Universal Store Holdings: FY22 Earnings - The Kids are All Right

About the author:

Author name:

By Alexander Mees

Job title:

Co-Head of Research and Senior Analyst

Date posted:

29 August 2022, 8:30 AM

Sectors Covered:

Gaming and Retail

• We believe UNI will deliver double-digit growth in sales and earnings in FY23 as an expanded store network plays into the resilience of demand for fashion apparel from a young customer cohort experiencing high levels of employment, higher wages and more and more opportunities to go out and socialise.
• Universal Store Holdings' (ASX:UNI) FY22 earnings were slightly better than expectations. We have increased our EPS estimates by 5% in FY23 and by 1% in FY26. The FY24F P/E is 10x, which we believe is far too low for a business with the quality and growth potential of UNI.
• We reiterate our ADD rating with an increased target price of (login to view).

Event

FY22 earnings.

Analysis

FY22 earnings marginally above forecast. Underlying EBIT (pre-AASB 16) was $30.9m, 1% above our estimate of $30.5m and down 30% y/y due to the effects of lockdown. Pre-AASB 16 underlying EBITDA of $35.7m was 2% above forecast. 

Back to double digit growth from FY23. We estimate lockdowns impacted group sales by at least $20m in FY22. In FY23, UNI has the opportunity not just to recoup these lost sales, but to accelerate growth through the annualisation of its post-lockdown surge in new store openings against the backdrop of strong demand from a resilient youth demographic.

We forecast 19% growth in sales in FY23 with a group LFL of +7.5%. With plenty of runway for new stores, enabled by the launch of new distribution centre in October, our best estimate right now is that UNI will deliver double-digit revenue growth in each of the next three years.

Product gross margin increased and can go further. UNI’s gross product margin (before outbound freight costs) rose 40 bp from 60.8% to 61.2%. This was a function of increased private label product in the sales mix (43.0%, up from 40.2%) and increased direct sourcing of women’s product.

UNI has increased selling prices selectively. Moving into FY23, we believe there will be opportunities to continue to increase the gross margin as the proportion of private label continues to rise. There may also be opportunities to reduce outbound freight costs.

Strong store rollout potential. In our opinion, UNI has a disciplined approach to opening new space. 11 new stores were added in FY22 and a further five will come before Christmas, which will take its footprint to 83, seven of which will be under the private label women’s banner, Perfect Stranger.

We forecast 87 stores by June 2023. The core Universal Store banner is, in our view, under-penetrated throughout Australia, but especially in the two largest states.

Forecast and valuation update

Our EBIT estimate for FY23 increases by 2% to $41.8m (pre-AASB 16) or 4% to $44.1m (post-AASB 16). Our FY23 EPS estimate increases by 5% to 40.3c.

We have increased our target price from (login to view).

This reflects a higher EV/EBIT in our multiples-based valuation, a function both of an increased peer company multiples and a reduced applied discount to peers.

Investment view

We believe UNI has a strong competitive advantage in youth fashion apparel. The potential size of its network may be twice its current footprint of 78 stores, with opportunities for new store locations likely to proliferate as it builds brand equity in the underpenetrated states of NSW and Victoria.

Perfect Stranger has proven to be significantly value enhancing, both within Universal Store locations and as standalone stores.

The payback on investment in new stores is close to best in class, and margins are likely to continue to benefit from the rising proportion of private label products in store as well as, in due course, operating efficiencies from the growth of the network and the launch of the new distribution centre. ADD.

Risks

A rise in youth unemployment could put pressure on the disposable income of UNI’s core customer cohort and impact LFL sales growth.

Failure of the Universal Store banner to increase its penetration of key states such as NSW and Victoria or failure of the Perfect Stranger brand to continue to carve a niche in young women’s fashion could impact forecasts.

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