Lovisa Holdings Limited (LOV) Earnings Call Transcript & Summary

Hello, and welcome to the Lovisa Holdings Limited Fiscal Year '23 Full Year Results Briefing. [Operator Instructions] I will now turn the conference over to Mr. Victor Herrero, CEO. Please go ahead, sir.

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, this morning, we published our full year results to the ASX, and we would like to talk 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 key to our success to date and our focus for the future. Our strategy is unchanged. We continue to be focused on the continued global expansion of our physical and digital store network. And as you will hear later, we have made a strong progress in delivering on this strategy during the financial year and have laid solid foundation for continued growth in the future. If you turn to Page 5, we will talk through some of the details of the year. May I remind you the numbers we will talk to today and included in our presentation includes the effect of the new lease accounting standard. A full reconciliation is provided in the appendix to the presentation. All numbers I will reference will refer to year-on-year comparative being on a 52-week basis. I am pleased today to present another strong result for the financial year '23, which again is evidence of the strength in the team, the products and the potential of the business. Our sales performance for the full year was strong with global comparable store sales up 6.3% compared to the previous full year. Our store rollout accelerated across the year, with 210 new stores opened and a net increase of 172 stores, taking the store network to 801 stores at year-end and resulting in total sales being up 33.1% on fiscal year '22. Our global rollout remains a key focus in the financial year. And while the growth in the store network was primarily driven by the U.S., we also opened in 12 new markets, which I will talk about later. Gross margin was strong and cost of doing business was well controlled while making significant investments into growing the business. As a result, we delivered an NPAT of 68.2 million, up 20.1%, which has allowed the Board to announce a final dividend of $0.31 to be paid in October. If we now turn to the financial overview on Page 6. As I noted earlier, our strong revenue growth for the year, up 33%, together with improved gross margins allowed the company to achieve an EBIT growth of 31.5% to 105.7 million for the year and net profit after tax of 68.1 million, up 20.1%. The net profit growth was slower than EBIT growth, with interest expense associated with our store lease liability up significantly on last year as a result of the large number of new stores added for the financial year, combined with higher levels of debt and higher interest rates. If we turn to Page 7, you can see the sales performance for the year, that shows the benefit of store network expansion combined with the store -- comparable store sales driven the overall sales growth by 30% on the prior year 53 weeks. Looking to our regions, most markets benefited from the strong first half of the financial year. Our Asian result was driven through both new stores opening and the strong first half sales cycling disruptions in fiscal year '22. Africa continued to perform well and benefited from 10 new stores, including 2 in Namibia and our first store in Botswana. European sales reflect our continued store growth and new market expansion, which in the second half included our return to the Spanish market, resulting in a net 55 stores to drive sales growth of 30%. The Americas continued its store rollout momentum, increasing by a net 82 stores, including Canada and Mexico. This helped to deliver a 78.1% increase in sales in that region. I will now hand over to Chris Lauder, our CFO, to talk through our financials.

Thanks, Victor. Good morning all. Turn to Page 8. Gross profit was $476.7 million at an 80% gross margin, up on last year by 100 basis points, delivered from tight management of pricing and promotion and strong focus on optimizing gross margin. We've continued to focus on the efficiency of our inventory position, and I'm very pleased that we have been able to close the financial year in a good state. Turning to Page 9, we'll talk about cost of doing business. Total cost of doing business for the financial year was up 36% on the prior year on a statutory basis, which includes the cost of the CEO LTI plan for the period and is post AASB16. To ease the comparability with prior period, we have presented the CODB table in this slide on a pre-AASB16 basis and provided the usual reconciliation between the statutory results and the pre-AASB16 result in the appendices. For comparability purposes, we've also presented this chart excluding the impact of the CEO LTI expense in the period, which was $27.1 million in the year compared to $18.7 million in the prior year. On this basis, the cost of doing business percentage for the year was slightly higher than prior year at 55.1%, reflecting good cost management in an environment where we have faced inflationary pressures and where we have continued to invest in rollout out 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 ex-tranche of the LTI to be expensed over its vesting period based on the 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 off in the best form. Turning to Page 10. You will see the cash generated by the business has again been strong with cash from operations before interest and tax of $188 million for the year, reflecting good management of our working capital. Capital expenditure for the period was $60.7 million predominantly from new store fit outs, which represents a significant increase on the prior year as the store rollout accelerated. Lease payments were up 20% on prior year, reflecting the growth in the store network, with the associated growth in balance sheet lease liabilities resulting in a large increase in lease payments classified as interest, with cash interest payments increasing 113% as a result of this, combined with the increase in the level of with net debt on the balance sheet. Cash tax payments increased as a result of catch-up of tax installments after lower-than-normal payments in prior years and reflects a more normal cash tax profile. Dividend payments were also higher for the year at $80.9 million. And all of these factors combined to deliver closing net debt of $33.4 million. Turning to Page 11. You'll see that the balance sheet remains strong with clean inventories and significant liquidity available to fund growth following the [Technical Difficulty] of our debt facility in April, resulting in an increase in term out 3 years and total cash facilities to $120 million. The focus on distributing surplus cash to shareholders and the introduction of debt into the capital structure combined to -- result in the increase in net debt you can see on the balance sheet. The strong result for the year and strong balance sheet has allowed the Board to announce a final dividend of $0.31 per share franked at 70%. As we said previously, the Board will continue to assess dividend levels at each period 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 will 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 Victor.

