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Lovisa Very Much In Fashion

Small Caps | Apr 23 2015

– Fast fashion exponent
– Extraordinary global growth
– Proven business model
– Undervalued


By Greg Peel

Lovisa Holdings ((LOV)) specialises in “fast fashion”. I’ll save you the trouble – I’ve already looked it up.

Fast fashion is all about taking note of the trends apparent on the catwalk at the new season fashion shows across the globe, and then producing and rushing to store on-trend clothes and accessories, in Lovisa’s case jewellery, at affordable prices for the masses.

Lovisa launched only in 2010 but today boasts some 220 stores across the globe, including company-owned stores in Australia, New Zealand, Singapore, Malaysia and South Africa and franchises in the UAE. The company’s growth has been no less than remarkable.

Revenue has grown from $25.5m in FY11 to $105.7m in FY14, representing a compound annual growth rate of 60.7%, Morgans notes. While the bling coming down the catwalk in Paris might be out of the price range of the average 25-45 year-old lady punter, Lovisa’s average transaction value in its stores is A$20. The company operates a vertically integrated model that sees products move from concept to store in 8-10 weeks. Growth has been all about store-roll-outs.

Usually when a successful local retailer looks to move into new geographies, analysts appreciate the potential but recommend caution due to the risk. In Lovisa’s case, the business model has proven successful in every region the company has launched in so far, notes Canaccord Genuity. All of Lovisa’s international operations are profitable, and the two top performing stores and six of the top twenty are located outside of Australia.

Integral to Lovisa’s success is the company’s heavy focus on inventory management. Investors in Australian retail stocks, and anyone who’s been into a store since the GFC, knows that a fashion retailer’s biggest risk is to be stuck with unsold inventory that requires heavy discounting to shift.  Lovisa closely manages its inventory such that not only is it into stores quickly, it’s out of stores and gone before anyone can say “oh, that’s so last year”.

Investors in Australian retail stocks also know the falling Australian dollar is providing a headwind for any business importing their products. Lovisa is not immune from this impact, as a large proportion of its cost of goods sold is in US dollars. However the company generates a gross margin of a whopping 75% which, as Macquarie notes, provides a considerable buffer against forex-related earnings erosion and puts Lovisa in an enviable position amongst peers.

Management’s near-term plan is to continue to roll out stores in existing geographies. Thereafter, new geographies will be sought with an initial focus on Asia. But there is clearly the potential, suggests Morgans, to enter a major market such as the UK, US or Europe.

Despite now cycling significant earnings growth in FY14-15, Lovisa’s revenue and earnings growth outlook compared to retail peers remains very attractive, Macquarie suggests. In terms of valuation, the broker notes the stock trades on an enterprise value to earnings ratio close to the average of its peer group, despite the 75% gross margin advantage. If compared specifically to other vertically integrated, high-growth specialty retail peers such as Beacon Lighting ((BLX)), OrotonGroup ((ORL)), Premier Investments ((PMV)) and Nick Scali ((NCK)), Canaccord Genuity notes Lovisa trades at both a price/earnings and enterprise value/earnings discount.

Morgans calculates an FY16 PE of 12.7x and a 5.5% dividend yield.

Lovisa listed at the beginning of 2015. Canaccord forecasts FY15 earnings growth of 133%, ahead of the prospectus forecast of 126%. The broker’s FY16 growth forecast is 28%, as store openings through Asia and South Africa continue.

All three brokers agree Lovisa’s share price will re-rate over time as the company’s global growth opportunities are further realised and as management develops a track record as a listed company.

And, presumably, as Lovisa flies into the range of more investor radars.

Morgans initiated coverage on Lovisa last month with an Add rating and $2.71 twelve-month target. Yesterday Macquarie initiated with an Outperform rating and $3.26 target, and Canaccord initiated with a Buy rating and $3.44 target (last traded price $3.05).

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