Small Caps | Nov 18 2020
This story features LOVISA HOLDINGS LIMITED. For more info SHARE ANALYSIS: LOV
Lovisa Holdings has made an opportunistic acquisition of a jewellery store chain in Europe, enabling a faster expansion of its network as opposed to rolling out new stores.
-Diversifies the global coverage and provides European platform
-Removes a competitor targeting a similar demographic
-Australia stands out amid the benefit of fewer restrictions
By Eva Brocklehurst
Lovisa Holdings ((LOV)) has reinvigorated interest in its costume jewellery store chain with the acquisition of the greater part of the beeline network in Europe that consists of 114 stores across six countries.
The price is nothing. The company has paid just EUR60 for 84 stores, negotiating to acquire a further 30 in France via a put option. The acquisition is opportunistic, CLSA notes, and helpful in reviving expansion plans that in the wake of the coronavirus outbreak have slowed.
Yet Lovisa will now have to contend with the complex task of running around 550 stores with a large lease liability across 17 countries. Morgans assesses, effectively, beeline is paying Lovisa to take over the operation and expects Lovisa will execute improved rental terms as leases roll over.
The weighted average lease expiry is 2-3 years, thus limiting downside should the new business fail to meet expectations. The company will take over the EUR3m of bank guarantees associated with leases as well as provide a further EUR3m bank guarantee to the vendors to support its obligations.
Macquarie assesses the purchase is effectively a transfer of lease agreements & obligations from the German wholesaler for net cash inflow, less the capital expenditure to convert to the Lovisa brand. A warehouse will be opened in Europe to support the enlarged network and provide for e-commerce fulfillment.
Strategically, the acquisition appears sound to Citi as it provides instant access to six new markets and diversifies away from the US. Canaccord Genuity also believes it reflects management's confidence in the longer-term prospects for the region, given the deal is being made during a widespread trading lockdown.
No reason for the divestment was provided by the owner, although beeline's competency appears to Cannaccord to be wholesaling. The breadth of inventory the stores were holding appears challenging, and the broker suspects there may be an incentive to rationalise the scope of operations.
Moreover, looking at the low number of posts on social media pages for the beeline stores I AM and SIX suggests the business was intent on promoting franchising opportunities as opposed to building consumer support for the brands.
Canaccord assesses the European retail property market is quite fragmented and this should enable Lovisa to benefit from the effort beeline has made to secure appropriate sites. It will also be trading with leases that are close to renewal, compared with the leasing timeframe if the company rolled out new stores.
Morgans notes the beeline stores are similar to Lovisa in terms of size and fit-out, which makes conversion reasonably simple. Bell Potter, too, believes this provides a strong platform to accelerate the European growth opportunity and it provide the main ingredients for growing quickly such as existing personnel in both stores and support.
CLSA describes the acquisition as a "fire sale" that shows how little value can be salvaged when a retail concept fails. The broker, not one of the seven stockbrokers monitored daily on the FNArena database, believes the share price leaves no room for error and downgrades to Sell from Underperform with a target of $8.75.
Citi upgrades to Neutral from Sell as the acquisition has diversified the global roll-out and provides another growth option in Europe. In order to turn more positive, the broker requires evidence that Lovisa is managing a world in which shopping centre traffic is lower amid the acceleration in online consumption.
Downside risks, in Citi's view, centre on the lack of consideration that suggests the beeline network was underperforming. This could be a function of sub-optimal locations that may be difficult to change, or lower demand for costume jewellery in these regions compared with existing regions for Lovisa.
The broker also wants evidence of execution in the largest growth market, the US, and assesses the acquisition does not address existing challenges, such as the resurgence of coronavirus in the northern hemisphere, which could drag on sales and make new lease negotiations difficult.
Consumers continue to go out less because of health concerns and the weak traffic in shopping centres increases the requirement to invest in online capabilities and marketing, in Citi's view.
Macquarie was surprised at the timing of the acquisition, given the second wave of lockdowns in Europe, although completion is expected between March and May 2021 when these should have lifted.
Also, there should be little impact on FY21 earnings as the conversion of stores is staged for late in the second half. The transaction is attractive to the broker, not simply because it delivers a step-change to the store network in Europe, but also because it removes a competitor that targets a similar demographic.
The slow organic rolling out of Lovisa stores, despite the compelling nature of the acquisition, remains of concern to Morgan Stanley. The acquisition signals management remains committed to a global roll-out and the broker does acknowledge a proven track record when it comes to acquisitions.
Australasia continues to stand out amid benefit from fewer restrictions. Comparable sales for re-opened stores have improved, down -9.2% for the first 19 weeks of FY21 compared with down -19% for the first eight weeks.
Canaccord believes the share price increase of 15% on the news is appropriate on a relative basis, as the store footprint increases by around 15-20%. Nevertheless, the multiples are "fairly full" and the broker finds better risk/reward opportunities in either online global retailers or domestic retailers which have clearer paths to normal trading.
Among those stockbrokers not monitored daily on the FNArena database, Canaccord Genuity has a Hold rating and $11.10 target while Bell Potter has a Buy rating and $13.50 target. The database has two Buy ratings and two Hold. The consensus target is $12.20, signalling 6.7% upside to the last share price.
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