Universal Store’s share price plunges after trading update
Sentiment remains extremely tentative. Good news is met with share price gains of one or two per cent but disappointment is met with market capitalisations falling by a quarter or more in a single day. That sentiment met Universal Stores (ASX:UNI) last week, as it released its trading update, which also offered insights into consumer behaviour and guidance for its Full Year 2023 result.
Another downgrade at Universal Stores suggests the consumer slowdown may down be spreading to consumers without mortgages. It’s worth remembering June and July are expected to be the peak months for $360 billion of fixed-rate mortgages – written at less than two per cent per annum – maturing and rolling onto variable rates of approximately six per cent.
According to Universal Stores, its “strategy is to deliver a frequently changing and carefully curated selection of on-trend apparel products to a target 16-35-year-old fashion-focused customer.” Because of this most analysts believe the company’s customers are largely insulated from changes in mortgage rates for borrowers.
It seems more than a handful of UNI’s customers must have mortgages because the company noted in its update, “trading conditions observed throughout April and May to date have further tightened, indicating that some customers are reducing their spending. The Group expects this subdued environment to continue for the balance of FY23 and into FY24.”
UNI also noted a delay to its store opening path, with four new store openings originally slated for the second half of the current financial year ending June 30, now expected to open in Q1 FY24.
The company said it’s “on track to deliver record sales in FY23, and material growth in earnings before interest and taxes (EBIT) compared to FY22”, adding, “despite a deteriorating macro environment, and increasingly clear signs that the youth customer is seeing pressures on their discretionary spending levels, FY23 is on track to be a year where the Group delivers significant financial and operational milestones”, including record sales.
But despite the record revenue, the company’s FY23 revenue guidance of $258-261 million is between five and 10 per cent below analyst estimates at the midpoint, effectively amounting to a downgrade. EBIT guidance of $39-41 million is as much as $11 million below some analysts’ estimates at the midpoint. Back in February, when the company announced its first-half results, UNI reported a strong start to second-half sales across all brands. Universal store sales were up 13.6 per cent year-on-year and store openings were ahead of expectations.
Given analysts all assumed UNI’s target market to be more resilient than the average consumer, a harsh share price reaction is unsurprising. While the company will release its full-year results for the 12 months ending 30 June 2023 on 25 August 2023, investors aren’t waiting. Universal Store’s share price fell 25% per cent on the day of the trading update.
Investment bank Barrenjoey estimates 67 per cent of Universal Store’s cost-of-doing-business (CODB) is made up of rent and store wages. Store wages are estimated to be 15 per cent of sales and rent is estimated to be 14 per cent of sales. In the past, healthy like-for-like sales growth and ultra-low inflation have meant the CODB has barely moved. But now, with inflation emerging in rent and wages, these significant cost components will deliver negative operating leverage, especially if the company has seen a medium-term peak in gross margins.
A business that generates sales with a high gross margin and low variable costs has high operating leverage. Lower gross margins and rising variable costs for UNI would disembowel that operating leverage.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
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