Company Reports

No-moat Lovisa’s fiscal 2024 net profit after tax of AUD 82 million beat our estimate by 10%, owing to strong gross profit margin and slightly higher sales than we expected. Selective price rises, by product range and market, lifted gross profit margin by 110 basis points to 81%. This together with a material cut in CEO long-term incentive expenses helped mitigate significant labor cost inflation. Compared with the previous corresponding period, pretax margin remained relatively steady, up 30 basis points to 15.8%.

Lovisa retails fast-fashion jewelry with a target customer base of fashion-conscious 25- to 45-year-olds. Its supply chain is vertically integrated; Lovisa develops, sources and merchandizes its own products. In fast fashion, speed to market is of the essence. From design to hitting the stores, its takes Lovisa up to 10 weeks and on average, over 100 new product lines arrive in stores weekly. Inventories are monitored daily, and in-demand products can be resupplied within six weeks. From its regional warehouses, most products are distributed by airfreight to reach end markets quickly.

The upcoming August 2024 reporting season will draw the line under a difficult year for Australian retailers in which they navigated soft demand and soaring labor costs. The combination results in a profit margin crunch and declining earnings for many retailers.

Talk of interest rate cuts and impending tax cuts is sparking a rally in consumer cyclicals. We agree these factors improve the near-term outlook for consumer spending, with cyclical retailers more exposed. We expect the combined impact of fiscal and monetary tailwinds to underpin mid-single-digit growth in total retailing sales in the medium term—compared with our estimate of only 2% growth in fiscal 2024. But underlying our near-term forecast is a significant divergence across categories, with sales in cyclicals virtually flat and defensives up 4%.

Lovisa retails fast fashion jewelry with targeted a customer base of fashion-conscious 25- to 45-year-olds. Its supply chain is vertically integrated, and Lovisa develops, sources and merchandizes its own products. In fast fashion, speed to market is of the essence. From design to hitting the stores, its takes Lovisa up to 10 weeks and on average, over 100 new product lines arrive in stores weekly. Inventories are monitored daily, and in-demand products can be resupplied within six weeks. From its regional warehouses, most product is distributed by airfreight to reach end markets quickly.

No-moat Lovisa’s gross profit margins are expanding, successfully raising prices without materially affecting demand for its fast-fashion jewelry. We were previously expecting gross margins to weaken in fiscal 2024.

E-commerce platforms have been outperforming physical stores recently. Transaction data from National Australia Bank suggests online retail sales in October lifted 10% on last year, while total retail trade was up only 1%, as reported by the Australian Bureau of Statistics.

We expect only modest discretionary goods sales growth in fiscal 2024, while interest rates stay high and household incomes struggle to keep up with inflation. With demand soft, discounts and promotions abound in discretionary retail, and with wages rising as well, earnings are under pressure. But for some, cost pressures are easing. Steep declines in global food commodity prices bode well for fast-food restaurants. Quick service restaurant operator no-moat Collins Foods and master franchisee narrow-moat Domino’s Pizza screen as undervalued.

We maintain our fair value estimate of AUD 22 per share for no-moat Lovisa. Although fiscal 2023 NPAT of AUD 68 million was 8% lower than our forecast, the miss is immaterial to the global jewellery brand’s rollout opportunity, and our investment thesis stands.

Lovisa retails fast fashion jewellery with targeted a customer base of fashion-conscious 25- to 45-year-olds. Its supply chain is vertically integrated, and Lovisa develops, sources and merchandises its own products. In fast fashion, speed to market is of the essence. From design to hitting the stores, its takes Lovisa up to 10 weeks and on average, over 100 new product lines arrive in stores weekly. Inventories are monitored daily, and in-demand products can be resupplied within six weeks. From its regional warehouses, most product is distributed by airfreight to reach end markets quickly.

Lovisa retails fast fashion jewellery with targeted a customer base of fashion-conscious 25- to 45-year-olds. Its supply chain is vertically integrated, and Lovisa develops, sources and merchandises its own products. In fast fashion, speed to market is of the essence. From design to hitting the stores, its takes Lovisa up to 10 weeks and on average, over 100 new product lines arrive in stores weekly. Inventories are monitored daily, and in-demand products can be resupplied within six weeks. From its regional warehouses, most product is distributed by airfreight to reach end markets quickly.