I’m Going to Propose a Trade Relationship With LOVE

I’ve fallen for a former pandemic star. The Lovesac Company (LOVE)  has seen its share price shed approximately three-quarters from its all-time highs. Like many other retailers, Lovesac overestimated demand in 2022 and has had to endure inventory adjustments. But don’t break up with the name just because it’s in a little trouble.

LOVE still looks attractive from a longer-term perspective, based on valuation and what I think is an intriguing niche in the market. You could say, I’m going to be faithful to this options play.

The company designs and markets mid-luxury furniture that includes modular couches, foam beanbag chairs, and associated home décor accessories. Sales are primarily at 189 retail locations in 40 states and online at www.lovesac.com. The company targets that 25-to-45-year-old affluent demographic. You have probably seen their commercials, which I find quite slick, even if I am no longer in the targeted customer base.

The shares are down some two thirds in 2022 but appear to be trying to form a base near current trading levels. The company’s core product line resolves around its “sactionals,” which are designed as interconnected building-block couch and loveseat segments with machine-washable covers. Owing to the interconnected and combinatorial nature of Lovesac’s products, they can be displayed in small-footprint locations that include malls, lifestyle centers, kiosks, mobile concierges, and street locations. The nature of LOVE’s offerings provides in-built stickiness: If a customer’s furniture needs to accommodate more people or if one of the covers is worn out, it is cheaper and easier to add or replace with Lovesac — as evidenced by its high number (42%) of repeat customers. These Sactionals account for nearly 90% of Lovesac’s overall sales.

The stock started 2022 in clearly overvalued territory at nearly 35-times forward earnings. Supply chain issues, recent inventory challenges and a slowing macro-economic environment have brought down earnings and revenue growth forecasts in recent quarters. But valuation seems quite compelling for this debt-free company that currently fetches nine-times trailing earnings and 50% times this year’s revenues. Sales are projected to be up 25% in fiscal 2023. A director bought over $190,000 worth of shares last week in a nice vote of confidence and recent analyst firm price targets are far above where the equity is currently trading.

I could see the shares trade sideways while Lovesac works off inventory issues which makes a covered call strategy an efficient way to play this undervalued retailer.

Option Strategy:

This is how one can execute a covered call position in LOVE. Using the July $20 call strikes, fashion a covered call order with a net debit in the $15.80 to $16.00 range (net stock price — option premium). This strategy provides downside protection of over 25% and roughly the same potential upside over the less than eight-month option duration even if the stock does falls some from current trading levels.

(Please note that due to factors including low market capitalization and/or insufficient public float, we consider this stock to be a small-cap stock. You should be aware that such stocks are subject to more risk than stocks of larger companies, including greater volatility, lower liquidity and less publicly available information, and that postings such as this one can have an effect on their stock prices.)