Lovisa Holdings Limited (LOV) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Lovisa Holdings Limited FY '21 Results Briefing. [Operator Instructions] I would now like to hand the conference over to Mr. Shane Fallscheer, Managing Director. Please go ahead.

Thank you, and good morning, everyone. Thanks for taking the time to dial in. On the call today, you have myself, Shane Fallscheer, Managing Director; and Chris Lauder, our CFO. As you're aware, we published our full year results to the ASX this morning, and we would like to talk you through them. I will now do a page turn through the presentation, and we're happy to take any questions at the end. So if we turn to Page 5, we can talk through the detail of our results. We had a challenging start to the financial year with markets going through various stages of temporary closure due to the impact of COVID. But as we move through the year, we saw an improvement in sales to deliver total sales growth of 18.9% year-on-year, and this reflects growth in the store network, whilst being offset by a significant number of trading days lost due to temporary store closures caused by COVID across all markets. Comparable store sales for the year were up 8.1% as compared to FY '20 after delivering negative 4.5% for the first half, with strong positive comps for the period throughout the rest of the year. Our cost of doing business was well managed, finishing at 56% for the year, delivering a full year EBIT, which was 39% up on the prior year to $42.7 million. This is excluding the impact of the new lease accounting standard. For the sake of clarity, all of the numbers we will talk to today and included in our presentation are after removing the effect of the new accounting standards so that they are more easily comparable with prior years. Our global rollout remains a key focus with the net 109 new stores opened for this year. And this is including the 87 stores acquired and converted to Lovisa as part of the beeline acquisition during the second half. This is assisted in fast-tracking our European expansion and complementing the continued growth in our U.S. network with 63 stores trading in that market at year-end. Cash flow from operations was $66 million and cash conversion at 110%, reflecting tight cash flow management and inventory control as well as the impact of continued rent deferrals. At year-end, we held $36 million of cash and no debt. As a result, the Board has announced a final dividend of $0.18 per share to be paid in October. Now if we turn to the financial overview on Page 6. As I noted earlier, revenue for the period was up 18.9%, with comparable store sales up 8.1% on FY '20. Gross margins were slightly lower, with CODB well managed to come in well below last year at 56% to sales, and this resulted in our EBIT being up 39.4% to $42.7 million. Pleasingly, despite the continued disruption to our business throughout this period, we were able to finish the year with a very strong balance sheet position. If we turn to Page 7, we have tried to make the impact of COVID on our store network clearer for you. As you can see, our store network was impacted by a number of temporary closures during the period with the Victorian market closed for approximately 3 months from August to October, followed by closure periods in the U.K. and France during the period from November to April. As you would be aware, we have unfortunately seen a return of lockdown since the end of the financial year in our Australian and New Zealand markets that I'll talk to later. If we turn to Page 8. We've spoken to the sales impact from COVID. And whilst our sales for the first half were down overall, we did see an improvement in our sales trend through the second half, delivering positive comparable store sales for the financial year and overall sales growth of 18.9%. Pleasingly, as you can see, our sales trajectory has returned to the level seen prior to FY '20 despite the continued challenges faced during the current year. As we've said previously, the store closures, we have had to deal with over the past year have given us a strong impetus to drive online and the investment made in our digital platform has helped us to offset some of the lost sales from our physical stores, with total online sales up 178% on the prior year. On Page 9, you will see our sales by region. The first quarter of the financial year was heavily impacted by temporary store closures in Victoria, Australia as well as weakness in most global markets. However, with Victorian stores reopening in the second quarter and most other markets showing improved performance, we saw positive comparable store sales after the first quarter as mall traffic began to return to normal. This was then again negatively impacted in the Northern Hemisphere as COVID cases began to increase and temporary store closures were again put in place with the U.K. in particular, suffering from closures in November and then again in the period from late December through until mid-April. The French market also suffered from an extended temporary closure period from February through to May, and Malaysia was more recently temporarily closed in June this year. These closures had a significant impact on trade. However, pleasingly, sales improved after the first quarter and have generally been stronger across most markets when stores were able to open for trade. In particular, the Australia and New Zealand region has grown total sales for the year by 26.7% and South Africa growing by 19.3% on FY '20. Sales in our Asian markets continued to be slow to recover as a result of low tourism and local movement restrictions in place, resulting in lower foot traffic throughout the mall. The increased store network in the U.S. and the loosening of restrictions across the course of the year has also helped that market grow sales by 83% on the year prior. Turning to Page 10. Gross profit was $221 million at a 77% gross margin, slightly down on last year, which is a solid result given the impact of increased freight costs during the year, combined with the decision to maintain high levels of inventory provisioning at the end of the year as a result of the current challenges being faced with temporary store closures. If we turn to Page 11, we'll talk to our cost of doing business. A strong focus on store wages during the year enabled us to deliver a lower store wage percentage than the year prior, which was pleasing, given the number of temporary store closures that we faced throughout the year. A tightening of support cost structures implemented in FY '20 to combat COVID, also helped us to keep our cost of doing business under control. And this also helped to offset significantly higher logistics costs that we both have and are being challenged with as well as the impact of one-off costs associated with the integration of our beeline acquisition. Additional to this, we've been able to negotiate improved rent terms as well as rent abatements across a number of our stores during this period that also contributed to our solid cost of doing business outcome. I'll now hand over to Chris Lauder, our CFO, to talk through cash flow and the balance sheet.

