Lovisa Holdings Limited (LOV) Earnings Call Transcript & Summary

Good morning, and welcome to the Lovisa Holdings Limited Full Year FY '22 Results Briefing Conference. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. Thank you. I'd now like to welcome Mr. Victor Herrero, Chief Executive Officer, to begin the conference. Mr. Herrero, over to you.

Good morning, everyone, and thanks for taking the time to dial in. On the call today, we have our CFO, Chris Lauder and myself, Victor Herrero. As you are aware, we published our full year results to the ASX this morning, so we would like to talk to you through them. I will now do a page turn through the presentation, and we are happy to take any questions at the end. Before we get to the discussion on the results, I would like to start with a recap of the business strategy included on Slide 4, which set out the keys of our success to date and our focus for the future. Our strategy continues to be focused on the continued global expansion of our physical and digital store network and ensuring that we are investing ahead of the curve to be able to execute on our growth objectives in both existing as well as new markets. It has been amazing to get to know this business and the people that make it what it is and the financial results achieved for fiscal year '22 are evidence of the strength of the team and the amazing potential of the business. If we turn to Page 5, we will talk through some of the detail of FY '22. Our sales performance was a highlight with the strong sales momentum from our first half able to be maintained throughout the year. Delivering full-year comparable store sales of plus 19.9% after plus 21.5% in the first half. This combined with the benefit of net 85 new stores opened for the year resulted in total sales for the year being 59.3%, up on FY '21. Just to remind all of you, fiscal year '22 is a 53-week year for us. So the growth percentage I refer to will be our 53-week fiscal year '22 versus 52 weeks on FY '21, unless otherwise note. We saw a strong improvement on our gross margin in the second half to take it to 78.9% for the year. And combined with tight cost of doing business management, this helped to deliver EBIT of $79.7 million, up 87% on prior year and up 81% on a 52-week basis. We have included a breakdown of 53 weeks versus 52 weeks performance of the business at Appendix 3 for information purposes. Also note that all of the profit numbers we will talk today and included in our presentation are removing the effect of the new lease accounting standards so that they are more easily comparable with prior years. Our global rollout remains a key focus with a net 85 net stores opened for the period, driven primarily by continued U.S. store rollout with the U.S. market trading 118 stores at year-end. Recently, we were also able to open 2 new markets in June 2022 with our first stores in Poland and Canada now open and trading. Cash flow from operations was $96.7 million and cash conversion at 99%, reflecting solid working capital management. At the end of the period, we held $21.2 million of cash and no debt. And as a result, the Board has announced a final dividend of $0.37 to be paid in October. If we now turn to the financial overview on Page 6. As we -- as I noted earlier, revenue for the year was up 59.3% with comparable stores sales were up 19.9%. Gross margins were higher, benefit from favorable currency movements and price increases. Our cost of doing business well managed despite a trading disruption early in the financial year and continued investment in team structures, which resulted of our EBIT in up 86.6% to $79.7 million. The strong performance for the year means that we are able to finish the year once again in a very strong balance sheet position. If we turn to Page 7, you can see the outstanding sales performance for the year that shows a return to the sales growth trajectory that we have been on pre-COVID with the benefit of a store network expansion combined with the strong comparable store sales driving the overall sales growth of 59.3% on prior year. On Page 8, you will see our sales by region. The first quarter of the year was heavily impacted by temporary store closures in Australia, New Zealand and Malaysia. Recently, the Australia and New Zealand markets were able to recover well after the store reopened and delivered a strong comparable store sales growth to offset the impact of the sales disruptions. This was also the case in South Africa with the market recovering well from disruptions early in the year to deliver growth of 35% on prior year. Sales of our Asia market continued to be slower to recover as a result of low tourism and low mall foot traffic. However, despite this, we were able to deliver sales 36% up on last year and a strong turnaround from minus 11.6% in the first half. Our European business grew substantially compared to prior year with the annualization of 87 stores acquired in FY '21 as part of the beeline acquisition and further store openings across a number of markets in the region, including our first store in Poland, opened in June. The increased store network in the U.S. and good comparable store sales growth helped to deliver a 91% increase in sales in that market as trading conditions improved. Turning to Page 9. Gross profit was $362 million at a 79% gross margin, up on last year by 220 basis points, with the impact of continued high freight costs, offset by the benefit of affordable hedge rate in the half comparing to prior year. And more importantly, the benefit of price increases up through the second half of the financial year. Recently, the price adjustment has -- the price adjustment has been well received by our customers and as a result, have contributed to both sales growth and growth margin expansion. I will now hand over to Chris Lauder, our CFO, to talk through the cost of doing business, cash flow and the balance sheet.

