A few thoughts after reviewing the Lovisa results and investor call

New Management:

I was looking for continuation of a product-focused management team. While commenting on the Jewells rollout, they referenced the Jewells product line and data. Paraphrasing their comment, it was something like: "We are collecting data on customer preferences, such as earring drop and necklace length, to work out optimal ranging." This shows a level of detail and product knowledge not always seen at management levels and is exactly what I was looking for, albeit just one comment in a call.

If there was ever a change of management to bean counters it would be a thesis breaker for me- this seems unlikely while Blundy is involved.

Jewells Assessment

In typical Lovisa style, management were tight-lipped about the Jewells rollout, apart from the repeated message that it's a test/pilot.

For what it's worth, I have a few observations:

A 6-part YouTube documentary was produced on the setup of Jewells. The stated aim in the clips was 15 stores in 6 months - big ask. 7 stores were opened, mainly due to lack of suitable locations. Stores opened one week late.

Initially, I wondered whether this was just about ego—“look what we can do!”—the clips were shot in a reality TV style and I watched them at double speed. However, I’ve since concluded it was an attempt to engage customers ahead of the store openings. The limited YouTube views suggest this approach wasn’t very successful. That said, the buzz around the store launches and how they boosted the brand is evident in other formats, mainly TikTok and Instagram—opening with queues with a new brand is no small feat. The question now is: will the hype continue?

What Product is New at Jewells?

• Tattoos: Offering fine-line tattoos, micro to large (£75-£155), in permanent ink and made-to-fade lasting 3 years. This seems like a winner idea to me - get the look without committing for life! I found the fade tattoo info on social media but no detail on the website, which only shows permanent tattoos. Only one store is currently offering tattoo services Friday-Sunday, with lots of appointment availability.
• Welding: Pick your charms and attach them to your chain permanently. Likewise online booking had lots of availability across all stores. I also like this idea, they are encouraging people to “play” and create their own look, and you probably add more charms/$
• Piercing: Obviously included.
• Lab grown diamonds: everyone offers this option now.

All appointments can be booked for 1-2 people - take your friend, I wonder if 2 people increases the basket size?

Competition Analysis

Jewells: My quick look suggests that at this more premium level of jewellery there is more established competition than Lovisa's demographic. I also think the fast rollout with multiple stores was deliberate to grab market share quickly. Anything slower and the competition has time to adapt. Stores such as Gorjana and Kendra Scott in the US and Pandora seem like direct competition. I'll do a deeper dive into this when I have some time. For now I have to trust that the Jewells team have identified a niche in the current market.

Overall I think Lovisa's market positioning and demographic seems to have less competition. Yes, anyone can copy and produce jewellery at the lower end, but packaging that up with the store experience and adding the touchy-feely value is much harder. I think Claire's experienced this when they opened Icing, which was direct competition to Lovisa.

Claire's Liquidation

Is there an opportunity here? It received attention from analysts on the call. If Lovisa could buy Claire's at an opportune price they would, but I don't think they'd do it at any cost, their ROI bar is high.  I think the real opportunity is the potential store locations it may open up in the States. And you never know there might be the opportunity to cherry-pick part of the business, ie the 120 Icing stores.

Product on Sale on UK Websites

Given Lovisa has always been aggressive in managing stock turn and selling out slow lines quickly, it's no surprise both Lovisa and Jewells have items on sale up to 70% off currently for the end of season sale. At a glance, Lovisa hovers around 50% off, while Jewells discounts seem more aggressive across the board up to 70%. 

• Jewells has 282 items on sale
• Lovisa has 162 items on sale,

Jewells operate at completely different price points to Lovisa, so I'm wondering if this takes away the impulse buy factor. When it's only £5-10 that's one thing. At £35, it's a different story, and that’s on sale.

Top-Up Considerations

My plan was to top up after seeing the results, but the price has gotten away from me. At $43 it's probably around fair value if you extrapolate out the 8-week trading update, which was surprisingly good, but to me it is at the optimistic end.

Buy Opportunities Ahead

I think patience is required now, but Lovisa has periodically given great opportunities to top up I'm looking to add around $35.

