Lovisa: 1H22 result - The jewel in the crown

About the author:

Alexander Mees
Author name:
By Alexander Mees
Job title:
Co-Head of Research and Senior Analyst
Date posted:
25 February 2022, 7:30 AM
Sectors Covered:
Gaming and Retail

  • In our opinion, Lovisa's (ASX:LOV) 1H22 result was nothing short of remarkable. +21.5% LFL sales growth, complemented by an accelerated store rollout and increased gross margins saw EBIT up 59%, 20% above our forecast.
  • We increased our EPS estimates by 24% in FY22 and 15% in FY23. We reiterate our ADD rating. Our target prices increases from (login to view). If LOV get this right, it could be one of the biggest success stories in Australian retail.

Event

LOV reported 59% yoy growth in first half pre-AASB 16 EBIT to $49.1m, 20% above our forecast. Sales rose 48%, driven by LFL sales growth of +21.5% and a marked acceleration in the pace of store rollout.

A net of 42 new stores were added to the network. This was twice our forecast. Gross margins increased by 110 bp with favourable FX and price more than offsetting pressures from increased supply chain costs. An interim dividend of 37c was double our forecast.

LFLs in the first 8 weeks were +12.1% (cycling +12% in the first 7 weeks of 1H21). Total sales were up 61.7% in the first 8 weeks. A net of three further new stores have been added since the year-end. We note the comps do get more challenging as the second half goes on.

We forecast 2H22 LFL sales growth of +6.6% and FY22 LFL sales growth of +14.0%.

Analysis

The global acceleration.

Recently appointed CEO Victor Herrero commented today that he joined Lovisa to ‘accelerate’ the rollout of stores around the world. Coming from a man who previously ran Guess (present in 100 countries worldwide) and the Asia Pacific business of Inditex (Zara is present in 88 countries worldwide), the scale of the company’s long-term ambitions is not hard to envisage.

Lovisa’s global footprint now spans 22 countries. In our opinion, investors can expect this number to increase steadily while, at the same time, Lovisa builds out its presence in its existing markets. We do not think there is any lack of opportunity.

In the US, for example, Lovisa now has 81 stores, representing 0.25 stores for every million people), compared to Australia with 158 stores, 6.15 stores for every million people.

Given Mr Herrero is well-incentivised to grow Lovisa’s EBIT rapidly over the next three years, and has already appointed senior former Inditex executives to his regional team, we could be at the start of a period of remarkable expansion.

A gross margin that goes up?

Despite cost inflation in the global supply chain, LOV reported a gross margin of 78.3%, which was up 110 bp on 1H22. We did not expect this (our forecast was 77.0%).

A favourable FX hedging rate, 4c higher than 1H21, was the main reason for the outperformance. On a constant currency basis, the gross margin was down slightly yoy (20bp), but even LOV conceded this was ‘better than we expected’.

LOV has been able to take price selectively and will be able to do more of this in the second half as required. We conservatively model a flat gross margin over the course of FY22 (which implies a 130 bp yoy decline in 2H22).

If we’d kept the gross margin forecast for 2H22 the same as 2H21, our EBIT estimate would rise by a further 3% to $81.7m.

Forecast and valuation update

We have increased our EBIT (post-AASB 16) estimates by 24% to $79.2m in FY22 and by 15% to $105.1m. The equivalent EBIT figures pre-AASB 16 are $77.7m and $103.1m respectively. Our estimates are stated after taking account of Mr Herrero’s LTI awards. 

Our target price, which is the average of our DCF and EV/EBIT-based valuation, increases from (login to view), driven by our higher earnings estimates.

Investment view

LOV may just prove to be one of the biggest success stories in Australian retail. With ambitious (and financially well-incentivised) 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.

Risks

Great rewards comes with great risks. Rapid acceleration of the rollout entails an elevated level of execution risk. It is important to monitor new store economics.

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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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