Thank you, Chris. If we turn to Page 12, a quick update on store numbers. The key driver of future growth for Lovisa continues to be in our global store rollout. We finished the period with 801 stores trading in 39 markets with a net 172 new stores opened for the year. Highlights include 72 in the U.S. as well as our first stores in 12 markets across the globe, including Italy, Hong Kong and Botswana as well as franchisee markets such as Peru, Colombia and Morocco, highlighting the amazing global opportunity of this business. Across Pages 13 to 15, we can see photos of some of our stores in our newest market to demonstrate the importance of consistency of presentation of our business. It doesn't matter if you are in Hong Kong, Italy, Northern Ireland, Botswana or Morocco, you will see the same Lovisa wherever you go. As we move to Slide 16, I would like to share some operational highlights across the last 6 months. We opened our new 5,000 square meter warehouse in [ Jaroslaw ], Poland to replace our existing 3PL warehouse there. We had so far provided a much improved level of service to our stores in Europe. During the year also made some changes in our franchisee business, taking back the UAE franchisee market and now in the process of converting this market to company operated. We have today converted 3 existing stores to company-owned, and we are looking to expand in this important market. This has, however, resulted in the closure of a number of existing franchisee stores during the year. And since then -- however, in the longer term, we believe this will be a much better strategy in the market. Our existing partner will continue to operate in the other Middle Eastern markets. Recently, we were also able to open a number of new franchisee markets that has allowed us to enter the South America and North African market. We have also continued to invest in our digital platform to enhance performance, customer experience and fulfillment capability, including expanding our marketplace offering as a means to reach to a bigger customer base and adjust our physical stores and own website. On Page 17, I will talk to the trading update and outlook for the coming half of the financial year. Trading for the first 7 weeks of fiscal year '24 saw comparable store sales for this period down 5.8% and total sales up 13.1% on last year. In year-end, we have opened 21 new stores together with 8 closures, which includes 6 UAE franchisee stores. The current store network is 814 stores. We continue to focus on opportunity for expanding both our physical and digital store network. Our balance sheet remains strong and available cash and debt facility supporting continued investment in growth. To summarize the financial year on Slide 17. Our sales performance was strong both in comparable stores and new store rollouts. Our global expansion delivered new stores in new markets across Europe, Africa, Asia and the Americas, resulting in a net 172 new stores opened, finishing the period with a total network of 801 stores. This delivered an excellent result with an EBIT of $105.7 million, up 31.5% on prior year and an NPAT of $68.1 million, up 20.1%, with our strong cash flow and balance sheet position, allowing the Board to announce a final dividend of $0.31 per share to be paid in October. I want to thank the entire global Lovisa team for the amazing work they are doing to deliver these outstanding results. And with that, I want to thank you for all your time. And we are happy to take any questions.

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

Perhaps to make a start, you do have articulated, I guess, obviously, cycling price increases as being a driver of slowing comp sales growth over the second half. Can you kind of, I guess, give us a bit more color on what's driving the negative 5.8 maybe by territory? And also the price increases implemented over the third quarter of FY '22?

