LOV (ASX) - Cheap disposable fashion jewellery

7 Sep 2017

 

 

 
Update
 
  • Round 1: Bought 4.45 & 4.65 - Sold 6.00

  • Round 2: Bought 7.77 - Sold 9.80 & 8.70

 

 

 

 
 
 
 
 
 
 
 
 
 
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GENERAL THOUGHTS

 

  • Cheap fashion jewellery and accessories retailer. 

  • Lovisa’s product concept of disposable fashion jewellery aimed at teenagers and young adults.

  • Attempting to emulate the early success of fashion stationery chain Smiggle

  • When Lovisa was launched it was set up as a vertically integrated retailer. It allows the company to quickly adapt its product range to changing global fashion trends and respond to customers. It's a model common among international retailers such as H&M and Zara. 

  • Lovisa's in-house design team develops the jewellery with orders delivered every six to 10 weeks from a range of overseas suppliers.

  • Lovisa has around 15,000 pieces of jewellery instore and introduces 100 new designs on a weekly basis

  • The key success drivers of Lovisa derive from ability to offer on-trend and well priced fast fashion jewellery 

  • Bought with GAP UP on 24 Aug

 

 

 

TRADING PLAN 

  • Portfolio Equity = 100k

  • Risk = 1%

  • ATR Multiple = 2

  • Recommended Quantity = 1,000 shares

  • Initial Buy = 1,000 shares @ 4.65

  • BOUGHT @ $4.45 - SOLD @ $4.59 (FEAR!)

  • 07 Sep: BOUGHT BACK @ $.4.65

  • Target: $8.0

 

ANALYSIS

 

STRENGTHS

 

  • Strong Financial Health.

- Exceeded consensus forecasts by booking double-digit revenue, earnings and profit increases. 

- Revenue increased by 16.5% to $178.7 million for the year ended 30 June. 

- Strong top line sales drove a 68% increase in EBIT to $40.7 million and a 75.5% increase in net profit after tax (NPAT) to $29 million.

Gross margins increased by 78.8% during the year

Cost of doing business (CODB) as a percentage of sales reduced to 53%

 

  • About Right Value based on:

 

- Future CF (Simply Wall) @ $4.88

- Lincoln Consensus Price Target @ $4.87

- ValueFrog: $5.00 (John Price); $8.00 (Roger Mont); $15.10 (Ben Graham); $10.29 (WB)

- Macquarie’s $5.06 price target for Lovisa over 12 months

 

  • Fast-fashion business model

- Allows it to turn over stock rapidly and quickly adapt its product mix to any changing trends.

- It is fast fashion, with the inventory being replaced up to 10% in a week.

Social media is a huge driver of disposable fashion. Rather than make products on a seasonal basis, Lovisa responds to emerging fashion trends and what’s hot on social media. If a celebrity wears a certain type of jewellery, it’s a good bet the retailer has a cheap version soon after

 

  • It is a low cost spend for its clients

- the trend of “mass-market luxury”. That is, consumers wanting fancier clothes, jewellery, cosmetics, food and travel – without the price tag. Low- and mid-priced jewellery perfectly fit the bill. 

- tends to remain relatively resilient even when consumer spending weakens more broadly. 

- The retailer has a strong customer value proposition as teenagers and twentysomething girls favour cheap, disposable jewellery (the average Lovisa item is about $20). Young girls who buy cheap jewellery, often worn only a few times, tend to make more store visits and repeat purchases

- the product does not lend itself to online shopping (Amazon), because of its low price, and the impulse nature of the purchase.   

 

  • Strong inventory management and limited sale and price markdowns have helped it maintain margins. Unlike many retailers, Lovisa has had moderate discounting.

  • LOV's  non-executive director, Tracy Blundy, is a major shareholder with 41% of the register. 

  • LOV is in a very strong uptrend. Some brokers have 12-month price targets above $5 as Lovisa rapidly expands overseas.

  • There is plenty of evidence of growth in disposable clothing, jewellery and other fashion items.

 

 

WEAKNESS

 

 

 

OPPORTUNITY

  • The long-term trend of “tweens” (girls aged 8-14) spending more on fashion is compelling.

  • Potential growth profile across international markets. 

- Operates in 9 geographies.

- They are only at the beginning of their international store roll out, which accounts for 36% of group sales.

