Lovisa Holdings Limited (LOV) Earnings Call Transcript & Summary

Good morning. My name is Jordan, and I'll be your conference operator today. At this time I would like to welcome everyone to the Lovisa Holdings Limited Half Year FY '23 Results briefing. [Operator Instructions] Thank you for your patience. I will now turn the call over to Chief Executive Officer, Victor Herrero. You may begin the conference.

Good morning, everyone, and thank you for taking the time to dial in. On the call today you have our CFO, Chris Lauder and myself Victor Herrero, CEO. As you are aware, we published our half-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 sets out the keys to 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 objective in both existing as well as new markets. I'm pleased today to present another strong result for the first half of fiscal year '23, which again evidence this, of trends in my team -- in the team, sorry, the product and the potential of the business. If we turn to Page 5, we will talk through some of the details of the first half. Our sales performance was a highlight with a strong sales performance delivering first half comparable store sales up 12.5% versus the first half of fiscal year '22. This combined with the benefit of net 86 new stores opened in the half, resulted in total sales being up 44.8% in the first half of fiscal year '22. Gross margin at 80.3% benefit from the price increases in the second half of fiscal year '22 with a strong focus on optimizing gross margins. The cost of doing business was well controlled. [ We will be ] making significant investment into growing the business. As a result we delivered an EBIT of [ $70.5 million ], up 38% with -- 38.1% on the prior half. Also note that the -- of the numbers we will talk to today and included in our presentation include the effect of the new lease accounting standards. A full reconciliation is provided for you in the appendix to the presentation back to the previous standard of your reference if you need it. Our global rollout reminds our key focus and was driven primarily by continuing growth in the U.S. adding a net 37 to reach 155 stores at the end of the half. Recently, in the 6 months to December we also open in 7 markets, which I will talk about later. Cash flow from operation was $115.8 million, up 49% on previous -- on prior year, reflecting solid working capital management. At the end of the period, we held a net $24 million of cash. And as a result, the Board has announced an interim dividend of $0.38 to be paid in April. If we now turn to the financial overview on Page 6. As I noted earlier, revenue for the half was up 44.8% with comparable store sales of 12.5%. Gross margin were higher, benefit from the price increases in the second half of fiscal year '22. The company achieved EBIT growth of 38.1% to $70.1 million for the half and net profit after tax of $47.7 million, up 31.9%. The strong performance of the half year meant that we were able to finish the half year once again with a very strong balance sheet position. If we turn to Page 7, you can see the sales performance for the half shows -- that shows that the benefits of the store network expansion, combined with the strong comparable store sales, driving the overall sales growth of 44.8% on the prior half year. Looking to the regions, Australia, New Zealand and Asia, cycle temporarily store closures and disrupted trade in the first quarter of the prior half year, which helped deliver strong Q1 sales growth, with this performance able to be maintained throughout the half, a bit slowing in Q2. Africa continued to perform well and benefiting from the 6 net new stores, including 2 in Namibia. European sales reflects our continued new store growth and new market expansion in the period in Hungary, Romania, and Italy. Adding to Poland, which opened at the end of fiscal year '22, resulting in a net 25 new stores to drive sales growth of 32.9%. America continued its strong store rollout momentum, increasing by a net 37 net stores, including 2 new markets in Canada and Mexico. This helped to deliver a 97.6% increase in sales in the region. Turning to Page 8. Gross profit was $253 million and at an 80.3% gross margin, up on last year by 190 basis points with the benefit of price increases put through the second half of last financial year. Pleasantly the price adjustment continue to be well received by our customers and as a result have contributed to both sales growth and gross margin expansion. I now hand over to Chris Lauder, our CFO, to talk through cost of doing business, cash flow and balance sheet.

Thanks, Victor. If we turn to Page 9. We'll talk to our cost of doing business. Total cost of doing business for the half year was up 65% on the prior half on a statutory basis, which includes the cost of the CEO LTI plan for the period and is post-AASB 16. The ease of comparability with prior periods, we have presented the CODB table on this slide on a pre-AASB 16 basis and provided the usual reconciliation between the statutory result and the pre-AASB 16 result in the appendices. For comparability purposes, we've also presented this chart, excluding the impact of the CEO LTI expense on the period, which was $15 million in the current half compared to $500,000 in the prior half year. On this basis, the CODB percentage for the half year was lower than that -- was lower than prior year at 50.8%, reflecting good cost management in an environment where we have faced inflationary pressures and where we've continued to invest in rollout of new markets and structures to manage the growing scale of the business. Just to remind you all, 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 will vest. As a result of the annual vesting profile of the LTI plan, this results in a higher expense being recognized in the first 2 years of the 3-year plan, with the final amount recognized for each tranche determined at its vesting date and trued up at that point. Turning to Page 10. You'll see that the cash generated by the business has again been strong with cash from operations before interest and tax of $115.8 million for the half year, reflecting good management of our working capital. Capital expenditure for the period was $31.8 million, predominantly from new store rollouts, which represents a significant increase on the spend in the prior half year as the store rollout continued momentum with 101 new company-owned stores built for the period. Cash tax payments reflect a more normal level following lower payments in recent years. And these factors combined to deliver closing net cash of $24 million, lower than the prior period as a result of higher capital expenditure and dividend payments. Turning to the balance sheet, on Page 11. You can see that it remains strong, which has allowed the Board to announce an interim dividend of $0.38 per share payable in April, which we've been able to fully frank as tax payments have returned to more normal levels. 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 do 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. Since the end of the half year, we have received conditional approval from our financiers subject to execution of facility documents for extension of our existing cash debt facilities for a further 3 years, an increase in the facility limit to $100 million to support future growth in the store network. I'll now hand back to Victor.