I'm waiting for:

• Market correction: Any bad news could see Lovisa drop 20%+ at its current high PE. Opportunities could include poor consumer data, Cost of Liv, inflation, tariffs, anything really.
• Store count milestones: If in 3-4 months the pace of store rollouts is hitting/exceeding my expectations, I would top up.
• Jewells performance: Either strong traction (upside catalyst) or failure leading to scrapping the trial (potentially a buy opportunity on a pullback). Very hard to judge from so far away, so I’m not factoring this in for now. 

Overall: I am happy to hold and add opportunistically. I feel this report has cleared up some issues on management, store growth, and revenue, and I can see a growth path forward for the next 5 years.

Held IRL

Lovisa Store Openings (June)

Just sharing an update with the latest Lovisa store openings as per the website as of June. The numbers aren’t guaranteed to be 100% perfect, but they’re usually close.

I count 138 store openings, which I think sets them up ok for the EOY results. (Note: I haven’t consolidated the store numbers for the Middle East, Africa, and South America as per Lovisa’s reporting.)

Overall openings seem to line up with what management’s been saying.

• US: Slow?, as highlighted previously
• Canada: Store count has doubled, but not a high store count overall, so expansion could continue here
• China: stagnant
• EU: Expansion continues, with Ireland called out as a recent success in the last commentary. Given the store counts in major EU countries, France, Germany, UK etc there is potentially further store growth opportunities here.
• Eastern Europe: Management flagged this as a good opportunity, but I’m not seeing that reflected in the latest store numbers.

Overall, I’m happy to keep holding into results.

Harli and Harpa (H&H) Competition

The H&H website is now live, presenting a clean and polished look. (FYI, it wasn't up when the first stores opened) It’s hard to find on Google due to name spelling variations, this should resolve as brand recognition grows. Their Instagram following is currently (2.3k), Lovisa's (461k), a metric worth tracking to gauge customer interest.

Product Range

The product range looks good, and I've changed my mind about the target age bracket (re my comments post LOV agm). After reviewing the website, I feel the product is more suited for an older customer base, 20-25+ and easily caters for a much older market too. To me, the product range appears more "mature" than Lovisa's offerings at this point.

Price points & SKUs

H&H's price points cover a broader range than Lovisa's, with products priced up to $200. Could this wide range potentially confuse customers about the store's target market positioning or is it a product fit test to see what works? Monitoring these price brackets going forward will help define where their market sits. For reference, Lovisa's highest price point is $75, with a total of 40 SKUs between $50-75 out of 6.4k+, so the bulk is well under $50. (ref: aust site)

Here's a breakdown of H&H's wristwear category, as per website 4/12/24

I've attached a comparison of a $200 bangle next to a $30 one, this is how it came up on the website. This price disparity might be confusing for customers, though the quality difference may be more apparent in-store. TBC

Product items by Major Categories as per websites, 4/12/24, (Note: This total doesn't capture all SKUs, especially for Lovisa, which has many subcategories.)

Bridal Category

The bridal category comparison was particularly interesting. H&H features it as a main menu item, with appealing product styling. Lovisa's bridal section, is hidden under "occasions," appears less attractive and to me looks "cheap" in comparison: no one wants to feel cheap when buying wedding jewellery. I think this could be a lucrative sub-category within the business.

Photography

A side-by-side product search for silver hoops revealed significant differences in image quality between Lovisa and H&H websites. Lovisa's product shots are arguably unacceptable for an online store. I suspect the images are being provided by manufacturers to accommodate their fast product turnover. While photographing small, reflective items on a tight budget is challenging (good jewellery photography is difficult and expensive), there's room for improvement in Lovisa's imagery. Enhancing photo quality could potentially boost online sales, maybe? This raises the question: what are the implications of trying to develop an online presence in China with subpar images? The flip side is it's perhaps this comment on product photos is misplaced, given that in-store sales remain the main driver of Lovisa's business. A focus on the important part of the business?

Store count

H&H currently has 11 stores open across VIC, NSW, and QLD.

Conclusion

My current thoughts, which are subject to change are that the H&H product is targeting an older customer than the Lovisa store. Side by side, the H&H website feels more luxurious and is easier to navigate and find items, although this is probably a reflection of the smaller number of SKUs available. Has Lovisa's ranging become too broad and less specific/targeted?

