I have a few companies reporting today. At a quick glance the Lovisa results look good, and ahead of FY24 analyst consensus. ROE, based on doubling 1H24 NPAT (ie. $107 million) and 1H24 equity reported ($104 million) is approx 100%. This assumes next half will be as good as 1H24. Does this look right Strawpeople?
I’ve been working on ROE of 90% for my valuation. I think the market will like it. I hope I haven’t made any huge errors here. I’ll have a more accurate look later.
Summary:
• Revenue up 18.2% to $373m with improving trend through Q2
• Comparable store sales down 4.4% on HY23
• Gross Margin 80.7%, up 40bps
• 74 new stores opened during the period, 854 at period end
• China and Vietnam markets opened during the half year
• EBIT $81.6m up 16.3%
• Net Profit After Tax up 12.0% to $53.5m
• Operating cash flow of $150m up 29.1% on prior period
• Net Cash of $15.5m at period end, with $120m of available cash facilities in place
• Interim Dividend of 50.0 cents per share, 30% franked
Lovisa shared their Macquarie Conference Presentation back on the 5 March 2022. This has been the most recent ASX news out of Lovisa…albeit old news now. What else has been going on?
Friday’s episode of ‘the Call’ with Luke Winchester (@Wini) and Claude Walker prompted me to review my IRL holding in Lovisa, which is currently sitting at about 2.5% of my portfolio.
I first became interested in Lovisa in July 2019 after hearing Owen Rask talking to Angie Ellis from ‘8020 Invest’ about Lovisa in this podcast. Lovisa sounded like a very promising high performance business, so I put it on my watch list.
In July 2019 Lovisa was trading around $11 per share. Then in Feb 2020 comes the onset of COVID19 and the Lovisa share price plunged as low as $2.45 before beginning it’s recovery to an all time high of $22.82 in November last year.
I started buying Lovisa in March 2020 (too early as usual) at an average cost of about $7 per share. Nervous about the market and economy I lightened off half of my holdings between March and November last year. I still hold 2.5% of my portfolio in Lovisa now. What should I do…Buy, Hold or Sell?
On the Call, Luke said if you look at Lovisa’s economics, it has the perfect recipe for a retailer:
- Very high gross margins
- Very high inventory turnover, and
- Very low store footprint
Luke said the growth was all in the US and if over the next 5 years Lovisa could grow US stores from 100 to 1000 or 1500, the shares sound cheap. But when Nadeem Blayne pressured Luke for a call, Luke went weak at the knees and said it was a ‘Genuine Hold’ (…not even a nibble)! :D
Claude had a different view saying Lovisa would be a company you would buy for the yield and that there is a real threat of competition.Claude said What is to stop ‘Lovisa 2’ coming along and reducing those nice margins? Claude thought Lovisa was closer to a Sell than a Buy!
Nadeem even threw in her thoughts saying that even though Lovisa has competition now, she has taken both her children to Lovisa to have their ears pierced…not really knowing why!
My view
Lovisa has been in the ‘too hard basket’ for me lately, so I’ve just Held. There is so much going on in Lovisa’s geographical footprint that it is hard to get a clear picture of what might happen to the businesses going forward. There’s also the relentless down selling of retailers lately (could be a good reason to buy??).
Luke talked about the growth in the US. However, there is also huge potential for growth in Europe.
I think Europe could be a wild card. Lovisa has added 168 stores since June 2020, 87 we’re acquired in Europe as a result of the beeline acquisition in FY21 and 163 stores now trading in Europe. This compares to 53 new stores in US.
What I like about the European Beeline acquisition is the price Lovisa paid for it, a total of 60 Euros from memory. Lovisa almost stole the distressed business when European retail businesses were being hit the hardest.
Headwinds
There are some real headwinds to consider, and the impact could last for a while:
- labour shortages and logistics challenges, in particular in the USA, which has also impacted store build costs
- Logistics challenges have continued in the second half in particular impacted by recent lockdowns in China
- The impact of a recession (if we have one) on discretionary consumer products.
- continuing COVID lockdowns?
Lovisa seems to be impacted more by COVID than many other retailers. Easy to understand when you think about it, people are staying at home so there’s no need for jewellery. Who wants to get up close and personal and have their ears pierced when COVID is spreading? Who wants to jam up in a tiny Lovisa store and try on jewellery others might have also tried on?
How well can this business perform if the headwinds disappear?
We only need to go back prior to COVID to see how well this business can perform in the absence of headwinds.
