A retailer with many years of high growth ahead

Shane Fitzgerald

Around 12 months ago, we highlighted Lovisa as a key position in our portfolios. At that time it was trading on 13x earnings and the share price was around $3.50. You can read our thesis at the time in this wire from back then. Twelve months later consensus earnings forecasts have been upgraded by 25%, the PE has re-rated to 30x and the share price is now $11.30.

More to come

While we have taken profits in the stock, it remains a significant position in our portfolios for one simple reason: it is still in the very early stages of its store rollout and is set to deliver strong earnings growth over many years to come.

LOV is a vertically integrated retailer of fast fashion jewellery with a very attractive business model. The key to its success is the extensive processes it has developed to get new product onto its shelves in a fast and highly profitable way.

From the initial concept to the shop floor takes only 8-10 weeks and they introduce >120 new lines per week. They monitor the returns of every “prong/hook” in the store and every week the stores are optimised. This all results in strong like for like sales growth, gross profit margins >75% and impressively less than 12 months payback on new store openings.

Global rollout continues...

LOV has officially stated that they are undertaking trials in Spain, France and USA and in a May 2018 company presentation stated that it has 2 stores in Spain and 1 each in both France and USA. Given that its store format has been proven in a number of culturally diverse countries (South Africa, Middle East, Singapore, Malaysia, Vietnam, New Zealand and Australia) it is a safe bet that these three trials will be successful.

Our in-depth research shows that this is true, with LOV in the process of opening an additional 3 stores in Spain (bring the total number to 5) and 1 additional store each in France and USA. In addition, LOV has advertised for Property Managers for both Spain and France, Regional Managers for both Spain and France, and in the USA a full-time Store Construction Project Manager. Clearly, you don’t put this level of management in place unless a full rollout is likely.

...but how big will it be?

Whichever way you look at it, the store rollout for LOV is significant. The question the market is currently grappling with is just how big these rollouts will be. In Australia LOV has around 155 stores, for a population of 24 million or a ratio of 6.5 stores per 1 million of population and in New Zealand and Singapore the ratio is between 4-4.5x, whereas in lower GDP per capita countries the ratio is around 1x. LOV has guided to a store capacity of 100 for the UK, a ratio of 1.5x.

We have little doubt that management is simply being conservative and the ultimate store rollout will be significantly higher. So the question is how big will a full rollout in UK, Spain, France and the USA be? The combined population of all four countries is 500 million so the answer is somewhere in between a 1x to 4x population multiple or 500 to 2,000 stores versus the current store footprint of 320. To put this in context, Claire’s Store Inc which is LOV’s closest comparable as at October 2017 had 2,638 stores.

High EPS growth for many years to come

At this stage consensus earnings forecasts don’t factor in a rollout across all four countries, therefore there is upside risk to consensus forecasts, so LOV is not really trading on 30x. The real limiting factor for LOV is not the size of the opportunity but rather its ability to find the right store locations.

Management is incredibly stringent on getting the right location for the right rent. In the past, it has closed stores when this is not being achieved. Management takes some pride in the fact that while it has closed numerous stores none of these have been unprofitable, highlighting their discipline.

True, the easy money has now been made in the stock, however the growth runaway ahead of LOV is very significant and will see the stock deliver high EPS growth for many years to come.

In the past we have seen stocks with large store rollout stories trade on big multiples for extended periods of time and deliver significant shareholder value.

We believe LOV will be another of these stories.

Further insights

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Shane Fitzgerald

Shane has over 22 years of financial services experience working for JP Morgan, UBS and Monash. His role includes research, analysis, dealing and investment management of the Monash Absolute Investment Fund. He is also co-founder of Monash Investors.

Expertise

ASX:LOV this time last year

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Mark Y

Thanks just interested in the competitive advantage of an accessories business like this? hard to let go of a stock that has done well, so appreciate the dilemma and the narrative to support the share price.

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