Shares in fast-fashion jeweller Lovisa (ASX:LOV) have been on a tear so far this year, having roughly doubled since January. And not without good reason — sales are growing well and the business continues to roll out new stores at a solid clip.
The question, of course, is whether it’s too late to buy.
What does Lovisa do?
Lovisa is all about providing a wide range of continually updated and affordable jewellery; so-called ‘fast fashion’. Unlike the more premium brands, the jewellery on offer is targeted more towards the impulse purchase, or for a specific event/outfit. Instead of the timeless item you might pass down to your daughter, they provide what is currently in fashion and that you may only wear a few times.
Since launching its first store in Queensland in 2010, Lovisa has since expanded to over 360 stores in 15 countries, with a mix of franchised and store owned locations. Most recently, the company is pushing further into the US and France and has opened 40 new stores in the most recent half.
Importantly, sales have grown strongly and consistently since listing on the ASX in 2014. The company is profitable and enjoys impressive margins (for a retailer) thanks to a relentless focus on efficiency. Lovisa even pays a dividend and, unlike many growth oriented companies, has managed to fund its expansion entirely organically. The share count has remained essentially unchanged over the past 5 years.
Are shares good value?
Based on the trailing 12-months of earnings, shares in Lovisa are trading on a price to earnings ratio (P/E) of approximately 33 times, well above the current market average of around 18.
For a business whose operating earnings were only 5% higher at the latest half, and with a modest decline in same store sales, that could seem a bit rich. Nevertheless, that’s partly explained by the ongoing new store roll out and the associated costs — this investment is one that takes time to bear fruit as new sites mature.
Importantly, top-line growth remains strong, and the company is exploiting a truly global opportunity. Lovisa management have a demonstrated track-record of fiscal and operational discipline and have generated metrics that are rather rare among retailers. Further, as the company grows it should, in theory, enjoy increasing scale benefits in areas such as product sourcing, warehousing, marketing etc.
Of course, retail is tough and consumers tend to be incredibly fickle. Today’s hot new brand can quickly become passe. It’s also a sector that tends to be rather susceptible top the ebbs and flows of the economy — although it’s ‘cheap and cheerful’ product range would likely hold up relatively well in the face of any stagnation (see ‘the lipstick effect’).
Although not yet widely followed on Strawman, shares are seen as close to fair value according to contributing investors. Click below to see that latest insights and valuations from the community.
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