LOV.AX - Cheap disposable fashion jewellery



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