Lovisa Holdings Limited

Company Profile: Lovisa Holdings Limited (ASX: LOV) is engaged in the retail sale of fashion jewellery and accessories. The company's segments include Australia & New Zealand, which is engaged in the retail sale of women's jewellery and accessories in Australia and New Zealand, and Rest of the World, which is engaged in the retail sale of women's jewellery 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

Healthy Balance Sheet and Growth in Online Sales: Lovisa Holdings Limited (ASX: LOV) is engaged in the retail sales of fashion jewellery and accessories. As on 21 September 2020, the market capitalization of the company stood at ~$825.29 million. Despite the disruption in the business over the past six months and its impact on sales and profitability, the company was able to maintain a healthy and resilient balance sheet, and thus seems well-positioned to navigate the uncertain times. In FY20, the revenue of the company went down by 3.2% to $242.2 million. However, the cost of doing business was pushed to 59% as compared to 56% in the last year due to the increased disruptions from the COVID-19 pandemic in the second half of FY20. During FY20, LOV reported an EBIT of $30.6 million and NPAT of $19.3 million.

The company reported healthy cash flows from operations before interest and tax of $51.7 million and a significant operating cash conversion at 115%. This was mainly because of strict working capital management. During FY20, the company refinanced its debt facilities and stretched its maturity of the term debt component for 3 years. The company's healthy balance sheet with a net cash position of $20.4 million is likely to support its future growth.

The company continues to focus on the international store roll out with opening of new stores in Louisiana, Missouri, and Connecticut and is presently operating from 53 stores throughout the USA.

LOV is also focused on accelerating its growth in the digital segment and witnessed a significant growth of 311% in online sales in FY20. LOV has achieved rapid growth since its inception, with revenue growing from $25.5 million in FY2011 to $242.2 million in FY2020. The company’s key growth drivers include international expansion, streamlining the global supply chain, enhancing the existing store performance, brand proliferation and pre-empting market trends.

Revenue Performance (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 FY20, gross margin of the company stood at 72.7% as compared to the industry median of 23%. In the same time span, net margin of the company was 4.6%, higher than the industry median of 3.7%. The higher gross and net margin of the company shows that the company is well managing the costs of doing business. During FY20, EBITDA margin of the company stood at 34.4%, higher than the industry median of 8.3%, indicating higher profitability. Consequently, the Return on Equity of the company stood at 20%, much higher than the industry median of 13.9%. This shows that the company is well managing the capital of its shareholders and can generate profits internally. Looking into the balance sheet, current ratio of the company stood at 0.75x. During FY20, Assets-Equity Ratio stood at 4.45x, and Debt-Equity ratio was 2.86x.

Key Margins (Source: Refinitiv, Thomson Reuters)

Growth in E-Commerce Channel: During FY20, the company focused on its digital capabilities and started servicing 8 key markets through digital store format across the globe. During FY20, online sales grew by 311%, with a massive growth of over 382% witnessed during Q4. This trend was supported by major digital programs, including, live chat for direct generation of sales, pre-sale facilities across markets for early product reads, and increased supply chain capacity through multi warehouse fulfillment. The company expects a decent pipeline of digital developments in FY21.

Continued Investment in Store Rollout: The future growth for LOV is likely to be driven by the continued international store roll out. The new store fit outs and renovation on existing stores resulted in capital expenditure of $25.6 million. The company is making progress on developing its newer markets and is diligently selecting the store locations. Despite COVID challenges, LOV witnessed considerable opportunities in the US markets, while also reported growth in its UK markets. With the re-opening of the businesses, LOV trades from 435 stores, reflecting an increase of 45 stores from the pcp.

Growth in Stores (Source: Company Reports)

Key Investment Risks: The company is exposed to a variety of risks including risks related 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, and change in prevailing fashions and consumer preferences. With the onset of COVID-19, LOV saw a closure in its stores’ network in Victoria, California, and New Zealand, which impacted its financial performance.

Future Expectations and Growth Opportunities: The company has delivered strong growth from new stores and seems well positioned to operate efficiently in a competitive market environment. It is focused on expanding its store network and is setting up support structure primarily in the USA, and will continue to review opportunities in new markets. During the first 8 weeks of FY21, the company has opened 8 new stores taking the overall store network to 443 stores. LOV is building its global executive team and has recently appointed a ‘Head of Digital and Marketing Team’, which will further bolster its capabilities in the digital business. The Annual General Meeting of the company will be held on 20 October 2020.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

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

EV/EBITDA 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 operational performance with strong operating cash conversion and healthy balance sheet. Its global expansion efforts and disciplined approach to working capital management has been the highlight of the year FY20. As per ASX, the stock of LOV gave a return of 76.15% in the past six months and a return of 13.44% in the past three months. The stock is trading slightly below its average trading levels and thus retains a potential for further upside. On a technical analysis front, the stock of LOV has a support level of ~$5.767 and a resistance level of ~$8.199. We have valued the stock using the EV/EBITDA multiple based relative valuation and have arrived at a target upside of lower double-digit (in percentage terms). Considering the current trading levels, attractive returns over the past six months, decent financial performance despite the softer market conditions and expansion in the US markets, we recommend a ‘Buy’ rating on the stock at the current market price of ~$7.610, down by 0.911% on 21 September 2020.

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

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