just to jump in there, it's because part of this I went on, there's a Reddit, a Lovsack Reddit, and I was trying to find knockoffs. And there's some competitors. You mentioned Joy Bird. There's a company Home Reserve. But a lot of people go on and say, hey, you know, $3,000 for a couch. This is a pretty expensive couch. It doesn't seem like it should be this expensive. And when people ask for competitors, they don't really list anything on the websites, which I thought was interesting. Because again, my first thing is there should be just knockoffs of this everywhere. So maybe it's

the patent. I don't know. Like, as you said, I didn't notice the Joybird. I don't know the Joybird background, but the Home Reserve when you look at it, it doesn't look like it's a really comparable product. Like it is a sectional, but it's not all replaceable. So yeah, that is interesting. So you think it's a patent that's really keeping people out here. You know, that's part of it. There's some other reasons. You know, if you're running a big furniture store, you kind of have to commit to this concept, right? Because you have to train the customer on how to actually rearrange these things.

And it's not, hey, I see this recliner. I've had a recliner before. I'll buy it. You know, it's more than that. The next part is really around reverse compatibility. So they have this concept. part of the design for life concept they have is reverse compatibility. So when they launch stealth tech, you can put that into a sectional you already got.

So if you buy a sectional, you know that whatever innovations they come out with new things, you can just plug it in. You don't need to go out and buy a new one, right? And that's not the way most companies operate. So it's just a different mindset. This episode is sponsored by Tigis, The Future of Investment Research. From the beginning, TIGIS has been committed to creating efficiencies in the research process

by making it easy to access the content that investors need to get differentiated insights. Today, they're taking it one step further by bundling qualitative content, quantitative data, and better automation and technology together in the same platform. Instead of piecing together data from fragmented sources, just log into TIGIS to get expert research, company and industry-specific metrics and KPIs, SEC filings and more, all under the same license costs. You can even take a look at your work offline with an Excel add-in that updates almost any model with the latest financial data, keeping all your custom formatting intact.

TIGIS is the fastest way to learn about a public or private company and the only platform you'll need for fundamental research. To try it for free today, visit tigis.com slash value. That's T-E-G-U-S dot com slash value. Let me ask a question on that. So, again, I listened to, I think we said ICR, the CEO was talking, he was like, look, these products are designed to the last lifetime. And he mentioned, I think he said, hey, I've got a couch that I can't remember was 17 or 14 years

old, but he was like, I've had it for 17 years. I'm going to have it for the rest of my life, right? And that sounds great. That's a great sales pitch. But you know what it's not great for? Like, when you say that, I'm like, hey, they pitch a lot customer lifetime value, replacement value. Like, one of the many worries I have here is like couches and furniture is a tough business, right?

Right. You generally, you buy a couch once every, I don't know, five years, 10 years, whatever it is. So it's really hard to form brand loyalty. But here it is unique because they're so unique, I could see how you get a little bit of brand loyalty. But if you're buying it and you know, you one shot it and you never have to replace that product, that's kind of tough on the repeat business. So how do you think about like, yeah, it is a, you know, Apple, they obsolete their phones eventually. If you've got a love sack that 17 years old, still going, never going to be obsolete, it is kind of tough on that repeat business angle. Yeah, I think the repeat business will be smaller, right? But 45% of their transactions currently are from repeat customers.

And I think the way that this kind of plays out, I've got an old couch. It's destroyed because kids, right? When I replace it, I'm probably going to get a smaller, sectional, you know, less pieces. And then eventually, when we move to get more space, I'm going to add on to it. And so, you know, you mentioned it's a one product, but the beauty of modularity is it's more than one, right? The reason they can have small formats is because you have two main skews that represent almost half the revenue. But you can combine that in any number of ways. So maybe you move or you want to replace furniture in another room, you buy more pieces.

You can take that apart, that couch apart, turn it into love seats. you can rearrange it into a queen-sized bed. When your kids go off to college, you can send them off with a few pieces. I mean, the utility, really, I mean, I don't know. I'm not a good judge of whether something's a good-looking couch or not, but the utility is unmatched for this kind of thing. No, look, I hear you, and it's nice, but again,

if you're sending it off with people to college, it's taking away potential sales. Let me, okay, so I still have a lot of questions, but I guess I want to do, just switch it up a bit and do the most pressing. So there were two companies, as I was looking at this, that came to mind the most for me. And one was Crocs and one was Shark Ninja. So I'll start with the Crocs, right? The Crocs example is pretty obvious, right?

