Lovisa: 1H23 earnings - Pedal to the metal

About the author:

Alexander Mees
Author name:
By Alexander Mees
Job title:
Co-Head of Research and Senior Analyst
Date posted:
23 February 2023, 7:00 AM
Sectors Covered:
Gaming and Retail

  • Lovisa (ASX:LOV) reported NPAT of $50.5m, 1% higher than our forecast. Sales growth was 45%, driven by store rollout and +12.5% LFL sales growth. LOV opened a net of 86 new stores in 1H23, more than in all of FY22.
  • We have increased our post-AASB 16 EBIT estimates by 2% in FY23 and 4% in FY24.
  • We reiterate our Add rating and increase our target price to (login to view).

Result synopsis

LOV grew sales by 45% in 1H23, 1% higher than our forecast. This was driven by an accelerating pace of new store rollout and +12.5% like-for-like (LFL) sales growth.

The gross margin was 180 bps higher than forecast, and 190 bps higher than the prior comparative period (PCP) at 80.3%, reflecting higher selling prices. This resulted in gross profit of $253.2m, 3.5% higher than our forecast and 8.0% higher than consensus.

The outperformance was offset by a 69% increase in employee expenses due to the inclusion of a $15m provision for CEO LTI payment (MorgansF: $9m), excluding which staff costs would have been up 42.1% and the ratio of staff costs to revenue would have reduced from 24.0% to 23.5%.

EBIT before the LTI provision was $84.3m (pre-AASB 16), 6% above our forecast. After the LTI, EBIT was $69.3m, 2% below our forecast. NPAT of $50.5m (pre-AASB 16) was 1% above our forecast. LOV ended the period with net cash of $24.0m.

Morgans comment #1: Rollout momentum set to ‘increase’

LOV opened more new stores in the first half of FY23 (86) than it did in the whole of FY22 (84). It entered seven new markets (Columbia, Hong Kong, Hungary, Italy, Mexico, Namibia and Romania) and added Peru after the period-end. So far in 2H23, it has opened a further 31.

LOV stated it expects its ‘rollout momentum to increase going forward’ (our italics). To facilitate an acceleration in store openings, LOV intends to double the size of its debt facility from $50m to $100m, even though it is currently in a net cash position.

LOV commented today that it sees ‘lots of white space’ around the world for future network expansion. This, in our opinion, is the reason to own LOV. The business has a product that can be deployed around the world; an efficient fit-out process; a strong position in a niche segment; and the ambition to turn Lovisa into a truly global brand.

We have upped our new store forecast for FY23 from 121 to 192. With the additional balance sheet capacity, we have flowed this pace through to FY24 and forecast a further 198 in that year.

Morgans comment #2: LTI provision speaks to higher earnings expectations

The $15m provision for the CEO’s LTI payment was $6m higher than the $9m we had forecast. The company is required to expense the total expected value of the three tranches of the LTI over the vesting period.

The provision made in 1H23 reflects what we believe to be an increase in the company’s own projection of its future profitability, meaning it includes an (unspecified) amount to make up an under-provision in FY22 as well as higher go-forward provisions.

We now assume that the highest EBIT hurdle (pre-LTI) will be met in both FY23 and FY24, resulting in LTI awards of $28m in both years.

Given $11m vested in FY22, this gives an assumed total vesting amount over the three years of $67m, which we apportion as follows: FY22A $19m, FY23F: $26m, FY24F: $22m.

Changes to earnings estimates

We have increased our post-AASB 16 EBIT forecasts by 2% to $120m in FY23 and 4% to $150m in FY24. This is the net effect of increasing our store rollout as discussed above, offset by higher CEO LTI and financing costs.

Our post-AASB 16, pre-LTI EBIT estimates (the basis on which the LTI hurdles are measured) are $146m in FY23 and $172m in FY24.

The top LTI hurdles are set at $130m and $155m respectively.

Investment view

LOV continues to impress us with the rate at which it opens new stores and expands into new markets. As we have said before, LOV may just prove to be one of the biggest success stories in Australian retail. LOV is showing every sign of becoming a global brand.

Investment will be needed to expand LOV’s network in the US and Europe and to take it into new markets, but the company has the balance sheet capacity to fund this and the returns could be stellar. We retain an ADD rating.

Our target price increases to (login to view).

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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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