South Africa remained Lovisa’s fastest growing market in terms of store openings, with 14 new locations in the country, alongside a company-owned pilot in Spain and franchise launches in Vietnam and Bahrain bringing the total network of stores to 288.

- There are seven Lovisa stores in the UK with 13 stores expected to be trading by August.

- Potential for a larger Northern Hemisphere expansion. 

- Lovisa plans to open between 20 and 30 stores in FY18

  • Lovisa’s FY17 Price Earnings (PE) multiple of about 14 times is not excessive for a retailer that is beating market expectations and has a growing offshore footprint.

 

THREATS

 

- Low Barriers to Entry into the fast fashion jewellery market   

Competition/ Copycats is expected to increase

- Discount department stores are probably the biggest threat, but they do not offer the same product range, in-store experience or speed to market as Lovisa.  

- Foreign exchange risk ​​ 

 

 

 

TECHNICAL

 

  • GAP UP (DAILY) & BREAKOUT RESISTANCE (WEEKLY)

  • SIGNIFICANT VOLUME

  • TOUCH UPPER BOLLINGER BAND

  • +DI > -DI

  • +DI cut above Avg. DMI 

  • ABOVE PARABOLIC SAR STOP

 

 

 

 

 

RUNAWAY GAP 

 

 

REFERENCES

 

(October 13, 2017) At $5.96, Is It Time To Sell Lovisa Holdings Limited (ASX:LOV)?

 

- Lovisa Holdings Limited (ASX:LOV) is trading with a trailing P/E of 21.5x, which is higher than the industry average of 14.6x. While this makes LOV appear like a stock to avoid or sell if you own it, you might change your mind after I explain the assumptions behind the P/E ratio.  

- At 21.5x, LOV’s P/E is higher than its industry peers (14.6x). This implies that investors are overvaluing each dollar of LOV’s earnings. As such, our analysis shows that LOV represents an over-priced stock.

- The first is that our peer group actually contains companies that are similar to LOV. If this isn’t the case, the difference in P/E could be due to some other factors. The second assumption that must hold true is that the stocks we are comparing LOV to are fairly valued by the market. If this assumption is violated, LOV’s P/E may be higher than its peers because its peers are actually undervalued by investors.

 

 

(September 29, 2017) Should You Be Content With Lovisa Holdings Limited’s (ASX:LOV) 75.3% Earnings Growth?

 

- 75.35% EPS growth, which Lovisa Holdings Limited (ASX:LOV) reported for the past 12 months, is more than impressive. Despite this strong performance, the long-term trend in earnings growth and industry’s growth as a whole are key factors for patient investors.

- LOV’s EPS growth over the past year exceeded the long-term average of 22.58%, indicating that it delivered a better earnings growth than projected by its track record. We found that LOV is on a path of improving earnings growth. 

- Over the past 12 months of recorded data, not only did LOV’s EPS growth of 75.35% beat long-term average, it also exceeded the Specialty Retail industry average of 14.89%, indicating an acceptable competitive positioning.

- Lovisa Holdings displayed a strong recent track record of earnings growth by beating both its long term historical trend and its industry average.

 

 

 

The 5 top themes in small caps right now

 

Believe it or not but Amazon won’t kill all retailers. Despite a soft consumer there are always some retail concepts that will work and the strong A$ helps gross margins. Valuations in this segment of the market are also supportive. Stock that best represents the theme: Lovisa (ASX:LOV). Lovisa is mature in Australia but has a long runway for growth in the UK and Western Europe. With incredible returns on capital and a balance sheet that can support their growth the team at QVG has never been so excited about costume jewelry.

 

 

Lovisa buoyed by expanding store network 

 

Australian-based events were becoming less important to the company as the proportion of offshore stores to local ones reaches 50 per cent.

  • Revenue increased by 16.5 per cent to $178.7 million for the year ended 30 June on the addition of 38 stores to the company’s network, while same-store sales increased 10.3 per cent.

  • Strong top line sales drove a 68 per cent increase in earnings before interest and tax (EBIT) to $40.7 million and a 75.5 per cent increase in net profit after tax (NPAT) to $29 million.

  • Gross margins increased by 78.8 per cent during the year, as currency headwinds normalised, prices increased and markdowns became less frequent.

  • Cost of doing business (CODB) as a percentage of sales reduced to 53 per cent, despite growth in stores on efficiencies in labour, distribution and occupancy.

