Lovisa: Waking up to store rollout growth each day

About the author:

Josephine (Jo) Little
Author name:
By Josephine (Jo) Little
Job title:
Senior Analyst
Date posted:
29 October 2019, 2:50 PM
Sectors Covered:
Consumer Discretionary, Industrials & Developers

  • LOV’s trading update showed YTD SSS growth of 2.3% - a slight moderation vs the FY19 result trading update (c3%), however still firmly positive and the base to cycle gets easier from here (2Q19 SSS -2.7%).
  • Pleasingly, the store rollout continues to accelerate with 31 net stores opened YTD (vs 14 stores at last year’s AGM). The US is now at 33 stores (half of the YTD rollout has occurred in this region), with a ‘strong pipeline’ in place.
  • While FX poses a GM headwind to this year, we expect LOV can potentially mitigate up to half of the c250bp impact via pricing. Opex will remain elevated as the global rollout progresses, with leverage expected to flow through in coming years.
  • Our forecasts are unchanged following today’s update. We forecast a c20% 3-year growth profile, with the rollout opportunity/growth optionality difficult to find within the sector. Add maintained. (Morgans clients can login to view detailed reports and price targets)

AGM update – SSS growth moderates slightly but still decent

LOV’s AGM trading update showed a slight moderation in SSS growth, reporting growth of +2.3% YTD (cycling -0.9%).

At the FY19 result, LOV noted that its SSS growth was within its target range of 3-5%. If we use c3% as our base for the first 7 weeks, this implies the last 10 weeks were c1.8% (MorgsE).

We would note that the base that LOV is required to cycle gets easier from here (2Q19 -2.7% SSS growth), which should see comps potentially rebound from here.

Store rollout strong to-date; reminder of FX headwind in FY20 

LOV noted that it had opened 31 net new stores YTD – well ahead of the 14 net stores opened at last year’s AGM.

Management reiterated their expectation for the net store rollout to accelerate off the levels delivered in FY19 (64 net stores). However, we do not expect LOV to roll out as many stores over the balance of the 1H compared to last year (c26 stores were rolled out in the last 9 weeks of 1H19).

Of most interest was the US, which is now trading from 33 stores across five states (Illinois/Minnesota recently entered). This implies that half of the rollout YTD is in the US – a clear indication of the materiality of the opportunity in this market.

France continues to be ‘pleasing’, with the rollout progressing well. LOV did note that FX continues to be a headwind, with the average AUD/USD hedge rate to be <A$0.70 (c240bp pro-forma impact).

Mapping out our forecasts 

Following today’s update we make negligible changes to forecasts.

Key assumptions to our FY20 EBIT forecast of A$57.2m: 72 net new stores; 2.5% SSS growth; GM -200bp yoy to 78.5%; and CODB -10bp yoy to 55.5%.

We believe that LOV should be able to mitigate c100-150bp of the FX impact via pricing optimisation, however we factor in some conservatism into our numbers, preferring to see the 1H performance. 

Hard to find similar growth; Add maintained

While LOV is far from being ‘cheap’, getting exposure to a significant global rollout program is also rare in the Australian retail sector.

Our DCF valuation increases due to a reduction in our risk free rate from 3.5% to 3.25%, Add maintained.

Key risks:

  • inability to secure new store site
  • increased competition
  • adverse fashion/trend movements
  • poor product/trend execution
  • FX volatility
  • higher than expected set-up/corporate costs associated with the roll out in US/France
  • supply chain disruptions

More information

Morgans clients can login to view our detailed report for Lovisa (LOV). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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