Like Crocs is a one-hit product. And for the past 10, actually longer than that, it has 20 years, people have debated, is this a fad? Is this a one-product company? Is this a real, real sustainable business? And Crox, it's been volatile, right? It's been up and down. But actually, over the long term, they've proven it's a real business, right? The stock's been unbelievable on almost any long-term time frame that you measure it.

People have hated it. They've made fun of the product as ugly, lowbrow. They said there were going to be knockoffs. And it never happened. I guess, you know, I'll pause there. I have some doubts on that comparison, but I'll pause there and ask, like, what do you think about the comparison to Crocs I just laid out there? Yeah, I think anything someone comes out with something drastically different, there are those questions and it's legitimate.

I think the way big customers will react, though, if they like the product, instead of going out and buying a new couch later, when they get tired of the color or the texture, they'll just buy new covers because it's a lot cheaper to do that than buy a new couch and you still retain the utility that you already had. So I think a lot of people buy, as you said, like, look, these are satchional. you can literally just take the fabric off, the fabric's dirty, you wash it. If it's too dirty, you throw it away, rip, throw it away. You can change. Do a lot of people do couch color changing? Do you know? You know, I've convinced several people to buy these things, but it hasn't aged enough

to see whether people actually do that. It seems rational to me that if the base furniture isn't worn out, that you wouldn't just do that rather than buy a whole new couch, right? No, it makes sense. I know, like, you want to change your color scheme. It's actually kind of nice if you can switch it. But I don't know. In my head, I'm so oblivious to those things.

I would think, like, you get a couch. It's there for sitting. You never change it. But they do have in their slides. They've got a lot of stuff talking about customer lifetime value. And I think they've kind of settled on the first initial purchase is the main one, but they kind of show over time you get about 35 to 40 percent more revenue on top of that first purchase from their customer.

But look, the Crocs comparison, right? A lot of people don't like it. It sells for a big premium to what you would think, like, kind of crox would go for. People thought there would be knockoffs, but it's never really developed. I guess my pushback on the cross comparison, and again, this might just because I'm not a furniture person, I can't, like, my couches are all hand-me-downs from friends who are like, I'm throwing my couch, I'm like, love that price, let's take it. But, you know, like, a crox, you wear it every day.

So the two things there are, A, it wears down, so eventually you do need to throw it away and replace it. And B, because you wear it every day, I feel like you get a little bit more of a brand connection to it versus sitting in a couch. Like, I have no clue who made my couch, my chair, like I'm looking at all. I have no clue versus my shoes. I know if they're crocs or Under Armour or Adidas. So, yeah, I just, I find it a really interesting comparison. Yeah, it is. I mean, you know, they have engendered some good brand loyalty and awareness, despite, you know, that's not normal in couches. I mean, you mentioned, I can't, I don't know who made my couch.

I really don't. And, um, but I think people that, that by a love sack, sactional, they know, you know. Um, so anyway, I think there's something there. And, you know, you see they get influencers and celebrities, you know, early on, that was part of how they got sacks sold because it was just, I don't know, so absurd and unique, um, that a lot of celebrities kind of lashed onto it. And I don't know who these people are, but they talk about a bunch of celebrities with 150 million TikTok followers. So obviously, somebody knows them.

I'm just not one of the 150, you know. Let me ask you there. So just A, on the passion, I mentioned it before, but I mentioned again, the Reddit lovesack board is like really well populated. And there are lots of people talking about it. And you can look, like, I did look. There's not a Reddit lazy boy board. As far as I know, most of the direct-to-consumer mattress brands don't have, like, it's really interesting that this is the one furniture. brand that has a Reddit board, just on the TikTok thing.

So one thing they said at ICR that I found very interesting, right? They talk about, hey, I think it was Charlie Diomato, or I don't really know who that is, but I know she's a TikToker. She got one of these couches and showed it to her 100 plus million TikTok followers. They talked about, hey, a almost direct quote from the CEO was, look, we have enroads into the gaming market. We're becoming through all these TikToks people talking about us. we're becoming the aspirational product for tweens, college kids, and gamers.

