Tuesday, September 3rd, 2019
Lovisa is a highly profitable and well-managed business with a global store rollout which is fully funded by free cash flow. The business currently has net cash and generates an ROE of 75%, gross margin of 80% and EBIT margin of 21%. As at FY2019, Lovisa has 19 stores operating in the US, compared to 154 in Australia, which highlights the long term growth potential. Group store numbers increased by 64 over FY2019, to 390 stores.
- FY2019 NPAT of $37.0m was 1% ahead of consensus and represented a marginal (+1%) increase on FY2018.
- The result reflected cost investment in new geographies and a tough year for like for like sales growth, given the consumer environment and cycling strong comps. Earnings are highly leveraged to this metric given relatively fixed costs of doing business.
- Positively, the business returned to positive like for like sales growth across all geographies in 4QFY2019 and is currently tracking within the target 3-5% pa.
- Moreover, management guided to an acceleration in the pace of store roll out from the 64 net new stores in FY2019. This compares to total store numbers at year-end of 390.
- Clime currently forecasts net new stores in FY2020/21 of 84 and 90 respectively.
- The top 200 malls in the US identified by Lovisa are essentially controlled by 4 landlords, increasing the potential for multi-store leasing deals.
- Importantly, management maintains strict criteria for signing new leases. The multiple active geographies enable this discipline to be maintained while accelerating the rollout.
- Partly offsetting increased store expectations, the average cost of new store fit out in the US is currently approximately double the group average. This has resulted in an increase to capex and depreciation forecasts. Management is targeting a 15% improvement in the cost of store build in the US.
- Management provided some useful metrics that increase confidence in FY2020 forecasts, specifically in relation to the FX headwind to gross margins and group operating expenses growth:
- The hedged rate for the AUDUSD on purchases results in a 250bp headwind to grow margins (from 80.5% in FY2019). Management expects to offset approximately half of this with price increases in the US and France. The business typically enters new geographies at prices below what management thinks they can achieve, providing scope to increase.
- Management expects the cost of doing business % of sales to be relatively flat at 55.6% of sales, while the ambition is to return to 53.0% over time.
- Clime currently forecasts EPS growth over FY2020/21/22 of 18%/23%/24% respectively. This is largely driven by new store rollout.
- The stock continues to offer upside to a one year forward DCF based valuation of $13.50. However, investors should note the high forward PE of 29x. This could make the stock vulnerable to a pullback given evidence of resumed weakening in the consumer environment.
Clime Group owns shares in LOV.