Chris here. Generally, we don't break it out like that. And I guess there's nothing new in any of that. It's the same messaging around the price increases from F' 22 and the impact of that on '23. So you saw the strong comps through the first half and we said that it would drop off in the second half as we got through that. I can't remember if we've shared a percentage increase on that, but it's not something we generally like to do. So -- but I guess the main point is that, that was definitely a driver in the slowdown in comps as we had expected. Obviously, there's -- a lot of people have gone out with comp numbers in this market. So you can read into that what you will -- how that's impacting on us. But we're probably not going to go into the detail market-by-market. But you can obviously see how we're trading so far this year.

Okay. And just maybe to -- I don't know -- historically, you used to disclose at your outlook comment like a target of 3.5%. Like is that something that you think that you can work towards over the course of this year as comps get easier towards the back end of FY '24?

Yes. I think that we used to say, yes, we like to be in the range of 3% to 5% comps. And obviously, that doesn't change. We would love to be in the range of 3% to 5% comps. But it's all very dependent on what's happening in the market and what we're cycling. And that's why we no longer make those comments because they're a bit pointless. We would like it to be more than 5%.

Marni, Victor here. I want to reinforce the message that we are in 39 markets at this moment. And there is a -- with the good and bad of having that. But I think at one point in time, maybe a market is performing better than the other one. And we have much more flexibility than 2 years ago when we were having 20 markets. And I think that's the message that I want to -- or the answer to your question is that we are becoming a truly global company. And with the advantage of having a global company that in some specific markets maybe you are not performing as good as other markets.

And do you think that your consumer is still kind of soft at the moment? Or is it just the cycling of such enormous strength this time last year?

What I am continuously thinking is that we have a great white space. Lovisa is received in every single market that we are opening, very well received. And what I think is that we continue strong. I think you can see the results. And I believe that it's still a strong category to be in.

Okay. And just one more final one for me. I can see now you've gone to -- and obviously leverage is only about 0.3x, but gone to being a net debt balance. Is that a thing we should continue to expect moving forward as you continue to rollout stores? And I also noticed the increase in the financing facility is coming about $20 million higher than what you kind of thought you had approval for back at the interim results. So what is it -- what's been the driver of that too?

Yes. So on the first part of the question, the net debt on the balance sheet has been what we've been targeting for the last couple of years, to be honest, as we've increased the level of dividend payout. So we've been pretty open about that was the reason for why we were paying out the level of dividend that we were. So that's definitely a deliberate thing and we'll continue to -- you'll continue to see that. And then in terms of the debt facility, yes, so what we announced at the end of the half was that we were extending the term debt facility to $100 million. The 20 million monthly option facility was already there. That's just a rolling annual facility. So that's just added, the 2 together. So that wasn't necessarily a change. That facility is still in place.

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

Just a question on store growth. I'm just curious. Do you -- are you confident you can maintain over 200 new stores in '24 similar to the [ 2010 ] that you did in fiscal '23? And should we anticipate more new markets? Or will growth be skewed to existing markets, please?

As we mentioned in the beginning, we will open the number of stores that we believe is the opportunity on one particular year. We are not store collectors. We are opening stores that have profitability and that they are expanding our global brand. So we are not going to go into the conversation on how many stores we are going to open this year. And it is going to be on the same line as last year. What I'm telling you is that I've been opening this -- Lovisa has been opening 210 stores this year, and let's see what happen next year. But I think we assure that our stores -- all the stores that will open, they will be profitable and we'll try to always expand our brand in other markets as well. So we are expecting maybe to open a few markets whenever the opportunity is coming.

Great. And then maybe just on costs. The EBITDA relative to the market really came through gross margins and CODB to sales. If you just touch on, Chris, maybe the drivers of the gross margin being so strong, whether it's sourcing costs, scale advantages there? And then, particularly, how in CODB you managed the labor and rent so well there?