And they kind of said, hey, that's great because when the tweens and gamers go to college, they want sofas or when the college kids graduate, they need sofas for their apartment. And we're going to be the aspiration product. And that sounded nice to me, but these are expensive couches, right? Like, it's $3,000 for kind of your starter sectional. College kids and tweens aren't exactly known for buying $3,000 couches, even though, you know, I remember my college years, I could probably use a almost indestructible couch.

But I was wondering if there's a mismatch, right, where, hey, if you're selling a $3,000 couch, like that's the type of stuff almost you're finding in a restoration hardware or something. You need to be appealing to more a 35 plus, you know, has the kids, lots of income can afford that versus the aspirational product for a college kid. You mentioned the TikTok, again, that applies to the tweens. Like, do you think there's almost a mismatch there where it's this fun brand that came from, you know, big, the big beanbags or whatever comes from that, but it's really meant to be sold to someone

who makes, who's got a lot of disposable income. Yeah, it is interesting because, you know, it's great to have that awareness and be aspired to by those younger generation, but there is a gap there, right? Unless their parents are going to help them buy that, you know, expensive piece of furniture in college or early in their career, they're going to have to wait, right? I mean, and they'll say their target markets like 25 to 40-year-old. I think the term they use is one at all parents or something. So there's clearly a gap until people most can afford that product. And to be honest, I'm not sure how they will kind of stay in front of those people during those periods.

But it could be that maybe they're hoping that the parents pass on a piece of furniture, right? And then they, if you buy one piece, that's not, it's not to add on to it. It's not crazy, you know. Makes sense. The other company that when I looked at them, I thought of was Shark Ninja, which I'm not sure if you're familiar with Shark Ninja or not. They make the Ninja brand of blenders and the shark vacuum cleaners. I looked at them really in depth last year. And they, you know, I was worried about they're competing with a Dyson or all these vacuum cleaners or whoever

makes the appliances and every time they introduce a new product it's got like these great features and it's price kind of middle of the pack but it's got the best features and they take huge product share and their argument was hey you know we're in call it 18 categories there's 50 categories we can go into and we're going to be innovative and we're going to be all these guys and you know we've got 10 years of yeah it seems like we're literally selling toaster ovens it seems like someone in china could copy all of our products and create toaster ovens cheap than us, but guess what? Because of our brand and innovation, all this sort of stuff, no one can. I was kind of skeptical, but as they kept telling me, the proof is in the pudding, we've

been doing it for a while, and we're going to do it for a while longer. And so far, at least, since the spin, the stocks really worked, the financials been credible. I guess what I was going to say here is, Lovesack reminds me of that a little bit, but they're basically a one company product, right? They've got the sectionals. They do have the traditional bean bag, but that's under 10% of the sales. They've been talking about a new product. So the two things I wanted to ask you are, what do you think about that shark ninja comparison, you know, in terms of the flexibility, innovation, everything, be like, they've been saying we're going to do more products. We're going to take more of the living room. What are the next products that they do?

Well, I don't know that I'm well educated enough on Shark Ninja to make that comparison, but I do have a strong hunch on what the next product line is. You know, I asked management, you know, what they thought or, you know, what the next play would be. And of course, they wouldn't say they're not telling anybody, but I think we can, you know, we can figure out what they think it is. If you look at their patent filings, you know, they've, they've issued patents for a number of different things, but there's two clusters. One, obviously, in the core business, around the sectional, things connected to that. The other one is embedding. I believe that they want to take the sectional modular framework and shift it over to bedding.

You know, and I asked Sean, I was like, I need you to create a crib because I'm annoyed that I'm going to have to disassemble this crib just to move it to another room. And I don't know if I'd get it back, you know, and he smiled. He knew exactly what I was talking about. The problems with traditional furniture, right? So you have this, you have an infant, you have toddler beds, you move up to what word am I looking for? Yeah. But anyways, you can be queen, king, you know, you move on up. Instead, maybe you just have modular pieces, right? And you can just grow that bed with the needs. Somebody comes over. You know, maybe you split it and have twins, twins. Anyways, I think that's the next piece. And the reason being is that they have multiple patents for products like that. And then if you look at their executive hires over the last couple years, they've got somebody, a new supply chain person. and CIO both of them are from one of them from sleep number the other one has experience at

purple so I think that that kind of shows their their hand a little bit and I asked I asked Sean I was like you know I love the small format it allows you to drive a ton of sales through a small you know it's an incredibly profitable idea but if you want to expand the profit line or the product line how are you going to do that in the same store right because you you you don't have a lot more room to work with. And, you know, he didn't commit to it, but it sounds to me like the plan is that you would have just another one, probably near it. So, you know, if you're in a high-end mall where most of the showrooms are, you might put one next to it or near it so you can share employees or what have you. And I don't know what they're going to call it.

