Lovesac, the furniture company known for its modular couches and beanbags, reported fiscal first-quarter results that actually beat analyst expectations. But the market wasn't impressed. Shares dropped 12% on Thursday after the company narrowed its full-year outlook, citing ongoing pressure from budget-conscious shoppers who are pulling back on spending.

For the quarter ended May 3, Lovesac posted a GAAP net loss of $11.1 million, or 76 cents per share. That's better than the $1.00 per share loss analysts had expected, though it's slightly wider than the 73-cent loss from a year ago. Net sales slipped 0.1% to $138.2 million, just ahead of the $137.4 million consensus estimate.

Breaking down the sales channels: showroom sales edged up 0.6% to $97.1 million, internet sales rose 7.1% to $35.7 million, but other sales—mostly from Best Buy shop-in-shop locations—plunged 36.3% to $5.5 million as those partnerships wound down. Omni-channel comparable sales fell 1%.

Gross margin took a hit, contracting 160 basis points to 52.1%. The culprit? Higher costs for inbound transportation, tariffs, outbound shipping, and warehousing. Lovesac tried to offset some of that with price increases and cost-cutting, but it wasn't enough to fully offset the headwinds.

The Tale of Two Shoppers

Here's where it gets interesting. Lovesac's management said transactions above $6,000 grew at a mid-double-digit rate during the quarter. Even better, purchases above $8,000 and $10,000 saw even stronger growth. The wealthy are still splurging on premium offerings like reclining seats, storage options, and larger configurations.

But the story is different for the rest of us. President Mary Fox noted that demand remains strongest at the higher end, while lower-priced purchases have been slower to convert. CEO Shawn David Nelson put it bluntly: given record-low consumer sentiment, the company continues to see softness in transactions below $6,000 as shoppers delay discretionary purchases.

To address this, Lovesac is working on improving affordability at entry-level price points, including promotional efforts tied to its Rain Chenille fabric offering. Think of it as trying to lure budget-conscious shoppers back with a more accessible entry point.

Guidance: A Trim, Not a Slash

Lovesac narrowed its fiscal 2027 guidance, which is a polite way of saying it lowered the top end of its ranges. The company now expects GAAP EPS of 34 cents to 81 cents, down from 34 cents to 95 cents. The midpoint is still around 57.5 cents, but analysts were looking for 71 cents. Sales guidance was trimmed to $700 million-$740 million from $700 million-$750 million, bracketing the $723.1 million consensus.

For the second quarter, Lovesac expects a GAAP loss of 48 cents to 20 cents per share, compared with the analyst forecast of a 31-cent loss. Sales are projected at $157 million-$166 million, versus the $165.8 million estimate. So the lower end of the range is a bit below expectations, but the upper end is close.

The outlook includes $3.6 million in tariff refunds already received. Management said total accepted refund applications now stand at $20.8 million, but the timing of additional recoveries remains uncertain. It's a nice buffer, but not something to count on.

The Bottom Line

Lovesac is navigating a tricky environment. High-end customers are still spending, but the middle and lower ends are pulling back. The company's balance sheet is solid—$57 million in cash and no debt drawn on its credit facility—and it's buying back stock ($2.4 million in the quarter, with $51.7 million remaining under authorization). But the guidance trim suggests management sees more headwinds ahead.

CEO Shawn David Nelson struck an optimistic note: "Lovesac's solid first quarter performance reflects disciplined execution, including modest market share gains, as we navigate continued industry headwinds while simultaneously preparing the business for our most prolific year of new product introductions in Lovesac's history."

Investors, however, are focused on the here and now. With consumer sentiment at record lows and budget-conscious shoppers delaying big-ticket purchases, Lovesac's near-term outlook remains uncertain. The stock's 12% drop on Thursday suggests the market is pricing in more pain before the recovery.