Yes. So on gross margin, I mean, a lot of that upside came from the first half and probably the first 3 quarters. So with the benefit of the price increases from the previous year. So we were well up in gross margin in the first half, I think from memory. And we've maintained that through the rest of the financial year. So that's where most of it came from. I mean we've been pretty strong on managing, obviously, the product cost side of the equation and keeping inventory clean. I mean that's probably one of the key things for us, is making sure that we keep the inventory clean. And then that naturally translates to not having to go as hard on markdown on that sort of thing. So combine all those factors, and that's how we got there. And then on the cost side, again, obviously, first half, it's very strong comps. So that keeps that cost of doing business percentage looking pretty good. And we were able to match the inflationary pressures. Obviously, that got a bit harder in the second half to continue to do that. But yes, I guess just constant vigilance and focus on costs while we're still investing in the structures to grow the store network and rollout into new markets, because that comes at a cost, that we're able to manage that pretty well.

And finally, just how does the accounting on the UAE chains work? Should we anticipate -- obviously, your store numbers are coming down. You see those -- sort of the revenue you get from those -- the sales on those stores obviously become corporate. What happens there on an EBIT basis? I'm just curious around if there's any sort of change there that we need to be alert to? And the shape, obviously, as you move from franchise to corporate will change. Can you just maybe walk us through what that does, please?

Yes. I mean -- so franchise income -- when it's -- a franchise market comes through one line on the P&L in the revenue line that we see franchise income. Obviously, when it's a company-owned market, it comes through just any other store, so sales COGS, cost of doing business down to the EBIT level. So that's probably the way to look at it -- look at that franchise contribution and reduce that number for the fact that market is coming out. But add stores into the -- you're normal modeling around company-owned stores.

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

What's the biggest impediment that stops you from rolling out stores faster than you currently are? And how do you expect this dynamic to change over the next year?

There is no much impediment. It's basically -- as I mentioned, always is -- of course, you can open 1,000 stores, but I think it will be very irresponsible from us because I think most of the stores won't be profitable. And so for us, we are happy with the pace that we are having over the last few years and we will continue doing that.

Got it. So if just profitability -- is it just the deals you're getting from landlords which are driving the pace of the rollout?

Yes.

Okay. And in FY '23, there's a higher rate of closures compared to FY '22. How should we think about the rate of closures in '24?

I think closures are, say, sort of straight line thing to measure, Sam. I mean, it's more about we're constantly focused on the store network and taking action where we think it's appropriate. Surrendering the keys back to the landlord to try and get better rent. Sometimes we win; sometimes we don't and we have to close the store because of it. But yes, in that number, there's obviously a big chunk of stores closed in the UAE that were franchisee store that we just talked about a minute ago. So -- and it's a much larger store network. So I haven't actually looked at the proportion of the total that the closures make up. But it's just a normal part of our business and you can expect it to continue.

All right. And given the success Lovisa had previously using price rises to drive sales, would you consider doing it again? Any price rises planned for FY '24?

Definitely, we have to continue. I think the inflation pressure is a reality. So whenever we believe that we need to do price increases, we will do it. And we are not shy. And also, we told you that we had a price increase in fiscal year 2022. So clearly, we will think about some price increases in a specific market as well whenever we believe it's the right thing to do and whenever we have inflationary pressure.

Got it. Should we think about anything this half? Is that likely?

Well, for the time being, we haven't think about it. But I think in case we do it, we will report it.

And I think, Sam, the other part of it is we're constantly tweaking our prices when we're doing it across the whole product range. So new products coming we'll tweak price points and that sort of thing. So we can get those benefits on an ongoing basis. It's not just probably not as widespread as what happened in F '22.

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

Just a couple for me. Firstly, on the like-for-like sales in the first 7 weeks. I get that you don't want to sort of talk on a market-by-market basis, but what's the trend been? Is it -- did it kick down early and [ trend ] is getting better? Or is it getting worse?

Yes, I'm not sure if there's any real comment we can make there. There hasn't been any major trend shift I guess is probably the main thing to say there, in that period. It's been pretty consistent.

Right. And in the store sort of rollout, I mean, you're in 39 markets now. Are there many more planned? Or are you kind of done for the moment?

Still the -- we plan some and we opened 21 stores over the last 7 weeks. And there are some plans to open over the next, say, few months. And this is how we work. We sign the contract and later on we open a couple of months after. And -- but clearly, I think we continue foreseeing opportunities on the store rollout, and we will continue doing. Right now, we have more flexibility because we are in so many markets. We are in 39 markets. And maybe we'll open other extra market over the next coming months.