Thanks, Chris. If we turn to Page 12, a quick update on store numbers. The key driver of future growth for Lovisa continues to be our -- in our global store rollout. We finished the period with 715 stores trading across more than 30 countries with a net 86 new store opened for the year, including 37 in the U.S. as well as our first stores in 7 markets across the globe in Hong Kong, Namibia, Mexico, Italy, Romania, Hungary and a new franchise market in Columbia to add to Canada and Poland that we opened at the end of fiscal year '22. Acceleration of the global store rollout remains our priority, and we have invested in the right team to deliver this. Turning to Page 13. I will talk to the progress we have made in recent times in relation to digital. We have continued our invest -- we have continued to invest in our digital platform to enhance performance, customer experience and fulfillment capability. However, we continue to have a long way to go. We have also made investment into digital partners, establishing a presence in online marketplaces in Europe with Zalando and Kaufman and in the U.S. with Simon Premium Outlets. We will continue to work to develop further partnership in this space as it provides us with further opportunity to extend the reach of the Lovisa brand, in particularly in newer markets. In Page 14, I will talk to the trading update and outlook for the coming half of the financial year. Trading for the first 7 weeks of the second half of fiscal year '23 saw comparable store sales for this period up 12.3% and total sales up 24% on last year. Since the end of the half year, we have opened our 2 stores in new franchisee market, Peru, and the store network currently at 746, including 31 net new stores opened for the half to date. We continue to focus on opportunity for expanding both our physical and digital store network. With the structures in place to drive this growth in existing and new markets and expects rollout momentum to increase going forward. Our balance sheet remains strong with available cash and debt facilities supporting continued investment in growth. Since the end of the half, we have received conditional approval from our financiers, subject to execution of facility document for extension of our existing cash debt facilities for a further 3 years an increase in the facility limit to $100 million to support future growth in the store network. So in summary, on Page 15, our sales performance was strong both in comparable stores and new store rollout. Our global expansion delivered new stores in 7 new markets across Europe, Africa, Asia and the Americas, resulting in a net 86 new stores opened, more than for the whole of fiscal year '22, finishing the period with a total network of 715 stores. Cost of doing business remains controlled despite inflationary pressures and the cost of new market openings, allowing for continued investment in team structure to support building the platform for future growth. This delivered an excellent result with EBIT of $70.1 million, up 38.1% on prior half year. A net impact of $47.7 million, up 31.9% with our strong cash flow and balance sheet position, allowing the Board to announce an interim dividend of $0.38 per share to be paid in April. I want to thank you, the entire global Lovisa team, for the amazing work that they are doing to deliver these outstanding results. And 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 Sophie Carran from Goldman Sachs.

Just one around some of the investments you've made in the support structure. Can you just talk a little bit about more specifically sort of what you've invested in there? How we should think about that scaling as the rollout accelerates? And then I guess more generally, with that accelerating rollout, some of the things you're sort of doing to manage execution rate?

Sophie, thanks for the question. Chris here. So, I guess, just in terms of what we've invested in. So obviously with the number of markets that we've rolled out in the period and the number of stores are rolling out at the moment. We need to invest in headcount to basically support that. So we've now got -- obviously we've always had the support office here in Melbourne, the global support office, but we've now got an office in South Africa, supporting the globe and then a European office in Poland as well as the office in L.A. supporting the Americas. So we've had to build out the structures in those markets to make sure that we can execute on rolling out new countries and the store network. So definitely investment in headcount at all levels, leasing teams to find the new stores and get them signed up. We've also had to invest in supply chain. So we've got a warehouse in Poland that we opened a couple of years ago last year, whenever it was. And what else? And then in terms of just our -- basically our systems and processes to manage a larger business. So we've had to invest the money in the IT side of things as well. What was the second part of the question?

And then you sort of answered the second part, but I guess, how we should think about that scaling as that rollout accelerates? Have you sort of set up the structure in a lot of the key markets? Or is there more to come?

