Company Overview: Lovisa Holdings Limited (ASX: LOV) is engaged in the retail sale of fashion jewelry and accessories. The Company's segments include Australia & New Zealand, which is engaged in the retail sale of women's jewelry and accessories in Australia and New Zealand, and Rest of the World, which is engaged in the retail sale of women's jewelry and accessories in Singapore, South Africa, Malaysia and the United Kingdom. The Rest of the World segment also includes the Company's franchise stores in the Middle East.

LOV Details

Increased Revenue and Improvement in Digital Reach: Lovisa Holdings Limited (ASX: LOV) is an international specialist fast fashion jewellery retailer. As on 3 August 2020, the market capitalization of the company stood at ~$680.22 million. During FY19, the company continued the offshore expansion with the addition of a net 64 stores, comprising of 70 new stores including new stores in France and the USA, offset by 6 stores closed. During the year, the company reported an increase of 15.3% in revenue to $250.3 million and an increase in gross profit by 16.0% to $201.4 million. This was mainly due to tight inventory management and the stronger USD hedge rate during the period. This increased margin benefited from currency tailwinds associated with the Australian Dollar. The Group’s Cost of Doing Business increased due to investing ahead of the curve to support the Company’s net opening of new stores and the ongoing store rollout plan. It has continued its investment in new territory infrastructure and senior management roles to support the store rollout.

In the same time span, net cash flow from operating activities increased by $8.3 million to $68.9 million. The group’s policy of distributing surplus cash by way of increased dividends resulted in a net cash outflow for the year, with net cash of $11.2 million on hand at the year end. During 1H20, the company continued to focus on improving the structure of the business and the way each department operates to best support its growth strategy.

LOV has achieved rapid growth since its inception, with revenue growing from $25.5 million in FY2011 to $250.3 million in FY2019. It is focusing on key drivers to deliver growth in sales and profit, including international expansion, streamline global supply chain, enhance existing store performance, brand proliferation and lead and pre-empt trends. LOV has global reach and is looking for new opportunities to open new stores in new countries, including smaller cities. It has vast opportunities for further growth and expansion and is continually improving its digital reach.

FY19 Financial Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Lovisa Holdings Limited. BB Retail Capital Pty. Ltd. is the largest shareholder in the company, with a percentage holding of 40.21%.

 Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Margins: During 1H20, gross margin of the company stood at 74.3%, higher than the industry median of 17.5% and net margin of the company was 16.4% as compared to the industry median of 4%. This indicates that the company is well managing its costs and is capable of converting its revenue into profits. In the same time span, EBITDA margin of the company stood at 40%, higher than the industry median of 8.4% indicating increased personality. During the half-year, Return on Equity of the company was 44.3% as compared to the industry median of 9.7%. This shows that the company is well managing the capital of its shareholders and can generate profits internally. During 1H20, assets/equity ratio of the company stood at 4.08x and debt/equity ratio of the company was 2.56x.

Key Margins (Source: Refinitiv, Thomson Reuters)

Half-Year Results: During 1H20, the company saw increased momentum of the store rollout delivering strong top-line sales growth. Despite the investment required to deliver this growth, the company managed to deliver decent growth in profit. During the half year, revenue of the company went up by 22.2% to $162.8 million with strong growth in store numbers delivering growth across most of the markets. The company opened 4 new stores in the UK, 10 in France and 21 in the US. However, gross margin decreased 200bps to 79%. The company is maintaining its brand proposition for its customers and has continued to make important investments into both people and processes to drive the growth of the store network.

During the half year, it reported decent cash flows from operations before interest and tax of $46 million and operating cash conversion close to 100%. The key driver of future growth of the company is the continued international store rollout. The store network increased to 439 stores, a net increase of 49 stores from June 2019.

1H20 Financial Highlights (Source: Company Reports)

Store Trading Update: LOV was forced to progressively close its store network globally due to COVID-19. However, it has re-opened the Australian stores in mid-April, and is progressively moving across all company-owned markets. The disruption throughout Q4 resulted in a reduction in sales revenue for the full year ended 28 June 2020 of $237 million, as compared to $249 million in FY19. However, the online business of the company was able to deliver a growth of 256% on prior year during Q4.

With the decisive action taken on costs and cash management since the outbreak of COVID-19, net cash at financial year end stood at $21 million, as compared to $11 million at June 2019 and $13 million at December 2019.

Key Risks: The company is exposed to a variety of risks including competition, retail environment and general economic conditions, failure to successfully implement growth strategies, availability of appropriately sized sites in good locations, product sourcing or supply chain disruptions, prevailing fashions and consumer preferences may change.

Future Expectations and Growth Opportunities: The company has delivered decent growth from new stores and seems to be well-positioned to react and deliver to whatever trends prevail in the market. It is focused on expanding its store network. It is also investing in support structures particularly in the USA, to support store network growth and the larger business, and will continue to review opportunities in the new markets. Whilst sales levels are yet to return to those seen prior to store closures, the company decided to reinstate the majority of its teams to ensure trading performance of the business and continue the store roll-out in the future. LOV has received approval from its existing financier for an increase in the limit of its financing facilities for a further 3-year term, adding to the company’s balance sheet strength.

The company has decided to exit the Spanish market and forecasts impairment charges and associated provisions against this business of around €2 million in FY20. Whilst it has delivered decent margins in the past year, it is in a fashion business and therefore margins can experience some degree of volatility.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company has reported decent financial performance with strong operating cash conversion and balance sheet. It has invested in global expansion, and its disciplined approach to working capital management resulted in delivering on trend products to its customers. As per ASX, the stock of LOV gave a return of 9.33% in the past one month (as at 31 July 2020) and is inclined towards its 52-weeks’ low level of $2.340, proffering a decent opportunity for the investors to enter the market. We have valued the stock using the price to cash flow multiple based illustrative relative valuation and have arrived at a target upside of lower double-digit (in percentage terms). Considering the current trading levels, decent returns in the past one month, expansion of the company in various jurisdictions and return of the company to momentum, we recommend a ‘Buy’ rating on the stock at the current market price of $5.910 (down 6.635% on 3 August 2020). 

LOV Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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