All right. So in terms of like the likely profile this year -- and in the new markets, it's been a varying rate of sort of acceleration. You went really hard in Poland, other than -- you've added only a few in the sort of second half. So can you kind of give like a view on where the rankings are in terms of the new stores in this next year? I assume the U.S. is still the biggest by a mile. But where does it sort of fall after that?

Yes. I think it's more based on opportunity, Julian. Obviously, the most opportunity is -- the U.S. is a big market, so there's a huge opportunity there. But Europe is also a market for us. So you'll probably see a lot coming from there. But a lot of untapped potential in the markets that we're already, in Asia. So you'll see it spread across the globe. But it just all depends on where the opportunities come up and where we can get the deals done at the right price. I mean that's -- you guys know that. It's not about -- we're not specifically targeting anywhere in particular other than we just want to rollout stores that are profitable.

Okay. And just finally. So in terms of like with the slowing global economy, what -- how do you -- what's your attitude to that? Is it to be more cautious in the rollout or take advantage of the opportunity?

Yes. I think everyone is talking about the global economy for the last few years. And at the end of the day, we've been very consistent, Julian, and we will continue being consistent and seeing opportunities in -- right now in 39 markets. And hopefully, we will continue winning by opening stores and by opening our digital network as well.

So no change, just continue gung-ho rollout?

Correct.

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

First one for me. Just on the comps or the sales as well. If you look at July, August, comps were down 6%. Same time last year, it was up 21%. So you were cycling price increases in a pretty big comp. If we go to the rest of the half last year, it slowed to 10% growth. So you went from 21% comps in July, August last year to sort of plus 10% for the remainder of last half. Mathematically, does that mean your comps will turn positive if just the current conditions continue for the rest of the half? Or is that not the way to look at it? Basically, what I'm trying to get at is to what extent do we extrapolate the negative 6% for the rest of this half considering if there's no change in sort of the current sort of conditions in the world, please?

Yes. I mean you're better at math than us, Aryan. So that's -- you've probably done some good calculations there to work out what mathematically could be the outcome. There's obviously a lot of real world stuff that goes into that to deliver that. But yes, obviously -- we're seeing the product of having some pretty huge comps in prior year, and then that -- and then once we get through that period, then it gets easy for us. A lot of real world stuff has to go into that process, not just math.

But you guys see daily sales and you know what the seasonality is like. Just -- I mean, just so we set expectations right -- and I suspect there's going to be a wide range of assumptions moving forward. But like is it incorrect to extrapolate the current comp decline for the rest of first half '24 considering if there's no change in the backdrop in the world? If your momentum and seasonality continue, is that the right number or just mathematically it will change? Because every year, you're cycling a different lockdown [indiscernible]. Then you get to full year stacked comps. So it just gets ugly. So just to everyone's benefit, like is it -- should it actually go -- sort of improve materially for the next few months because of -- yes.

Yes. I mean, we haven't given any guidance on comps for the reason that you're just articulating that it's complicated and it's impossible to land on what that number should be. So it makes it pretty hard for us to give you any other guidance on how to calculate it other than what you've already done, which is look at what's happened in the past and look at the dollars that we're delivering and what those dollars would look like if you compare that to the same time last year as a comp. I mean, that's the best way to try and back calculate it and work out where you think it's going to get to.

Okay. And just on the gross margin, I mean, in 2023 it's about 80%. And then if we just think about the pluses and minuses, on the plus side, you've got obviously lower freight cost that everyone's calling out; sourcing benefits from manufactures in China, so you're getting better rates. But on the negatives, you've got obviously a significant weaker Aussie dollar and your hedges start rolling off particularly towards the back end of next year. So how do we think about the balance of outcomes? And should we basically assume that you can maintain that 80% margin into '24? Or should there be a weakness based on those things, please?

Yes. I mean that's obviously what we're trying to do, maintain that level with -- like you said, there's a lot of moving parts in there and things that will impact on that. I mean freight cost is a good one. But just remember, a lot of our product moves by air freight. So if people are talking about changes in sea freight costs, then that tends to be a different profile for us. But yes, we're obviously not going to give guidance on gross margin, but our objective is that we certainly don't see that going backwards.