Thanks, Shane. Turning to Page 12, you'll see that despite the ongoing disruption to our business and associated lower profits during the period. And cash flow was again strong with cash from operations before interest and tax of $66 million for the year, and operating cash conversion of 110%. We were able to again keep tight control over our working capital with inventory well managed despite significant investment made in inventory to support the conversion of beeline stores to Lovisa in the second half with stock purchases to support our new warehouse in Europe and Online 3PLs. We also saw continued rent payment deferrals in some markets arising from situations where we have agreed such deferrals of our landlord as well as where rents have been withheld or moved to being paid in arrears rather than in advanced, pending finalization of abatements. Capital expenditure for the period was $14 million, predominantly from the conversion of beeline stores to Lovisa during the second half as well as new store fit-outs and refurbishments on existing stores upon lease renewal. This represents a reduction on prior year CapEx spend despite opening more stores overall, with 22 full new stores built for the year compared to 66 stores last year, with the remainder of store growth coming from the beeline acquisition in Europe with the 87 stores converted, requiring significantly less CapEx spend per store than a full store fit-out. In addition to the above, part of the beeline acquisition, we received EUR 11.8 million in cash under the terms of the acquisition, which, combined with the items I mentioned earlier, helped to deliver closing net cash of $36 million, a $15 million increase on the position of June 2020, with no debt at the end of the period. Turning to the balance sheet on Page 13. You can see that it remains strong, which has allowed the Board to announce a final dividend of $0.18 per share payable in October, franked at 50%, taking the full year dividend to $0.38 per share, reflecting the strong cash flow position for the year. You'll recall that in prior year, the Board elected to defer the payment of the interim dividend, which was ultimately paid in September 2020 with no final dividend paid in relation to FY '20. So it's pleasing that our strong balance sheet position has allowed us to return to the payment of dividend and distribute surplus cash generated during the year to shareholders. As we've said previously, the Board will continue to assess dividend levels each half year and determine the appropriate level of dividend based on profitability, cash flows and future growth CapEx requirements in the context of prevailing economic conditions. The Board does not currently have a specific dividend payout ratio, and we'll continue to base dividend on the cash flow needs of the company and the structure of the balance sheet. I'll now hand back to Shane.

