Lovisa: FY22 Earnings - Goldmine
About the author:
- Author name:
- By Alexander Mees
- Job title:
- Co-Head of Research and Senior Analyst
- Date posted:
- 30 August 2022, 8:00 AM
- Sectors Covered:
- Gaming and Retail
- What was clear to us from Lovisa’s (ASX:LOV) FY22 result was that this is a global growth story that is really only just getting started. FY22 earnings were certainly impressive, with sales beating our forecasts rising 59% and statutory EBIT before LTI more than double that of the prior year. Even the dividend, at 74c for the year, was a very positive surprise. But all this could be just a taste of things to come.
- What was even more remarkable than the result itself was the phenomenal scale of LOV’s ambition. In its own words, LOV is ‘building a global brand’, which will involve the development of a global presence that we believe will far out scale the 651 stores in the portfolio today. The momentum of growth is expected to increase in FY23 and the addition of further new markets, perhaps including Italy and Mexico, appears more than likely. In our opinion, it won’t stop there. Expansion in Hong Kong seems to us to be a precursor to a move into mainland China in due course. And if LOV can prove itself in Italy, the European fashion capital, why not Japan, its counterpart in Asia, further down the track?
- We have increased our post-AASB 16 EBIT estimates by 13% in FY23 and by 15% in FY24. Our sales estimates increase by 9% and 8% respectively. We reiterate an ADD recommendation and increase our target price from (login to view).
A powerful sales engine. FY22 sales were 59% higher than FY21. On a 52-week basis, revenue was 4% higher than our forecast. Comparable sales growth was +19.9%. Over the past 12 years, LOV has achieved a sales CAGR of 30%.
Every region grew sales in FY22, with the fastest rate of growth in Europe, following the acquisition of beeline, and in the USA.
There were 104 new store openings, leading to a net addition of 85 stores to the global network. 55 of the new stores were in the US, taking the total to 118, and surely putting to rest any doubts that LOV would be able to gain traction in this market.
EBIT pre-LTI was well above forecast. Pre-AASB 16 EBIT on a comparable 52- week basis was $77.5m, up 81% and in line with our forecast of $77.7m. Statutory EBIT was reported as $82.7m, up 90%, and 4% higher than our post-AASB 16 forecast.
This tells only half the story, however, as this EBIT number was net of c$18m of LTI payments in respect of the CEO’s performance in the current year and some accrual for his performance in the two years to come. Our EBIT pre-LTI forecast was $84.2m, 17% lower than the $101.3m LOV actually achieved.
Margins were strong. Gross margins increased by 220bp to 79%, 260 bp above our estimate. This was assisted by a favourable FX movement, but was even more a function of LOV’s success in pushing through higher prices to offset the inflation of freight and other costs.
Gross margins in the current year will benefit from an annualisation of increased sales prices, offset by a reversal of the FX benefit. The EBIT margin increased 220bp to 17.4%, even after accounting for LTI payments and investment in people and systems to support the next phase of growth.
Forecast and valuation update
We have increased our post-AASB 16 EBIT estimates by 13% to $118.5m in FY23 and 15% to $143.4m in FY24. We forecast the store network to expand by a net of 117 in FY23 to 745. We do not include any unannounced new markets in our estimates.
Our forecast is for sales growth of 25% in FY23 and EPS growth of 37%.
Our DCF and EV/EBIT-based valuation increases from (login to view).
LOV may just prove to be one of the biggest success stories in Australian retail. With ambitious new leadership in place, we think now is the time LOV steps up to become a global force.
Investment will be needed to expand LOV’s network in the US and Europe and to take it into new markets, but the returns could be stellar.
Rapid acceleration of the rollout entails an elevated level of execution risk.
It is important to monitor new store economics.
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