$LOV have issued their trading update ahead of today's AGM.

• Global comparable store sales for the first 20 weeks of FY25 were up 1.0% on FY24 for the year to date
• Total sales for this period up 10% on FY24, benefiting from continued growth in the store network over the past year.
• 27 net new stores opened for the financial year to date, including 40 new stores opened and 13 closures (including 2 related to the conversion of our UAE franchise business to company owned and 2 relocations).
• This has taken the store network to 927 stores across 49 markets, with three new franchise markets opened for the year to date in Ivory Coast, Republic of Congo and Panama.
• Compared to this time last year we are currently trading from 91 more stores in 9 additional markets.

My Assessment

LFL is a bit soft, from my perspective - looking at the wider retail sector growth in the large ex-Australia markets of USA, SA, UK, Fr, Ger., and Malaysia. Given that most of these markets still have some inflation, a 1.0% LFL to me would indicate declining volumes.

So the sales growth is largely driven by 11% net new stores.

If I am reading market consensus correctly, then the market expects FY25 to deliver EPS growth of 27%. Presumably, $LOV have continued to see their costs increase, so I don't see how they'll get anywhere near consensus, unless the have a blow-away peak November-December season.

That said, the SP is already 11% below consensus. Maybe, on these numbers, there is further to fall? I guess we'll find out.

Disc: Not held

 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

Following the ASX announcement this morning of the CEO departure I'm reluctantly selling.

This was one I was looking forward to holding for years to come. The timing of the announcement worries me, and I've been burnt before by unexpected CEO departures.

It's possible this is positive news, and a change was needed.

If the new CEO is able to deliver more store growth (particularly waiting to see what happens with China) I'll look for the right price to buy back in.

This morning $LOV announced their CEO succession. I didn’t see that one coming. 

ASX Announcement

Rock Star Victor Herrero is staying on for another year until 31^st May 2025, and will be replaced by John Cheston, who I understand is currently the MD of Smiggle, in the $PMV stable.

Given that Victor only joined in late 2021, this wasn't a long tenure.

This morning I sold my entire holding at the open, for three reasons.

1. Part of my thesis was that Victor's experience in leading Zara's Asia-Pacific expansion would be key to the group success in China
2. Following last week's exchanges on here, I did a deep dive over the weekend into new store openings. Not that great, (See below)
3. Shares are currently priced for perfection, and require flawless execution to sustain their premium.

Store Count

Assuming their global website is up-to-date AND that all franchises lists their store on it, I gleaned the following insights from some weekend data analysis.

• In the last few months, it appears few if any net new stores have opened in the US
• In ANZ it looks like they have opened only 3 net new stores since end 2023
• They still have only one store in Mainland China
• The main countries growing are Canada, Ireland, Germany, Belgium - 26 of the new stores by my count
• By my analysis stores have increased from 854 to just over 900 since Dec-23. About +50

Now my analysis might be wrong, because I had some data integrity issues with my web-scraping and data analytics, but I did do some manual checking, and I think it is directionally correct.

What is interesting, is that the counting confirmed my hypothesis about China. Despite having been open there for one year, they either haven't cracked the formula to rollout and/or the market conditions are not favourable.

I am working on other things today, but combined with the ongoing global consumer weakness, my hypothesis is that $LOV will be tracking along the lower bound of my valuation, indicating that it is significantly OVER-VALUED.

Hence I exited immediately this morning on the news about Victor. (This is one big tax bill I didn't want!)

Victor was on an extremely lucrative package. But hitting all his incentives required a continued strong global rollout. Maybe he knows something. Speculation, but can't help it.

Disc: Not held in RL, still held in SM

Lov is an amazing business, with great economics, a long runway for growth, high margins, a very good experienced management team, operating as a market leader within their niche, However she trades at 47.5x 2024 earnings in a global economy with subdued demand, while reporting declining SSS, both of which can and are resulting in a slowing of store growth.

It's hard to see any short-term upside given the set-up above of poor market conditions and high expectations.