Great. Last one, just on the cost, particularly the other cost in business line. So obviously, the first half you called out that as sort of setting up new regions and sort of consultants and all that sort of stuff. If you look at the second half, it's still pretty elevated. So like do we assume a lot of those costs drop off into '24? Or is that the right base to annualize and maybe grow more just because of inflation? Like how do we think about the cost base into '24, please?

Yes. I mean, generally we don't say that costs are going to drop off because we'll continue to invest to keep growing. It doesn't come for free, unfortunately. So yes, there will be some stuff in FY '23 that won't happen again in FY '24, but there'll be new stuff in FY '24 that replaces it. So I mean, our objective is to make sure that we -- we'll try to make sure that we don't see that CODB percentage rising, or if it is, it's not rising too fast. But the inflationary pressures are real, particularly on wages and that side of things. But yes, it's our job to manage that.

Your next question comes from the line of Ed Woodgate with Jarden.

Guys, can you hear me again?

Yes.

So just following on some of the questions on GP margin. So I appreciate as you said that -- I mean, you had a good strong full year. Obviously, you said it was first half driven. It looks like the second half is down circa 70 bps versus the first half. Can you just talk to the puts and takes there?

Sorry. What was the last thing?

Can you just talk to the reasons for the decrease in the gross profit margin from 70 -- or by 70 bps.

First half to second half you mean?

Yes.

Yes. I mean that's not unusual that we see that. Yes, so I don't think -- don't read anything into that. I guess the main message is that we -- I think that the growth in gross margin was higher in the first half year-on-year. So where it should be now? And as I've just said before, we would hope that we can maintain that through FY '24.

Yes. Okay. And then just on the store rollout churn update. I know you've already had a few questions on this, but -- and I know you don't like providing quantity targets there. You've said in the past that usually implied run rate is a good indicator. So the pace of the remainder of the year -- it's just seems like where consensus is for store rollout target of -- I think it's 971 in FY '24. It seems like you've got a lot to do. So is there any reason why we can't look at the store rollout today on a gross basis -- and that just might have been a bit slower than usual. And would it be reasonable for us to assume an increase over the remainder of the year?

I mean, we've opened 20 -- more than 21 new stores or something in the first 7 weeks, but still a pretty strong pace. We keep saying repeatedly that it's not a straight line. So store rollout -- and I think Victor said before we're not store collectors. We'll open stores that are profitable and at the right time. And we're not sitting here going, "Well, we opened 200 stores in F '23. We've got to deliver that again and then some." If we don't deliver that level of number it's because we -- the deal hadn't landed at the appropriate time with the [ appropriate ] metrics. So I know it doesn't help you guys as much because you're trying to land on what the number is going to be. But it's -- we're not giving any guidance on store number to still rollout for the year. Just sort of make your own assessment of what that current run rate means and what that extrapolates to for the full year.

Okay. And then just one more for me. So -- just the second half regional performance. So that's the pace that you [ played ] it looks like on a -- it looks like ANZ, Africa and Asian markets have softened a lot. Is there any reason to -- not to assume that those regions are the main ones dragging on the year-to-date performance?

Yes, I think you can do the math, right? So you can see what that comes out to. I mean, yes, it is what it is. I'm sure you just picked up what the half year numbers were and what the full numbers were and then try to back solve it. But you know those markets were really strong in the first half in terms of that overall comp number. So that's probably what you all have seen there. And those numbers that you're working on obviously are inclusive of new stores and closures and all that sort of thing. So it's not really a comp position you're looking at.

Yes. Sure. I mean, that's it for me. But I guess, obviously, it's a high-quality business and you guys have been doing a great job. I think people are just trying to work out the next couple of periods.

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

Can you discuss the experience you've had as you've entered some of these newer markets, Victor? And have you had to adopt -- or adapt, I should say, the business model to suit local trends and what have you?

