LOVE Lovesac Company

By Akane Otani 

Lovesac, the Connecticut-based maker of beanbag chairs, is sounding the alarm on the trade fight between the U.S. and China.

The company's shares shed 23% Tuesday after Lovesac reported worse-than-expected earnings for the first quarter, blaming in part the 25% tariffs on the chairs the company manufactures in China for the American market.

Lovesac isn't the type of bellwether company whose results ripple across the broader market, like Caterpillar's did in October, for example, or Apple's sales outlook did in January.

But Lovesac is still worth watching because it shows the vulnerabilities that companies with business overseas face this year as the global economy slows and the trade fight lingers on.

S&P 500 companies that generate less than half of their sales inside the U.S. are expected to report earnings declining 9.3% in the second quarter from the year-earlier period, according to FactSet. In comparison, S&P 500 companies that generate more than half of their sales inside the U.S. are expected to report earnings growing 1.4% over the same period.

Even more worrying, the sector that rakes in the highest share of its sales from outside the U.S. also happens to be one of the biggest drivers of the market's gains this year: The S&P 500 tech sector is expected to post a second-quarter earnings decline of 12% from the year-earlier period, the steepest drop of the broad index's 11 groups, according to FactSet.

To be sure, many companies -- Lovesac included -- are making plans to shift their production away from China to try to mitigate the fallout from the continuing trade conflict. Lovesac said on its earnings call that it expected to shift nearly all of its production out of China within the next 18 months, a move it expects will help improve its results in future quarters:

But Lovesac's less-than-comfy results show the trade fight is negatively affecting U.S. companies' earnings at an inopportune time: when investors are already expecting economic growth to slow around the world.

Write to Akane Otani at akane.otani@wsj.com

(END) Dow Jones Newswires

June 11, 2019 17:53 ET (21:53 GMT)

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