But thinking more long-term there's no reason why LOV can have 2k+ stores in the US (which is still lower than Aus's current penetration) if they continue to do what they're doing and add in the UK and maybe China dare I say, all of which compares to the total global store count of 854 today. In H1 24 the most recent half, they added 53 stores compared to 86 in both H1 & H2 23 (+172 for the year). Brett has outlined they will grow the store count when they find suitable profitable locations, and in this environment, it's likely getting harder to grow the store count which has raised the possibility for some short-term downside given the optimism

My base case valuation includes

The ASX has never seen a store rollout like this, our best retailers only really operate within Australia, and US peers are likely a better comparison. The Alpha in my opinion will come from years 5+, and I think Lov can compound Rev and earnings for 12-15% for 10+ years. The assumptions above along with a PE of 30 give an IRR forecast of 7.86% across the next 4 years which is very meh.

Given 44% of stores fall within Aus and the US, I'll show some data looking at US peers which gives a good gauge on the market and Lov likely SSS and store count growth. All ASX retailers are recording poor numbers which isn't too much different to the US

US Peers: overall from the most recent government data US retail spending was up 2.67%, with in store sales up 1.5%

Target- recently reported -3.2% sales growth in Q1, with EBT up 1.3%, noting decent declines in discretionary partially offset by beauty (Likely strong online growth)

Amazon-Q1 US sales up 12%, with US operating income up from $0.9B to $5B, with International Sales up 10% and operating income falling from $1.2B to $0.9B

Lululemon- 2023 sales up 18.5% with Profit up 81%, however, they have guided for 2024 growth of just 9% for revenue and EPS growth of 3-5%

Nike- Q3 sales up 2% constant currency, noting no growth in the US, with decline's in Europe/ the Middle East offset by growth in Asia with NPAT down 5%

ADIDAS- Q1 sales up 8%, noting growth in all markets But North America which declined 4%, with Profit up 3%

Inditex ( Zara, Massimo Dutti, and Pull&Bear)- FY sales up 10.4% and NPAT up 30%, with US sales up 7%

H&M- Q1 sales down 2%, with US sales down 7%

Summary, the non-online and more discretionary retailers are struggling, all recording no real growth or strong declines in growth (ex Amazon)

Summary for Lov: I will likely Trim, it's hard to see any real upside in the short-term while there is a decent amount of downside given the valuation and market conditions, would love anyone's commentary or thoughts

Gaurav Sodhi has been a long term Bull on Lovisa and here are his latest thoughts post reporting season.

Gaurav is still very positive about Lovisa's future. He said he hopes to be still holding it in 5 or even 10 years time as they roll out around the world into a Global Brand.

https://ausbiz.com.au/media/lovisas-30-on-the-way-to-50-or-60?videoId=34817

This straw examines the performance of $LOV over recent years and considers how the business might evolve over the next decade, to form a basis for my valuation.

I’ve not been very reader-focused in writing it up, as it is more a download of the thought process I went through. So for those for whom life is too short, I’ll summarise the key messages below, and then for those who have developed their own valuations of $LOV and want to get into the details, I’ll leave it to you to wade through my brain dump (good luck!).

Key Messages

• $LOV along with most of the retail sector has rallied strongly over the last 6-months
• This has been driven by excessive market pessimism combined with operational outperformance by many, including $LOV
• $LOV is still early in its global rollout, having established clear and compelling unit economics
• The rate of the future rollout is a key unknown which drives uncertainty in the valuation
• $LOV has significant optionality in capital management including i) new store openings, ii) dividend policy and iii) capital structure.

Valuation

• $24.80 ($19.50 - $30.50) – at constant FY23 LT Debt of $65m
• $30 ($23 - $37) – capital structure with LT Debt of 0.5x EBITDA (“Levered Case”)
• To achieve a 10% Return in the Levered Case requires a SP of $18.50 ($14 - $23)

Conclusions:

• At the current SP of $31.65, I’m a HOLD on $LOV. While at the top end of the valuation range with the current capital structure, it represents reasonably fair value considering the balance sheet and growth optionality.
• I'm a Buy around $19 and a Sell above $36.

