my 2c
LOV FH26 RESULT
There were two negative surprises in the LOV result and a couple of positive ones. The first negative surprise was the size of the losses at the start-up Jewells, being $11m for the half. The second negative surprise was the poor showing of sales in Australia. The positives were the rate of store rollout and the GM. Overall, the core franchise did very well, driven by growth in Europe and the Americas. LFL sales +2.2%, imo, good enough.
Americas increased stores by 18 and Europe by 39. There was a strong showing in the Americas, which LOV described as driven by a buoyant consumer, in-store execution and good product range.
The core business reported sales up 23%, GM up 23%, ebit up 20% and NPAT up 22%, all very good numbers. Store count ended the period at 1095, a better run rate than my expectations, with acceleration mainly in Europe. 85 new stores were opened, and 17 closed, 7 moved. Active management of the store inventory remains a core feature of LOV and a competitive advantage. “Being very selective about the location of the site and very demanding in terms of the ROI. And we've been negotiating hard with the landlords to make sure we've got compelling deals. So I would take it as a positive the fact that the stores we've been signing off have been very accretive.”
Core GM was 50bp higher at 82.9%, outstanding margins for a low-end retailer. Jewels cost 0.7% for the group as a whole, which is a big impact for a small amount of sales. LOV described the Gm improvement as “This result has been delivered from tight management of supplier cost prices, promotions, and our focus on keeping our inventory healthy, as well as improved performance in management of shrinkage across the business.” In the Q&A, LOV highlighted the lack of promotional activity, LOV being not willing to buy sales.
Claire's is a competitor that is in the throes of receivership. Lov commented that where there is overlap in the US, LOV is expected to gain share, especially in piercings. The Uk is only now entering receivership, and more stores are expected to be gained in the 2H than the FH. LOV states that they are being very selective in acquiring Claire's stores, and some had onerous leases, which helped cause their demise. LOV has a competitive advantage over its competitors, given its scale over suppliers, in-house design and fast logistics and supply chain.
LOV is very miserly with its capital. Over its history, there has been no large M&A or extravagant capex spend. The business is run very tightly and made to make money, not build empires. That is a common feature of owner-operator models. LOV described Jewells as a modest investment to potentially find a second global brand. This is a trial for a second global brand. Whether the more upmarket concept will work on the scale of LOV is yet to be determined. We also know that the market is not very efficient at pricing options and will likely extrapolate losses, which could open opportunities with the SP. In the end, it is a trust me situation with a management team that is exceptionally frugal, and although they will give it a real go, they will likely not persist forever if the concept does not work. I now look at LOV as two businesses and give modest positive value to Jewells and value the underlying core. At worst, Jewells is probably a 3-5% writeoff; (maybe much less), if it succeeds, obviously much more upside.
LOV stated that Fx is a wash, with the strong $A giving sourcing benefits, as well as negative translations in some currencies. LOV has a wide range of currencies; the weak USD is the swing factor at the moment.
Australia—management admitted issues in the Australian operations and outlined action being taken. Sales in Australia were down maybe 8% per store. The stores are being refurbished, as they are the oldest in the LOV fleet, and there have been new competitors, with flashier stores entering the market. LOV appear to be targeting the spend on an as-needed basis, upgrading those stores at most threat. The refurbishments were a cost in sales during the period. LOV also replaced some management (now kicking some goals) and introduced new products that were described as having “exceptional” early new product sales. LOV described the new stores as “the concept is designed to give a more refined and elevated feel to our stores and adds a new piercing studio store-in-store concept along with new elements such as digital screens.” Australia looks like it was left too long for a store refurb, management has been changed, the stores are being refurbed, and new products are being launched. There will probably be some drag until the new stores are all operating and cycle through the old results.
Trading for the first 7 weeks of the second half saw total sales up 21.5% on the same period in FY '25, with comparable store sales for this period up 1.6%. I think this is good enough and no cause for alarm.
SUMMARY and VALUATION
The core franchise continues to grow strongly and is very profitable. The growth runway remains large. The Australian operation needed refurbishment, new management and new products and that has been rolled out. Will probably take some time to be fully reflected in the results.
My base assumptions are 16% 5y eps growth and an exit multiple of 25X. At $26, that generates a return of 135 and is considered a buy. My large buying and selling in the stock market have been around $25 and $42, and I can't see a reason to change that range. There may be some consternation over the statutory losses for Jewells and the lack of guidance for losses (of course, you should not tell your competitors what your pain threshold is), which may offer some better opportunities in the SP, and I can wait for that.