Yes. I mean we've set up the structures there or the baseline of those structures. But the fact is, and we've said this over and over again over the last few years that we need to continue to invest in those structures. It's not as simple as putting the structure in place and then just rolling out hundreds of stores and it all works. There's constant investment in regional management structures and operational leadership to make sure that we can continue to execute the way we need to execute to be successful. So our objective there is to make sure that we're actually investing ahead of that growth curve. So don't expect a lot of that leverage is to come through because we've got those that baseline in place. We'll continue to hire more people and put more cost into the business to make sure that we're successful.

And then just a second question, just around the comp store sales that you've reported second half '23 today, just wondering if you can give any sort of color around any regional performance? And then just thinking about the price increases that you put through in the third quarter last year, just any color around the sort of timing in quantum just so we can sort of think about how those comp store sales trend once we start to cycle the price increases?

Yes. I mean we probably saw a broker record of this one, but we don't tend to break out some regional comp sales. So I can't give you too much more color than that. But in terms of the price increases, that was, I think, it was around late Feb, early March last year that started to flow through, so that's not reflected in these numbers. So we'll start to cycle that pretty soon. So obviously, that means that the comps in the remainder of the financial year will get tougher to cycle.

And then just one final question before I jump back in the queue. Just on the gross margin, any more color you can sort of provide around some of the moving parts from sort of whether it's a price point or on the cost side? And do you think that can sort of be sustained at that 80% plus margin level?

Yes. I mean, obviously, a lot of it is from the price increases. So you can see that coming through the comps and you can see it coming through the gross margin in improvement. We've done better with our suppliers as well. So that's helped, there's been negative in there as well. So obviously, part of the period the freight cost went reasonably high. Currency wasn't necessarily in our favor, but we managed to offset that by the adjusting prices and negotiating harder. And Victor, I am not sure if you have got anything else to add.

Yes, I think it's a balance, Sophie. This is Victor. From the price increases, but at the same time, from a more nimble supply chain, where I think that we are partnering with our suppliers and also the logistic cost that is now significantly lower versus maybe 1 year ago. So it's a combination of several things, the margins.

Your next question comes from the line of Marni Lysaght from Macquarie.

Hello, Victor, Chris, I trust you can hear me. Just a few questions for me just on like-for-like. I just remember back -- when you go back to the FY '22 results, there were some adjustments being made there, given you were cycling various lockdowns, et cetera. Can you just clarify your comp sales growth you've given us for the first half and to early second half, is that making any kind of similar adjustments? Like what does that consist of?

It's completely consistent with how we reported it previously, which was our comp sales only reflect stores that were open and trading. So where Australia had some markets been locked out in the prior period and those stores are out of comp. Those are only stores that we're actually trading in the period. So that's why the difference between the comp number and the total sales growth for that period.

And then just another one for me. With the run rate of early second half, like I don't see run rate, you can gauge from the early second half net new stores. Is that a go forward indicator because I just recall analyzing your business over time that you tend to roll out stores in the second half and that being skewed to the back end? Or is that -- is it -- obviously, I mean, at this time last year you were struggling to open up stores with some of the issues with trade. So kind of just some color on that run rate and how we think about the rest of the half in terms of rollout?

Yes. I think what we said in the full year results call was that the run rate that we were running at, that's a reasonable assumption that we'll continue at that rate and that I think we're probably in a similar position now that the numbers we've opened in the first 7 weeks of the second half, we would like to think that we can continue that momentum through the -- but as we always say, it's heavily dependent on our ability to get leases executed, get trades locked in and get on site and get the stores open, so can be lumpy, but we'd like to go to I think, we can continue that momentum.

And just a final one for me. You started giving a cash flow statement in the online slide deck on a post AASB 16 basis. Is it -- if we wanted to convert that back to pre, -- is it some of the other, like previous disclosures, it's a simple addition of the lease payments and the investment cash flows relative to what operating cash flows are? Is it sort of fair wider kind of proxy of cash -- operating cash flow pre-AASB 16 to kind of affect cash conversions?

Yes. I think it's the only way you can do it. I mean, obviously, interest is already up in operating cash flow up there. That's the other part of that. So it's the interest in the lease payment effectively add up to you, what would have been in the rent line, I guess. So if you're trying to get back to the cash conversion, then yes, that's the best bet I think. And what would you say has been a driver of your cash conversion in this past half compared to kind of what you did in the prior half. I think you've got to adjust for the noncash component of LCI, so I see that's a big number in the period. That gives us, obviously, what looks like a really favorable working capital movement -- but yes, if you take -- strip that out, obviously, it's not as big a number, but it's still good. And obviously, it's an area we focus on heavily in terms of managing our inventory and managing our supplier payment terms. So we've obviously -- look, we're happy with the job that we've done in the period.

Your next question comes from Alexander Mees from Morgans.

