Universal Store Holdings: Under the hoodie - Universal tick of approval

About the author:

Josephine (Jo) Little
Author name:
By Josephine (Jo) Little
Job title:
Senior Analyst
Date posted:
02 December 2020, 4:30 PM
Sectors Covered:
Consumer Discretionary (Retail)

  • Universal Store Holdings (ASX:UNI) has carved out a strong competitive advantage in the youth apparel category, benefiting from a disruptive and likely enduring shift to streetwear.
  • UNI remains relatively ‘young’ in terms of both footprint and brand awareness in newer markets like NSW/VIC, lending strong sales upside in periods to come.
  • We forecast a 3-year EPS CAGR of 25%, well in excess of most retail peers. There is a likelihood this growth will be significantly weighted to FY21 as opposed to FY22 as UNI customers play catch-up post COVID and comps continue at elevated levels.
  • We see UNI as having similar attributes to Lovisa Holdings Ltd (ASX:LOV) (store economics) and Baby Bunting Group (ASX:BBN) (store immaturity). We are mindful of how successful niche retailer IPOs have been where there is substantial store rollout still on the table and therefore scale benefits.
  • Initiate with an Add rating and updated price target (login to view)

Introducing Universal Store – youth apparel retailer

From a base of 65 stores, Universal Store (UNI) is a youth apparel retailer targeting customers aged 16-35 (who on average spend cA$86/transaction).

The emergence of ‘streetwear’ over recent years has seen growth materially outpace broader apparel trends, something we think can continue. UNI has carved out a strong niche domestically in a segment that has seen competitors shrink their presence.

UNI has a long track record of strong growth, recording 5-year CAGR results of 16% store growth, 13% LFL sales growth, 25% revenue growth and a 32% 2-year EBIT CAGR.

The things we really like about this business model

We highlight the following in terms of key attributes we think sets UNI apart:

  1. Store payback of 12-14 months (close to best in class);
  2. 62-92% store footprint upside from here (vs a largely mature peer set);
  3. Private brand penetration is at 30%; will continue to grow and with a greater proportion of stock sourced directly, lending upside to GMs;
  4. UNI is still underweight the key NSW/VIC markets, providing brand awareness/sales productivity upside;
  5. Potential for lower rental terms/higher landlord contribution post COVID;
  6. We estimate UNI saw a cA$5m EBITDA hit due to COVID in 2H20 (net of JobKeeper subsidy); and
  7. Strong cash generation will provide ample coverage of growth initiatives and a 60-80% dividend payout.

Forecasting continued strong growth trends – 25% EPS CAGR

UNI’s store rollout profile is close to double-digit footprint growth p.a. (excl. FY21 due to COVID). This, combined with solid LFL sales growth, GM upside and operating cost leverage from scale, set the scene for a strong compounding growth profile.

In FY21 we forecast EBITDA of A$40m (+48%) off the back of 25% revenue growth – obviously an exceptional year of growth as the average young consumer plays catch up after being sidelined by COVID. Forecasting FY22 against what will likely be a very strong FY21 comp is difficult.

LFL sales will be less relevant given the base removed closed stores, making total sales growth the key measure in 1H22 in particular. For now we assume a flat year of growth in FY22 (2-year avg growth of c25%), but comfortably see upside.

Indeed, UNI’s 2-year revenue growth stack (FY19A-FY21F) equates to 30%, not at all far off historical levels. Post FY22, we assume strong growth resumes from store rollout, LFLs, GM and opex leverage.

Initiate with an Add rating 

We value UNI at (login to view price target) and initiate with an Add rating. UNI is still ‘young’ in terms of brand awareness and store footprint, leaving meaningful upside for incoming investors. Based on our forecasts, UNI is trading on 13x FY21F; annualised yield of c5%.

We think the group can sustain a 15x+ multiple based on a superior growth profile with multiple levers, strong cash generation/BS and attractive yield. Catalysts: Jan trading update.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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