Universal Store Holdings: 1H23 Earnings - Look Sharp
About the author:
- Author name:
- By Alexander Mees
- Job title:
- Co-Head of Research and Senior Analyst
- Date posted:
- 24 February 2023, 7:30 AM
- Sectors Covered:
- Gaming and Retail
- Universal Store Holdings (ASX:UNI) reported strong growth in 1H23, with sales up 35%, 5% above forecast, and post-AASB 16 NPAT up 44%, 4% above forecast.
- Our post-AASB 16 EBITDA estimates are effectively unchanged in FY23 and rise 2% in FY24.
- We reiterate our Add rating with an increased target price of (login to view).
1H23 sales rose 35% to $146m, 5% above our estimate. The growth was driven by a strong recovery in physical stores as customers returned to in-store shopping after the restrictions of the PCP.
Growth was further boosted by the inclusion of $6m initial revenue contribution from CTC (THRILLS), which was part of the group for two months of the first half. LFL sales growth was +2.4% at the group level, with store LFLs up +5.5%, in line with our forecast.
Online sales declined by -5.4% (- 10.6% LFL). EBITDA increased by 30% to $41.2m, 2% above our forecast of $40.3m. This reflected a strong 170 bps increase in the gross margin to 58.9%, 40 bps above our forecast, supported by supply chain enhancements, freight cost reductions and optimised price architecture.
The ratio of the cost of doing business (CODB) to sales rose by 270 bps to 30.6% (MorgansF: 29.5%), driven by higher staff costs and the new distribution centre.
EBIT rose 43% to $28.5m, 2% below our estimate due to higher depreciation than forecast. NPAT increased by 44% to $19.5m, 4% above forecast. The momentum continued in the first seven weeks of 2H23, with Universal Store (US) bricks and mortar LFLs up 11%.
Morgans comment #1: Store rollout gathers pace
The pace of rollout has stepped up. UNI opened 6 new stores in 1H23, comprising four Perfect Stranger (PS) stores (taking the total to seven) and two US stores. One of the new PS stores was at Warringah Mall in Sydney, the first foray for the brand as a standalone store concept outside of Queensland.
The initial performance of this store was the best of any PS store opened so far, giving UNI the confidence to increase the pace of expansion to a national scale. UNI expects to open 3-4 new PS stores in 2H23, which we expect to be focused on NSW.
In addition, UNI aims to open 4-6 US stores in 2H23 and one new THRILLS store. In our opinion, the acceleration in pace is evidence that the investment put in by UNI in laying the foundations for growth is starting to pay off. We think this is just the start of a sustained period of network expansion.
Morgans comment #2: The customer continues to spend
It is evident from the strong sales performance in 1H23, especially in-store, that UNI’s customer made up for lost time following the reopening of store and the normalisation of events and social activities.
The early performance in 2H23 suggests the customer continues to spend.
The cost of living pressures expected to weigh on discretionary expenditure in Australia in the months ahead certainly apply to UNI’s youthful customer base, although they are likely to be more resilient than other demographics given they are less likely to have a mortgage to service.
Nonetheless, disposable income is likely to be in tighter supply and UNI needs to adapt to this by ensuring it offers fashion products that appeal to the customer at prices that represent fair value. UNI will, in our opinion, take share from other fashion retailers with its strong product development pipeline and brand curation.
Changes to earnings estimates
We have made minor changes to capture an increased sales forecast, offset by higher depreciation forecasts.
Our sales forecasts rise by 2.4% to $268.6m in FY23 and by 4.7% to $326.5m in FY24 due to higher store numbers and more resilient LFL sales.
Our EBITDA estimate is effectively unchanged at $69.6m in FY23 and rises 2.3% to $85.7m in FY24. Higher depreciation forecasts result in our EBIT estimates declining by 1.7% to $45.3m in FY23 and by 3.6% to $56.1m in FY24.
Our positive view is predicated on the opinion that UNI is a well-managed business with opportunities to grow through multiple avenues.
We recognise the general risk around a decline in consumer expenditure on discretionary categories like apparel, we highlight that the youth demographic is likely to be more resilient and we expect UNI to deliver growth from store rollout and share gains.
Key risks include a sharper-than-expected decline in consumer demand and loss of share in a competitive market.
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