Morning, Victor and Chris. Congratulations on a good result. Just firstly, with regard to doubling the size of your facility and also talking about accelerating or increasing momentum, is it fair to assume that we're looking at more store openings in '24 then '23 at this stage? Would you be disappointed if that wasn't the case?

We -- it's always a recurring question, no. And I think we will open profitable stores, and we will open opportunities. What we can tell you is that we are seeing a lot of white space everywhere and we will continue trying to accelerate whenever it's possible in every market where we are present and maybe we will open several other markets in the future.

I think just in the context of the facility increase. It's obviously our existing facility was due to expire in a few months' time, so we needed to renegotiate that. And just with the larger size of the business and the fact that we're focusing on having some debt in the capital structure, we just made sense to increase the facility limit to 100 to make sure if see us through the next 3 years.

That's prudent. Just secondly, on price increases. Obviously you mentioned that customers have responded well to that, and we are annualizing those price increases very shortly. So I'm wondering if you're thinking about taking prices up further in the third or fourth quarter this year?

We'll -- we don't have any plans to increase prices so far, and we will continue being or looking at what is -- our customers. We try to always give them the best offer for -- as a fast fashion company. So affordable prices on -- with a lot of fashion in jewelry. So I don't expect any price increases over the next on the foreseeable future.

And then just finally, if I may, more for modeling purposes, Chris. Just with regard to the $50 million LTI expense. I was just wondering; I appreciate the mechanism of the way it's expensed in the vesting period. But is it possible to disaggregate how much of that $15 million relates to FY '23?

Can I just say no. It's -- so we're not going to break it out between the different tranches and exactly how much of it relates to which period because it probably won't help you that much because the way that we have to account for it, obviously, spread the expense over the vesting period. So last year, we had to book some of the FY '23 and FY '24 tranche into FY '22. This year, we've got that both of those years again in this number as well as a little bit of the FY '22 tranche, and we had to catch up a bit on what we booked last year. So we probably -- we didn't book enough. We were -- our expectations have now increased on what we think is going to vest, so we had to top that up. So if you look at the number that we've put in there for the first half, which is around $15 million, that's obviously 6 months' worth of that expense so a full year would be around double that which is obviously higher than the total of $28 million, which is the opportunity for the current year in its own right, which shows that there is some catch-up from last year in that number. But I guess the main thing to be thinking about is the look at what the profile of the expense would be if we were booking it at 100% of the opportunity for each year and spreading that across the 3 years. And that will give you an idea of roughly where we're thinking. But probably -- I can't give you a direct answer on that because that would be basically giving you guidance, which we're not doing.

It was worth the try, wasn't it, Chris?

It was.

Your next question comes from the line of Wilson Wong from Jarden.

Hello, Victor and Chris, can you just talk to the market opportunity and relative store economics in the new markets in Romania, Peru and Columbia?

Well, Columbia and Peru is through a franchisee partner. So there is opportunities and both of them are potential markets. And regarding Romania, as you may know, it's one Eastern European country, European Union member with more than 10 million people with a kind of disposable income similar to Poland. So I think the potential of the market is there, and we believe that we can have a rollout -- a considerable rollout of the stores there.

I think just there is my message also. I mean these markets are brand new. We don't tend to give finer details of new markets until we've got some experience there because we will just be obviously guessing, we need some experience before we can do that.

And what are you looking for in particular in that trial period of whether you sort of step-up investment in that -- in those markets and/or whether you sort of tailored off?

We're looking for the stores to hit our investment hurdles. I mean, that's about it. So we obviously have -- we make assumptions on what we think the stores are going to do in terms of that average sales per store. What's the wage cost, how much is the rent going to cost, how much of the cost of the store. And once we've rolled out a few stores and had some trading experience under our belt, we can see whether those assumptions are right, and we're actually going to hit our hurdles, and that's about it.

And just on Europe, obviously, challenging trading commissions in the region at the moment. Like have Lovisa stores been trading sort of on a like-for-like basis? Any sort of color you can give there would be helpful.

We don't give breakdowns of our like-for-like by geographic region and what you can see is in the slide back in the accounts is a breakdown of total sales by region. So the European sales were up 33% on the prior year. So obviously, look at the increase in number of stores versus that percentage to see roughly sort of trading in terms of comp. So we're happy with how Europe is trading with those sort of numbers coming out.

My last question is just around the competitive environment. How are you sort of seeing that? Any sort of changes over the last 6 months or so? And because, I guess, looking at the gross margin improvement, why there hasn't been much pressure to discount products unlike some of your peers?

Yes. Well, the competitive environment is still there. But at the same time, it didn't change so much during the last 6 months. And regarding the -- well, we are a fashion company with affordable prices. So we don't realize so much on discounts more than in value and in our product proposition.

Your next question comes from the line of Sam Teeger from Citi.