Yes. Our market -- we opened in Granada in Spain, and basically so far was completely uneventful. We are coming back to Spain, as you may know. During COVID period, we decided to close Spain. And right now, we are opening again. And I think at the end of the day, we have some reference there because I think we were quite strong in the French market with more than 70 stores. So basically, we are adapting a little bit of whatever we are selling in France. So we adapt the assortment to that particular store. But anyway, I think we opened in end of June, beginning of July and was uneventful. And I think the product -- the customer is happy with whatever they are seeing and they are shopping in our stores. And what is important, that I mentioned on our script, is that basically we try to be very consistent on the image, on the customer experience and everything in every single market. And I think this is an important thing to say because it's appealing to this global customer anywhere we are opening stores or we are trading digitally.

So you're saying, Victor, like if you go into these new markets as Botswana, for instance, it's the same woman who's buying the product, you feel like it's like resonating as it would in Spain on the other end of the spectrum?

I would say that I think they will buy the same as they are buying in South Africa. As you may know, we have a lot of experience in South Africa with more than 70 stores. So Botswana case was an easy one to figure it out what is the product that is going to resonate to our customers. But in general, at the end of the day, the assortment is quite similar in every market.

Yes. Okay, yes, that's the key of it, trying to understand the assortment and the store selection and how the customers respond. And you mentioned the change of heart on Spain. Can we get a bit of an explanation on the -- on Taiwan? I know 6 months ago, it was a little bit vexed on whether that was a potential new market or not. Now it looks like you are in there. And what does that mean for other new markets in that Greater China region?

Yes. I think Taiwan is a market with 23 million people and which I think our products will resonate very well. And I think it was one of the markets that we opened on fiscal year '23. And clearly, we are continuing -- expanding in Hong Kong as a market. Also, we opened several stores in Malaysia. And clearly, I think maybe there will be some opportunities in Mainland China at one point of time.

Your next question comes from the line of Johannes Faul with Morningstar.

I had a question on your online business. Just if you could give us a sense of where online penetration sits? Or at least like what growth you're seeing in that channel? And also, do you have any more detail on that marketplace offering you mentioned earlier?

Yes. We don't give penetration of online, we never have and may never ever. So obviously, it's an important part of our business because we need to have it there and the customer needs it as part of the overall offering. But obviously, you can tell by the fact that we're not calling it out and breaking it out like a lot of others retailers do, it's not a huge part of our total mix, but it's still very important as part of the customer experience.

Okay. Great. And just on the cost of doing business. So I guess you both mentioned that you open stores when they are profitable. And I'm just trying to just verify on the cost of doing business, back going up, let's say, on an underlying basis on a pre-AASB16 basis. Is that driven by labor? So it's not -- is it just labor cost inflation? It's not that newer stores are less profitable than the existing footprint?

Yes, not necessarily. No, it's -- definitely labor cost is an impact, but it does vary a little bit depending on the market in terms of the rents or the wages or whatever. But generally speaking, it washes out in the overall mix. So like I said before, it's just something that we just have to manage, the relative economics, to make sure that each store that we're signing off fits our investment hurdle, which is the same globally.

Okay. Got it. And then just on your debt covenants where your ratio sits. Did you break those out? I haven't seen those in the presentation, the fixed charge ratio, the operating leverage and also cash conversion.

I don't think we did, but there's plenty headroom in there. I mean, you can calculate leverage. We calculate that all pretty easily. But plenty of headroom.

Your next question comes from the line of Joseph Michael with Morgan Stanley.

Just the first one I had was just around the long-term incentive plan. The current one goes out to FY '24. Things are obviously going really well based on the existing targets. When should we expect an update on a new LTI package for FY '25 and beyond?

Yes, at the appropriate time, Joe. If there's anything to talk about now, we would. But there isn't. So we'll let you know when there is.

Wonderful. Okay. And then I just had one other question, just around sort of the longer-term potential. Just trying to understand how to think about new country launches. I guess every time you launch in a new country, should we think of that as increasing your medium or long-term store targets? Or is it providing another sort of pathway to your existing target? I'm just trying to understand, is the longer-term growth potential for Lovisa and the store rollout increasing?

Yes. I think we don't have any long-term store number targets. I'll just put that out there in the public. So you just got to think of every new market as an opportunity for us to open new stores. That's what it's about. I mean, it doesn't matter where we're opening them. We just -- as long as they are hitting the hurdles and profitable, then we're happy.