Thanks, Victor. If we turn to Page 10, we'll talk about cost of doing business. Cost of doing business for the year was higher than prior year at 58% of sales, impacted by continued higher logistics costs and general cost inflation as well as the impact of the increase in executive remuneration costs with the CEO long-term incentive cost and sign-on bonus resulting in total executive remuneration costs being $16 million higher than prior year. Excluding this increased cost of doing business would have been 55% of sales below FY '22 and more in line with pre-COVID levels. This outcome also includes further investment in team structures to help drive future growth opportunities and the cost of setting up a number of new markets in the second half of the financial year. Just to discuss the CEO LTI costs a little further, the accounting treatment of Victor's LTI plans requires the amount of each tranche of the LTI to be expensed over its vesting period based on current expectations of how much we'll vest. As a result of the annual vesting profile of the LTI plan, this results in a higher expense being recognized in the first year of the 3-year plan with the final amount recognized for each tranche term at its vesting date and trued up at that point. Turning to Page 11, you will see that the cash generated by the business has again been strong with cash from operations before interest and tax of $96.7 million for the year, reflecting cash conversion of 99%. Capital expenditure for the period was $34.5 million, predominantly from new store fit-outs, which represents a significant increase on the spend in the prior year as the store rollout regained momentum with 104 new company-owned stores built for the year. Cash tax payments were again low with installment rates lower due to the lower taxable profits in prior year and final Australian tax installments for FY '22 due to be paid in the second half of FY '23. Cash taxes are also lower relative to profit as a result of the increased share of profit being generated by newer markets with historical tax losses and, therefore, no cash tax payable. These factors combined to deliver closing net cash of $24.2 million, down on prior year as a result of higher dividend payments in financial year. Turning to the balance sheet on Page 12, you can see that it remains strong, which has allowed the Board to announce a final dividend of $0.37 per share payable in October, franked at 30% as a result of the lower Australian taxes being paid at proven. As we have 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 did not currently have a specific dividend payout ratio, and we'll continue to base dividends on the cash flow needs of the company and the structure of the balance sheet. I'll now hand back to Victor.

Thanks, Chris. If we turn to Page 13, a quick update on store numbers. The key driver of our future growth for Lovisa continues to be our global store rollout. We finished the period with 629 stores trading with a net 85 new stores opened for the year, including 55 in the U.S. as well as our first store in Poland and Canada that were opened in June. Acceleration of our global store rollout remains our priority, and we are investing in the right team to deliver this. Turning to Page 14, I will talk to the progress we have made in recent times in relation to digital. Our focus on our digital capabilities accelerate over the past 2 years. And while we have made good progress here, our online business is still in its infancy. We continue to invest in our digital platform team and fulfilling capability to deliver in this space, reminding focus on maintaining the profitability levels of our online sales. On Page 15, I will talk to the trading update and outlook for the coming financial year. Trading for the first 7 weeks of FY '23 has seen a continuation of our strong performance of FY '22 with comparable stores for the period of plus 21% on FY '22. Total sales for this period are 66.1%, up on the same period of FY '22 with prior year impacted by lockdowns in parts of Australia and Malaysia. Since the end of the financial year, we have also opened our first 2 stores in Hong Kong and our first story in Namibia that opened on the weekend. The store network currently is at 651 with 22 stores opened year-to-date. We continue to focus on opportunity for expanding both our physical and our digital store network with the structures in place to drive this growth in existing and new markets and expect roll out momentum to increase going forward. Our balance sheet remains strong with available cash and debt facility supporting continued investment in growth. So in summary, on Page 16, our sales momentum has been strong across most markets, which helped to offset the impact of temporary store closures earlier in the year with comparable store sales up 19.9% for the year and total sales up 59.3%. Progress continued to be made in digital with increasing contribution from online sales and opportunity for further improvement to be made. Cost of doing business remained under control despite cost headwinds from inflationary pressures on wages and logistics and the impact on temporary store closures. Allowing for continued investment in team structure to support building the platform for future growth. Our global expansion accelerated on prior year with 85 net new stores opened during the year and a total net worth of 629 stores at the financial year-end. All these combined to deliver EBIT of $79.7 million, up 87% on prior year with our strong cash flow and balance sheet position, allowing the Board to announce a final dividend of $0.37 per share to be paid in October, an increase of $0.19 per share on prior year. I'm thrilled with the acceleration in the performance of the business over this financial year and would like to thank the team for helping to deliver a seamless transition for me into the business and remain laser focused on continued success of Lovisa globally. The financial results the team has been able to achieve this year is very pleasing. With the business continuing to go from strength to strength and well placed to take advantage of future opportunities as they arise. So with that, I want to thank you for your time today, and we are happy to take any questions.

