Lovisa: Time for a big recovery and return to material store growth
About the author:
- Author name:
- By Josephine (Jo) Little
- Job title:
- Former Senior Analyst
- Date posted:
- 26 August 2021, 12:00 PM
- Sectors Covered:
- Consumer Discretionary (Retail)
- LOV navigated a COVID-impacted FY21 and reported a strong FY21 result slightly ahead of market expectations (EBIT +39%).
- Trading continues to be impacted by lockdowns in Aust/NZ while the northern hemisphere is emerging strongly as restrictions ease. LFL sales growth +38% on total sales +56% in the first 8 weeks. Essentially, the recovery is playing out as hoped.
- Store rollout momentum continued with 87 acquired Beeline stores and 22 net new stores opened. While 1H22 will remain curtailed by the constrained availability of materials and labour, we think the group can still do +60 stores in FY22.
- LOV is a business that comfortably looks better placed on the flip side of COVID. The substantial global rollout potential is unchanged and we expect a strong recovery in sales/margins over the coming +12months.
- FY23 LTI EBIT targets paint strong growth ambitions and alignment. Add maintained; (login to view price target).
Event: Strong FY21 result
Lovisa's (ASX:LOV) FY21 result was ahead of our expectations. Key highlights: revenue +18.9%; GM -63bp to 76.7%; CODB (% of sales) -309bp to 55.8%; and 109 net new stores added (25/84 1H/2H) with 87 from the Beeline acquisition.
Operating cash flow (110% conversion) flat on pcp and a strong net cash position (no debt) of A$36m (1H21 A$42.5m; and FY20 A$20.4m) provides further optionality for accelerating growth.
LOV paid a large final dividend of 18cps, bringing total dividends for the year to 38cps (MorgansE 25.4cps) vs EPS of 25.8cps with the group paying out excess capital to shareholders.
Outlook: Rollout ramping up again
LOV noted SSS growth for stores open in the period was 8.1% for FY21 (- 4.5%/+20.7% 1H/2H). The southern Hemisphere did all of the heavy lifting with the northern hemisphere still plagued by extensive lockdowns/restrictions.
Sales trends are clearly highly correlated with COVID infections rates/lockdowns globally (ie ANZ the strongest sales recovery market).
LOV has added 7 new stores in the first 8 weeks of FY22 – implying a run-rate of 0.875 stores per week. LOV noted it is experiencing extended landlord negotiation periods with landlords (northern hemisphere) and therefore 1H22 rollout pace could be impacted. That said, we think the group could do c30 stores in 1H22, before accelerating in 2H22.
LOV has set an FY23 EBIT target (upper end) of A$105m in their long-term incentive plan (LTI). The upper end of any LTI should represent a stretch target. To be eligible for 50% of LTIs, EBIT needs to be A$95-100m vs our new EBIT forecast of A$90.6m (pre-AASB16).
These targets provide plenty of alignment and indicate forward targets for the group.
Forecast changes: EPS +6-15%
We upgrade our EPS forecasts by 5-12% over FY22-FY24. We now forecast FY22 EBIT of A$62.7m (+48% on A$42.7m in FY21) on a pre-AASB16 basis.
Should all LOV’s markets be open well in time for Christmas there is clearly the chance that demand accelerates and our forecasts prove conservative. But for now, with a material amount of A/NZ stores closed which represent upper quartile margins, caution is likely prudent.
Investment view: Add maintained
LOV’s global rollout opportunity remains substantial and unchanged, boosted further now by the Beeline acquisition opening up new markets to scale in.
LOV now has 40% more stores vs FY19. This coupled with a strong sales recovery, potentially improved rental terms and opex leverage make for a strong earnings growth trajectory.
Add rating maintained; new PT of (login to view).
Downside: continued COVID-19 impacts; increased competition; poor product/trend execution; FX volatility; and supply chain disruptions.
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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.