Maybe they'll call it like lovesack bedroom or something, you know. I'm sure they'll have a better name for it. But I think that's the plan for next product line. I don't know if they'll come before they test the international market. And all those are kind of, I don't know where they'll saturate the U.S. market in terms of showrooms. You know, is it another 100 showrooms? Is it 200? I don't know. But I think one of the risks is, obviously, in making that next transition.

And will they be successful either going internationally or this new product line? So I do want to ask about a few other competitors, but let me just, I think valuation would be a nice way to start a frame. So as you and I are talking to stock trades for about $23 per share, I think they've guided, hey, we're going to do about $1.50 in EPS this year. They're going to have $2 to $3 per share in net cash on the balance sheet. So, you know, there's obviously real value there. But take it out and you're trading at low to mid-teens times each. EPS. So when I look at that, like I kind of thought when I was first researching this, like, you know, we're coming off 2020 and 2023. Industry sales have been decimated. The industry, there's been bankruptcies left and right, all this. I kind of thought this was going to be like dirt cheap, you know. It's not like screaming dirt cheap. So I want to ask you, how do you look at valuation and fundamental value here? Well, if you look at, if you look at the income statement, there are a lot of investments in there that they're making for new growth. So they're opening right now about 40 showrooms a year, and that cost of about $425,000, you know, each.

And I don't know how long. They say the payback is less than two years, you know, but there's obviously a period where, you know, that's a drain. And so anyways, there's a lot, you know, you could add back just on that cost if they decided to stop opening up showrooms. The other thing I'd point out is, you know, the company trade. at 0.5 times sales, which is a pretty hefty discount to competitors. So just looking at Lazy Boy here, they are at 0.8, right? But Lovsack has gross margins that are at least 10 points higher than Lazy Boy. They grow faster.

They've been outperforming the category by about 20% a year. But even if that were to stop And you just rationalize the cost structure And got I mean There's no reason to think that they couldn't get Lazy Boy margins or better With that much head start And the gross side

And Lazy Boy trades it 12 times forward So let's Let's stick with that Because that was the other question So One of the things I just have written down Is what are we playing for right? Because you mentioned Lazy Boy

I see Lazy Boy it's a stock that's done, it's been really volatile. If you bought it at the depths of COVID or the bets of the depths of the GFC, like you've done pretty well because there's been a couple times it looked like it was going to stop to exist. But if you zoomed out on the long enough time horizon, like the stock has done pretty poorly, right? It's way underperformed the S&P.

And today, and that's over a very long time period. And anything except for buying it at the absolute bottom. And today, Lazy Boy trades for kind of like seven. I've got them at 10 times free cash flow. I look at something you mentioned they've got execs from purple and sleep number. Like neither of those are really like kind of making, setting anyone's world on fire with their stock prices or trading multiples and stuff. So again, this is one of the reasons why I looked at something like Sharky Ninja, which I know you're not crazy familiar with, but I just looked at it and I was like, hey, this is a growth company taking over this industry where if I just told you they make toaster ovens, I'd be like, pull it should trade for book value or six, but they're growing better margins taking share all that so it's just like i'm trying to weigh two

things in my head when i look at this one i'm like what are they playing for even if they win and they take over lazy way like cool seven times ebidot 10 times three cash flow is below where they trade currently obviously there's a but the b is hey shark ninja has shown me a nimble innovative company can take over lots of adjacent products the margins can be great the returns have been great so i'm just like kind of trying to throw all that in there when i'm thinking of valuation Yeah, I mean, you could look at restoration hardware too, right? I mean, their gross margins are better than restoration hardware. They've been growing faster than restoration hardware.