In contrast, Lovisa's site feels cheaper, this is partly due to the current Cyber Monday marketing, which is loud and in your face. At different times, the presentation has been "classier" so take this comment with a grain of salt. 

Obviously, we need a lot more time to really see how H&H and LOV compete head-to-head, or if they are they actually targeting slightly different markets, with clear overlap in some areas but perhaps not all?

I'll revisit this after I have a chance to visit a store, (no idea when I’m next in Melb) and see if the online experience matches the in-store experience. I'm also v interested in accessing the quality of the product.

Store-Product Feedback

It would be great to get wider feedback on customer insights on Lovisa and H&H stores & product. So if you, your wives, daughters, or other family members have shopped there, I'd love to hear their thoughts on:

• Product, store layout & atmosphere
• Customer service
• Anything really, all feedback is valuable, esp from real consumers

Thanks

held

This summary is based on my notes from the meeting. Direct quotes appear in italics, and unless otherwise noted, all responses are from Brett Blundy. My personal observations appear in [square brackets]. Questions have been reordered by topic for clarity.

Trading update and store openings as per ASX announcement.

Brett Blundy (BB) announced that three new stores were just approved in the US, expecting to reach 1000 stores "before we know it". The company's focus going forward is on:

1. Succession planning: Bringing team members through the system into management and country management roles.

2. Systems to support growth: Improving logistics, computer systems, and inventory control.

Official business:

Received a second strike on the remuneration, but avoided a spill with a huge margin 

Q&A Session 

Hybrid Meeting System

Q: Why is there no hybrid meeting system, and can one happen in the future?

A: The company prefers a single, straightforward meeting format and will continue this way. Shareholders interested in the company can attend in person. [me: This response seemed dismissive and offhand; a virtual meeting seems unlikely at this point.]

CEO Succession & Leadership

Q: Provide an update on Victor's step down and the plan for the incoming CEO.

A: There's no change. It's still business as usual, focusing on continued growth.

Risks

Q: What are the top risks for the company?

A: 1. Competition: Staying ahead of both store and online competitors.

  2. Succession planning: Helping people improve and move up within the company.

Debt

Q: Can you talk about the company's debt levels?

A: The goal is to not exceed one times EBIT, note, the company has never come close to that. BB commented that they don't like debt but will use it if needed.

Store Growth and Strategy:

Q: Why does the store rollout rate seem to be slowing?

A: The company is strategic about store openings, always testing markets before expanding even though it looks like we go in fast. BB described themselves as "growth junkies" and said that's not going to change.

Comment: Ireland has performed exceptionally well, beyond expectations. They now have six stores, with an additional store opening yesterday and more planned.

Q: Where are the greatest opportunities for expansion?

A: Eastern Europe is seen as a huge opportunity. There's also potential for expanding the store base in the EU and various Asian markets. BB mentioned visiting Germany recently, where the EU country manager was pushing for additional store openings. BB emphasized there is still significant runway in many markets.

Q: What's the status of store expansion in China?

A: There was a slight admission that the market has been tougher than expected. They are currently seeking 3-4 store locations to run as a test scenario before further expansion and then "putting the foot down" as per BB.

Q: How are negotiations with US landlords progressing?

[Me: There appeared to be some challenges in securing favourable lease agreements in the US.]

A: BB stated:

- "We do all right," but "the landlord always wins" [cheap laugh]

- Brand recognition is now creating some tailwinds in landlord negotiations

- We are now finding it easy to engage with landlords just not easy to close

- Some US stores closed due to unreasonable rent increases

- Planning approximately 150 store openings in next 12 months (unclear if US-specific or global)

Q: Why has the ideal store size increased to 60-70 square meters?

A: The slight increase accommodates piercing services and expanded product ranges. Most stores will remain 50-60 square meters, with new locations being slightly larger. The new Series5 store layouts reflect evolution in product and customer needs. The cost increase in rent is negligible.

Q: Why has franchising been chosen in some African countries, and what are the economics?

A: Franchising is used where joint ownership is required to operate. While Lovisa prefers company-owned stores, the franchise model maintains similar profit profiles as Lovisa controls pricing, product, and advertising. Agreements vary by country, with franchisees primarily managing store operations and inventory ownership. The Ivory Coast operation was noted for its outstanding performance.

