Why the Lovisa share price has more than quadrupled since late March 2020
Brett Blundy certainly has a knack when it comes to backing retail concepts and Lovisa Holdings Limited (ASX: LOV) – a leading specialist fast fashion jewellery retailer – has grown to 570 stores across 20 countries in the 11 years since its launch.
In the period from the COVID-19 pandemic lows in late-March 2020, the LOV share price has more than quadrupled from $4 to the current $21. After recording revenue of $288 million in the year to June 2021, LOV has recorded like-for-like sales growth in the first 20 weeks of Fiscal 2022 (excluding those stores that were temporarily closed) of 25 per cent.
The recent appointment of Victor Herreo, successor to the long-serving Shane Fallcheer, as the Global CEO will be an interesting transition for the company. At the Annual General Meeting earlier this week, the Remuneration Report was understandably voted down, however Victor became the possible recipient of bonuses aggregating to $68 million (at the top end) if the company’s Earnings before Interest and Tax (EBIT) hits $105 million in Fiscal 2022, $130 million in Fiscal 2023 and $155 million in Fiscal 2024. (At the bottom end, if EBIT is below $65 million, $90 million and $95 million, respectively, then there is no bonus). For context LOV’s Fiscal 2021 EBIT was $42.7 million, however with total sales growth jumping by 46 per cent in the first 20 weeks of Fiscal 2022 there is certainly strong near-term momentum locked in.
As the Founder, Non-Executive Chairman and 40 per cent shareholder, Brett Blundy is unequivocally backing Victor Herreo to double LOV’s store numbers to 1,150 by Fiscal 2025; and simultaneously increase the EBIT margins from the Fiscal 2021 level of 14.8 per cent. Victor had 13 years at Inditex (Zara, Massimo Dutti), including Head of Asia Pacific where he oversaw the roll out of 800 stores across China and India. More recently, he was CEO of Guess, which has 2,000 stores across 90 markets and annual revenue of US$5 billion.
The question is whether these expansion plans can be internally-funded, whilst delivering a targeted at least $800 million revenue and EBIT margins approaching 20 per cent over the next 3-4 years. Based on Victor’s experience, the market is sold. With a current market capitalisation of $2.26 billion, it seems that very strong momentum in internally funded growth of store numbers, sales and EBIT has largely become the consensus view.
The Montgomery Small Companies Fund owns shares in Lovisa. This article was prepared 24 November 2021 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Lovisa you should seek financial advice.