And restoration hardware trades at one and a half times sales. Is that a fair company? I mean, I know everybody loves restoration hardware, right? Like they squeeze the short with the buybacks. And I certainly hear you, but aren't we talking apples to oranges when we're talking luxury? It's a different market, sure. everything, huge stores, like, isn't that just a little bit apples to oranges to compare it to? It is, you know, I guess, but in my mind, everybody is at apples to oranges in a way with

Love Sack just because nobody does this concept. So it's hard to find and say, like, this is the one it should trade next to, right? You kind of have to look at it as a group and think about the differences, in my opinion. So one of the things they also pitch is, hey, because we're sactions, right, we sell one product. It is a cow, you want it, it's great for the showroom, right? We don't have to have these huge stores like a restoration hardware would where we show you nine different couches and different colors and different fabrics. They're like, you go into the showroom, you look at one couch and we say, hey, here it is. You can move it around if you want.

It's in white. If you want it in blue, we'll ship it in the different upholstery. And that's great for low overhead inventory turns, all that sort of stuff, showroom. And that's also great in terms of shipping time. You go to them and you say, hey, I want a couch. And they say, great, we're going to put the order into the warehouse and it'll be shipping to you within the next week or two. One thing I've kind of worried about that, that is really nice for inventory returns and stuff.

But one thing they've kind of worried about is that was great during the supply train crunch, right? When I remember my brother went and bought a couch and they're like, hey, it's going to ship in 15 months. He's like, what? my lease will be up in 15 months I'm going to need it so it was great then but I just wanted to talk to you about that I did really lead the witness with the softball of all the inventory stuff but the two-week turnover that they have how much of an advantage is it but was it more of an advantage in maybe a different time period than it is right now when kind of in supply chains are still

kind of stuck with furniture yeah it was definitely a huge advantage during the pandemic because you know, they were, yeah, they were getting people of their furniture quickly. And so if you wanted something turned around, there weren't a lot of other options. And that would concern me as things normalized if they hadn't had a long period of really strong growth before that. They were taking market share quickly before the pandemic, before all that stuff came around. So I think that was just a unique lever they could pull during that period of time. And actually, when I look at their inventory, they don't, I don't think that they turn it over. Like, they're, they're working capital.

It's not in a better position than their competitors, as far as I can tell. But I think that's because they're holding inventory. They can get it to you quickly, whereas everybody else, like, as soon as they get it, it's out the door. But I think that they'll be able to leverage that model in different ways. right. So the benefit really is in the long run is, you know, they can ship you your couch via FedEx or UPS, right? They don't have, you don't have to contract through another moving company, you know, and pay all those people extra money to send. Granted, you have to put it together yourself. And that's a barrier for some people. You can hire a white glove. And maybe

that negates part of the benefit. But it provides options. This episode is sponsored by TIGIS, the future of investment research. From the beginning, TIGIS has been committed to creating efficiencies in the research process by making it easy to access the content that investors need to get differentiated insights. Today, they're taking it one step further by bundling qualitative content, quantitative data, and better automation and technology together in the same platform. Instead of piecing together data from fragmented sources, just log into TIGIS to get expert research, company and industry specific metrics and KPIs, SEC filings, and more, all under the same

license costs. You can even take a look at your work offline with an Excel add-in that updates almost any model with the latest financial data, keeping all your custom formatting intact. TIGIS is the fastest way to learn about a public or private company and the only platform you'll need for fundamental research. To try it for free today, visit tigis.com slash value. That's Tegus.com I mentioned the Reddit boards with a love sack, and the most frequent thing that is on is, how do I put this together? Oh, my God, putting this together as a pain. But, you know, I'm kind of with you where it's like you get it delivered by UPS. If you want someone to come over and install it for you, like that's an option.

So I kind of like that better than, hey, if you buy a couch, like you have to have the couch delivered. You know, we got a dresser delivered. It's $200 to get it delivered. It kind of comes installed. But if you just want the love sack shipped to you, then you can pay. you know, 50 or 100s UPS, and if you want somebody for an extra 100 bucks to come over and put it together in 45 minutes, you can. I also like the love sack.