Thanks, Chris. If we turn to Page 14, a quick update on store numbers. The key driver of future growth for Lovisa continues to be in our international rollout. With 72% of our store network now trading outside of Australia. We finished the period with 544 stores trading with the net 22 new stores opened for the year in our existing markets, plus 87 new stores via the beeline acquisition in Europe that have now all been converted and this trading as Lovisa store. We are very excited with the addition of 6 new European markets, providing a strong base for further growth in the region on top of our existing U.K. and French markets. The rollouts in the U.S. and France continued throughout the year. And whilst this slowed as a result of the COVID disruption, we now have 52 stores trading in France with 9 new stores opening in the year in addition to the 22 stores acquired from beeline. In the U.S., as at end June '21, we are now trading from 63 stores across 15 different states, and we will continue to open the stores in this market. During the financial year, the contract with our Vietnamese franchise partner was terminated and the stores closed. We continue to see this market as an opportunity for Lovisa, and we'll continue to seek further opportunities, and hope we don't forecast anything in this market to take place in the short term. The pace of our organic rollout in existing markets slowed during the year as a result of the COVID disruptions and the focus on landlord negotiations on our existing portfolios. Focus more recently has returned to new opportunities, and we continue to work closely with landlords in relation to new stores in all markets and appropriate rent structures to manage current economic risks. Turning to Page 15. I'll talk to the progress we have made in recent times in relation to the digital business. The focus on our digital capabilities accelerated during the initial COVID lockdown period in FY '20, delivering strong sales growth, which has continued throughout FY '21, with total sales growth of 178% for the year. We now have website servicing all of the company-owned markets we operate in, including the new European markets we've entered recently via the beeline acquisition. We have also improved our customer focus with 24/7 live chat, improved social inflow programs and improved order fulfillment capacity with the implementation of dedicated online fulfillment warehouses in the U.K., U.S.A. and South Africa. And our new European warehouse that we established in Poland to service our European stores and digital customers. The digital channel remains an important part of our global strategy, critical to providing our customers with the full range of our shopping options that they require. We continue to invest in support structures to drive ongoing growth in this area and remain focused on maintaining the profitability levels of our online sales. Turning to Page 16. I will now talk in more detail around the beeline acquisition we announced in November. As previously announced, the acquisition was due to be completed between March and May 2021, which occurred as planned, albeit with most of the acquired markets in lockdown at time of handover. This acquisition brings us 6 new European markets, being Germany, Switzerland, Netherlands, Belgium, Austria and Luxembourg as well as acceleration to the existing rollout in France. The purchase price for the shares in the beeline retail companies was EUR 70, with $11.8 million -- sorry, EUR 11.8 million of cash in the acquired business at handover, effectively meaning that beeline paid us that amount to take over the store network. Of beeline's 114 stores at the data signing the agreement, we've converted 87 stores to Lovisa with the remaining stores already closed as they weren't deemed suitable for Lovisa to trade. At the time of handover, and as a result of COVID lockdowns in most of these markets, we experienced delays in being able to trade these stores as well as disruption to normal trading once these stores opened. However, more recent sales performance has been pleasing as restrictions have begun to relax. To manage the larger European business, we have strengthened our support team in both the Melbourne support office and in our new support office in Cologne, Germany, to provide localized support, and we envisage that this support office in Germany will continue to grow as we expand across Europe. The acquisition was cash flow positive immediately with the acquired cash of EUR 11.8 million, offsetting our implementation costs with aggregate CapEx and working capital investment of around EUR 6 million. This transaction provides a strong base to accelerate growth in Europe, taking our European store network to 158 stores, and we're excited by the opportunity this provides us to expand into a number of new markets at pace. On Page 18, I'll talk to the trading update and outlook for the coming financial year. Trading for the first 8 weeks of FY '22 has seen continued strong sales in markets where COVID-related restrictions are low and stores are able to trade with comparable store sales for this period at positive 37.8% on FY '21. Total sales for this period are up 56% on the same period year-on-year. The first 8 weeks of this financial year have again been impacted in some markets with temporary lockdown, with 106 stores currently closed, including 82 in Australia and 24 in New Zealand and the Malaysian market only recently reopening after a 10-week lockdown. We continue to focus on opportunities for expanding our store network. However, progress in our new store openings may be slowed in the remainder of calendar 2021 due to logistics capacity challenges around the world. These capacity issues may restrict the volume of new store fit-outs that were required to be shipped around the world to open our new stores. Our store network is currently at 551 stores, and our balance sheet remains strong with available cash and debt facilities supporting continued investment in growth. As a result of the current uncertainty in the global economic environment, we are not in a position to provide any further information in relation to an outlook for our business. So in summary, on Page 19. Our sales levels have shown a solid recovery since the first quarter. However, some markets continue to remain heavily impacted by COVID, and most are subject to some form of ongoing disruption. We are pleased with the progress we have made with our digital business, increasing contribution from online sales, and we're also able to control our cost of doing business well during the period, which has enabled us to continue to invest in building a platform for future growth across both physical and digital channels. Our international expansion continued through the period with 22 net new stores opened on top of the 87 new stores acquired as part of the beeline deal, allowing us to accelerate our European expansion, enabling us to launch into 6 new markets all at once. Our continuing strong balance sheet position has allowed for the announcement of a final dividend of $0.18 per share and leaves us in a strong position to again move forward with our growth plans. So with that, I want to thank you for your time today, and we are happy to take any questions.

[Operator Instructions] The first question comes from Sam Teeger from Citi.

Can you hear me okay?