Competition & Market Position:

Q: Can you comment on Harper and Harli?

A: The company faces competitors worldwide and emphasizes the need to view Lovisa as a global company, not Aust-centric.  Aust’s revenue as a % of the company’s sales has greatly reduced over time. But we don't take our advantages for granted and we must stay in front through evolution of stores, product, systems, & people. 

Q: What is the impact of online platforms such as Shein and Temu?

A: We need to remain relevant and monitor all competition.

Systems & Operations:

Q: Can you expand on the focus on systems?

A: The number one priority is RFID system. It is hugely important, but we're currently going through cost versus benefit analysis as the investment to update to it is significant. But when we get this, it will be a “game changer” BB

The company is also revaluating various other logistics system, merchandise management was mentioned, several systems were said to need updating

Target Market

Q: Has the target market for Lovisa changed? - this was an observation from a shareholder who felt that the ranging was now targeting younger clientele

A: It was reiterated that the core market remains 25-35 years old and expressed some surprise that the shareholder felt this. It was noted that they do have ranges within the store targeting younger age groups. At this point Victor weighed in and said the trends in in fashion at the moment are looking at more premium type product rather than fashion product. He commented that the fashion style product is actually a bit off trend but will return. [Me: interesting comment]

[Me: I went to the store after the meeting, and this really did stand out. There was product targeting the younger age brackets. I'm not sure I agree with the comment that there were limited items for an older customer. In my opinion, there were options I could see my sisters and friends wearing, and I am in the older customer category, note: this is purely an opinion]

The shareholder also commented that they'd spent time at Harper and Harli at Doncaster doing some scuttlebutting. They felt that the quality was not up to the same standard as Lovisa, but the ranging was more suitable for an older customer.

Supply Chain:

Q: How will potential US tariffs affect the business?

A: Multiple manufacturing options and simple product construction provide flexibility and reduce vulnerability to tariff issues compared to US business heavily reliant on China manf.

Summary:

The Lovisa AGM had a relaxed yet confident atmosphere, Brett Blundy is an engaging speaker. Shareholders seemed supportive, despite a remuneration strike (though those responsible seemed absent).

But yeah, take my personal observations with a grain of salt, we can all get sucked into a story and I have no previous AGM exposure to benchmark this against.

Discl: I won't be making any changes to my position at this stage.

 Store opening: Harli + Harpa

Woah, I totally missed this! I've been away a lot in the last couple of months, but I just found out about this via the Intelligent Investor weekly report. (It was a 1-liner in the II report to explain the recent SP drop)

Thought I'd share it in case others missed it too. 

Lovisa's ex-CEO Shane Fallscheer has opened a new jewellery store called Harli + Harpa. They launched their first store on the Sunshine Plaza last week, with a second one in Westfield, Doncaster.  

Interestingly, I couldn't find a website for them, and their Instagram only has six images so far. Looks like a soft opening.

Their message: Harli + Harpa is positioning itself as ‘Your walk-in jewellery box’, focusing on fashion-forward, long-lasting pieces for every occasion, good tagline.

Fallscheer at the helm is a huge advantage for this new chain. With his Lovisa background, he knows the prime locations with the biggest ROI and will target those first. I reckon they could easily ramp up to 20+ stores quickly - he's probably got the funds to make it happen.

Excerpts from AFR, link below

"Mr Fallscheer has deep retail connections after working with billionaire Mr Blundy for three decades, and is aiming to shake up a sector that Lovisa has dominated with its affordable earrings and friendship bracelets."

"The retail executive surprised the market in October 2021 when he flagged his departure from Lovisa after 12 years leading the fashion jewellery company, which at the time of his exit spanned more than 550 stores in 20 countries."

"Mr Blundy, who is the chairman of Lovisa, said at the time that Mr Fallscheer was the driving force behind its creation."

A major threat is the potential migration of key Lovisa staff, which may have already happened. SF has working relationships with important players at Lovisa, making poaching or offering new opportunities very tempting. My thought has always been: if you wanted to compete with Lovisa, poach their product development staff first, followed by other key operational positions. So, this could be exactly what's happened here.

Another reason for Herrero’s departure?

