Lovisa Earnings: Cyclical Sales Weakness, but Store Rollout Undeterred

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

At current prices, shares trade close to fair value, appropriately balancing near-term challenges and long-term earnings potential. Our short-run forecast is subdued due to rising macroeconomic pressures on consumers.

Total revenue of AUD 597 million was 5% below our forecast, accounting for most of the earnings miss. Data from the Commonwealth Bank of Australia implies Lovisa’s core customer base of millennials is curtailing consumption. In the four weeks to July 23, Commonwealth Bank cardholders aged 18-34 have reduced their debit and credit spending, while older cohorts are still spending more than in the previous corresponding period. Globally, Lovisa’s comparable-store sales momentum deteriorated materially in the last 19 weeks of fiscal 2023, on average declining by 4% based on our calculation.

This trend continued into fiscal 2024, with like-for-like sales down 6% in the first seven weeks versus the previous corresponding period. We expect flat like-for-like sales in fiscal 2024, underperforming the already impacted 6% growth achieved in fiscal 2023.

In fiscal 2024 to date, 21 gross new stores opened at an annualized run rate of over 150 stores. However, we expect the pace of store openings to moderate to around net 100 stores in fiscal 2024 and 2025, from 172 net new stores in fiscal 2023. Our long-term forecast more than offsets weaker near-term expectations. We anticipate underlying demand for fashion jewelry to rebound as inflationary pressures on the consumer subside and momentum to start building from fiscal 2025.