We can hear you now, Sam.

How many stores have you opened to date in FY '22? The one in a [ bit months, the last 10 ]...

We have 551 now, and we had 544 at the end of the year.

7.

Okay. Cool. And then in Note B7 of the accounts, what's driven a doubling of accrued expenses to $20 million, is it fair to assume that's primarily rent deferrals, which is still due? And then on the subject of just landlords, what proportion of abatements have you extended tenures and roughly what would be -- how long the extensions are?

I can cover the first part. I'll let Shane cover the second part. So the accrued expenses, yes, you're right. A big chunk of that is accrued rent, but it's also got a bit in there from the beeline acquisition that what we've taken on as part of those companies, so just that natural increase there, but a big chunk of it is rent that is accrued, still got to be paid.

And Sam, I think your question was how much of the abatements are ongoing? Is that right?

I just wanted to get a sense of, I mean, given there's some deferrals, I mean, what -- of the stores you've come to terms with landlords? What's the mix between the abatements and deferrals and where you've agreed on abatements? What proportion of them have you extended at least 10 years and roughly how long would the extensions be?

Yes, there's probably no easy answer to that with the amount of countries we operate in because every country has basically been dealt with individually. I'm not going to be able to give you exact numbers, but very roughly speaking, very few leases have been extended to gain any rent subsidies or rent deferment. So we've tried to deal with everything within the current lease format. And again, conscious that the -- as we're probably all feeling that we are surprised and disappointed that we're still in the middle of COVID nearly 2 years in, we've been reluctant to extend any leases on current terms to ensure that the business is in the best positioned to continually move with the challenges that are presented with it. So to achieve some abatements in the U.K., we moved some leases out. But as a general term, we've basically done deals under current terms and structures. And then as the markets have returned to normal, most of those have dropped away, needless to say that we're probably back at the table in Australia or New Zealand with the challenges that have taken place in the last couple of months.

Got it. And then just last question for me. I think the EUR 11.8 million of grant income, what proportion relates to Australia?

Without breaking it down by country, Sam. So...

Is it fair to say the bulk is Australia?

I mean we've got a reasonable amount of other countries around the world. Because obviously, some of the other markets were in lockdown for periods of time. I mean most of that was always the first half. But yes, I mean, there's obviously a sizable part of that number was Australia, but we're not going to break that down.

The next question comes from Mark Wade from CLSA.

You've entered a lot of new countries during the period. First of all, curious to know what you've seen across the customer response to that. I mean other than the straightforward with online sales, but just how those customers responded and how we've been able to improve the awareness in those regions. The reason I ask is you look at on the Google trends figures and I mean it's just gone off the scale in places like the U.S. and parts of Europe that have reopened. So something seems to be working. Can you talk us through what you're seeing on the ground?

Sure. Just to recap, as we entered these new markets, disappointingly, we sort of took possession of the -- we took possession of those stores through March, April, May. And at that stage, we negotiated the contract, thought we'd be able to sort of open the stores, but we opened those stores into lockdown in a number of markets. So technically, we took over the stores, and they were forced to remain closed. And then it's been reasonably well documented the different challenges in most of the European markets. They've had COVID and dealing with the restrictions differently. So probably what I'm trying to articulate there is some market bounced out when we opened well, and they were the ones that probably had less impact over COVID. Luxembourg, Belgium came out strong. France came out strong. But then sort of different ways of COVID have sort of slowed that. So in general terms, our typical customer around the world is the same around the world, which is what's led to the positive response that Lovisa sees in each new market that we open. So the girl in her 20s sees that a new fashion jewelry store full of beautiful pieces of jewelry, then they're attracted into that store as they are anywhere else in the world, and we're getting very similar sales trends and responses. We do see some mix in sales patterns for different markets and what the customers are buying. As we ebb in and out of lockdown -- as we came out of lockdown, we saw a strong surge in higher fashion items, bridal items and all of the accessories that you would imagine, our customers are buying when they can start getting out and socializing again. And then as we get closer to lockdown, we see the trends move back towards more sort of everyday wear products. So -- and those trends are reasonably consistent around the world. I suppose the summary of your question is the thing that has seen Lovisa succeed in the markets that we've entered, it's the customer base. Being female customer attracted to our stores and wearing fashion jewelry in all the markets that we operate in. So we're seeing similar positive result.