ROE has been gradually declining over several years from over 100% in 2016 to 29% in 2020. Declining ROE is something I really don’t like to see in a business and is usually a signal for me to get out, but hey…when you start out with ROE of over 400% (2015), something has to give!
in 2021 the ROE lifted back up to a respectable 55% and according to 10 analysts from S&P Global (Simply Wall Street data) Lovisa could return to ROE upwards of 90% and earnings growth of 18% over the next 3 years.
If we use McNiven’s StockVal formula and apply a 90% ROE as the APC, 28% reinvested earnings (RI), and shareholder equity of 58 cents (E), the valuation for a 10% required return is $17.20. That makes Lovisa good value if you want to take the risk!
A lot is hinging on a quick turn around over the next 12 months. It’s still a bit of a gamble for me, so I’m going with Wini on this one…it’s a ‘Genuine Hold’!
Disc: Held IRL
A very pleasing 1H22 result was announced by Lovisa this morning, despite the overall trading days lost being higher than in the prior year. EPS of 34.2c for the half seems to be well ahead of analysts forecasts of 40c for the full year. The interim dividend is up by 85% pcp to 37c. This should go down well with investors. Good gross margin at 78.3% despite some inflationary pressures and cashflow remain strong.
Disc: Held IRL
Sales Momentum Continuing, Balance Sheet Remains Strong
• Revenue up 48.3% to $217.8m with strong momentum through the half
• Comparable store sales up 21.5% on HY21
• 42 net new stores opened during the period, 586 at half-year end
• Gross Margin 78.3% with Gross Profit up 50.5% to $170.7m
• EBIT1 increased by 59.0% to $49.1m
• Cash conversion of 93% with operating cash flow1 of $53.6m
• Net Cash of $52.7m with $50m of cash debt facilities and $20m of bank guarantee facilities in place
• Interim Dividend of 37.0 cents per share, 30% franked
Results Highlights
Chief Executive Officer Victor Herrero said, “I’m thrilled to take over running the Lovisa business in such a strong position and we are very pleased with the performance for the first half despite the ongoing challenges and disruptions we face globally from COVID. The team have performed very well through this period and have the business well positioned for the next phase of growth, with the strength of our balance sheet putting us in a great position to take advantage of future opportunities as they arise”.
Results
Revenue was $217.8m up 48.3% on HY21 with comparable store sales up 21.5%. Q1 of the financial year was once again heavily impacted by temporary store closures in a number of markets including Victoria and New South Wales in Australia, New Zealand and Malaysia, with overall trading days lost higher than in prior year. Comparable store sales momentum was pleasingly able to be maintained across the period once stores were able to be open and trading, with strong growth across most major markets as economic conditions improved. Some of our European markets continued to be impacted by COVID related restrictions through the period, and sales in our Asian markets continued to be slow to recover as a result of low tourism and continued local movement restrictions in place resulting in lower mall foot traffic.
Gross Profit was up 50.5% on HY21 with Gross Margin at 78.3% impacted by continued higher freight costs due to COVID surcharges on freight rates, however this impact was offset by favourable exchange rates compared to prior year.
Cost of Doing Business (CODB) for the period was higher at 51.8% to sales, with logistics costs remaining at significantly higher levels than pre COVID levels due to global supply chain disruptions, and increased inflationary pressures also seen on labour costs across most markets. CODB was also impacted by the temporary store closures experienced across a number of markets in the period, with much lower levels of wage subsidies and rent abatements available compared to prior year to offset the impact of lost sales. Also impacting on CODB for the period was the cost of the CEO sign-on bonus and LTI, which were offset by the reversal of prior year LTI cost associated with the outgoing Managing Director’s LTI.
Cash flow was again strong despite catch up on some deferred rent payments during the period and higher stock holdings due to the implementation of the additional warehouse in Poland and to mitigate the risk of supply chain disruptions, with cash from operations before interest and tax of $54m, and operating cash conversion of 93%.
Capital expenditure for the period was $13.7m predominantly from new store fit outs, up $7.3m on prior year as the pace of new store opening increased with 41 new company owned stores built for the period. Cash tax payments for the period were low as a result of lower instalment rates due to lower prior year profits and outstanding tax liabilities in relation to FY21 that will be settled in the second half. Cash taxes in the current period were also impacted by higher profit contributions from markets with prior year tax losses.
Our continued strong balance sheet position has enabled the Board to announce an interim dividend of 37.0 cents, reflecting the strong cash outcome for the period and the ongoing strong balance sheet position.
The Board will continue to assess dividend levels each half year and determine the appropriate level of dividend based on profitability, cash flows, and future growth capex requirements. The Board do not currently have a specific dividend payout ratio and will continue to base dividends on the cash flow needs of the company and the structure of the balance sheet.