Lovesac Swings to Q2 Profit as Gross Margin Reaches 68.4%

Lovesac returned to a quarterly profit in its fiscal second quarter, but the headline improvement came with an important qualifier. The furniture retailer said gross margin rose to 68.4% and net income reached $7.4 million for the quarter ended Aug. 2, compared with a $6.7 million loss a year earlier. Much of that jump, however, came from tariff refunds rather than a clean step-change in the underlying economics of the business.

Net sales were nearly flat at $161.2 million, up 0.4% from $160.5 million a year earlier. A larger showroom base helped offset softer demand from existing locations and the loss of sales from the Best Buy shop-in-shop program. Operating income improved to $10.9 million from an $8.8 million operating loss, while diluted earnings per share swung to $0.51 from a loss of $0.45.

Tariff refunds did most of the work on margin

In its second-quarter results announcement, Lovesac said gross profit increased 21.7% to $110.3 million. Gross margin expanded by 1,200 basis points from 56.4% to 68.4%. On the surface that looks like a dramatic improvement in merchandise profitability, but management’s own breakdown shows that the quarter was heavily influenced by recoveries of tariffs previously paid under the International Emergency Economic Powers Act, or IEEPA.

The company received about $21.0 million of tariff refunds and related interest in the quarter. Of that amount, $20.0 million was recognized through cost of merchandise sold, $0.3 million reduced inventory and $0.7 million was recognized as interest income. Lovesac said those recoveries alone contributed 1,240 basis points to gross margin. Excluding them, second-quarter gross margin would have been 56.0%, which was actually 40 basis points lower than the prior-year period.

That distinction matters because it changes how the quarter should be read. Lovesac did report a 250-basis-point improvement in product margin, helped mainly by price increases, although that gain was partly offset by higher promotional discounting. At the same time, inbound transportation and tariff costs rose by 160 basis points and outbound transportation and warehousing costs rose by 130 basis points. The refund therefore amplified the reported margin improvement far beyond what the core operating trend alone would suggest.

The same pattern showed up in earnings per share. Diluted EPS of $0.51 included a $0.86 net benefit from tariff refunds, according to the company. That helps explain another unusual result in the release: adjusted EBITDA was negative $1.3 million even though Lovesac posted GAAP net income. Lovesac excludes the tariff-refund effect from adjusted EBITDA because it does not view that gain as part of ordinary operating performance.

Store expansion offset softer comparable demand

Revenue growth was modest. Lovesac said the quarter’s 0.4% sales increase was driven primarily by 14 net new showrooms over the past year. The chain ended the period with 284 showrooms, up from 270 a year earlier. During the quarter, it opened five additional showrooms and closed two.

That footprint growth compensated for weaker comparable demand. Omni-channel comparable net sales declined 1.9% in the quarter after a 0.9% increase in the year-earlier period. Internet sales also fell 5.3% year over year. Showroom revenue increased to $114.1 million from $109.1 million, but online revenue slipped to $40.2 million from $42.5 million, while other sales dropped to $6.9 million from $9.0 million.

Management said the higher end of the business remained a relative strength, with customers configuring larger Sactionals setups and adding products such as reclining seats, Lovesoft and storage features. Even so, the top-line figures suggest the category backdrop is still uneven. Sales growth was not broad-based enough to produce a strong revenue beat on its own, and the closure of Best Buy shop-in-shop locations also remained a drag on comparisons.

Below the gross margin line, cost control was relatively stable. SG&A expense edged up just 0.3% to $72.3 million, while advertising and marketing expense fell 2.9% to $22.8 million. Total operating expenses were essentially unchanged at $99.3 million. That expense discipline, together with the tariff-related benefit in gross profit, turned last year’s operating loss into a positive operating margin of 6.9%.

For the first half of the fiscal year, the picture was similar but less dramatic. Net sales for the 26 weeks ended Aug. 2 increased 0.2% to $299.4 million. Gross margin rose to 60.9% from 55.2%, yet the company said that figure also benefited from IEEPA recoveries. Excluding those recoveries, first-half gross margin would have been 54.2%, down 100 basis points from a year earlier. Year-to-date operating loss narrowed to $6.4 million from $23.8 million, and net loss improved to $3.7 million from $17.5 million.

Guidance now reflects the refund windfall

Lovesac updated its full-year outlook to include the tariff recoveries it has collected. The company now expects fiscal 2027 net sales of $690 million to $710 million, net income of $14.5 million to $18.5 million, adjusted EBITDA of $31.5 million to $35.5 million and diluted earnings per share of $0.98 to $1.26. Earlier in the fiscal year, Lovesac had projected revenue of $700 million to $740 million and net income of $5 million to $12 million.

The guidance revision tells a mixed story. The profit outlook improved materially, largely because the tariff refunds boosted reported earnings, but the revenue range shifted lower at the top end. Management also said its outlook reflects the current tariff backdrop for the remainder of the year without speculating about additional changes. In other words, the company is not assuming another comparable one-time benefit will appear later in the year.

Nearer term, Lovesac expects a seasonal loss in the third quarter. It guided for net sales of $140 million to $150 million, a net loss of $9 million to $12 million and a basic loss per share of $0.62 to $0.83. That forecast suggests the second-quarter profit is not the start of uninterrupted profitability, even after the improved first-half showing.

Balance-sheet metrics were healthier. Cash and cash equivalents rose to $68.8 million from $34.2 million a year earlier, and Lovesac said it had no outstanding borrowings on its line of credit. Merchandise inventory increased to $130.2 million from $124.0 million, which the company attributed mainly to a planned stock inventory increase. The stronger cash position gives Lovesac more flexibility as it enters what management called its most active year of product launches.

The next question for investors is how much of the second-quarter improvement can carry forward once the tariff-refund effect is stripped out. Lovesac clearly improved reported profitability, and its broader showroom base helped stabilize sales. At the same time, comparable demand remained negative, online sales were softer and underlying gross margin, excluding the refund, still slipped from a year earlier. The back half of fiscal 2027 should give a cleaner read on whether new product launches and pricing are enough to produce durable operating improvement without help from one-off recoveries.