Universal Store: How Strong Are The Young?

Small Caps | Aug 30 2022

This story features UNIVERSAL STORE HOLDINGS LIMITED. For more info SHARE ANALYSIS: UNI

Outlook for Universal Store Holdings remains resilient despite the impacts of covid lockdowns, with a number of analysts predicting the company will exceed its new store targets.

-Universal Store Holdings delivered full year sales at the top end of guidance, despite covid impacts driving a year-on-year earnings decline
-Market largely positive on continued growth underpinned by new store rollouts and resilient demographic
-Store openings exceeding target and increased private product lines offer upside risk

By Danielle Austin

An ongoing store rollout and resilient customer base underpins Universal Store Holdings’ ((UNI)) growth outlook, and has carried favour with analysts.

The company reported sales of $208.0m, down -$2.8m on the previous year but near the top end of guidance, while earnings declined -30% year-on-year as the cost of doing business margins rose 540 basis points, both a product of first quarter lockdowns and higher investment by the company.

Selling both third party branded products and private label products, youth apparel retailer Universal Store Holdings has a current network of 77 stores across its Universal Store and Perfect Stranger brands, plus a growing digital platform.

Perfect Stranger, a private label women’s banner, has expanded from a Universal Store private label range to an expected seven standalone stores by the end of 2022, with no cannibalisation to its parent brand.

The company’s new store rollout continued throughout the year, with a total eleven new stores opened; eight under the Universal Store banner and three under the Perfect Stranger banner. The company guided to five new openings in the first half of the coming year, with four of these being Perfect Stranger stores before an acceleration in Universal Store openings in the second half.

Trading has remained positive in the early weeks of the new financial year, with sales in the first eight weeks of FY23 up 54.7% year-on-year, and with the company indicating sales trends may be improving in August over July.

Stock analysts have largely noted Universal Store Holdings’ more resilient customer base continues to support growth initiatives, with the younger demographic less likely to curtail spending habits in an inflationary environment.

Analysts highlighted the company’s customer base is less exposed to rising costs of living, has fewer financial commitments and savings goals, and is more likely to place importance on appearance and social occasions, all factors that should see sales remain resilient to the impacts of rising rates.

What the brokers say

Four of FNArena’s database brokers have updated on Universal Store Holdings since the release of the company’s full year results, and between them hold three equivalent Buy ratings and one equivalent Sell rating. These brokers have an average target price of $5.53, ranging from $3.60 at the lower end to $7.00.

Morgans (Add, target price of $7.00) estimates lockdowns took at least a -$20m toll on sales in the last year, but anticipates the company has the opportunity to recover lost sales and accelerate back to double digit growth each year for the next three years. The broker expects a post-lockdown surge, coupled with new store openings and the company’s resilient demographic should drive 19% growth in sales in FY23.

Morgans described the new store openings as representing close to best in class return on investment, while anticipating margins will continue to benefit from more private label products. Morgans lifted its FY23 earnings per share forecast by 5%.

Citi (Buy, target price of $5.75) finds the company’s targeted more than one 100 stores across Australia and New Zealand to be conservative, seeing potential for more than 110 stores across the region. Given the current network of 75 stores, should the company achieve a total 110 stores, the broker estimates 27% upside to FY23 earnings.

The Citi analysts reiterated their rating is underpinned by the company’s new store campaign, as well as a strong balance sheet and a resilient customer base. While Citi largely retained its outlook on Universal Store Holdings’ FY23, it did cut its net profit forecast for FY24 by -7% to account for the impacts of inflationary pressures.

UBS (Buy, target $5.75) noted a strong start to the year is indicative of an attractive sales growth outlook for Universal Store Holdings. This broker notes store growth, particularly in New South Wales and Victoria, remains a significant opportunity for the company, and growth beyond the 100-store target offers upside risk.

Looking ahead, UBS analysts predict higher costs of marketing, labour and rent to impact on earnings margins. The broker lifts its earnings per share forecasts 6% and 7% for FY23 and FY24 respectively.

Noting Universal Store Holdings has outperformed the Small Ords Index 50.0% since June, Macquarie (Underperform, target $3.60) points to the company’s $23.9m net cash position as at the end of the financial year as supportive of the ongoing store rollout.

This broker noted the eleven stores added in the last year, alongside other investment spend, drove the company’s capital expenditure to $7.0m, up $4.0m on the previous year. Macquarie lifts its earnings per share estimates 3.0% and 0.3% in FY23 and FY24 respectively, accounting for increased store rollout estimates, including the opening of a further five stores before the end of 2022.

Jarden and Wilsons, two brokers not monitored daily by FNArena's Australian Broker Call Report, are equally positive about the retailer's prospects in the year(s) ahead.

Wilsons is banking on total sales growth of 34.3% in 1H23e alongside minor gross margin declines with private label sales normalising. Wilsons has an Overweight rating for the stock with a $5.50 price target.

Jarden has grabbed the opportunity to upgrade its rating to Buy from Overweight, while bumping up its price target to $6.10 from $5.50.

FNArena's consensus price target, which does not include Jarden and Wilsons, currently sits at $5.52, suggesting more than 18% upside from yesterday's closing share price. On current consensus forecasts, the shares are yielding 5.4% and 5.9% respectively for this year and next.

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