DETAILED NOTES and ANALYSIS

1. Retail Context

$LOV broadly reflects what has happened to the retail sector over the last 12 months. We saw a low point in market expectations around 6 months ago – when many were predicting a 2024 recession in US, EU and Australia, which would necessarily result in serious belt-tightening in discretionary categories.

While the results have indeed shown some slowdown, like-for-like (LFL) comparisons between the last quarter of calendar 2023 and trading updates in January and February have indicated the resilience of the consumer. With interest rate cuts anticipated in CY24, and job markets generally strong (albeit weakening), consumer confidence in US and Australia has picked up more recently. The EU area  and UK – both in recession – remain in the doldrums. While global economies are not yet out of the woods, it appears increasingly likely that many areas will avoid recession and recessions, where they occur, will likely be shallow and short-lived.

So, with this macro backdrop, retailers headed through 2023 preparing for the worst. Many managed inventories tightly, continued to benefit from normalised supply chains, and managed costs of doing business as well as they could in an effort to minimise the negative operating leverage of their high fixed cost bases. Certainly, there were significant profit falls, but generally retailers performed better than expected. SP's have rebounded accordingly.

$LOV reflects this broad trend. Compared with FY23, when the P/E was 30.5x, after 1H, the forecast P/E for the FY24 has rocketed back up to 41 – near its highs in the last 24 months.

So, I am keen to understand what a reasonable range of valuations is for $LOV, at this point.

Lovisa is still at the early stages of a global roll-out. It now has a significant presence in ANZ, US and the EU/UK, but is in fact now present and growing on every continent and it in 40 countries.

It has proven compelling economics at the store level, and with strong free cash generation, a key question is at what rate will it continue to roll out new stores. This is clearly a perpetual question on the analysts’ minds – rightly so – and one which CEO Victor Herrero steadfastly refuses to give guidance on, sticking to the key message that they will open stores when they get good deals. Personally, I like this approach, as it has capital discipline written all over it. However, as my analysis shows, the uncertainty creates a wide range of potential outcomes for  valuations.

2. The$LOV Global Rollout Under Way

I like to invest in companies that are building leadership in global markets (think $ALU(sniff), $RMD, $WTC, $PNV,…and yes $AD8 and $PME). So, part of my thesis is that $LOV is building a global brand and footprint in fashion jewellery and, provided it continues to execute, it has a very long runway ahead, even if the business is now relatively mature in ANZ. (Even my small home town in NZ with a population of <100,000 has a $LOV store!)

Table 1 below shows the evolution of the store footprint. The bottom row of the table shows the net annual change in stores. What this table doesn’t show is how actively the network is managed. Underperforming stores or even entire franchise agreements will be exited where necessary.

Considering the ANZ store footprint as indicative of a relatively mature market gives an indication of the potential ahead. For example, with 207 stores in the US today, the potential here could be 1500-2000 stores, double the size of all $LOV today. The same is true for the EU/UK region.

Table 1: Store Footprint

3. Revenue Growth Tells the Story of the Recent Retail Cycle

Next, I want to understand the historical story of revenue growth.

Figure 1 (below) shows annual sales growth by half-year increment, on both a like-for-like (LFL or comparable stores) basis and total revenue growth. The latter benefits from the significant new store opening programme of the company's global roll-out.

Figure 1: $LOV Annual Revenue Growth (%, Total and LFL)

Source: Annual Reports

Consider first the LFL sales growth. Pre-pandemic, $LOV experienced a slowdown from 2017 into 2019. At that time, $LOV was dominated by ANZ, and I can’t see anything in the macro for clothing and accessories retail segment to support the companies claim at the time that macro factors could justify their claims of “cycling strong prior periods” and “tougher trading conditions”. In any event, strong new store grow meant that overall revenue growth was strong.

The pandemic dip in 2020 and sharp rebound in 2021 requires no explanation.

