Company Overview: Incorporated in 2018, Universal Store Holdings Limited (ASX: UNI) operates in the fashion retailing market and offers a wide variety of products, including clothing, footwear and accessories for females and males. The company started to trade on ASX in 2020.

­­­­­­UNI Details

H1FY22 Performance:

• Top-Line Update: Sales stood at $108.3 million, down by 8.2% on H1FY21, vastly attributed to store closures in VIC, NSW and the ACT resulting in 3,192 lost trading days. Store sales slipped by 16%, while online channels were up by 49.9%.
• Bottom-Line Movements: Underlying product gross profit margins improved by 60 bps on a PcP basis. Aggregate gross margins slipped by 40 bps, primarily driven by higher delivery costs associated with the channel mix and online growth. Underlying EBIT dropped to $19.3 million, down by $11.8 million on PcP.
• Cash Position: Net cash stood at $33.8 million, up by $15.4 million on a PcP basis due to robust cash generation. Inventory stood at $17.1 million, moderately over the December 2020 levels. Investment in PP&E stood at $3.6 million, primarily driven by new stores and relocations.

Figure 1: Half-yearly Performance

Source: Company Reports, Analysis by Kalkine Group

Full-Year FY21 Performance:

• Top-Line Update: Sales stood at $210.8 million, up by $55.9 million or 36.1% over FY20. Stores sales pent up by 30.9%, and online channels advanced significantly by 90.3%, clocking online sales at $25.8 million.
• Bottom-Line Update: Gross margins climbed by 210bps to 58.7%, and underlying EBITDA advanced by 78.4% to $48.7 million, primarily driven by continued mix shift towards the private brand, expansion in men’s private brand, and direct sourcing of women’s categories.

Figure 2: Annual Performance

Source: Company Reports, Analysis by Kalkine Group

Top 10 Shareholders:

The top 10 shareholders together form ~62.23% of the total shareholding. Bennelong Australian Equity Partners Pty. Ltd. and Challenger Managed Investments Ltd. holds a maximum stake in the company at ~­­­14.83% and ~9.01%, respectively.

Figure 3: Top 10 Shareholders

Key Metrics:

The company has reported an improvement in net margin performance from ~6.8% in FY19 to ~11.6% in FY21. On the other hand, it reduced its current ratio from 1.45x in FY20 to 1.22x in FY21.

Figure 4: Key Financial Metrics

Source: Analysis by Kalkine Group

Outlook:

• Initial Sales Recovery: In the first eight weeks of H2FY22, total sales shot up by 5.0% relative to H2FY21 (8 weeks), up by $1.5 million. Online sales surged by 28.8% relative to H2FY21 and up by 257.1% relative to the corresponding FY20 period.
• Decent Cost Management Efforts: UNI’s inventory is well managed and aligned to current trading volumes. Up to three new stores are expected to launch in H2FY22.

Key Risks:

The recent inflationary pressure on the consumer sector has significantly affected consumer behaviour, raising concerns about a potential decline in sales volumes. The current disruption in the global supply chain has dramatically affected consumer businesses, especially the apparel industry.

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: UNI has delivered 3-month and 6-month returns of ~-30.02% and ~-45.51%, respectively. The stock is trading below the average of the 52-week low price of $4.480 and the 52-week high price of $8.560, indicating an accumulating opportunity. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). The company might trade at some discount compared to its peers’ average EV/Sales (NTM trading multiple), considering supply chain disruptions and inflationary pressures. For valuation, a few peers like Premier Investments Ltd (ASX: PMV), City Chic Collective Ltd (ASX: CCX), Mosaic Brands Ltd (ASX: MOZ), and others have been considered. Given the sales recovery in H1FY22, cost management efforts, sufficient liquidity position, positive industry prospects, current trading levels, potential upside as indicated by the valuation, and associated key business risks, we give a “Speculative Buy” recommendation on the stock at the closing market price of $4.430, down by 7.515%, as of 10 May 2022.

Markets are currently trading in a highly volatile zone due to certain macro-economic issues and prevailing geopolitical tensions. Therefore, it is prudent to follow a cautious approach while investing.

UNI Daily Technical Chart (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 for upside potential, risks, holding duration, and 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 stock prices tend to find support if they are falling, and a downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in stock prices tend to find resistance when they are rising, and an 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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