At Monash Investors we look for recurring situations and patterns of behaviour to help inform our investment decisions. One situation is the drive by Boards and Management to exploit high returning opportunities in their core business. In the world of retailing new store roll outs can be a powerful driver of returns. Lovisa has a proven retail format that produces exceptional returns on invested capital, and with a long runway of roll out opportunities its outlook is exciting.
Lovisa retails low cost jewellery as fast fashion. The customers are principally young women who want the latest accessories to wear with their clothes. Lovisa has addressed this market by designing its own product, based on the latest trends from social media and fashion shows. Lovisa aims to replenish 15% of their inventory each week with new designs so there is always something new to see in store. The stores have a relatively small footprint, yet high turnover.
This contrasts with fashion stores that are focusing on a wider demographic with a wider range of price points. Competitors often have accessories as a smaller part of apparel stores but do not specialise in it. The speed of Lovisa’s inventory cycle is unique for a specialist jewellery company as some competitors have inventory cycles of 3 months plus. However, Zara operates with a similar inventory cycle to Lovisa in the apparel sector.
The business model was rolled out rapidly in Australia where they have 145 stores and it is mature. However, they are only at the beginning of their international store roll out, which accounts for 36% of group sales. Locations include New Zealand, South East Asia, the Middle East and South Africa. Critically, all of these international operations have a similar return profile as Australia, demonstrating that this store format works across different international markets. They have 4 stores in the UK, and this is to be a particular focus of growth going forward following the success of their pilot program, which only started in November 2015.
The payback on a new store is between 4 and 8 months, with same store sales growth of around 4%pa. Given these exceptional returns on invested capital Monash Investors’ view is that there is little doubt that Lovisa’s management and Board will materially expand its store network. The size of the UK market is such that the store rollout in this market alone could easily double profits over time, and then there is Europe and the USA to consider. With Lovisa trading at a valuation discount to other retailers and with a dramatically greater growth runway, Monash Investors’ view is that the there is significant upside to the share price.