Universal Store Bucking the Trend

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In a tough consumer environment, youth fashion retailer Universal Store continues to post exceptional sales and margins. A slight earnings miss reflects investment in future growth.

-Universal Store posts slight FY25 earnings miss
-'Miss' related to investment in staff, margins a standout
-Further store roll-outs add to upside
-Full suite of Buy ratings from brokers

By Greg Peel

Youth fashion retailer Universal Store’s ((UNI)) FY25 result proved slightly below expectations, driven by higher costs which offset stronger than expected gross margins. The company’s execution in a tough consumer market has nevertheless been exemplary, Morgans suggests, with like-for-like Universal Store sales up 13%.

The strong sales momentum has continued into the start of FY26, despite significantly harder comparables, featuring double digit like-for-like sales in Universal Store and women’s fashion label Perfect Stranger.

After selling off with the rest of the market post Trump’s Liberation Day, Universal Store has traded in meet-equals-beat territory for much of the first half of FY26, Jarden notes, with the market rotating into interest rate sensitive retail, and concerns around ability to cycle FY26 comparables unfairly, in Jarden’s view, dragging on the stock.

The first seven weeks of FY26 saw Universal Store sales up 10.7%, cycling 12.5% a year ago, Perfect Stranger up 19.3%, cycling 19.3%, and CTC (originally Cheap Thrills Clothing) sales up 4%, cycling 22.4%.

Jarden believes this risk is significantly reduced by the trading update, gross margin beat, and management’s store rollout guidance.

Gross margins were a standout in FY25, analysts note, up 100bps to 61.1% (61.7% in the second half). This was driven by increased growth in the Perfect Stranger retail format, greater penetration of private label brands (55% from 49%), and disciplined pricing. This is particularly impressive, Morgans believes, in the context of many peers heavily discounting, and a foreign exchange headwind. Morgans expects gross margins will continue to improve with growth in Perfect Stranger, despite the FX headwind.

While it is not unreasonable to question the sustainability of the company’s strong sales performance, particularly with comparables getting tougher to cycle over the key trading period, Citi thinks there could be upside to forecasts, particularly in Perfect Stranger, given the relative immaturity of the brand means comparables can remain strong as awareness builds from low levels.

Higher Costs, More Stores

Offsetting the margin increase, and leading to an earnings miss, were increased operating costs (cost of doing business), up 130bps as a percentage of sales, driven by increased investment in team capability to support future growth. Morgans believes this is a logical investment for future growth.

Citi forecasts an increase to 33.5% in FY26 (up another 40bps on FY25), directionally consistent with company expectations. This investment is largely driven by the company hiring staff to support the growth of the business as it scales, particularly in Perfect Stranger, where the company is hiring dedicated staff such as a Head of Product.

Altogether the company has hired for a General Manager of HR, a Head of Loss Prevention, an IT role, four roles in retail, four in product, and three in marketing, with most starting work in the first half FY26. Citi suggests this investment will be fractionalised over time as sales lift.

A potential risk to consider is increased security costs given increasing theft seen in retail, particularly in CBDs, although Universal’s service-based model makes it less targeted by thieves, Citi notes.

Universal Store’s revenue should be boosted into FY27 by accelerated store rollout in FY26 across its divisions. Management is guiding to 4-6 new Universal Store stores, 5-7 for Perfect Stranger and 2-4 for CTC. Macquarie is forecasting a more conservative 12 store net addition.

With regard CTC, Morgans notes CTC Thrills has underperformed expectations since acquisition in 2022. The wholesaling market has been weak, and was down -13.8% in FY25. Direct-to-consumer has nonetheless improved, with sales up 2.9% through the year and continuing in the first seven weeks of FY26 (up 4.0%).

Morgans believes the company is laser-focused on this brand, having hired a new CEO and Head of Product. Two new stores were opened and two closed in FY25, with newer stores performing better. Morgans suggests guidance of 2-4 stores shows confidence in the retail proposition.

The market has little expectation of this business, but Morgans thinks it could be reaching a turning point.

Buy Buy

Universal Store continues to do an exceptional job at sourcing and merchandising product, in Citi’s view, driving better-than-expected sales and gross margin trends. Citi remains confident the retailer can continue to deliver in the short-term, and a more bullish consumer outlook provides another layer of support in FY26.

Longer-term, Citi sees upside from both national and international growth opportunities for Perfect Stranger, albeit international expansion may be less favourable now with heightened global uncertainty from tariffs.

UBS highlights strong execution, private label growth, and resilient youth demand as key drivers of market share gains.

Morgans has a positive view about the fundamental long-term appeal of Universal Store as a retail proposition and investment opportunity. Perfect Stranger is performing well, justifying an acceleration in its network expansion; the prospect of building out the wholesale distribution channels with CTC is compelling; and customers continue to respond well to the Universal Store banner, rendering management’s plan to grow this network to more than 100 stores more than reasonable.

Macquarie sees gross margin expansion ahead on higher Universal Store private label sales and a new Perfect Stranger retail format.

While the stock trades at a 19x PE on a one-year forward basis post the strong re-rate over the past year, Bell Potter continues to view distinctive growth traits supporting consistent outperformance in a challenging category, longer term opportunity with three brands, organic gross margin expansion via private label product penetration (currently circa 55%) and management execution.

Bell Potter sees catalysts ahead including broader tailwinds associated with interest rate cuts, and potential inclusion in the S&P/ASX300 index at the next rebalance in September, justifying the multiple.

With the stock trading around 1.5x price to earnings growth (PEG) based on Jarden’s forecasts, the broker considers Universal Store to still represent good value and deserving of a multiple re-rate, reflecting the strategic optionality of its growing multi-brand platform, the strong long term roll-out ahead of it and what it sees as its best-in-class management.

The five brokers monitored daily by FNArena covering Universal Store all have unchanged Buy or equivalent ratings post the FY25 result. The consensus target has risen to $10.66 from $10.27.

Jarden also maintains its Buy rating, lifting its target to $10.69 from $10.38.

Overall, Universal Store’s 19x forward PE isn’t cheap and Barrenjoey thinks the re-rate potential has played out. However, the average ASX retailer also isn’t cheap on around 19x PE and considering Universal Store’s $17m net cash, 10%pa two-year earnings per share growth, upside risk from more share gains (as competitors exit), rollout opportunity, and potential index inclusion, Barrenjoey remains Overweight.

Barrenjoey has, however, reduced its target to a low-end $9.60 from $9.80.

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