Success Story Lovisa Powers On

This story features LOVISA HOLDINGS LIMITED. For more info SHARE ANALYSIS: LOV

Following Lovisa's impressive first half results, the potential entry into new markets adds spice to an already strong growth outlook.

-Lovisa Holdings' first half results revealed a 48% jump in revenue
-Price increases to support second half margins
-Potential upside from the store rollout and online sales
-Potential for store rollouts in China and India?

By Mark Woodruff

Should all go according to plan for specialist fashion jewellery retailer Lovisa Holdings ((LOV)), Morgans believes the business could be one of the biggest success stories in Australian retail.

While investment will be needed to expand the network in the US and Europe and to venture into new markets, it’s thought returns from such expansion could be stellar.

This comes as first half results revealed a 48% rise in revenue versus the previous corresponding period while a profit of $36m was above the consensus estimate. The gross margin jumped 110 basis points though this was assisted by a favourable foreign exchange hedge.

The company operates in several international markets and in 2020 acquired the German-based Beeline, a European jewellery retailer. According to Bell Potter, the strong half reflects the contribution from Beeline, 42 net new store openings and same store sales of 21.5%, despite lockdown impacts.

A 30% franked interim dividend of 37cps increased by 17cps over the previous corresponding period.

Lovisa has a vertically integrated business model that can respond quickly to changing accessory trends and offers a broad product range. Around 90% of sales are currently made via the bricks and mortar network, but Macquarie points out online sales rose 36% in the first half and notes management has implemented dedicated online fulfillment warehouses.

Citi has upgraded its rating for Lovisa to Buy from Neutral given the better-than-expected and improving sales outlook, as consumers look to shop more often. In addition, the rollout of stores looks set to accelerate. 

A potential entry into new markets adds further spice, and the broker points out the new CEO’s experience in both China and India.

The store rollout

Bell Potter believes there is a pent-up pipeline of store openings once supply chain delays ease. So far in the second half, three stores have been opened taking the store tally to 589.

Tailwinds are emerging with respect to site availability, points out the broker, which bodes well for the growth strategy. As supply chain constraints ease, it’s thought the store rollout will be strong, and there is upside from potential new territories.

Following a share price retreat prior to results, Bell Potter finds the valuation more appealing and has upgraded its rating to Buy from Hold. The broker, not one of the seven brokers updated daily in the FNArena database, has set a 12-month target price of $21.70, up from $21.30.

Jarden was surprised by the rate of store rollout in the half, particularly the 18 new stores in the US, given logistics delays and the shortage of building contractors that had been previously flagged.

Margins

A favourable foreign exchange hedging rate, 4 cents higher than the first half of FY21, was the primary reason for margin outperformance, explains Morgans. On a constant currency basis, the gross margin was down -20bps year-on-year, but even management conceded this was better-than-expected.

Incremental price increases in the first half are set to benefit margins in the second half and provide an offset against higher freight costs. Jarden’s gross profit margin estimates have improved 50bps in FY22 and FY23, after incorporating slightly better-than-expected resilience to those higher freight costs.

Meanwhile, Citi estimates second half gross profit margins will increase by 70bps to 76.8% driven by ongoing favourable foreign exchange benefits and the abovementioned price increases.

Outlook 

No guidance was provided, as is usual practice.

However, Morgan Stanley sees upside to the FY22 consensus expectations for sales and earnings. Consensus, at the time of first half results implied second half sales growth of 26%.

This compares to the current run-rate of 62% compared to the previous corresponding period, for the first eight weeks of the second half. Moreover, this was achieved in a period when Lovisa’s stores continued to be disrupted by covid.

Potential upside from China

China is the biggest costume jewellery market with a market size of US$15bn.

Citi notes Lovisa could rollout 151 stores across the ten most populous cities in China, which would likely yield $108m in sales and a $13m earnings opportunity. Those earnings, to put things into perspective, would represent around 11% of projected earnings for FY23.

The long-term earnings opportunity could be even more significant should the company be able to expand beyond key cities, explains the broker. Moreover, there could be freight synergies from a store network in China, as much of the company’s product is manufactured there.

Citi noted China was referenced several times in a conference call following first half results.

Investors will have to wait, but it may be no coincidence that newly-appointed CEO Victor Herrero has tremendous success with store rollouts in up to 100 countries for brands such as Guess and Zara in both China and India.

The FNArena database has four Buy ratings and one Hold (Citi). The consensus target is $22.64, suggesting 12.6% upside to the last share price. Targets range from $21 (UBS and Morgan Stanley) to $24.90 (Macquarie)

For those brokers that are not in the FNArena database, Jarden maintains its Neutral rating and increases its target to $19.54 from $15.92. Bell Potter, as mentioned, upgraded to Buy with a price target of $21.70.

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