[Operator Instructions] Your first question comes from the line of Marni Lysaght of Macquarie Capital.

Well done on a great result. Just a few for me. To kick it off just on the balance sheet. So as you called out back in February, you're going to start to take on some debt to support the growth, and there's $10 million of current borrowings drawn. Can you give us an insight on how we think about ongoing use of your debt facility moving forward in light of kind of the extent of what you did this half?

Yes. Yes. So I guess -- Chris here. The $10 million on the balance sheet at the end of the financial year, I mean we still got net cash of over $20 million, more just a factor of where the cash sits around the world at any point in time. So we're still in that cash position. The strategy around the balance sheet hasn't really changed from what we've talked to previously, which is that come -- we're looking -- we paid dividends based on cash flow and the available facilities with a view that we target around that 0.5x EBITDA level if that as being a reasonable level to hold. So obviously, we've $0.37 final dividend being paid. That's a continuation of that strategy. We're very confident that with the CapEx requirements for the store rollout in the coming half and payment of that dividend that -- we'll be utilizing our facilities, but it won't likely go anywhere over that 0.5x EBITDA.

Okay. That's all clear. And just with the inventories up, obviously, versus December, when we're thinking about getting to the next half balance date, do we anticipate your inventories to remain elevated like sure you'll have some unwind over this half of the buildup? Or do you think that just given the ongoing uncertainty, you probably want to have a couple of extra weeks cover?

Yes. Yes. I think there's a few factors in there, Marni. One of them is just the store rollout. So obviously, we've rolled out 20-odd stores in the first 8 weeks of the new financial year. So we will be holding stock to be able to move -- that's still a roll out requirement, particularly with some of the challenges around logistics and getting stock into markets, in particular new markets, where we haven't actually managed to get stuff through customers before so the lead time is a bit longer. And we've obviously got a much bigger European business now. So we've got the warehousing pole and which means another stock holding locally there. So -- we're very happy with the cleanliness of our stock and then where we're sitting in the buffers that we've got in there to cover the potential risks in supply chain that are ongoing for everyone at the moment. So yes, we're not necessarily planning on seeing that unwind it all in the first half. I think we want to make sure that we've got plenty of stock to meet the comp sales that we're doing.

Okay. So is it fair to say that what Fed asked for us to be thinking that December '22 inventory, obviously ahead of December '21 and potentially [indiscernible] versus June.

Yes.

Okay. Okay. And just one final one for me before I'll jump back in the queue. Just managing the rollout given the disruptions are and when you [indiscernible], the monthly run rate up until the end of April was a bit weaker. So kind of -- what changed in the balance of the second half for you to eventually hit a rollout in line with what you did in the first half? Was there improvement in logistics? Or was it just being able to really put more resources into ensuring that you keep those -- that store rollout outlook?

This is Victor. I think that, I mean, we try to tend to have a policy of no excuses and trying to roll out with the current challenging situation. And basically, we've got really good results on the rollout, and we opened several stores and we are pleased with the results, having opening on fiscal year 2022, 85 net stores and in a way is trying to execute or trying to find efficiencies and on execution.

Your next question comes from the line of Shaun Cousins of UBS.

