Company Overview: Universal Store Holdings Limited (ASX: UNI) provides casual apparel wear to the youth. It operates 65 physical stores in and around Australia and is also making a mark as a fast-growing online store. The target audience is mainly in the range of 16- to 35-year-old customers and who are in the lookout for frequently changing and well curated on-trend apparel products.

UNI Details

Robust Growth in Sales Revenue Aided by Increase in Online Sales: The company was formerly known as US Holdings Pty Ltd. It provides a quality shopping experience and high customer service to its young customers, who are supposed to be fashion-centric, socially active and occasion driven. It also offers its private brand labels, which complements with third party brands and provide margin comfort to the overall sales strategy. It believes that it has significant potential in the men’s private brand offering.

View on H1FY21 Performance Highlights:

• UNI reported robust sales during the period with a growth of over 3% to ~$118 million. Store sales grew by 16.1% to ~$104 million during the same period.
• Online sales contributed 12% of the sales mix in H1FY21 and grew by over 3% to ~$14 million.
• Gross profit increased by over 24.5% to $67.9 million, with a gross profit margin of 57.6%, reflecting an increase of 60 bps.
• There has been an improvement in underlying NPAT by 63.6% to $21.1 million, compared to $12.9 million on the pcp.
• The management declared an interim dividend of five cents per share.

It ended the period with a net cash position of $22.5 million as of 31 December 2020.

Cash Balance Trend (Source: Analysis by Kalkine Group)

Q3FY21 Sales Update:

• The company reported decent sales performance during the period with a growth of over 39.6% on the pcp. The increase in sales has been aided by comparatively softer sales in the prior corresponding period due to the initial impacts of the COVID-19 pandemic.
• LFL store sales reported a growth of over 27.5% and online sales grew by over 148.2% in Q3FY21.

Inclusion in S&P/ASX All Ordinaries Index:

As per an announcement on 12 March 2021, UNI has been added on S&P/ASX 200 Index, effective from 22 March 2021.

Top 10 Shareholders: The top 10 shareholders together form around 57.02% of the total shareholding, while the top 4 constitute the maximum holding. BB Retail Capital Pty. Ltd and  Bennelong Australian Equity Partners Pty. Ltd. are holding a maximum stake in the company at 16.39% and 6.57%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: The company reported a marginal improvement in gross margin to 59.6% in FY20, compared to 59.5% in FY19. Net margin stood at 8.3% in FY20, from a level of 6.8% in FY19. There has been an improvement in the liquidity with current ratio at 1.45x as of FY20 end, compared to 1.08x in FY19 end period.

Growth Profile and Profitability Metrics (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

• Impact of COVID-19: The company’s performance has been impacted due to the onset of the COVID-19 pandemic, and the risk continues to prevail with continued lockdowns and travel restrictions.
• Credit Risk: The company’s line of business makes it prone to credit risk.
• Product Risk: UNI has to constantly keep evolving in order to be on the same page with latest trends and fashion culture.

Outlook: The company is focused on expanding its number of stores and has a target of over 100 stores across the ANZ region. Despite the impressive growth performance, UNI has a relatively low market share, and this presents a significant opportunity for the company to expand its base. It has been investing in its digital marketing capabilities on the back of decent growth in the online segment.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:  As per the management, the youth apparel segment, which represents one-third of Australia’s population, is poised for favourable growth driven by positive tailwinds. The segment attracts total spends of $24 billion on an annual basis. As per ASX, the stock of UNI is trading above its average 52-weeks’ levels of $4.190-$8.250. The stock of UNI gave a positive return of ~17.01% in the past six months and a negative return of ~15.35% in the past three months. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight premium to its peers’ average, considering the impressive financial performance, robust growth in online sales, strong balance sheet position and market opportunity. For the purpose of valuation, few peers like City Chic Collective Ltd (ASX: CCX), Accent Group Ltd (ASX: AX1), Lovisa Holdings Ltd (ASX: LOV) have been considered. Considering the expected upside in valuation, impressive performance, increase in online sales, improving bottom-line performance, positive sector outlook and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $6.60, down by 1.05% (as on 17 August 2021, 03:59 PM (GMT+10), Sydney, Eastern Australia).

UNI Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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