So like-for-like sales up 12.5% this half to date. I'm not asking you to get into a regional performance because I understand you don't discuss it. But are your comps positive all around the world? Or are there any signs that your target consumer is softening? I know in the past, you provided high-level covenants about Asia. So just trying to get a sense of -- is this lower age customer demographic being really get right now? Or is there any signs of softening anyway?

Yes. I mean that's just another way it was providing you with market-by-market commentary, Sam. I mean we've talked about Asia previously because it was a sizable impact from COVID that was a hangover. So it lasted longer than other markets, which thankfully has turned around, as you can see from the total sales numbers coming out of that region. So yes, I mean, obviously, there's plenty of talk out there around softening retail trading conditions, we're all operating in the same -- that same environment. It remains to be seen how resilient our customer is. We'd like to think that they are because of the nature of our business and the nature of our customers. But so far, it's probably a bit early to tell and comment on that.

And given the upside in the debt facility, just keen for any comments on your appetite for acquisitions?

So far we don't plan to do any acquisition. And in case it's happening will opportunistically whenever is -- something is presenting that, we don't have any plans to have any further acquisitions.

And Victor, since China has relaxed the quarantine requirements, have you been up there in recent times? Or are you planning to go there soon?

I haven't been recently to Hong Kong, but clearly, it's a place that I plan to go because, as you know, part of our supply chain is coming from China. And clearly, it's an important thing. But as well, as I mentioned before, once there is less uncertainty of the market, maybe we'll consider in the foreseeable future to open China.

Your next question comes from the line of Allan Franklin from Canaccord Genuity.

Just looking for a bit of context on the OpEx side, obviously, excluding the LTI. Just sort of noting. It looks like your employee costs are sort of down as a percentage of revenue, but there's sort of a lift in other costs? Just any sort of color you can sort of talk to appreciate you're reinvesting in different parts of the business? Any sort of color on the other costs and what's lifting that as a percentage of revenue?

Yes, maybe a little bit of color, Allan, but thanks for the question. But obviously, the wages as a percent to sales, if that's what you're looking at, if you strip out the LTI has gone down. But obviously, benefiting from 12% comp. So that's in terms of the rate of increase in rates haven't gone up with that sort of space, that's probably what you're seeing there. And then obviously, that line includes investment in the support structures that I mentioned earlier, to drive the growth in that other expenses line at the bucket that everything else goes into. There's -- we had to spend money on opening new markets. So that doesn't come for free. It's not just spend a few hundred bucks in setting up the company and off you go, there's a lot of work to do in terms of understanding the requirements of each of those markets lawyers, accountants, you name it. To make that work, working at how we get things through customers and setting our systems out at with out of trade in one of these markets because it's not straightforward in some countries. So in that other expenses line, yes, there's definitely cost for IT consultants, Lawyers, accountants sort of thing.

And then just pivoting on the digital marketplace strategy, to what extent in Europe, in particular, I guess, sort of what are you going to drive from those marketplaces and adding your product in there? Is it brand awareness first and foremost to then try and drive consumers into your stores?

Well, both, no? I think you are increasing your brand relevancy because it's a B2C business. It's not really a B2B. And with opening Zalando, it's major marketplace, for example, in Germany. So we have more than 50 stores in Germany. So it's complementing our omnichannel strategy, where we have several platforms. And basically, what is important to say is that it's kind of another store inside Germany, for example. So it's an omnichannel strategy where we believe that a part of our own platform as well, we can develop our brands and continue increasing the number of customers by having some marketplaces.

Your next question comes from the line of Aryan Norozi from Barrenjoey.

Two for me. First of all, your comments, Chris, on the fact that you mentioned don't expect operating leverage or significant operating leverage. If I just look at your EBITDA margins, excluding the LTIs, it's about 29% this half. Obviously, first half is bigger than second half. But that's sort of back to pre-COVID levels in terms of margins. So give me a comment on what you've just delivered, is it fair to assume that, that sort of -- this is sort of a steady-state margin at least as you sort of accelerate your openings and plan for your next phase growth?

Look, I'd love to think so. Just the caution is that we invest where we need to drive that growth. So we're not fixated on that topic. We're excited on what do we need to actually structure the business to be able to open the stores that we want to open in the market, we want open in and putting the structures in place to do that successfully. So, I generally don't answer this question with the straight answer very often, but it's basically that we just continue to invest and there might be lumpiness in there. So we could invest more in the second half than we did in the first half and it goes the other way. But yes, it's not an easy question for us to answer because we're reacting to how quickly we can roll out and what we need to invest in at any point in time.

I guess another way of asking it is, has there been a lot of cost investment in the back end of the half that's kind of annualized in the second half. So to your point, in terms of lumpiness, I mean, should we be sort of more than annualizing the first half cost run rate just because the costs that haven't fully hit the P&L in the half?

Not in any major way, Aryan. I mean, there's always aspects of that, but I don't think there's anything major that I'd say, yes, that you need to adjust for that, what you're seeing is probably reasonable.

