Universal Store Holdings: 1H22 result - A steady hand on the tiller
About the author:
- Author name:
- By Alexander Mees
- Job title:
- Co-Head of Research and Senior Analyst
- Date posted:
- 24 February 2022, 3:00 PM
- Sectors Covered:
- Gaming and Retail
- Universal Store Holdings' (ASX:UNI) trading gross margin improved by 60 bp in 1H22, reflecting the benefits of direct sourcing and good management through strong pricing discipline. Overall LFL sales were down (2.2)%, cycling +26.2% in 1H21, which we see as a good outcome.
- In the first eight weeks of the second half, overall sales were up 5% and LFLs down (4.8)% (but up +23.5% on a 2-year stack). Given the impact of Omicron on consumer footfall, we regard this as resilient.
- We have taken account of the effect of Omicron on 2H22 sales, resulting in a 2.8% reduction in our EPS forecast for FY22. We reiterate an ADD rating.
UNI released its full 1H22 result, having pre-announced its sales, gross margin and pre-AASB 16 EBIT last month. The trading gross margin was very resilient, rising 60 bp before delivery costs.
EBIT was down 19.5% to $19.3m, reflecting the inclusion of one-off subsidies and concessions in the PCP and the effect of COVID-related store closures. Against strong comps, group LFLs were down (2.2)%, including store LFLs down (10.8)%. Online sales were up 50% and accounted for 19.3% of overall sales.
Gross margin resilience. UNI’s gross margin shows the benefits of its direct sourcing strategy. Had it not been for the need to markdown more seasonal inventory than usual because of store lockdowns in NSW, ACT and Victoria, the 60 bp increase in the trading gross margin would have been even more.
We believe UNI has been disciplined on price, avoiding the store-wide discounting in which many other fashion apparel retailers have engaged.
FX hedging rates and elevated freight rates will challenge UNI (and practically all retailers) in 2H22, but the seasonal markdowns in 1H22 will not recur and the benefits of direct sourcing will continue to support margins. We forecast a 40 bp yoy reduction in the gross margin in 2H22.
Store rollout accelerates. UNI’s rollout strategy was put on ice over lockdown, but with state borders re-opening and consumer behaviour finally showing signs of reverting to ‘normal’ patterns, the pace of expansion has accelerated.
UNI opened nine new stores in 1H22 in November and December and has plans to open a further three in 2H22. The new stores included UNI’s first two permanent sites for its women’s banner, Perfect Stranger. We believe the initial trial of standalone Perfect Stranger stores has been a success, allowing UNI to explore the concept outside of Brisbane.
The new stores’ performance, both Universal Store and Perfect Stranger, has been ‘solid’. UNI has long stated its target for Universal Store sites in Australia and New Zealand is ‘100+’, with Perfect Stranger incremental to this. We believe the emphasis is increasingly on the ‘+’ and network expansion is likely to underpin good growth over the medium-term.
Forecast and valuation
We have taken account of the effect of Omicron on 2H22 sales. This lowers our EPS estimate for FY22 by 2.9%. Our FY22 EBIT estimate, on a pre-AASB 16 basis, is $32.4m.
Our target price, which is based on an EV/EBIT-based valuation, declines from (login to view), largely as a result of lower peer company multiples.
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 76 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.
The payback on investment in new stores is close to best in class, and margins are likely 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 a new distribution centre.
We believe multiples are highly attractive and we reiterate an ADD rating.
Risks include unexpected pressure on gross margins; failure to achieve rollout plans; and disruption associated with new distribution centre.
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