Lovisa--FH24--glamming the world
LOVISA FH24—Glamming the world
As part of my top 10 holding series I report on the above.
The result showed a strong top line and very strong GM performance
in what is a difficult trading environment, sss -4%. The top line benefitted
from new stores overwhelming some cyclical weakness, mainly in Australia the
most mature market. Interest/lease expenses were higher and costs were generally
higher due to growth and also some underlying cost pressure.
Given the outlook for the business and the assumptions necessary
to make a reasonable return from these levels the critical questions remain
around the extent of store rollout, ie how many and to a lesser extent how fast,
as well as the related ongoing economics of new store rollout. These issues
above all others will determine the investment case, imo.
Given that what did the last result teach us,
China and Vietnam were entered as new markets, and how these
evolve, especially China will be a big swing factor. The Chinese market is different
with social media and e-commerce platforms being more influential, so it may
take some time for LOV to find its feet in this market. LOV has consistently
stated that they will open stores if profitable and the opportunity shows
potential, so the confidence to grow stores into these markets will be critical
to LT performance and a point to monitor. LOV, “so far so good”.
LOV stated that the US was twice as expensive to build stores
as other countries, including Australia ($150k/store), which surprised me. The US saw 17 stores over the last 6 months,
disappointing. The ability to lease at attractive rates remains the largest brake
on growth, imo. Demand appears to not be a big issue.
LOV made the interesting point that monitoring sales per
store, which I do, is not always appropriate since there are reasonable differences
in the cost of operations, like labour, so lower sales matched with lower costs
will give the same or even better profits. As they expand into poorer countries
this will swing that measure a bit. GM does not vary significantly across
countries. Shrinkage does.
LOV actively manage the stores, meaning poor returning
stores get closed. The profitability drag from new stores and the
opening/closing activity should dampen margins from the steady state. LOV
stated payback on a store is 1-2 years (not bad).
There is no doubt that as the countries increase and scale
builds there will need to be costs put in MIS, mgt etc, and given the
volatility in the growth rates, we will likely see good and poor results around
an improving trend that will likely be extrapolated by the market.
Other areas of interest
LOV stated that sss turned positive this year and tending
higher, a positive.
FCF was very strong, although lumpy, and strong FCF
generation has been an ongoing positive feature of the LOV investment case.
The GM performance showed the ability to use price to
protect margin, a positive. Inventory was stated as clean at period end.
Analysts were trying to back solve for ebit from the LTIP
for the CEO, which is based on future ebit but must be amortised over the current
period, this appears to be where I am at, for what it is worth.
Currently in 40 countries
VALUATION
The valuation I use is a simple 5-year eps growth and PE exit
multiple. The growth is based on store rollout and sales per store and a gradual
improvement in margin from scale. I assume 1177 stores by 2028 (854 now). The exit
multiple, as with all growth companies will be a function of the remaining
growth (+5yr) and the inherent profitability of the franchise at that time. At this
stage, I am confident in both. At 16% cagr and under a range of exit PE’s I get
a strong buying level at $22. Possibly lighten above $30.
Held cost base (profit/loss adj) $4.64. last buying $17.98,
no sales in last 12 months
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