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One ASX retailer to pick up if markets tumble
Fast fashion jewellery shouldn’t be a lucrative market. An abundance of competitors mixed with constantly changing trends means any economic returns are typically competed away.
Yet Lovisa Holdings Ltd (ASX: LOV) has grown sales by 30% per annum for the past decade, with its store count increasing 12-fold. Over 70% of its outlets now reside outside Australia, with an ambitious plan to take its success across Europe and North America.
Lovisa’s outperformance stems from a laser focus on the product. In-house merchandisers rigorously analyse the latest trends, with 100 new styles launched weekly. Design, manufacturing and logistics are vertically integrated. As a result, it takes just 8-10 weeks to bring a product to market while retaining gross margins above 75%.
Unlike other retailers, Lovisa doesn’t suffer as much from seasonality. What customers want in California, is the same as in London and Sydney. As a result, inventory turns over twice per year, reducing the risk of write-offs.
The business deliberately sticks to its knitting, choosing not to go into new fashion verticals. Once a market is capped out, such as Australia, it takes the same strategy abroad rather than saturate an existing region.
Like Chemist Warehouse, Lovisa maximises its revenue per store by choosing high footprint areas in AA/A/B grade shopping centres. While this can be expensive, rent costs are kept low by leasing small and unattractive locations other retailers usually shun. Expenses are also controlled via centralised decision-making and back-office functions in Australia, meaning new markets can be deployed quickly with minimal capital.
The company has a robust balance sheet, with no debt and $55 million cash on hand. Management is led by retail doyen Brett Blundy as Chairman, who owns 41% of the company. Founder and CEO Shane Fallscheer recently moved into a non-executive director, with Victor Herrara taking the helm as CEO. Previously, he held senior roles at Inditex (owner of Zara), the pioneers of fast fashion.
The big concern around Lovisa – and why its share price has fallen 30% in 2022 – is the dour economic outlook. Retail is already a tough industry. Add in falling discretionary spending from higher interest rates and it could go south fast. Fortunately, Lovisa will benefit from what is known as the “lipstick effect”.
When the economy hits the fan, the theory is that consumers look for less costly luxury goods and services. For example, instead of spending big on a new necklace, a customer chooses earrings, which costs less.
The customer feels rewarded, but the monetary outlay is smaller. As a result, Lovisa should fare better than most other retailers in a weakening economy.
The other notable risk is expanding abroad. Entrenched competitors exist in North America and Europe. Yet very few have a record of profitability. Claire’s, which has 2,300 stores, entered Chapter 11 in 2018. Accessorize fell into administration in 2020 and is rumoured to be insolvent in 2021. Beeline is withdrawing its retail footprint in Europe, selling 114 stores to Lovisa for just €70 in 2020.
Lovisa could very well be the exception. Management has shown they will walk away from unprofitable regions, exiting Spain in 2020. But the results of competitors suggest expansion will be no walk in the park.
Consensus earnings estimates expect $0.49 earnings per share in FY22, placing the business on a profit multiple of 30. In a normal economic backdrop, this could well be an attractive entry point for those willing to back the global rollout.
But should consumer spending slow and retail shares take a tumble, Lovisa is the exact type of high-quality company investors will want to be picking up.
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