Okay. Fair enough. And just on the other side of the coin, is just how you've been under-managed internally, just the complexity as you're now approaching 20 countries. You mentioned the German support office. I'm just curious to really delve into how -- what kind of processes are in place in that office to really help manage the expansion?

Yes. Yes. So probably the 2 big parts that we had to establish at pace is we established a warehouse that is managed through a third-party vendor being Schenker, which is one of the world's largest logistics providers. So we established a warehouse in Poland, which is one of the lower cost markets that enables us to get product within to our stores within 24 to 48 hours across Europe. So that was established to support the back end of being able to deliver product into our stores in a sort of just-in-time format. That was one of the first triggers. And then second to that, being that the beeline business was based in Cologne, Germany, which is a reasonably central city to get across Europe. We base -- and we took over some of the beeline team we elected to basically pick up where they left off. So that helped us establish sort of a cornerstone support structure in Germany to support Europe. And we've built off that. So we've hired a senior executive or a number of senior executives that are now based in Cologne, Germany. Some of our teams have moved over to Cologne, Germany, moved out of the U.K., some expats that we had living there. So we're sort of doubling down our resources in Germany, and we foresee at least for the next year or 2 that we'll continue to build out that office in Cologne to be a support structure for Europe. So things like payroll, finance, loss prevention, recruitment, HR practices that typically, when the markets were smaller, were being largely managed out of Australia. Those divisions have all been moved over to Europe and are being managed out of Europe under a European team. So we are starting to see some decentralization of some of our resources as we get bigger because, again, as much as most of those countries fall under the EU, they've all got their nuances, especially in HR and management of teams and so on. So we're doing that out of Germany.

Okay. Well, I really appreciate those insights guys and impressive recovery. Well done.

Thank you.

The next question comes from Julian Mulcahy from E&P.

Just one question -- a couple of questions. First, on rent. Do you -- are you expensing at the current agreements although you might be holding back rent because of some negotiations going on?

Yes. Unless we've signed a deal for a lower rent or some sort of abatement, we recognize the full amount of rent under the lease.

Right. Okay. And in terms of the freight, high freight costs, I mean you have historically air freighted goods around. It's just -- is it getting access to flights? Or is there any kind of dramatic increase in actual pricing?

Both. So both shipping and air. Look, I mean, the positive for Lovisa is being that we fit a lot of product in a box and/or [ parador ] and/or container. The cost per piece inflation at the moment is real. But due to our low-cost of goods, we can absorb that. And again, we're moving the product around, we're moving a lot in a small metric volume of space. But basically, it's more expensive to get our product on planes and significantly more expensive to move product in both time and cost through shipping containers. And I mean that's all well documented across all industries. So there's a cost issue. And some of those containers are costing us 3 and 4x as much as usual. But on top of that, the time issue that there's just huge backlogs imports around the world. So the delay in getting things into containers and/or on plane and getting them off the shipping is worse. But there's some real challenges there that the world -- from everything we're seeing and reading and analyzing is that this will run into China in the year before we see any real catch up, I suppose, around the world.

Okay. Cool. Just on the still rollout. I mean I get the logistics issues at the moment. But over the next sort of 12 to 18 months, is it going to be mainly in the U.S.? Or are you ready to also start expanding the beeline network?

So we're actively -- we've got leasing teams on the ground in the U.S. and Europe, and we're actively looking at sites in all of the current markets that we operate in. So yes, we actively engaging in new deals in all of the beeline market, albeit that -- I mean France is a known market to us. We're filling in the gaps between sort of Austria, Belgium, Luxembourg, Switzerland. Germany is another large market that will do -- will probably go slightly slower in Germany just to ensure because there's a big footprint of stores that has potential, but we just want to make sure we understand the market before we sort of go to a vast rollout there. So we're proceeding with caution in the new markets, continually filling in France and moving as fast as practical in the U.S.

Could the rollout over the next 12 to 18 months, do you think?

Sorry, I missed that question.

Will the U.S. account for most of the rollouts over the next 12 to 18 months?

Yes. In the next 12 to 18 months, off the top of my head, probably 60 -- somewhere between 50% and 70% split would be U.S.

The next question comes from Sam Haddad from Bell Potter Securities.

Just on the store rollout. I know you have not providing guidance. Can you give any flavor on what a sensible profile would look like, given all the moving parts in terms of freight cost constraints and things like that and it sounds like the landlords are looking more focused on new sites. So just looking on 2 sides of the equation, what you've seen in terms of your pipeline?