Lovesac Company (NASDAQ: LOVE) is emerging from legal issues involving former executives and is on track for its share price to stage a rebound.

The rebound will be driven by its growth, improving operational quality, and shift to sustainable profitability, but there are risks.

Among these are significant risks of shareholder dilution and a high level of short interest that remain unaddressed.

The question for investors is how great an opportunity for upside there is, and how the risks of stock price decline offset it. 

Lovesac Is Growing, and the Analysts Like It

Lovesac’s Q1 release highlights the primary reasons for buying it: positioning and operational quality. The company’s $138.4 million in net revenue isn’t industry-leading, but the 4.4% is. Competitors like Ethan Allen Interiors (NYSE: ETD), La-Z-Boy (NYSE: LZB), and Bassett Furniture Industries (NASDAQ: BSET) are growing at much slower paces, if at all. Ethan Allen and Bassett Furniture posted significant declines in their calendar Q1 reports, highlighting the market share gains reported by Lovesac.

Lovesac’s growth is underpinned by its increasing store count, which has risen by 21 compared to last year, with sales in that channel up 18%. The weak areas are in the digital and other categories, which contracted by 9% and 40.5%. 

Operational quality resulted in a 60-basis-point contraction in the gross margin and a 310-basis-point contraction in SG&A expenses. The net result is that the GAAP losses contracted by more than 1,600 basis points, and the adjusted loss by more than 2,000 basis points, allowing management to issue strong guidance.

The guidance for the year was increased, with revenue expected to range around $725 million and EPS expected to be around $1.05, both above the consensus forecast reported by MarketBeat. 

The news is unlikely to alter the analysts’ outlook, which is bullish for this stock. The coverage reported by MarketBeat has been consistent at six for more than a year, with all analysts rating the stock unanimously as a Buy. The price target revisions for calendar 2025 are limited, with only four tracked ahead of the FQ1 release; however, they align with the consensus, which forecasts a 50% upside for this stock. 

Lovesac’s Share Buyback Is at Risk

Lovesac invigorated its market during the summer of 2024 by announcing a share buyback program. The company has repurchased numerous shares since then, significantly reducing the count in that time. However, there is a risk that this repurchase may not only cease but also be reversed. The impact of operations and legal settlements, including share repurchases, resulted in a substantial decrease in its cash position, current, and total assets that have only been partially offset by declining liabilities. 

The net result is a 7% decline in shareholder equity and insufficient cash to ensure operations can continue while repurchasing shares.

Add in the fact that guidance includes an 11.6% increase in the expected average share count between the Q2 and full-year forecasts, and the odds are high that the share count will be increased or at least offset the impact of buybacks. 

Short interest has decreased significantly from its highs but remained elevated at more than 20% in May. With this in play and shareholder dilution a possibility, it is unlikely that short interest will continue to fall over the summer. The risk is that shorts will pile back into this market, lowering the share price. 

Even if Lovesac can rebound from its mid-June price points, gains could be capped at resistance targets near $22.50 and $25 unless another catalyst emerges. 

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