And the graph clearly shows the retail cyclical slowdown from 2023 into 2024, with modest single digit LFL growth falling into negative territory. On a volume basis, given inflation and pricing icnreases, the down turn is probably deeper. 2023 was probably flat, and 1H FY24 was probably closer to a LFL contraction of 6-8%.

So, in terms of future, long term modelling, I will consider LFL sales growth scenarios (in nominal $) of 2%, 3% and 4%.

At the low end (assuming long run inflation of 2.5%), this actually represents a scenario where same store sales decline in real terms, with the 3% representing broadly flat, real sales, and 4% a modest increase. Given the competition that will exist in this segment, I don’t consider it reasonable to consider higher growth scenarios, even though these have been achieved in the past, as I don’t see a case where strong brand value creates pricing power in this market. (I’m not a branding expert,… so I’d rather be conservative).

Now turning to total revenue growth, the difference between the orange bars and the blue line in Figure 1 is the global rollout of new stores.

4. Global Store Rollout

Key to understanding the value of $LOV is knowing the future pace and economics of the store rollout program. On the last two investor calls Victor Herrero was clear that the rollout trajectory is “not linear”, that they open stores when they can get a deal that works, and that each time they open a new market, a new set of “blue sky” awaits them.

So, what does history look like? Consider Figure 2, below.

Figure 2: $LOV Store Roll-Out (Annual Net Change in # Stores; and % Change from PCP)

Source: Annual Reports

$LOV appears to not be driven by a pre-determined target of number of new store openings.

The drop in 2020 is easily understood due to the pandemic restrictions impacting 2020. In fact, the net store increase masks a larger number of closures, no doubt due to the pandemic.

2021 can be explained by the pent-up demand following re-opening, as well as (potentially) a brief window when good deals could be struck with shopping mall owners seeking to repair their balance sheets and attract quality tennants.

So, with the backlog of 2021 out of the way, 2022 probably reflects a return to something like BAU, which then makes 2023 a surprise with a massive step up in new stores, which drove revenue and SP.

So, what of 2024?

Well, 1H has seen only 54 net store openings, with an even slower start to 2H. It seems likely that FY24 will end up with somewhere between 80 and 100 new stores – back around 2022 levels. There were no capital constraints to store opening in 1H FY24, because $LOV paid down $22m of its $65m long term debt, finishing the year with $58m cash, up from $50m 6 months earlier.

Perhaps the conservative approach is prudent given high interest rates and continuing marco-uncertainty, with the EU and other markets in now squarely in recession, Australia in a per capita recession, and the US being somewhat the exception in the OECD group.

Based on the current operating economics, $LOV has the capacity to take on more debt, increase the rate of store buildout AND modestly increase the dividend. So, Victor has a lot of levers at his disposal. (The fact that Victor won’t provide forward indications as to the rate of store openings is clearly driving some of the analysts nuts.)

Next, we have to understand store level economics.

On the recent 1H call, Victor said in Q&A that the best way to figure out the cost of opening a store is to get it from the capex and number of stores, recognising the following:

·      Australia or South Africa about $0.15m per store

·      US “about double that”, so $0.30m 

·      Cheaper markets “a bit less”, so assume $0.1m per store

Having looked at the accounts for 2022 and 2023, I get higher numbers of around $0.4m per store. So, what is driving the difference? In calculating a Net Change in Stores, I am blending several factors which all impact the investing cashflow (capex) line:

·      New store openings;

·      Store closures (there were 31 in FY23 and 19 in FY22);

·      Acquired stores; and

·      A reduction to capex from contributions from Owners to fitouts. When Lovisa takes on a lease and fits out a shop, some of the investment improves the store beyond the life of the lease, so the landlord makes a contribution to the fitout.

So, this explains why a simplified Capex per net new store results in a higher figure than those indicated by management, and it allows me to keep the model simple.

Because the market potential is large, and we cannot know the rollout rate, I’ll run three scenarios:

·      Low Case: 100 net new store per year

·      Mid Case: 135 net new stores per year

·      High Case: 165 net new stores per year

I’ve chosen a fixed number per year rather than a % number to reflect that as the rollout continues, while the company will have progressively higher financial capacity to open more stores, countering this it will become progressively harder to find good deals in each market (law of diminishing returns).