  • Capital expenditure came in at $8.8 million, impacted by continued international expansion, although a net cash position of $11.0 million was declared at years end.

 

  • MONASH INVESTORS - AUGUST 2016 @ $2.5

Lovisa is a stock that the Fund holds that has a long runway of store roll out opportunities ahead of it. Lovisa retails low cost jewellery as fast fashion. The customers are principally young women who want the latest accessories to wear with their clothes. Lovisa has addressed this market
by designing its own product, based on the latest trends from social media and fashion shows
.

 

Lovisa aims to replenish 15% of their inventory each week with new designs so there is always something new to see in store. The stores have a relatively small footprint, yet high turnover.

This contrasts with fashion stores that are focusing on a wider demographic with a wider range of price points. Competitors often have accessories as a smaller part of apparel stores but do not specialise in it. The speed of Lovisa’s inventory cycle is unique for a specialist jewellery company as some competitors have inventory cycles of 3 months plus. However, Zara operates with a similar inventory cycle to Lovisa in the apparel sector.

 

The business model was rolled out rapidly in Australia where they have 145 stores and it is mature. However, they are only at the beginning of their international store roll out, which accounts for 36% of group sales. Locations include New Zealand, South East Asia, the Middle East and South Africa. Critically, all of these international operations have a similar return pro le as Australia, demonstrating that this store format works across di erent international markets. They have 4 stores in the UK, and this is to be a particular focus of growth going forward following the success of their pilot program, which only started in November 2015. The payback on a new store is between 4 and 8 months, with same store sales growth of around 4%pa.

 

Given these exceptional returns on invested capital Monash Investors’ view is that there is little doubt that Lovisa’s management and Board will materially expand its store network. The size of the UK market is such that the store rollout in this market alone could easily double pro ts over time, and then there is Europe and the USA to consider. With Lovisa trading at a valuation discount to other retailers and with a dramatically greater growth runway, Monash Investors’ view is that the there is signi cant upside to the share price.

 

Lovisa (ASX: LOV), a vertically integrated retailer of low priced jewellery. It is fast fashion, with the inventory being replaced up to 10% in a week.  

 

First, it is a low cost spend for its clients, so it tends to remain relatively resilient even when consumer spending weakens more broadly.  

 

Second, the product does not lend itself to online shopping, because of its low price, and the impulse nature of the purchase.

 

Finally, it is rapidly rolling out new stores and has a strong track record of quick payback as it does so.

 

Lovisa is trading on an analyst consensus PE of 13x for FY18 with double digit growth expected over the next few years, being a combination of like for like increases and store openings. In the past it has accelerated its growth through bolt on acqusitions.

 

Lovisa (ASX:LOV), a retailer of fashion jewellery, delivered a strong result. Same store sales were up 12.6% during the half, with revenue rising 21% and EBITDA improving 48%.  

 

Importantly this increase in pricing also drove sales growth in the half, while the number of units sold remained stable. As a result management guided to slower same store sales growth in the second half of the year.

 

Growth in stores from the current 268 is likely to take up the slack however; overseas expansion plans remain robust with an aim to deliver close to 30 new stores this year.

In the world of retailing new store roll outs can be a powerful driver of returns. Lovisa has a proven retail format that produces exceptional returns on invested capital, and with a long runway of roll out opportunities its outlook is exciting.

 

Lovisa retails low cost jewellery as fast fashion. The customers are principally young women who want the latest accessories to wear with their clothes. Lovisa has addressed this market by designing its own product, based on the latest trends from social media and fashion shows.

 

Lovisa aims to replenish 15% of their inventory each week with new designs so there is always something new to see in store. The stores have a relatively small footprint, yet high turnover.

 

The speed of Lovisa’s inventory cycle is unique for a specialist jewellery company as some competitors have inventory cycles of 3 months plus. However, Zara operates with a similar inventory cycle to Lovisa in the apparel sector.

 

They are only at the beginning of their international store roll out, which accounts for 36% of group sales. Locations include New Zealand, South East Asia, the Middle East and South Africa. The payback on a new store is between 4 and 8 months, with same store sales growth of around 4%pa. 

 

The size of the UK market is such that the store rollout in this market alone could easily double profits over time, and then there is Europe and the USA to consider

 

 

 

 

 

 

 

 

 

 

 

 

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