Universal Store Holdings Limited

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 both females and males.

UNI Details

“Expansion, Digital Marketing and Inventory Management”- Key Focal Points: Universal Store Holdings Limited currently operates through 76 physical stores and online, including 73 Universal Store Sites and 3 Perfect Stranger Sites in Australia and New Zealand.

1HFY22 Features:

Though the company intends to release the Full 1HFY22 accounts, six months ending 31^st December 2021 on 23^rd February 2022, it has updated its unaudited financial results on 19^th January 2022. Supported by the online sales, the company’s financials are as mentioned below:

• Sales Revenue: Due to government regulated perpetual store closures, the company lost 3,192 trading days (equal to ~25% of potential trading days), leading to an overall reduction in revenue by ~8.2% to ~$108.3 million in 1HFY22.
• Underlying Gross Profit Margin: Despite the incorporation of markdowns due to closed stores, the company managed to marginally hike its margin (excluding online delivery costs) from ~59.7% in 1HFY21 to ~60.3% in 1HFY22.
• Balance Sheet: The cash balance at the end of 31^st December 2021 stood as ~$48.8 million (~$33.7 million – net off ~$15.1 million of bank debt) versus ~$33.40 million as of 30^th June 2020.

Top Line & Bottom Line Performance in FY21:

• Revenue: The revenue from customers was up by ~36% Y-o-Y and reported as ~$210.82 million in FY21 versus ~$154.86 million in FY20.
• NPAT: The group’s product mix, organic growth in volumes, increasing gross margins, and effective inventory management contributed towards a ~90% increase in its NPAT and reported as ~$24.37 million in FY21 over ~$12.82 million in FY20.

Offline Sales offset by Online Retailing: Though the company didn’t face major supply chain disruptions, for further enhancement, it has also worked through inventory management – which is in line with the demand and normalisation of aged inventory. Other focus points include promotional strategies to protect brand, margin and customer trust along with price discipline and direct sourcing to improve margins. Its sales constituents:

• Offline: The offline stores faced a setback owing to low footfall in 1HFY22, customers’ aversion to shopping in centres, fewer demands due to low socialising. In its decline of ~2.2% in Like for Like (LFL) sales Y-o-Y, the offline stores’ revenue was down by ~10.8%.
• Online: Whereas, due to the diversion of offline into online sales (~19.3% of total sales) was reflected by ~52.5% Y-o-Y growth as compared to 1HFY21.

Revenue Growth Highlights (Source: Analysis by Kalkine Group)

Top 10 Shareholders: Recently, Pendal Group Limited became UNI’s substantial shareholder by gaining voting power of ~5.015%. The top 10 shareholders together form around 56.95% of the total shareholding, while the top 2 constitute the maximum holding. Bennelong Australian Equity Partners Pty. Ltd. and Challenger Managed Investments Ltd. are holding a maximum stake in the company at 14.83% and 7.14%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

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.

Key Metrics (Source: Analysis by Kalkine Group)

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

• COVID-19 Risks: The company is prone to the impacts caused by government-mandated lockdowns due to the COVID-19 pandemic, which might affect its functions, employees and further factors.
• Supply Chain Disruptions: The company is susceptible to the supply chains disruptions caused by lockdowns, which might be affecting the fulfilment of sufficing the clients’ demands.
• Changes In Tastes & Preferences: The demand for its products might get impacted by changes in consumer & client preferences caused by the dynamicity of the apparel industry. It is also directly proportionate to the increase in attending social events.
• Demand & Supply Gap: Due to the government restrictions, the company faced lower footfall in offline stores in the first half, together with, the company might be unable to fulfil the demands of the clients, therefore affecting its volume of sales.

Outlook: Currently, UNI holds 73 brand stores and targets to open 100 plus stores in Australia and New Zealand in the near future. Adhering to this, UNI opened nine new stores in 1HFY22 (seven Universal Stores sites and two Perfect Stranger sites).

• The company expects its underlying EBIT to be finalised in the range of ~$19.0 -~19.5 million.
• The higher freight costs in its online retailing might lead its net gross profit margin to slightly decline by ~0.4% on Y-o-Y basis.
• As the company witnessed diversion towards online sales in times of lockdowns and its growth, it is all prepared to increase its investment in digital marketing and enhance its omni channel model.

The Group 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 ASX, the stock of UNI is trading below its 52-weeks’ average levels of $5.33-$8.56. The stock of UNI gave a negative return of ~19.99% in the past nine months and a negative return of ~12.44% in the past six 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 some discount to its peers’ average multiple, considering the increase in marketing expenditure thereby shrinking the margins, expected supply chain disruptions in the near term and lower footfall in offline stores. For the purpose of valuation, a few peers like City Chic Collective Ltd (ASX: CCX), Premier Investments Ltd (ASX: PMV), Lovisa Holdings Ltd (ASX: LOV) have been considered. Considering the expected upside in valuation, optimizing the product mix through direct sourcing strategy, margin management strategy, current trading levels, increasing online sales, lower debt, optimistic long-term outlook and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $6.10, 10:30 AM (GMT+10), Sydney, Eastern Australia, as on 25^th January 2022.

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: -

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

Disclaimer

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