Universal Store Holdings: A ‘young’ retailer with plenty of growth ahead

About the author:

Josephine (Jo) Little
Author name:
By Josephine (Jo) Little
Job title:
Former Senior Analyst
Date posted:
26 August 2021, 9:00 AM
Sectors Covered:
Consumer Discretionary (Retail)

  • UNI’s FY21 result met the market’s expectations with a strong recovery year post peak COVID (EBIT +86%).
  • While COVID lockdowns on the East Coast have impacted trading short-term as expected (and for all retailers), history tells us how quickly demand recovers in this category and for UNI in particular.
  • Having recently factored in an estimated lockdown impact, we lower FY22 forecasts by 2% with all other forecasts unchanged.
  • Longer term, UNI looks set to secure double-digit footprint growth p.a. and has a long history of averaging >12% LFL sales growth. This, coupled with a GM expansion trajectory and scale benefits/leverage, makes for a strong growth story.
  • Add rating maintained; new price target of (login to view).

Event: FY21 result – a big recovery year

Universal Store Holdings' (ASX:UNI) FY21 result was in line Morgans/consensus forecasts with 36% revenue growth converting to 86% EBIT growth.

Key result drivers: 28.5% LFL sales growth (26.5%/31.7% 1H/2H); GM +210bp CODB -270bp.

UNI exited FY21 in a A$18.6m net cash position, with ‘balanced inventory’.

Outlook: COVID bites ST, but demand bounces quickly on the other side

NSW/VIC and other lockdowns have seen total sales in the first 8 weeks of FY22 down 20.7%. LFL sales growth (excl. closures) is -0.4% (cycling +24.5%). We understand that QLD/WA/SA experienced over indexed growth in the pcp (implying these states are cycling higher than the 24.5% average).

The flat comp against a 24.5% base, implies a 2-year avg of c12% - very much in line with the company’s 5-year average prior to COVID (13.4% FY15-FY20). This tells us the company hasn’t massively over-traded.

Inventory is ‘balanced’ in early FY22 which is great outcome given lockdowns and coming out of the Winter season – a testament to the group’s buying close to market strategy.

Private label penetration and increased proportion of direct sourcing in womenswear are sustainable drivers of GM upside over time.

Forecast and valuation update

We lower our FY22 forecasts by 2% in FY22 to account for a more extended east coast lockdown (we pulled our forecasts back in recent weeks which appear largely adequate vs today’s trading update). Our FY23/24 forecasts are unchanged.

Our longer term forecasts increase with higher rollout forecasts and GM expansion.

We note the group is cycling the extended VIC lockdowns in 1H22 which saw a A$6m sales impact (cA$3.5m at EBITDA). 

Short term, UNI will continue to be impacted by lockdowns which will likely see 1H22 earnings fall yoy. However, history tells us how quickly demand rebounds as restrictions ease. We are therefore willing to look through the ST impact and focus on the long-term growth potential of this business.

Or DCF/PE valuation increases to (login to view).

Investment view

UNI remains ‘young’ in terms of its store foot print which, combined with scale benefits and GM upside (private label/direct sourcing penetration), makes for a strong growth profile.

Playing catch up post COVID (18 months of little store rollout), c10 new stores p.a. would realise double-digit footprint growth. We see upside risk to UNI’s targeted +100 store target over time – from both regional locations and potential standalone private label concepts.

Add rating maintained. Based on our CY22 forecasts, UNI is trading on c14x.

Risks

COVID-19/store closures; adverse fashion trends; supply chain disruption; loss of key suppliers; FX; inability to secure new store locations; new entrants/increased competition in UNI’s key category; failure to acquire sufficient new customers.

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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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