Universal Store Holdings: Dressed to impress - AGM update

About the author:

Alexander Mees
Author name:
By Alexander Mees
Job title:
Senior Analyst
Date posted:
26 November 2021, 8:00 AM
Sectors Covered:
Gaming and Retail

  • Universal Store (ASX:UNI) continues to impress us. LFLs in the first 20 weeks of FY22 were +3.1%, more than 2 ppts above our estimate of 1.0%. This was driven by +67.8% growth in online sales. Store LFLs were (8.4)%, but +16.2% on a two-year stack, normalising out the unusual trading patterns seen by all retailers in FY21. With previously locked down stores in NSW, the ACT and Victoria now open in time for Christmas, we believe total sales will gather momentum as the year goes on.
  • Making up for lost time, Universal Store has opened 9 stores so far this year and expects to open another 2-3 before the end of FY22. This is a greater rate of store expansion than we had previously expected and is well ahead of the 2 new stores opened in FY21. Standalone stores trading under Universal Store’s private label concept Perfect Stranger now make up three of the group’s 76 physical stores. Perfect Stranger will shortly launch its own standalone website.
  • Following a change of analyst coverage, we have introduced a new earnings model based on AASB 16. On a pre-AASB 16 basis, our FY22 EBIT estimate is $37m ($36m post-AASB 16). We forecast an FY20-24F sales CAGR of 18% with an EBIT CAGR over the same period of 27% (post-AASB 16). Our 12-month price target is (login to view). ADD.

Online sales power UNI to positive LFLs in the first 20 weeks

Last year, UNI delivered one of the fastest rates of growth in online sales of any of the omnichannel retailers in our universe (+90.3%). It has carried that momentum through into FY22 with +67.8% growth in online sales in the first 20 weeks of the year, despite cycling a +123.6% comp.

This meant that UNI achieved positive overall LFL sales growth of +3.1% in the period, exceeding our estimate of +1.0%. This was achieved even though store LFLs were negative (8.4)% against last year’s exceptional performance of +21.2%.

On a two-year stack, store LFLs were +16.2%, which in our opinion is most reflective of underlying trends. Including online, the two-year LFL was a frankly astonishing +40.8%. 

Of course, lockdowns took their toll on overall sales growth. Store closures in NSW, Victoria and the ACT caused the loss of 3,192 trading days up to 14 November, representing 34% of available trading days. This meant total sales were down (14.1)% in the first 20 weeks, but up +3.3% on the same period in FY20 even though that year was unaffected by COVID-related lockdowns. Overall, UNI estimates lockdowns cost it $20-23m in lost revenue and $7-9m in lost EBIT.

Reopening sees customers return ‘in strong numbers’

With all stores now open once more (and another 9 added to the network in recent weeks), we expect total sales to start to build back up and recover all the lost ground by year-end.

In fact, total sales so far in November are up +8.3% (including LFL of +3.8%), a trajectory that we expect to continue. We now include 12 new stores in our estimates for FY22 (previously we had forecast 9).

Balanced stock position to limit pressure on gross margin

Unlike some of its competitors, UNI does not have an issue with excess inventory, particularly of out-of-season apparel. It acted quickly and ‘aggressively’ to clear winter stock early in the season, aware of the possible impact of lockdowns.

This meant gross margins so far this year have ‘moderated slightly’. We forecast a 1H22 gross margin of 57.1%, down 40 bps yoy. UNI is offering a 20% discount on all stock on Black Friday, but is unlikely to extend this discount beyond Cyber Monday. 

UNI sees an opportunity to capitalise on its strong competitive position and developing profile around the country and so plans to ‘almost double’ its investment in advertising and marketing this year to around $9m.

We expect most of this to be deployed to digital channels. We have factored this into our estimates and believe it will pay dividends as UNI moves through FY22 and into FY23.

Investment view

In our opinion, UNI has managed the external challenges of the past few months very well. With all of its network now open and the store rollout now back on track, we believe the prospects for further growth are positive. At an FY23F EV/EBIT of 11.1x, we see good value in an investment in UNI. ADD.

Risks

Failure to deliver ongoing positive LFL sales growth.

A return to lockdown in any of UNI’s key markets.

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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.


Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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