There are lots of people before they put them together. They just take photos of them in boxes as they're going to set it up, and the photos actually look pretty cool. Two more questions, and then we'll kind of wrap this up. So one thing a lot of people talked about was, you mentioned earlier, 25% of the stock is short. So I just kind of want to hit you with a dual question. A, what are they looking at when they're short this company? And B, there were a lot of questions about the barter revenues that they report, which I've never, I kind of had in my mind what it was.

So for listeners who don't want to dig through the 10Q and 10K, they say, hey, we do barter revenues where we provide love sacks to people in exchange for media credits, which doesn't seem crazy to me. In my mind, that was like, hey, we provide it to the prices right as a prize for a game show in an exchange. get that. But on their balance sheet in the 10Q, it says they've got $31 million of unused media credits. That's a pretty big amount of media credit. So I wanted to ask about short interest and the bartering. Yeah. One more point on the shipping, one part where that creates an advantage is if you're shipping this product at a shipping container, you can fit a lot more seats and sides in these boxes than you can fully assemble, you know, couches. Well, you can also else yell it. Right? So you send, if you're sending me a couch, like it kind of has to take the whole truck when it's coming to me. Whereas if you're sending five of these over UPS, I would imagine UPS could be like, cool, we're sending it to Bad Rouge, but you know, what will fit a thousand other packages in there. I'm not 100% sure, but I'd imagine that's a huge advantage.

My favorite visual on that is the friends meme, the pivot, you know, when they're trying to move. You know, you don't have to deal with that. But on short interest. So. they've had a lot of short interest and I've not been able to find anybody publishing it, but I can kind of guess. You know, first of all, we're talking about a furniture company, furniture sales, until recently had been trending down a hangover from the pandemic, right? You're also talking about retail. We all know consumer squeezed with inflation. And so, you know, consumer stocks have been hurt right or wrong for that, right?

they also have a past bankruptcy right nobody likes to see that um they had to restate their financials because um they capitalized inventory i mean it all boiled down to you know not that much money but it's a red flag right a lot of people don't like to see that um which resulted in a CFO change i mean that's not how they characterized it but i don't know why else you would do that you know there's some others you know they i was i was annoyed that they um they had some options in their executive comp right and they didn't reprice it but they extended it out another year um and that's not really something i like to see but um you know those are kind of the the reasons i think that that maybe there's a high short interest it may not be you know the same

reason for all the shorts, but that's what I'm guessing. Let me ask on management. So this is kind of where I want to wrap up. I was of two minds of management here. Look, this is a founder-led company that has grown to hundreds of millions of dollars of sales, and the guy started it, as you said, high school or college, kind of in his garage 20 or 25 years ago when he's growing it to this. So that's pretty cool. And they've got a devoted fan base. That's awesome. That's what a lot of, everybody kind of likes to see the founder-led company and everything, which is awesome. My other thing is, I know they went through bankruptcy, but stock insider ownership here

is really low. So I was like, oh, it's a founder-led company. You generally get great insights, great incentives. I was just surprised by how low the incentives were. So I guess I'll just ask you, you know, kind of what do you think about management, the founder-led story, the stock ownership, all of that. Yeah, I mean, I would love it if Sean owned more of the shares. And I assume that his arrangement is a result of, you know, that that, that, um,

restructuring that they had. One thing I would say, though, is that the private equity firms that worked with them through that, most of them are still around. They're on the board, and they own a lot of shares. And recently, actually, one of the, I can't remember exactly which private equity firm they exited, but the guy that runs that private equity firm bought the shares, which I thought was a really, you know, positive thing. You'd expect the private equity firm to exit. You would not expect, you know, that person to acquire the shares. They didn't need to, right? The other thing, really, I guess is, you know, it's still, it's still Sean's company, right? He, I mean, he doesn't, he doesn't own a huge percentage of it, but his personality, his,

his vision is still a company, right? And his reputation is tied up into that. So I think, he's, you know, like a founder just kind of has that extra. They understand what makes it great, right? They understand why it works. That's still there. And he still has this personal like interest, invested interest in seeing it succeed. And that's, I mean, to me, that's why you want a founder-led company, not because they still own 40% of it. I mean, you like to see them own a lot of it but really it's in they have just the will to make sure that it succeeds right uh i don't know i'd like i'd like to see them get paid if it's succeeded too but i mean he's getting options and stuff uh so i imagine that that ownership will creep up a little bit over time but i wanted to

circle back i had asked about the barter revenue question but i don't think we ever fully addressed that yeah yeah um so that was curious to me because i had not seen that either right um so What Lovesack does is whenever there's an open box return, they hand that inventory over to Icon International, is what it's called. Anyways, that company was founded by a media exec, and they go out and buy media credits for them, and they can basically place it through the ad agency they already do. And, you know, LoveSack's pretty, if you look at, you know, their marketing spend per per dollar of revenue, it's higher than most of their competitors. And it seems pretty, I mean, lifetime value to CAC is over five times. So it seems effective.