The analysis is conservative because, in the high case, we are simply repeating a level of store openings already experienced in 2023. Total stores across the three scenarios considered are shown in Figure 3.

Figure 3: Number of Stores – 3 modelling Scenarios

In the scenarios contemplated, the 2033 store counts are 1804, 2108, and 2412, given a 1H FY24 count of 854, so a two to three-fold increase.

This is in the context of a global roll-out already underway where the US at 207 stores is arguably  10%-20% penetrated, and the EU/UK at 249 is at a similar level. Based on these scenarios, there will plenty of growth potential beyond 2033 (if the brand remains relevant and if the competitive landscape allows!)

These projections Also seem reasonable for global retail brands. Retailer H&M grew its global physical store network from 550 in 1998 to a peak of 4,500 in 2019. If anything, subject to financial capacity constraints, my Scenario 3 could be considered modest, because opening what is a relatively small Lovisa boutique is arguably a less ambitious undertaking than an entire H&M store.

4. Margin Evolution

Gross Margin

Pre-COVID, $LOV achieved gross margins of 80%. (That’s pretty impressive, when compared with $SUL at 47% and $NCK at 63%.) While gross margins dipped through COVID, they have most recently been restored to 79.9% at FY23, and even 80.7% in FY24. To keep things simple, I assume %GM is maintained at 80% in all scenarios.

I’ve done this partly because I don’t understand the potential impact of i) increasing scale, driving future economics of scale in manufacturing, offset by ii) a potential increasing proportion of stores in locations where prices may be lower (e.g., middle income countries). Having said that, my modest store growth scenarios could be achieved in the high value markets of the US and EU/UK alone, however, it is clear that $LOV are truly going global!

Cost of Doing Business

While the store level expenses are directly scalable, as the network of stores scales in any country or region, there will be efficiencies in a) distribution, b) regional overheads and c) e-commerce.

On e-ecommerce, I have not modelled this separately. $LOV has an online offering in each of it’s markets, however, it has not been particularly transparent in breaking out the key value drivers. This is a limitation in the model. If $LOV achieves increased brand recognition and ability to move loyal customers online, this will result in the lower cost of doing business and increased margin potential.

Figure 4 shows the Cost of Doing Business, which I have calculated as:

= Salaries and employee benefits expense +  Property Expense + Distribution Costs + Other Expenses.

Figure 4: Cost of Doing Business

CODB as a % of revenue increased significantly during 2022 and 2023. However, judging by the comparison of 1H FY24 to 1H FY23, the result for FY24 appears to be stabilising.

What can explain this trend? There are three factors:

1. First, we should ignore the results for FY20 and FY21, as these will have been impacted by various closures, restrictions, and subsidies during the pandemic.
2. FY23 also saw a record number of new store openings. So, this is likely to result in a period where stores incur their full operating cost during a period when store sales are ramping up. As the network scales, this effect will become proportionately less important over time.
3. FY22 saw higher distribution costs and FY23 was a period of peak inflation.

For future periods, I therefore assume that CODB/Revenue is maintained at FY22 levels. The modelling assumption is described fully in the next section on Operating Margins.

Operating Margins (OM)

%OM was 18.0% in FY22 and 17.7% in FY23. Margins appear to have stabilised in FY24, with 1H FY24 at 21.9% compared with 1H FY23 at 22.2%. (Note: 1H %OM is significantly higher than 2H due to the stronger 1H revenues)

Over time, as the store network continues to expand there should be economies of scale in the distribution network. For example, the distribution infrastructure for US, EU/UK and ANZ is now largely in place. Further buildout of the stores within these regions should enjoy lower incremental distribution costs.

What is less clear is how the CODB and margins scales as the mix of stores across regions evolves. For now, it is assumed that US, EU/UK and ANZ will continue to contribute the large majority of stores. This assumption could be changes in future, for example, if there was a major build-out of the network in China. However, this seems unlikely to change the overall assumption given the prior progress of Western retailers in China, who generally have not built out networks beyond about 200 stores (e.g. Carrefour).