Great. Chris, maybe you could just talk a little bit about sales growth. Your sales growth on a total and like-for-like were very strong in the second half '22 and then also to start first half '23. Could you talk a little bit about some of the contributing factors, but particularly, I guess, the strength in like-for-like sales growth around be it the resilience of the customer, reopening leverage, quality of the offers or just some of the broader drivers of sales growth that you're seeing given that the consumer in the global markets in which you operate is not necessarily strong. So you're doing something right. Can you just talk a little bit about some of the drivers you think that are contributing to that, please?

I think we have a comprehensive product offering. And I think at this moment, we are very happy with the product offering that we are having on a global basis. We are in more than 20 markets. So it's something that I believe is capturing the attention of existing market and also new markets. So this is something that we are very pleased, and I believe that I think we have a strong product, and I believe we will continue -- we'll try to continue having a strong product.

Great. And maybe looking to store growth and potentially some of the phrasing that we used in the first half '22, would it be fair to say that Lovisa management would be disappointed if you couldn't grow stores in fiscal '23 at the same rate as fiscal '22, please?

I mentioned maybe -- what I can say is that we are very happy at this moment with this 85 net stores that we opened and clearly, I mean if you do the math, we opened 22 stores over the last 8 weeks. So you can make the math, and you will see where we will think we will maybe -- we will find ourselves by the end of fiscal year '23.

Okay. Worth a try. And finally, just in terms of the new markets of Hong Kong, maybe can you just discuss what's appealing about those markets? I guess, particularly Hong Kong, where we've seen retailers like Smiggle exit and considerations of broader growth in Asia, including China on a potentially company-operated basis, but maybe just sort of what's appealing around Namibia, or especially Hong Kong for you and what that could parlay in terms of future store markets in which you opened stores, please?

Well, we consider that Hong Kong still has a lot of potential in terms of retail. I mean 8 million people with a high disposable income. And we believe that is an opportunity as well to test gateway to China. And then regarding Namibia, is a natural evolution from our big presence or big presence or substantially presence in the South Africa market.

[Operator Instructions] Your next question comes from the line of Wilson Wong of Jarden.

Can you just provide some details around the store economics you've observed in Poland and Canada so far? And I guess, any indication of the extent of the continued store rollouts in these markets going forward?

Yes. We don't talk to store economics on markets that have just opened. We've got one store trading in each of those markets and they have only been up and running for a couple of months now. So yes, I mean, other than saying -- we're happy with where they started. The product seems to be resonating with the customers. And we're obviously looking at other opportunities in those markets, but until we get a decent read on trading there over a period of time. We won't be discussing the specifics.

Okay. Just one quick one.

Your next question comes from the line of Alexander Mees of Morgans.

A really good result. Just my one question is just, Chris, would you mind stepping me through the reconciliation of the EBIT before share-based payments, which I believe was $101.3 million to the reported EBIT number. I just want to make sure that I understand how you bridge one to the other.

So it's the -- so before I answer the question, just sort of operator, if you can let the people asking questions, finish their questions and not cut them off. I think you cut the last person off before they all finished. Thank you. Yes. So the reconciliation is the statutory EBIT number and then adding back the cost of Victor's LTI. So if you look at the statutory EBIT number on the face of the P&L, which I'm just trying to find the page, but then add back the total cost of bits of LTI. If you look on Page 25 of the remuneration report, that would be the performance-based payment of $4.9 million and the options and rights under the share based payments column of $13.7 million. So basically that's sort of $18 million adding back to the statutory EBIT number, but that adds up the EBIT to a couple of times.

Yes, it does. So we're not thinking about the year-on-year development of EBIT. It's to the 101.3 [indiscernible].

Sorry, I didn't quite catch that last bit, can you repeat it?

So when I'm thinking about the year-on-year progression of EBIT from '21 to '22, I should be thinking about comparing apples to assets going to $101.3 million is the EBIT number before accounted for share based payments.

That's one way of looking at it, if you're looking at pre share-based payments. I mean the way we look at it, it's an expense to the business now. And -- that's why we haven't called it out specifically in any of the documentation as an underlying result. But you can see on Page 25, the increase in executive revenue year-on-year is a reasonable number.

Your next question comes from the line of Mr. Mark Wade of CLSA.