You know, but that's what they use it for. It has come down over time. I think it's, I don't know how long, how much longer they're going to be using it. If you look at that ACR or ICR presentation, there's a note in there that they have a goal in FY25 to take that in house. for like a resale operation. So I imagine, because they've been investing in their warehouse software and capabilities, so my guess is they feel like they're close to having the capability to do that in the house. Yeah, it just, it wasn't a huge piece of sales.

Like for Q3, I think they had it at 2% of sales, which 2% isn't nothing, but it's not huge, but just what jumped out to me was the $31 million of media credits, was just that is a lot of marketing spend and that is a lot of unused media credits. there. I would imagine those will be probably, I mean, because, you know, they're always marketing a lot over the holidays. Because unique to Love SAC, there's seasonality in it. If you look at other furniture companies, most of them don't have a big jump in Q4. They tend to, which I think probably speaks to the affinity consumers have with the product that they see it as kind of like a treat. But aside from that, I wouldn't be surprised if they use a lot of those, if it turns out

when the next quarter comes out, they've used a bunch of them. But I mean, they'll have expiration date, so they can't keep them forever. Cool. I think, let me look through my questions as I asked this, but I think we've hit most of my, I say most, I mean all of my questions here. I don't know. Any, anything else that people are talking to you about Lovesack or people push back on when you talk to them about it that you kind of wanted to convey?

I think most of the time, it's just, you know, it's kind of an odd ball. You know, I tend to gravitate towards companies that I think have a unique advantage. in an industry that's known for being bad. And so that's kind of how I think about this. Can you give another example of a company which you need advantage in an industry known for being bad? Yeah. So a number of years ago, I was an investor for solar.

We still have some shares in it. Again, not a recommendation. But anyways, we bought that for just over net cash. And there was going through a lot of things. I mean, you know, China was flooding the market with cheap solar panels. So, you know, nobody's making any money anymore. The narrative was that these will never be successful. But the difference was they had a completely different technology where they're not using polysilicon, right?

And the process is such that they can actually manufacture those, you know, in the U.S. profitably, right? And so when the narrative around this, we don't want, you know, solar panels, from China because of Xingxia slave labor and all these things, right? And we're going to tariff polysiliclin panels. That doesn't apply to them because that's not what they are. And the other result is when companies go out and they want to like, they're focused on farther down like ESG scope, scope two and scope three emissions, they show a much better profile for that. And so that gives them pricing power in that regard. So you have a crappy industry, you know, but they

actually do have a really nice competitive advantage. I mean, it's not Coca-Cola competitive advantage, but I like finding companies that have a unique lever to pull there in an industry that's just known for being, you know, commoditized. I'm with you. It's just the parallels to, just as I was looking at, the parallels to Crocs and Shark Ninja. And Shark Engine, particular just jumped out of me. And I like how you framed it. It's an unique advantage in an industry known for being crappy. And that's what Shark Ninja has and does. And people can go look. I mean, that company from almost nothing, it's built up. And, you know, when they spawn, people were like, what, what is this? It's spun from a Chinese private equity firm. And it's done really well.

And it did well in part because it was cheap. And it's done really well in part because they're just knocking the cover off the ball. And the sales are incredible and all this are stuff. So yeah, cool. Anything else you want to talk about here? No, I think that's it. I really appreciate you having me on. This is a lot of fun. Cool. Well, hey, I appreciate you coming on.

I've got a link to your write-up. I'll be sure to include in the show notes so people can go check that out if they want to see and learn more. And that's on your website so they can use that to find you. And yeah, awesome. Thanks so much for coming on. Looking forward to having you on again. All right. Thank you.

A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guests or the host may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial. advisor. Thanks.