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Lovisa: More Growth, More Markets, More Growth

Small Caps | Sep 01 2022

This story features LOVISA HOLDINGS LIMITED. For more info SHARE ANALYSIS: LOV

Lovisa Holdings continues its global takeover with significant store expansion into the US in the last year, as analysts suggest a move into the Chinese market could be on the cards.

-Lovisa Holdings' FY22 yet again beat market expectations
-Aggressive store rollout remains on the cards
-Retailer experienced strong trading in early weeks of the new financial year
-Analysts are predicting upwards of 130 new store openings in the coming year

By Danielle Austin

With an increased store network underpinning its FY22 result, Lovisa Holdings ((LOV)) delivered 59.2% year-on-year sales growth, and trading in the early weeks of the new year suggests firm growth will continue. The company reported revenue of $448.2m, earnings of $140.8m and net profit of $58.2m, while gross margins improved 220 basis points over the year to 78.9%.

An ongoing global rollout continues to be the focus for management at the company, with an additional 85 stores opened in the last year seeing the retailer close out the year with a global network of 629 stores.

Of these, 44 were opened in the second half of the year and the company has already successfully opened a further 22 stores to date in the new year, a run rate that analysts have estimated could see a total 130-140 new stores opened in the coming year, far exceeding the historical opening rate of 50-100 stores annually.

First stores were opened in new markets Poland and Canada, while an additional 37 stores were opened in the US, alongside new store openings in Cyprus, Lebanon, Namibia and Hong Kong.

Like any discretionary retailer, consumer confidence uncertainty does pose risk to performance moving forward, but analysts highlighted the company should benefit from its younger consumer base, who are likely less sensitive to changes in interest rates.

Onwards and upwards

Five of FNArena’s database brokers have updated on Lovisa Holdings since the company released its full year results. Between them, four of these brokers are equivalent Buy rated and one is equivalent Hold rated, with an average target price of $22.84, out of a range of $18.00-$27.70.

Citi’s conviction in Lovisa Holdings has improved following the full year beat, with the broker (Buy, target $24.00) expecting further expansion into new markets is not only on the cards for the retailer, but imminent, with Italy and Mexico potential new geographies.

Given these countries both border existing markets, Citi notes the company would be able to leverage existing infrastructure, and sees potential for Lovisa Holdings to open 75 stores in Italy and 58 in Mexico, expanding its total network 23% with these two markets.

The broker also sees Hong Kong as a possible gateway into the Chinese market, and considers the retailer's recent expansion into Hong Kong as a likely indicator of its interest in entering the Chinese market at some point, potentially once covid restrictions in the region ease.

Citi highlighted the company’s CEO has experience in the Chinese market, which should prove beneficial should they pursue market expansion, and estimates the retailer could open 161 stores across Chinese cities, which could represent a $108m sales benefit.

Citi lifted its earnings per share forecast 1% in FY23, but retained its FY24 forecasts with greater investment costs offsetting benefits of an increased store network.

Lovisa Holdings delivered mid to high single digit beats to Macquarie’s estimates at the earnings, net profit and earnings per share lines with its full year result. This broker (Outperform, target $27.70) noted Lovisa Holdings should prove more resilient than retailer peers given its positive exposure to low price point products and a younger core demographic who are less likely to curtail spending in the current economic environment.

Given the company’s full year beat, Macquarie lifted its earnings per share estimates 15% and 14% in FY23 and FY24 respectively.

Jarden (Overweight, target $22.29) considers Lovisa's positive outlook is underpinned by the material pickup in pace of the international store rollout.  This broker anticipates 116 new store openings in the coming year, and a further 113 in FY24.

Lifting new store assumptions has driven a 15% increase to the broker’s FY23 revenue estimate, and a 19% increase to its FY24 revenue estimate. This broker’s earnings estimates also increased 5% and 10% for the same years respectively. Jarden expects the company can deliver a 33% earnings per share compound annual growth rate through to FY25.

Morgans rates Lovisa an Add (equivalent of Buy) with a price target of $24.50. Morgan Stanley has a positive Overweight rating but with a price target below the current share price of $18. UBS too has a more modest price target ($20) and rates the stock Neutral.

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