Great. And then just a last question for me, just around new store CapEx. I don't know if my math is right, but back of the envelope calcs, I think new store CapEx is down about 10%. And you correct me if I'm wrong there. But can you just talk about what's driving that? Is that a mix towards lower cost regions? Or is there a deflationary element in there?

No, I wouldn't read too much into that. I'd say it's probably more just to do with how much landlords have contributed towards the [ push of ] it. And the mix of stores that we've opened in the year, I don't think we -- we certainly haven't seen deflationary, yes, impacts on store CapEx.

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

Just drilling down a little bit further on some of the previous questions. In regards to stores, the closures in the UAE, what didn't you like there? What wasn't working? And are there similar stores that make up the portfolio that you'd be looking at this period?

It's an opportunistic move. I think -- as you know, UAE is among the -- some markets that everyone is having top stores over there. And we thought that I think by taking over the -- some of the stores and closing some others, I think on the long term will be a good market for Lovisa. So that's why it's an opportunistic move. And I think that we will -- over the long term, we will see the results of that strategic action.

And I mean that should -- normally that would have a positive impact on gross margins?

Yes. Yes. I mean, obviously, going from a franchise income model to a owned store definitely. Obviously, at EBIT level see a wash out, but it should be more profitable for us, otherwise we wouldn't be doing it.

Yes. And then on the U.S. stores, you're definitely at scale now. Have you got better visibility on how that can move around economics -- at the gross and cost of doing business lines in '24 and '25 now?

I mean, yes, obviously, there's a lot of stores now in the business in there for the full year and trading well. So yes -- I mean, we're not going to sort of break out it for you. But it shouldn't -- if your question is, would we see any changes in the structure of the P&L because of having more stores in the U.S. going forward, I'd say the answer probably is, no, it's already now -- it's kind of baked in there, if that is what you're asking.

Right.

Adding a little bit on that. What is important as well is that we have 190 stores in the U.S. I think we have a significant footprint at this moment. We are becoming a relevant brand for our category. And I think that we will continue being -- or developing the brand in the U.S. market, which you -- as you know, is a very significant market for any global retailer. And we -- I think we are in 39 states at this moment, which is kind of a significant presence in many states, which is quite unique for a retailer because normally they concentrate in several states. But I think so far our product offering has been appealing to almost every customer in the states.

Okay. And so you're probably -- are you happy with profitability there now? It's hard for us to get a read on --like I said, if you were to increase the footprint again by 25% or 50%, how that would impact the bottom line?

Yes. I mean if we do that, it's based on our normal investment metrics. So you would expect that it should -- obviously, we're never happy with profitability and we want more.

Okay. Last one for me on the dividend and the drawdown. Obviously, you're a growth-focused company. Does this mean that there's not as much infrastructure investment required going forward? Or it's just an opportunity to open up the channels for the debt?

So I'm not sure I understood the question fully. But I mean, definitely going forward we will need to continue to invest in infrastructure. I mean we're...

So is it significant what you've done recently?

Yes, I think I kind of answered this a bit earlier on, that, we look to maintain that cost of doing business percentage because we're reinvesting into the business. And we're not planning on stopping and staying where we are in the existing structure that we've got. So we're constantly just evolving and adding and spending more on what we can do to become more efficient. So you can expect that to continue.

Your next question comes from the line of Chami Ratnapala with Bell Potter Securities.

Just wanted to expand on the regional performance a bit. The European region at a headline level looks pretty strong. Any call out here, I mean, in terms of -- is it more new stores or comparable sales, just keen to hear.

Yes, both things are quite -- we are quite pleased with the performance in Europe. And as you know, we are in several euro markets. We are also in some other markets like Poland, Romania and Hungary. So I think we are overall very pleased with our performance in the European market.

Your final question is a follow-up from Aryan Norozi of Barrenjoey.

Just last one. Has there been any change in the number of stores meeting the unit economic criteria since the last time you spoke to us, so in Feb, versus now? Are you finding that fewer stores are removing your hurdles or the same?

I mean, we generally comment on the store-by-store profitability perspective, but no real change.

And there are no further questions at this time. I will turn the call back to Mr. Victor Herrero.

Thank you very much. And we will see you or we will come back to you in 6 months' time. Thank you.

This concludes today's conference call. Thank you for joining. You may now disconnect your lines.