Having picked up a small parcel (1%) at $20 yesterday I now own Lovisa for the first time, a bit of a surprise to see it get to that price, if only for a few minutes. So time to put some meat on the thesis bones, beyond it’s delivered great margins, store growth and looks to still have plenty of opportunities to continue to grow. The issue had been that the growth rates will slow due to an increased base, which is the reason I have been hesitating at higher prices (didn’t want to pay a growth premium for slowing growth).

Thesis

• Business Model: The combined logistical, range management, product development and store management magic Lovisa has is summed up in an 82% gross margin. A retailer of low-cost fast fashion is achieving software type margins. They have combined commodity low price provider advantages with brand value. An extremely difficult combination that provides a solid moat.
• Growth: organic (same store) growth is likely to remain mid to low single digit, the main growth will be store expansion (inorganic) the same as what has driven growth to date. The question is how many new stores can be opened without saturation. Store growth of 100-200 a year (10-20%) for some time is expected, opportunities to pick up/replace Claire’s store sites (2000 store network) provides scope along with continued US expansion (China was an option but is less so and not needed in any case).
• Innovation: the Jewells UK experiment was not good, but shows a business that is trying new things and if they don’t work they are willing to cut the cord early and take the hit. This seems to parallel their data driven approach to new product development, so it seems that the fail fast culture extends across the business which limits capital loss on failures and offers lots of shots on goal for successes.

So I expect growth to continue in low double digits for many years and the companies innovative culture and high margin business model to deliver strong investor returns.

Price/Value

At $20 a share the PE is ~26 times FY25 earnings, if we exclude the impact of Jewells FY26 earnings are probably going to land at around $103m NPAT, which is a PE of 22. I think for valuation purposes looking through Jewells is appropriate. FY26 growth, top and bottom line is expected at ~20%, so a PE below 30-35 is in my view cheap.

I don’t have a fixed valuation, but will look at it from what you may expect your returns to be if you hold until 2030. I have assumed 20% FY26 growth for both views and NPAT% stays at the current low 10.8% and dividends growing at 10%.

9.0% ROI (IV $20):

To get a 9.0% return with dividends, at a $20 buy price, you need growth of 7% from FY27 to FY30 and to exit at a PE of 20. Hence to get market returns does not require a significantly challenging growth path for the business given previous performance.

22.3% ROI (IV $31):

You get a 22.3% return buying at $20 if the FY27 to FY30 growth rate is 15% and exit at a PE of 25, which I see as achievable. If you were happy with a 9.0% return you would pay $31 now.

On this basis I see Lovisa as at least at value but more likely to be 35% undervalue. If the market falls back in love with Lovisa then doubling or tripling your money in the next 4 years is likely provided there aren’t many Jewells type issues.

Lovisa is an impressive business which up until now has had an appropriate price tag which assumed previous success was replicated for many years to come. The risks have switched at the current price from downside to upside as the continued high growth assumption has dropped out of the price.

My low position size reflects capital constraints rather than a view on returns, so I may buy more if circumstances change and the price remains at current levels.

Disc: I own RL