And just on the sales per store, I mean, if you just go back 2 years ago, you were on the trading on your stores because you had COVID, shopping centers impacted, are you overtrading now. So like when you look at your sales per store metrics in each of your regions, are you getting the catch-up demand benefit at the moment? Or are you comfortable with where your sales saw out versus the target levels and funding obviously the price increase in there.

If you look at our comps over the last couple of years, obviously, they were extremely strong. And that's hard to maintain in the long run, doing that through the price increases that we had last year. We see that's baked in now. So that's been a step change in the sales per store. But obviously, different markets have different economics and different levels of sales per store. And as we add new markets in Eastern Europe, both markets tend to have as high sales per store as say, in Australia or somewhere like Switzerland, the more higher income market. So it will change over time, but some, I guess -- I think you asked, have we been overtrading. Hard to say. I mean, we -- given the comps of what we are doing, you could argue, yes, maybe we were, but we'd hope that we can continue that. But obviously the conditions economically around the world are not necessarily going to get any easier in the second half. So that's going to be a challenge for us.

And then just the price increase magnitude just on that, is it fair to say that that 10% price increase linked across it's all see 10% increase in the sales.

Yes. I mean we haven't shared the percentage and we are not going to now but you can see the comps and obviously come up with that number somehow. So it's obviously somewhere in the vicinity of 5 to 10 depending on what range we were still looking at, at the time, but we're not going to give an overall percentage on it.

Yes, just a very last one on the gross margin. you're not obviously giving guidance, but if I just think about the drivers of your gross margin into second half 2013 and FY '24, you've got the price increase that annualized that basically annualized, but then you've got a weaker patency revenue against you. Can you just talk through, is there any offset to that? Because from what I understand, the cost you're getting from factories shortly getting any work in fact, you might be getting some discounts because there's no capacity. So just can you run us through the pluses and minus I am sure I think there'll be more minus than pluses over the next 6 to 12 months on the gross margin?

Yes. I guess the benefit from the price increases is baked into that. So that continues through the second half. And historically, if you look back, is our second half gross margin tend to be lower than the first half just because of the trading period that it obtained. So Yes, I guess when you're looking at it, you just got to assume that we follow a similar sort of pattern than we have historically in the first half, second half and currency will have an impact that's obviously not as strong as where it was at second half of last year, but then outside of it, better buying and cost prices. So I probably sort of avoid your question completely, but it's hard for us to give you a definitive, well, here are all the [indiscernible]. We're not expecting any major things, I guess.

What is your hedge rate for the second half '22 and FY '24, please?

We're not calling out the hedge rates anymore because; A, the U.S. dollars is where we could totally talk to is less relevant now. I mean that's obviously still a large part of the business, but for Euro, U.S. dollar is a big part now and just the impacts of translation that -- of results back from other currencies is also having impact on the numbers. So we're trying not to get everybody fixated on that one number, but you can think compared to last year, it will be lower. So probably $0.01, $0.02 lower than what it was at that point, maybe more. But yes, it's not as big an impact on the gross margins that used to be.

One thing that I want to tell you that you mentioned that I totally agree that there is plenty of opportunity with suppliers in order to get better prices now that there is a capacity opportunity.

Your next question comes from the line of John Hynd from Wilsons.

If I may, can we perhaps unpack the trajectory of sales post your last update? And can you give us some color perhaps about how important the cyber period in Christmas is to Lovisa and is it a focus for the customer now on a global scale as well or more regionally a focus?

Yes. I mean, absolutely, like Friday through Monday, that whole period is becoming bigger and bigger globally. So there's no doubt that the sales being pulled into that period that maybe weren't there before. But Christmas is still a huge part of our sales for the year and for any retailer. So there's no major change in that compared to where we have been, but not really anything further to add on that. And I guess just in terms of trajectory of comps and total sales, I mean, you can see the numbers that we put out there. So hopefully they're pretty self-explanatory.

Yes. So you essentially you stated that same trajectory post the AGM update, by the looks of things. Is that -- if I'm reading that correctly. And does that mean that the store openings, which were amazing, they were much closer to the Christmas and cyber period this year?

But when you say store opening, you mean did we open those later in the year?

Yes.

I mean you can tell -- I can't remember what the store count was when we announced at the AGM. But it certainly went up quite a few from then until the end of December. We opened a lot more stores in December than what we would normally do.

Yes, that's what I am asking?

Probably [indiscernible].

And I guess the run rate now for stores is really attractive. I think we can all do the math on what it implies for perhaps by the end of '23. You've got your funding in place now. What would -- what are some of the impediments that we should look for on perhaps not achieving that run rate? Does it just come down to locations?

