Universal Stores Dressed For Youthful Success

This story features UNIVERSAL STORE HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: UNI

Specialist discretionary retailer Universal Store Holdings has bucked the macro headwinds from higher interest rates with a successful blend of product positioning, cost disciplines and new store roll-outs.

-Is history a guide for what’s in store?
-The demographics with cash to spend
-Product, price and positioning in tune
-Growth equals organic plus new stores
-Brokers sing in unison

By Danielle Ecuyer

FY24 results beat expectations 

Retailing is one of the more challenging businesses to operate successfully, just ask Myer or David Jones. The latter is in its umpteenth iteration of reinvention.

But when a retailer gets it right, hitting the sweet spot of on trend brands as a must-go-to destination for shoppers, the pathways are potentially a tale of follow the yellow brick road.

Enter Universal Store Holdings ((UNI)) with Petra Capital the latest broker to pick up coverage on the company with a catchy tag of “Stylish Fit”.

So why are some of the brokers’ falling over themselves to espouse positive views on the company?

To answer that question, let’s turn the clock slightly back in time to the FNArena Corporate Results Monitor that provides some insights on the latest earnings results from the company. 

 “FY24 earnings from Universal Store proved slightly better than pre-released guidance. They came with a strong trading update and a higher-than-forecast dividend. Morgans (Buy) highlights strong trading momentum in 2H24 which has continued into the first seven weeks of FY25, including double-digit growth in like-for-like sales across all brands. Macquarie sees significant opportunity for store roll-out and sales growth in FY25, in particular for Perfect Stranger. This broker has upgraded to Buy for a maximum score of five Buy ratings.”

On balance, Universal was one of the 26.6% of companies which delivered better-than-expected FY24 results, a “beat” no less, and a positive outlook, despite a challenging macro backdrop of higher interest rates.

The company remains sensitive to youth spending as Bell Potter highlighted at the FY24 results, although sales for the first seven weeks of FY25 generated 15% revenue growth for like-for-like sales growth across all the company’s three banners. 

Maybe the younger demographic was happier to go out and spend the tax cuts?

Jarden points to a more resilient youth spend relative to families whose discretionary spending is more challenged from higher rental and mortgage costs. The broker’s economics team illustrates the household cashflow (disposable income less rent/mortgage payments) has been better for older owners and young renters compared to the mortgaged family.

Digging into the retailers weeds

By way of history, Universal Stores has grown group sales 97% since FY19 to FY24 which equates to a five-year average compound rate of 14.5%. Universal Store format sales have expanded at a 10.8% compound rate per annum. The company has expanded net stores, advancing from 60 in FY19 to 102 in FY24, across three retail formats.

–Universal Store is the largest specialty retailer of premium casual clothing for youth fashion with 80 stores in operation at the end of FY24, and around 58% of sales from private brands and “sister business’ Thrills. Petra points to a target of around 100 stores for the Universal Store format with the possibility of larger stores.

–Perfect Stranger is an emerging on trend women’s fashion store brand with 14 stores at the end of FY24. Morgans observes Perfect Stranger has positioned itself as a more upmarket and “boutique store look” with the brand able to attract new customers and operate in stand-alone stores while not cannibalising Universal Store sales. It is the bestselling women’s range within the group, the broker notes, with a long runway of new store roll-outs over the next five to ten years, including four-to-six new stores in FY25. Petra believes there is scope to expand the Perfect Store footprint to 60 stores over time.

–Thrills, named post the Cheap Thrills Cycle acquisition in Oct 2022, represents eight stores including wholesale channels with premium partners including Universal Store. It is Byron Bay based, independently managed incorporating both men’s and women’s casual fashion. Citi points to some cannibalisation from the Worship brand for Thrills in the FY24 results. Management is heightening the focus on direct-to-consumer sales due to the softness in the wholesale channel. Some growth to United States wholesale has also been evidenced. The analyst at Petra suggests 40 stores are possible for Thrills over time compared to the current eight stores at the end of FY24.

Factors for success

Petra dissects Universal Stores’ value proposition across five factors of success.

The broker believes the sourcing of products from a range of in-demand third party brands with an emerging portfolio of private brands is one of the strategic advantages for the company. Citi highlights private brands represented 46% of sales in FY24 compared to 45% in FY23. The analyst views the direct sourcing of private brands assists the company in producing strong gross margins.

Morgans accents the contribution of Cheap City Thrills, discipline promotions and private brand expansion boosting the gross margins by 110bps to 60.1% in FY24. A nod to management on the cost controls is also apposite with the cost-of-doing business down -40bps to 31.8% as a percentage of sales.

The brokers observe the company’s strong financial ratios with Petra pointing to around a 22% return on equity and circa 27% return on capital invested. The returns are assisted by the strategic benefit of “on-brand” offerings which limits markdowns and boosts sales per square metre. The strategy also allows for store paybacks of a year after fit-out. Combined these factors lead to a circa 100% cashflow conversion.

Universal Stores has also developed a robust omni channel presence from store-to-door, click & collect, endless aisles with a range of delivery options and payment styles. The coverage permits what Petra refers to as a “seamless customer shopping experience across online and in-store”.

Looking ahead, Citi forecasts a total of 12 new store openings in FY25, which are at the midpoint of management’s guidance for each banner, five for Universal Store, five for Perfect Stranger plus two extra Thrills stores.

The analyst at Citi is particularly upbeat on the prospects for new store roll-outs and growth for Perfect Stranger. While the closure of Accent Group’s ((AX1)) 17 Glue stores may provide some benefits too.

The Universal Stores story would not be complete without some feedback on management. Petra emphasises how well-regarded the long-standing management team is including CEO Alice Barbery who has been associated with the business since its inception. The former Super Retail Group ((SUL)) CEO Peter Birtles is Chairman. The broker views the success of the company can be attributed to the “importance management places on culture and significance of the customer”.

Management has a preference to promote internally to preserve the quality of the culture.

Universal Store Holdings is a well covered company with all FNArena daily monitored brokers tipping their Buy equivalent ratings for the stock with an average target price of $7.70. Jarden believes the company is well positioned to cycle weak 1H24 comps in the near term. Longer-term, the broker is positive on the “significant valuation upside”, store roll-out and best in class execution. (Buy rated with a $7.88 target).

Wilsons has the highest target price at $8.40 (Buy equivalent).

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