Located in the Northern Undead Asylum between the exit doors and the pick-up point. Snuggly has a nest on the ledge and is more of a trader than a merchant. You never see her, just her nest.
Snuggly will only swap one item for another and only once per play through. The list of items swapped is a fixed list as well - think of her as fussy.
While it is possible to trade with Snuggly during the Tutorial, there are only a few items you could have at this point that she is willing to trade.
As you approach, Snuggly will start to talk. Walk into her nest. Locate the item in your inventory that you wish to drop. Select the Drop option and walk away from the nest to a safe point.
You can now either jump of the ledge (and restart from the Bonfire) or quit and restart the game. After that weird part, go back into the nest and collect your swapped item.
Ascended Pyromancy Flame note: Snuggly will not accept an Ascended Pyromancy Flame if it has a + level.