No. We are becoming a global brand. And we are a global brand already, but there is some macroeconomic or macro headwinds that you cannot expect it. Maybe, I don't know, Europe will be solved because of the war or U.S. will have a small crisis. But so far, we have been managing all these things. And sometimes, some area is not performing, but the other areas are performing and are basically coping to our forecast. So that's the good thing about having a global brand and being present in 30 markets. Sometimes some markets are not performing as good as others, but the others are overcoming the bad performance of the market that are not performing. So this is something that is very important that having several markets is adding as well flexibility in terms of how -- where it's going to come our performance. And we are not really focused only in 2 markets. We are focusing in all the markets in order to try to continue capturing the attention of our customers and trying to understand the needs and motivation of each individual market.

Yes. And how -- just to take that one step further, how with the new systems and infrastructure in place, how nimble is Lovisa with its store rollout program, for example, if I don't know if the geopolitical issues eased in Europe. In areas where you're not at the moment, how quickly can you get on the ground and hit locations where you're not at the moment?

I think we've been improving over the last few years on this. And I think we are becoming a very nimble organization in terms of how we open net more than 80 stores during the last 6 months. So I think it's an important milestone in the company. And I believe that I mean, we will continue trying to be as effective and nimble as possible in opening markets anywhere. We opened 7 new markets. So it means that, I mean we open -- we have 25% more market than we were having 6 months ago. So I think that it's hard work, but at the same time achievable.

Yes. Just one more for me and not wanting to split hairs or focus on a negative given the store growth you've achieved. I'm just looking at the 17 store closures. Was there anything that you learned -- that didn't work in those 17 stores that you can share with us? Or was it just bad locations?

I think if you break down the 17, it was I think 5 of them are relocations, so that's exactly what you just said, that the location of the store would be more than what we wanted and we may do for the term of the list. But then on renewal, we've agreed with and not to move to a different spot, it's better. So that's -- we count that as a closure and obviously, and then a new store opening in the same mall. So I think there were 5 of those. There were 4 closures in the Middle East from our franchise partner. So if you strip those out, then it's actually not that big a number in terms of the overall spend of the store network. And that's part of our normal process. We get to the end of the lease negotiate with the landlord if we're not performing as well as we want, then if they're not willing to reduce the rent or make the economics work for us, then we'll have close the stores because there's no point holding on to stores for the sake it, so there's always learnings in those things. But I mean it’s actually 10 stores or less out of 700 that's not that many you get right.

And congratulations on such a strong result.

Thank you.

Thank you.

Your next question comes from the line of Julian Mulcahy from E&P.

Just a question on your read on fashion trends. And I realize that Lovisa is not dependent on any particular dominant trend, but you still need a trend. So with the sort of minimal fashion and it seems to be developing on red carpet fashion shows that sort of thing. Are you all worried that it's going to impact like-for-like stores in the business?

Well, for the time being, so far, so good, in terms of like-for-like stores. I think what I can tell you is that we are continuing over the history of Lovisa is we want to be the fashionable option for any customer that wants to buy a fashion with affordable prices. And I think we have an innovation department as well, where we are basically working on also new ideas as well. And at the same time, trying to capture every single trend in our stores, as you can -- as you can see, we have several SKUs where we try to be a little bit the fashion option for jewelry category in every single market, not only in -- and one thing that I think has proved us right in our strategy on fashion is that basically, we work in several markets. It's not only specific to the Southern Hemisphere or the Northern Hemisphere or very focused on the U.S. or very focused on Europe. I think that's an important thing to say.

But if the fashion becomes not wearing jewelry, can you quite easy just accelerate the store rollout even faster just to compensate?

Well, we will deal with that problem in case its happening. But I don't expect that this is going to happen over the next few months or maybe years to come because at the end of the day, we are a fashion company with element of affordability. So people will continue, I think buying jewelry and in case it's not so fashioned by jewelry, maybe they will come to us because it's less costly than some of our competitors.

And just finally, I saw you've opened a store in Taiwan. Does that opening in that market first have any restrictions on what you could do into China?

We haven't opened a store in Taiwan, Julian.

I saw it on LinkedIn.

Well, that's not happened.

Or coming, isn't it?

Not yet open, not yet coming. We will -- whenever we open, you will find out. And -- but at the end of the day, you overcome any restriction anywhere. And at the end of the day, what we want is to be close to our potential customers, and we will open wherever we believe is the right, Julian for example, there are plenty of global companies that they have stores in Taiwan, my previous company, as you may know, they have, I don't know, if more than 20 stores in Taiwan and is not affecting at all the China market in terms of relationship or anything like that. We tend not to be too political thinking when we open any market. It's more about -- if we believe that there is fashion jewelry customers on that particular market.

And just, Chris, you said that the price increase, the average was 5% to 10%, but you didn't want to be specific. Is that right?

It is within that range, you assume.

Your next question comes from the line of Sophie Carran from Goldman Sachs.

Victor and Chris, just a quick follow-up for me. Just around the CapEx. Could you give us a rough split on expansionary versus maintenance CapEx? And then how should we think about the step-up in CapEx, just noting differences between different markets and where that rollout is going to be concentrated?