Store layout looks familiar

Same goes for the Insta styling

It's worth noting that Claire's in the US recognized the threat of Lovisa and established a new chain called Icing to go head-to-head with them. However, in my opinion, they aren't in the same league as Lovisa, so I never really considered this a real threat. On the other hand, Harli + Harpa, with Fallscheer at the helm, is potentially a long-term real threat to Lovisa's business.

Where to from here:

I'll be tuning into the AGM on Friday, keeping a close eye on developments, and reassessing my options. It’s probably time to reduce my position size, which is quite large IRL due to cap growth.  While the long-term impact on Lovisa will take time to materialize, there could be a quick hit to individual Aussie store profitability if they are head to head in a shopping centre.

For example, if jewellery spend in a shopping centre gets split between two stores, it immediately impacts Lovisa's profitability at a store level and, by extension, their bottom line.

https://www.afr.com/companies/retail/brett-blundy-s-lovisa-stares-down-ex-ceo-s-jewellery-challenger-20241017-p5kj9m 

https://www.capitalbrief.com/briefing/lovisa-shares-slide-as-ex-ceo-opens-rival-harli-harpa-bdbf1c54-d0ee-42ec-846f-6ca4c6069e3e/

https://www.westfield.com.au/doncaster/store/KFjwzhsYadhfS2xM1nvHb/harli-harper?srsltid=AfmBOoqoZm7-t9JNQsvMCLBeH1ftV7_ZxyoW7lyWVdrQBCGyDtCY9TwL 

held

“Join the Lovisa America Team! Exciting times are ahead at Lovisa with many new stores opening across America. We are looking for our next amazing Lovisa Sales Super Stars to join our growing team.”      Ref: Lovisa US website, job openings

I’ve been exploring job openings at Lovisa worldwide to get a sense of new store openings. My hunch is that the focus is on the Americas region, given the new logistics/warehouse facility that opened, which should allow the store count to ramp up. In FY24, there were only 17 new stores in the US compared to 72 the previous year. Did they hit operating/logistics capacity in FY24 and were unable to effectively open more stores?

The American website combines job searches for the US, Canada, and Mexico, reinforcing the comment at the last meeting that they look at geographic regions rather than country borders.

Based purely on job availability locations, there has been an increase in store numbers in the region:

• US: 23 new locations
• Canada: 5
• Mexico: 1

As shown below, there are also a few additional store locations in other countries.

This brings my estimate of new stores opened since FY24 to 36 plus. My rough analysis only captures stores needing staff, so it is far from perfect data, just an indication.

I’m in two minds about this. In around half a year, there have been less than half the store openings compared to the 99 from last year. Ideally, I would have expected to see a greater number of stores opening by now to capitalize on the Christmas trade.

However, I have no idea about the number of stores in the pipeline waiting on lease negotiations, etc. The US is far from saturated in terms of store numbers and locations.

I was unable to count the stores on the store locator map of the US, as they are not shown in list form only as a map. I don’t have the time/patience to count them now. Does anyone know a way to count the stores from a map easily? https://www.lovisa.com/pages/store-locator This would be a better data point.

Regarding China store openings, I found nothing on any new stores in China. I did come across Lovisa on numerous online platforms in the region, so it appears that China stores has been put on the back burner, opting for an online-only presence.

 disc: held

Competition

I have an alternate view on Lovisa’s moat/competitive advantage. I’m not convinced starting a competitor would be easy for the following reasons.

• Their secret sauce is the product development team, who have an ability to consistently release on trend accessories at a staggering pace, this is not an easy thing to do.
• Their stock turn is well managed, dogs are sold off promptly. Quick manufacturing and airfreight, allows best sellers to be topped up. Following on from this, a best seller can be updated into a new version to keep the store fresh but still hitting key sales points.
• Their sales data for the past 10 plus years is a clear advantage in analysing, best product categories, price points, sales cycles, key market differences, metro v regional, EU v Aus etc.
• Brand recognition takes time to develop. Lovisa has a well-established store and online presence.

So yes, you could attempt to replicate the above and, on the surface, it is doable.  However, it would take deep pockets and a lot of $’s thrown at marketing. To my mind, the intangibles of product development and consumer love are not so easy to replicate.

I have held in the past and it is on my watchlist, due to the issues well outlined in @Rickpost. However as Rick notes, with retail so out of favour it could be time to relook at the business and a possible entry point.