Model Scenarios - Operating Margins

Going forward, my model assumes FY24 %OM will be 17.5%, with scenarios as follows:

• Flat %OM = 17.5% from 2024-2033;
• 0.1% p.a. margin improvement reaching 18.4% in 2033;
• 0.2% and 0.25% p.a. margin improvement in the high-store buildout scenarios, reaching a %OM of 19.8% in 2033, in the highest case.

5. Capital Structure

In running the valuations, I have run all 9 scenarios across three cases:

• WACC = 7.9% with constant LT debt at $65 million (calculated off the current balance sheet with cost of equity of 9.5% and cost of debt of 6.0% - applied to both debt and leases)
• Increase LT debt to maintain a constant leverage of 0.5 x EBITDA (this drives significant FCF generation while still maintaining a conservative balance sheet. For example, this is approximately the level of debt at $JBH)
• I’ve also modelled a 10% discount rate, to show the SP required to deliver that investment return.

6. Continuing Value

Across the scenarios modelled, by 2033 $LOV will have established a global network of between 1804 and 2412 stores, compared with the 854 at the end of 1H FY24.

2033 need by no means represent “Peak Lovisa”. For example, Zara reportedly has around 3,000 stores worldwide, and H&M has between 4000 and 5000.

Therefore, assuming annual market growth of 2.5%, I assume ongoing growth in Free Cash Flow in the continuing value period of 4.0% p.a. achieved through any combination of i) network growth, ii) brand value improvement, iii) operating efficiencies, and iv) increasing contribution over time from stores in middle income countries.

7. Key Risks

Some key risks are not considered in my valuation model:

• “Peak Lovisa” is reached beore 2033 or shortly thereafter, due to a global shift away from fast-fashion, costume jewellery.
• Growing competition – others seek to replicate Lovisa’s model. (We have seen this before in fashion as Zara’s disruptive business model was replicated over time.)

Either risk materialising would see a slowing of network expansion, followed by pressure on margins, over time. Emergence of these risk would likely see a rapid contraction in the earnings multiple, back into the pack of retail more generally. (P/E of 12%-15%).

Note that in the current model, the implied P/E at 2033 ranges from 17.6x to 19.3x – so my valuation assumes that $LOV retains its growth premium over the retail sector for the next decade.

8. Valuation

Figure 5 shows the NPAT over the 10-year period across the 9 scenarios. The scenarios spanned the ranges of the parameters shown in the blue box.

Figure 5: NPAT Evolution Across Scenarios

Figure 6 shows the resulting valuations, with the red lines reading off the mean, p10%, and p90% valuations for the valuations run at constant LT debt ($65m) and WACC of 7.9%.

The light grey line shows the valuations run with LT debt increased each year to a level of 0.5 x EBITDA.

The orange dotted line shows the SP required to achieve a Rate of Return of 10% in the Levered case.

Figure 6: Valuation Results

Table 2 below provides some more of the modelling puts, including earning growth rate, margins and implied P/Es over time.

Disclaimer: The analysis has been performed for my personal use and should not be used as the basis for investment decisions. Model calculations and outputs are not validated to be free from error.

Disc, Held in RL and SM

Key takeaways & important update:

• revenue up 18% ( $373 M)
• Profit up: 11.7% ($72.7 M)
• Store roll out: network now at 860 stores, with 9 new stores opened in 2024.
• LFL sales in 2024 up 0.3%
• Overall sales up $19.6 on PCP for January 2024.

Summary new store sales growth more than offsetting LFL store sales growth. 3 new markets - China, Vietnam, and Ireland opened in 2024.

Looks like a long runway of growth form US, Europe, and China........

First glance.

Looks like a strong result from me. LFL store sales down but already seeing a recovery this half.

Looks like they came roughly in line with consensus revenue ($273M actual v $275M expected) and profit ($54.4M actual v $55.43 expected). Using TikR consensus but did see in the AFR some had this as a beat.

