Young Consumer Base Key to Universal Store

This story features UNIVERSAL STORE HOLDINGS LIMITED. For more info SHARE ANALYSIS: UNI

A young demographic, less likely to be exposed to rising mortgage costs and the impacts of rate hikes, looks to be Universal Store’s saving grace as discretionary retail peers feel the pressure of inflation.

-Universal Store’s consumer demographic will be key to its outlook amid inflationary pressures
-New store rollout remains focus despite headwinds
-Analysts warn inflationary pressures, and minimum wage increases, will impact

By Danielle Austin

While the consumer environment is set to face significant pressure in the coming year, market analysts have noted Universal Store’s ((UNI)) relatively younger consumer base should provide a buffer as inflationary impacts ramp up. With gross margins remaining resilient in the second half to date, the benefit provided by its younger demographic has already been demonstrated, as other discretionary retailers face the early impacts of inflation.

While discretionary retailers face the real prospect of declining earnings and margins in the current inflationary environment, analysts anticipate Universal Store should be more resilient than discretionary peers given its younger key demographic. The company’s target customer, aged between 16 and 35, is less likely to have a mortgage than an older demographic, and therefore less impacted by rising interest rates.

Analysts have noted this consumer group is also more likely to prioritise fashion during economic downturns, a historic trend that should bode well for Universal Stores’ outlook. Further, with covid restrictions easing, and events, festivals and travel returning, the company’s key demographic shows a tendency to prioritise these social occasions which should benefit the company.

In the near-term, the company continues to guide to full year earnings of $30-31m, down -30.7% year-on-year, and sales of $205-207m. The company has benefitted from a return to in-store activity in the second half, with sales up 6.9% to date, and online sales up 27.3%, with market analysts noting second half results were comparatively boosted by the 25% of store days lost in the first half due to covid restrictions.

Store rollout remains front of mind, but inflationary pressures will impact

Growth and new store rollouts continue for Universal Store, with 78 out of a targeted 100 new stores set to be complete in June, despite the impact of macro headwinds in the current economic environment, and some market analysts anticipating upside risk to the 100 store target.

This includes three of the company’s Perfect Stranger stores opening in FY22, with up to a further eight stores to open in the coming year. The initial Perfect Stranger stores will act as a trial, but the company sees the new brand as a growth opportunity that will not cannibalise Universal Store sales.

Analysts warn while Universal Store’s customer base does provide some relief from inflationary pressures in the near-term, the company will not be able to avoid impacts on the retail sector completely. Industry data points to a slowing consumer sector, and this is anticipated to worsen moving forward.

Market analysts also note the recent minimum wage increase announced by Fair Work Commission will impact on Universal Store’s earnings potential, predicting the increase will impact by as much as -20% in FY23 and FY24.

Of the four FNArena database brokers to update on Universal Store’s outlook, three are equivalent Buy rated with only Macquarie holding a Neutral rating. These brokers have an average target price of $4.78.

Macquarie does expect macro headwinds to impact on the company’s top line, and has decreased its earnings per share forecasts -33.1% and -27.9% in FY23 and FY24. The broker also noted continuing cost of doing business investment will continue, as flagged by Universal Store management, with the company continuing to spend on staff, new office space, and distribution centres to future-proof further growth. The Macquarie analysts did highlight the company reported net cash in excess of $20m, well ahead of the broker’s anticipated $14m. Macquarie is Neutral rated with a target price of $3.50.

Analysts from Morgans are cautious on the year ahead, and have reduced earnings expectations -13% in FY23 assuming lower sales growth and higher costs. The broker noted impacts from declining consumer confidence in the coming year are inevitable, and highlighted while Universal Store’s younger demographic does provide some buffer given its limited exposure to rising mortgage costs, rising food and fuel costs will reach all demographics. A -5% decline in the broker’s expected sales in the coming year reflects this, but Morgans notes this still allows for 18% sales growth on FY22. Morgans remains Add rated with a target price of $5.60.

Citi’s Buy rating is underpinned by Universal Store’s continuing growth opportunities in both new store rollout and the opportunities presented by new store concepts such as the Perfect Stranger brand, with the broker describing the company’s rollout target as conservative. The broker also likes the strong balance sheet and resilient customer base. The Citi analysts downgraded earnings per share forecasts -8% to -12% through to FY24 given softer than expected sales in the second half, and  decreased the target price to $5.00.

UBS analysts also reduced earnings per share forecasts -6.1% and -4.6% in FY22 and FY23, anticipating lower earnings margins from FY22 and lower sales growth from FY23. With trading improving in the second half to date, UBS notes the ongoing rollout of both the Universal Store and Perfect Stranger brands remains a sizeable opportunity for the company. Further, the company appears to be handling its inventory levels well, and some stock delays from third party brands are not anticipated to have major impact. The broker is Buy rated with a target price of $5.00.

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