LOV FY26 strong result--its a NA and European story

 LOV FY26 Result 

My Take

LOV results calls are often a bit unusual. LOV is really a private company masquerading as a public company. The management plays its cards close to its chest. Blundy controls the company, and management is aligned with him. That is good and bad; disclosure can be frustrating, and transparency can sometimes not be as clear as other companies. The positive is that management has a strong record of adding value, and there has been no real sign of conflict between the major shareholder and the outside shareholders. Incentives are aligned for profit growth. FY26 was one of the results where disclosure was not that great, despite the results being strong.

Compared to my expectations, revenue was 1% better, and NPAT was 5% better. Revenues were +18%, and NPAT was +12%; note the difference. There were two negative inputs on NPAT. The first was the Jewells expansion. LOV lost $11m in the FH and provided no full-year numbers, but said losses were about the same. Taking them at their word, that is $20m (tax-effective?) for the FY, and NPAT would otherwise have grown 35%.

The second negative was a large increase in store churn, with loss on sale and impairments being about $12m compared to a few million pcp. Both these were taken above the line. That shows how strong the underlying store profitability was over the period. The results also disclosed the full-year store count being 10 below my estimate and coming in at 1136 stores.

Over the year, LOV opened 160 stores, but net openings were 105 stores. The closure rate went up a lot. Management stated that they would be active if the landlord's take is too high. LOV is aggressively managing its stores for profitability. If the landlords want too much in rent, LOV will move. The issue appears to be in lower-quality US and European malls. The rental outcome is critical for retailers; otherwise, they are working for the landlord and not shareholders. Negotiating these outcomes is a core skill for management in this space. What this means for LOV is probably better margins and profitability, but it makes the store rollout probably slower than expected. Management indicated that malls do want Lovisa stores, and it is about terms.

The mix of growth was stark. The store rollout in NA and especially Europe continues apace. Revenue from these two areas is now 68% of total and expected to grow. Asia was flat, with some new markets doing well while others were flat or down. Australia went backwards, and the mature market is fighting saturation and competitive issues. Management was very tight-lipped about this and avoided questions. The refurbishment is ongoing, aimed at stabilising the situation. LOV remains a NA and European growth story where the proposition is resonating.

Gross margin at 82.5% is phenomenal for a retailer, and further improvements here to drive profitability must be limited. The payout ratio was 100%, which is unusual given the growth opportunity for LOV and must be driven by the major shareholder. Net debt of $43m, although not high, was added to the balance sheet. Blundy did add to his LOV position, the first time for many years, earlier this year. Comparative store sales were good and the company guided for strength into FY27. Much of this would be inflation pricing recovery, but it is positive to see LOV handle the rising input costs with margin improvements.

Summary and Valuation

No doubt in my mind that LOV is an outstanding retailer. The growth opportunity is large, and LOV has a track record of excellent execution overseas, especially in Europe. The Jewells trial will either work or be shut down in time. IMO, management has done enough to try it out. No time frame was given and no new numbers. The churn and losses on sale of stores and lease renewal were higher, and it was unclear whether this is an ongoing cost of doing business or an unusual period. The Australian business remains challenged, and we are yet to see any benefits from the store refurbishments. LOV is an NA and European store rollout story, and that appears intact.

My base assumptions are 18% eps cagr over the next 5 years, which assumes a reasonable outcome for Jewells, and an exit PE of 20x. These assumptions make LOV a buy below $28. The volatility involved in the retail industry would mean we want an entry price well below this level (my last buying around $22), and the overall portfolio weight of the group should be middle weight, IMO. LOV continues to earn a place in the portfolio. 

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