Interested to see what happened with the shorts and share price today - would not have a clue.

All up thesis on track, guess ignore whatever happens to the SP unless it presents an opportunity.

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

LOV ASX: Lovisa shorts hit $100m ahead of results (afr.com)

Short sellers are piling into Lovisa Holdings at the highest level in almost four years before what could prove a pivotal market update on the health of the discount jewellery retailer on Thursday.

Hedge funds betting against the stock now make up about 4 per cent of the share float, the most since 2020, when short positions topped 7 per cent amid sweeping pandemic-induced store closures and a global retail slump.

About $100 million is betting against Lovisa’s share price before its half-year result on Thursday. 

Shorts against Lovisa started to rise around November when the retailer reported a 6.2 per cent drop in same-store sales during its expansion effort in the US and China. That missed market expectations, fuelling shareholder concerns about chief executive Victor Herrero’s $30 million salary.

Short positions have accelerated in the lead-up to the retailer’s half-year report on Thursday and now amount to about $100 million – the highest level in dollar terms since the stock listed almost a decade ago.

“Expectations are very high coming into this result,” a local long-short fund manager, who is betting against the stock and was not authorised to speak publicly about the trade, told The Australian Financial Review.

“It’s been priced for perfection,” the fund manager, citing the stock’s historically high share price, mounting global headwinds for retailers and declining same-store sales as the reasons behind the fund’s short bet.

“Some of the new stores may not be achieving the level of economics that the market analysts have been expecting.”

Analysts had become increasingly divided on the Lovisa stock as the half-year report approached. UBS downgraded Lovisa to neutral last month, noting that the shares had rallied substantially (up 48 per cent) since November and pointing to growing signs that the store rollout was losing steam.

Jarden, which upgraded the stock to a buy in November, has held firm on its valuation, even as its analyst Ed Woodgate cautioned that investors should be “buying for the long term” as there “may be surprises before then”.

“Like every other retailer, Lovisa is facing a tough consumer environment,” he said in a note this month.

“While the trading update may be weak as Lovisa has to cycle one more period of strength and the net store rollout may disappoint, we expect investors will start to look long term once the worst of the bad news is in the rearview.”

Funds also appear similarly divided on the stock. Hyperion, ECP Asset Management and Fidelity are among those holdings large long positions, based on recent filings.

QVG’s Chris Prunty, who counts the stock among the largest holdings in the firm’s long-short fund, is bullish on the outlook.

“We like Lovisa because the return on capital on new stores is very high, and they have a long runway to open stores in existing markets like the US and new ones like China,” he said.

“We understand the market has some concerns around the generosity of the CEO’s remuneration package, but we believe that if he can replicate half the success he had as Zara’s head of APAC, then he will have been underpaid,” he said.

One Lovisa short-seller says the stock could slip as much as 30 per cent – should the fund’s thesis behind the short play out.

“What we’ve seen with companies on high multiples in the past is that when you start to see cracks in the business, the market tends to be a bit more forgiving, until the cracks become the crevices,” the short-seller said, citing Domino’s Pizza and Pro Medicus as two stocks to have suffered this fate in recent weeks.

That said, funds that have been holding Lovisa for some time might not blink at the near-term dip short-sellers are betting on. The shares are up more than 1000 per cent since it listed in 2014 and more than 150 per cent in the past five years.

I know this observation has been made before but sometimes seeing is believing…

took the kids to the Myer Christmas window in Melbourne last night (china town dinner beforehand). Was great combo for anyone other young fans in Melbourne.

Anyway being a 40something bloke lovisa is not exactly my thing but: walked past the Bourke st one.

Could not believe how small the footprint was!!! but how stocked the place was with merchandise. And they had customers in there!

