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Lovisa’s Expansion Captivates Brokers

Australia | Oct 30 2019

Jewellery retailer Lovisa Holdings continues to expand and invest in new markets, now operating 33 stores across the US, considered its main opportunity.

-Like-for-like sales growth moderated in recent weeks
-Price increases likely to provide only partial offset to currency headwinds
-Significant premium factored into the stock


By Eva Brocklehurst

The long-term growth outlook for jewellery retailer Lovisa Holdings ((LOV)) is robust and intact, underpinned by the expansion offshore. Margin pressure from currency is considered temporary while investment in new markets is acknowledged as essential for setting up a strong base.

Morgans points out that obtaining exposure to a significant global roll-out is rare in the Australian retail sector, albeit the stock is far from cheap. Operating expenditure is likely to remain elevated as this global expansion progresses but leverage should flow through in coming years.

Like-for-like sales growth for the first 17 weeks FY20 was 2.3% but this indicates a slowdown from the first 6-7 weeks, which were in the 3-5% growth range. Hence, there is some disappointment relative to expectations. Still, Morgans points out this is still firmly in positive territory and the base being cycled will become easier.

Gross Margin

Lovisa Holdings continues to invest in support structures, particularly in the US and currency headwinds have been flagged. Gross margin pressures have materialised, driven by Australian dollar weakness.

Citi forecasts gross margins will fall in FY20 because of currency pressures and this may only be partially offset by price increases, reduced discounting and better gross margins in new markets. The broker calculates every -US1c decline in the AUD/USD results in a -35 basis points decline in gross margins and only a third of this decline is likely to be offset.

Macquarie continues to factor in 3% same-store sales growth and captures the full extent of the FX headwinds in gross margin estimates. While the broker accepts price increases are likely to provide only a partial offset, other options are cited such as management of sourcing and input costs.

Store Numbers

Bell Potter assesses growth in the year to date reflects price increases, as volumes are roughly flat. There has been an increase of 31 stores since July and this brings total store count to 421. The company expects to open more new stores in FY20. There were 64 new stores opened in FY19.

There are 33 stores now operating across the US, in five states. This remains the largest market opportunity for the company. Bell Potter believes Lovisa Holdings has reached an important inflection point, where key US landlords now embrace the concept. The broker, not one of the seven monitored daily on the FNArena database, retains a Buy rating and $15 target.

No guidance was provided, given the spring racing and Christmas periods are still to come and this has a significant bearing on the company's performance, hence Macquarie cautions about extrapolating recent trends. Yet, the broker is least concerned about same-store sales growth, believing the rolling out of stores is the main driver of the investment case.

Citi expects further upside if issues in Spain can be fixed and the company enters a new market, which appears likely over a 6-24 month timeframe. The broker notes that 71% of new stores opened over the last two years have been skewed to the first half and considers it too early to be upgrading assumptions for the roll-out in FY20.

Both strong like-for-like sales momentum and store roll-out are essential, in Morgan Stanley's view. The broker remains cautious into the crucial Christmas trading period and, while acknowledging the appeal of a global roll-out, considers this balanced by the significant premium factored into the stock.

FNArena's database has three Buy ratings and one Hold (Morgan Stanley). The consensus target is $13.53, signalling 2.9% upside to the last share price. Targets range from $11.40 (Morgan Stanley) to $14.50 (Macquarie).

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