Forum Topics LOV AGM commentary
Solvetheriddle
9 months ago

LOV AGM trading update

LOV released a trading update with its AGM today. Store openings, sales and same-store sales (SSS) for the first 20 weeks were disclosed.

The stores were 836 (up 35) currently, about on track with my estimates of 75 for the full year, and sales were +17% compared to my 15% for the full year.

The SSS were -6% and this was quite a bit of a shock to the market, for a time anyway.

My understanding is that SSS are calculated for stores open for a full 12 months to take out what can be a lot of noise.

SSS can move around for several reasons, cyclicality, mix of stores and structural improvement or deterioration. The measure is less useful the more of a moving feast the base effect happens to be. LOV is certainly adding a lot of stores so we can, imo, expect volatility in the sss numbers. I don’t specifically assume a sss number but can back solve a small drop was my expectation but with less conviction and importance given the circumstances of strong store growth.

The big bear case is of course, that new stores are seeing a structural decline in profitability compared to the older stores. That is a conclusion that is premature in my view. Stores take time to achieve full run rate and again we have massive build-out occurring here.

I expect a fair degree of volatility in the LOV share price but stick by my view it's an accumulate in the $17’s, and bought some more this morning. The end prize still looks big to me.

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Wini
9 months ago

@Solvetheriddle To your point on the store roll-out and assessing the profitability of new stores compared to old, one thing that came to mind seeing LOV this morning and the rapid pace of store roll-out was this tweet thread from the SecretCFO talking about working capital cycles. More importantly, when the stars align for a retailer, you can achieve a negative working capital cycle by squeezing payables and turning over inventory quick: https://x.com/SecretCFO/status/1584569328816783361?s=20

I'm sure people far smarter than me have looked at LOV specifically, but with a small store footprint, high gross margins and rapid inventory turnover, from a cash on cash point of view it wouldn't surprise me if LOV had negative working capital on new stores. Weakening store economics over time is definitely the big bear case, and well worth watching given there is an incentive in the short term for management to ignore economics and focus solely on store count growth.


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Solvetheriddle
9 months ago

thanks @Wini i cant recall w/c strain being an issue so far, maybe due to the above will have a closer look. certainly, no raisings since ipo implies something positive going on

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rh8178
9 months ago

My gut feel at least is that LOV's working capital is not a key issue for the business, given the high margin of their inventory. Key is store openings and keeping discipline on return on investment, killing off dud stores where necessary. The big challenge I think is making sure the turnover at a store level gets to a point that the store can make money, given the low sale value per customer. Same store sales are interesting and worth a closer look, your point on volatility given new markets is bang on, although I'd like to see more granular data on this stat before making a final conclusion (if that's possible).

Held IRL.

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UlladullaDave
9 months ago

I reckon if you can increase revenue by ~350% over 8 years and never have a single half with negative OCF you probs don't have any WC issues and your business runs on an oily rag. The GMROI of LOV is out of this world. It bounces around 600%-800%. That is up there with the world's best retailers.

The initial reaction yesterday was odd given they had disclosed SSS was down 5.8% in the August results announcement.

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rh8178
9 months ago

Love that! More people should talk about GMROI!

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