Yes. I probably going to give you a split in the dollars that we actually spent. But I guess, a big part of the CapEx that we spent in the 6 months of our new stores, we probably didn't get through as many refurbishments as what we would have liked to in the half. So it is in the a big a part of that number. But if you're looking at it, trying to forecast that what you think that demand is, I mean generally, every lease, as we renew it, we look at whether we need to spend CapEx on that store to get it back up to standards, depending on how long ago after the last refit was. But if you assume average lease terms like 5 or 6 years and refurbing stores on renewal, but probably on average. Probably, a third to half the normal fit-out cost of the store, depending on what we decide to do then that gives you a benchmark for what we might need to spend on an ongoing basis.

And sorry, just on the -- any sort of major differences between fit-out costs in new markets?

Yes, absolutely, the U.S., as we've said time and time again is the most expensive market in the world for us to build a store in. So it's in a lot of respects, more than double some of the other markets in terms of what it costs to build a store. We try to offset that by getting the landlords to help pay for the fit out because a lot of the time, it's the extra cost is caused by their requirements. And we've been reasonably successful in that, which has helped bring that net CapEx for the U.S. market down closer to what we spend in some of our other markets but still above. So as the rollout is skewed towards that U.S. market that means that the CapEx that we're spending is higher. And obviously that will have a flow on effective depreciation over the years to come.

Our final question comes from the line of Aryan Norozi from Barrenjoey.

Just a clarification on the LTI. Last year in the FY '22 result, you disclosed in the accounts that there was a $5 million provision or costs taken for FY '23's LTI. So that's fair to assume that you've already provisioned for $5 million. So if you add there's an extra cost that's been providing for both this year and next year. Can you just give us a bit of color around how you're thinking about the catch-up and the profile of that fleet, could be confusing.

Yes. So I'm not sure where you're getting the $5 million from, Aryan. Is that -- that may just be cash component or where are you getting that number from?

I think the REM report, the [ LT accounts ] investing schedule. So this $4.99 million that was expensed in the FY '22 results based on the FY '23 vesting assumption and then another $2.9 million for FY '24.

Sorry, I'm just trying to find the page that you…

It's page 24, 9.3.

Yes. So that's just the equity component. But as -- if you think about it in terms of the opportunity for this year is $28 million in total, $3.6 million of that is in cash, and the rest is in equity. So that -- the number you're looking at is only the equity component.

Yes. But it's fair to say that you've already provisioned for $5 million of that equity component last year for this year, basically. So…

Yes, Correct. I'm just -- you're not talking the whole picture. But yes, that's exactly the point making earlier…

And then…

Sorry, you go.

And then there's extra costs you've incurred this year based on FY '24 as well. So the provision -- increased provision that you made in this half for the FY '24 and LTI as well. Okay. The true cost for first half '23 is materially lower than the $15 million that you've called out like the true LTI that you would have incurred if you hadn't provision would have been materially lower than $15 million.

It would have been -- it would have been lower. I'm not sure what your question is though, because it is what it is, right? So we've got a book an amount in relation to the LTI initiate, part of which relates to what we could have booked last year that we didn't. So we had to catch up some of that because of our assumptions around low cost profits for this year and next year have changed. So we've had to catch up on some of that that relates to this year's LTI and some of that that relates to next year's LTI. I hope that helps?

No, that's fair. That makes sense.

I guess, probably the point to remember, though, is that the cost initiatives is high as it will be because next year, it will be a much lower number because we've had to provide for next year's LTI, last year and this year. So it will be much less to catch up on next year. That makes sense?

Has the LTI had an impact from morale when there's large pay divergence from the CEO to the rest of the business? Or have you seen pressure -- upward pressure on the remainder of wages throughout the business space on that LTI or not?

Not that I'm aware of. Not a topic of conversation around.

We have one final question from [ Stephen Floyd from nil ].

I'm just a private investor and love your work. In the media, there's been some comments about unhappy employees and some legal action. Is that being addressed? And are the customers -- are the employees happy? Every time I go into a store, the employees always seem hard working and very happy. But -- and I was surprised to see that in the media. What's going on?

We don't disclose anything. The only thing I'm -- you can see the results. I think that people are very happy with the results inside the company, and we are very happy with the team. One of the things that we mentioned on the press release is that we want to thank you, the team, because this is not really the big performance is by all the team that is working with Lovisa. And we are very proud of them, and I think that they are very happy and proud of working with us and working for Lovisa.

That's what I see too. And that's why I was surprised to see that in the media in the last few months, some very unhappy employees claiming that they're overworked and having to deal with bad conditions.

With no further questions, I turn the call back over to Victor Herrero.

Thank you very much. And hopefully we will see each other in 6 months' time, and we can continue talking more about Lovisa's performance, and we will see some of you guys within the next coming days. Thank you very much.