I can see how the combination of small footprint, small staff numbers and high turnover leads to such high net margins.

if this can be reproduced in the American market (which I understand is already well underway) there are some real natural advantages in their model which could see them grow massively IMO…

Lovisa Acquisition History

·      December 2020 beeline execution of a put option agreement in relation to the acquisition of the beeline France sotre network of 30 stores. Lovisa will acquire beeline France for a purchase price of €10 (ten Euros) https://announcements.asx.com.au/asxpdf/20201201/pdf/44qh128v116s7z.pdf

·      November 2020 beeline purchase for €60 as part of the transaction, upon completion, of the take over approximately €3 million of bank guarantees associated with the leases of the acquired beeline entities, as well as provide a further €3 million bank guarantee to the vendor to support our obligations under the share purchase Agreement, expiring on 31 March 2022. beeline store network consists of 114 stores, including 30 stores in France subject to the Put Option discussed above. https://announcements.asx.com.au/asxpdf/20201113/pdf/44ptns0td4ydfy.pdf

·      May 2017 Acquisition of 17 fashion accessory stores from Klines South Africa the majority of which will be rebranded as Lovisa’s stores following the handover. The acquisition includes the sotre locations (lease assignments) and fixtures and fittings at a total cost of A$800K https://announcements.asx.com.au/asxpdf/20170501/pdf/43hxkw534sfcr8.pdf

·      March 2015 LOV acquires 21 Retail Stores in South Africa, the majority of which will be re-branded immediately following handover. Purchase price of A$2.0m with a further deferred payment of A4250K payable 12 months post transaction. https://announcements.asx.com.au/asxpdf/20150326/pdf/42xj6xwvl113r1.pdf

No Capital Raises since IPO!!!

In the the AFR this morning. Citi has cut its price target for Lovisa by 38 per cent to $16.

Citi says sell Lovisa

Tom Richardson ( AFR, 15/06/23)

Broker Citi has taken a second look at the valuation of jewellery retailer Lovisa and weak consumer confidence to downgrade its rating on the stock from neutral to sell. 

It also warned of headwinds from minimum wage rises to slash its price target by 38 per cent to $16. 

Lovisa shares have plunged 27 per cent over just the last month and last closed at $18.81.

Disc: No longer 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.

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

Ive looked at Lovisa a number of times over the last year and as others have pointed out its ROE and margins are fantastic.

It reminds me of Michael Hill or H. Samuel (in the UK).Both have done very well over a time period of several years, but extend the SP graph back further and it tells a very different story: a steady decline for 5 years, before the reason uptick.

Both were market darlings and expanded rapidly within their own countries and oversees (MH). Both over-extended and were highly vulnerable to tightening credit to the less affluent members of society. They had to close stores rapidly and exit from new geographies. I am sure there are significant differences in terms of debt load, strategy etc. but discretionary retail is not a space I personally feel comfortable investing in. (Although tempted by Dusk and Adairs on their great valuations)

And they sell crap.

Ratners, another UK jewellery chain imploded fantastically after the founder and majority owner, admitted as much, a decade ago with hilarious consequences

Lovisa shares reached an all time high of $23.07 this morning. According to James Mickleboro from The Motley Fool:

’Investors have been bidding the Lovisa share price higher today after it was the subject of a bullish broker note out of Macquarie Group Ltd (ASX: MQG) this morning.

According to the note, the broker has upgraded the company’s shares to an outperform rating and lifted the price target on them by an enormous 47% to $25.00’.

Disc: Share held IRL

Half Year 2021 Results Announcement Strong Balance Sheet, improving sales trajectory

•  Net Cash of $42.5m with $50m of debt facilities in place
•  Revenue down 9.8% to $146.9m due to continuing global COVID-19 trading disruption
• Comparable store sales positive in Q2, down 4.5% for the half year
•  25 net new stores opened during the half year, 460 at half year end
•  Gross Margin 77.8% on constant currency basis with Gross Profit down 11.7% to $113.4m
•  EBIT1 decreased by 23.6% to $30.9m
•  Cash conversion of 131% with operating cash flow1 of $52m
•  Interim Dividend of 20.0 cents per share, 50% franked

Presentation:-

https://www.asx.com.au/asxpdf/20210219/pdf/44stnmd8tj8djp.pdf