Lovisa Holdings Limited (LOV) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Lovisa Holdings Limited FY '24 Full Year Results Briefing. [Operator Instructions]. I would now like to hand the conference to Mr. Victor Herrero, CEO. Please go ahead.

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 highlights of the presentation and we are happy to take any questions at the end. If we turn to Page 4, we will talk through some of the highlights of the year. I am pleased today to present another solid results for the financial year 2024, which is again evidence of a strength in the team, the product and the potential of the business. Our store rollout continues through the year. We opened 128 new stores in the period, taking the store network to 900 stores at year-end. This allow us to deliver a strong growth in total sales of 17.1%, which was achieved despite comparable store sales being down 2% on last year. Recently, we were able to open a further a seven new markets during the year, including the significant growth opportunity markets of Mainland China, Vietnam and Ireland. Gross margin was strong and total cost of doing business was stable whilst making significant investment into growing the business. As a result, we delivered an EBIT of $128.2 million, up 21.2% and impact of $82.4 million, up 20.9%, which has allowed the Board to announce a final dividend of $0.37 to be paid in October. If we turn to Page 6, you can see the sales performance for the period that shows the benefit of our continued store network expansion. Looking to our regions. Growth was particularly strong in the European and Americas market with those regions providing the majority of the new store growth. The Australian regions continued -- Australasia regions continue to be the most challenging market and opportunity for improvement. I will now hand over to Chris Lauder, our CFO, to talk through our financials.

Thanks, Victor. Good morning all. If we talk -- turn to Page 7, gross profit was $565.8 million, an 81% gross margin, up on last year by 110 basis points and delivered from tight management of pricing and promotion and a focus on keeping our inventory healthy. This outcome was achieved on top of the 100 basis points of gross margin expansion delivered in FY '23 and built on the 40 basis point improvement we saw in the first half of FY '24. We continue to focus on the efficiency of our inventory position and are very pleased that we've been able to close the financial year in a good state. Turning to Page 8, we'll talk to our profit. As you can see, we have again been able to deliver growth in both EBIT and NPAT despite the impact of negative comps and inflationary pressures on our cost base as well as ongoing investment into service and management structures to operate our constantly growing business. This outcome was assisted by the reduction in the CEO LTI expense from $27 million last year to $12 million in the current year. NPAT for the year includes higher interest expense on our debt with increased gross borrowings on the balance sheet throughout the year and higher interest rates having an impact. We've made a deliberate effort to continue to reinvest in rollout of new stores in existing markets as well as the opening of new markets and structures to manage the growing scale of the business, and we'll continue to do so to ensure that we are able to continue to deliver operational excellence for our customers. Turning to Page 9, you will see that the cash generated by the business has again been strong with cash from operations before interest and tax of $240 million for the year, reflecting tight management of our working capital. Cash capital expenditure for the period was $23 million, predominantly with new store fit-outs, which represents a decrease on the prior period as the store rollout in the year was slower than that delivered in FY '23 with 128 new company-owned stores built for the year versus 210 for last year. It was also impacted by the receipt of landlord fit-out contributions in the current year related to stores built in prior year. Cash interest payments were significantly higher than in FY '23, primarily due to the larger store network, resulting in an increase in lease payments classified as interest but also from the deliberate strategy to introduce additional debt into the capital structure of the business, combined with higher interest rates resulting in higher interest payments on debt. Turning to Page 10, you'll see that the balance sheet remains strong with a clean inventory position and significant liquidity available to fund growth with net debt at the end of the year of $23.5 million, down $10 million on June 2023, and total cash debt facilities of $120 million. The solid profit result for the period and continued strong cash flow and balance sheet position has allowed the Board to announce an unfranked final dividend of $0.37 per share, taking full year dividends to $0.87 and a 26% increase on FY '23. As we've said previously, Board will continue to assess dividend levels each period end and determine the appropriate level of dividend based on profitability, cash flows and future growth CapEx requirements in the context of prevailing economic conditions. The Board did not currently have a specific dividend payout ratio, and we'll continue to base dividends on the cash flow needs of the company and the structure of the balance sheet. I'll now hand back to Victor.

Thanks, Chris. If we turn to Page 11, 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 900 trading -- with store trading in 46 markets with 128 new stores opened for the financial year. Although the pace of the rollout was slower than prior year, we remain focused on continuing to grow the store network globally. Pleasantly, we are able to deliver our first new stores in a strategically important Asian market of Mainland China and Vietnam, both of which provide us with significant growth opportunities in the region, as well as our first stores in Ireland. With the strong base we built in our European market allow that market to deliver the largest share of new store growth for the year, and provide us with a very strong base to continue to expand from. We were also able to open a number of new franchise stores in the year to continue our growth in the South American and African markets, with new franchise markets open in Ecuador, Guadalupe, Senegal and Gabon. Turning to Page 14, we continue to focus on our execution of e-commerce and our journey towards being an omnichannel retailer, with ongoing investment in consumer experience and support systems, including a new product information management system. We also now have a presence on a number of e-commerce marketplaces globally, including Zalando in Europe, ASOS in the U.K. and Iconic in Australia. And importantly, we are now live on a key Chinese online marketplaces, Tmall, Douyin, Little Red Book, WeChat and JD.com as a part of our strategy to build our presence in the market. Moving on to logistics. We are -- I am very proud to say that last week, we opened our new company operated 5,000 square meters warehouse in Columbus, Ohio to provide our growing Americas region -- to service, sorry, our growing Americas region -- currently service from our Chinese 3PL warehouse. This warehouse represents an important step in the growth of our American business, currently servicing over 200 stores and provide capacities to support significant future growth across the regions. This new facility adds to our existing warehouse in Poland, Australia and China. On Page 15, you can see a recap of the business strategy, which set out the keys to our success to date and our focus for the future. Our strategy is unchanged. We continue to be focused on the global expansion of our physical and digital store network. And as you have already heard, we have made strong progress in delivering on this strategy during the current year and have laid a solid foundation for continued growth in the future. We have continued our focus on delivering an omnichannel experience to our customers and have improved our e-commerce execution at the same time as expanding our customer reach by adding presence on a number of new online marketplaces during the period across multiple markets. On Page 16, I will talk to the trading update for fiscal year '25 to date. Trading for the first 8 weeks of fiscal year '25, saw comparable store sales for this period, up 2%. Total sales for this period are up 12.7% on the same period of fiscal year '24. Since the end of the year, we have opened 10 new stores with two closures, with total store count of 908, including our first franchisee stores recently opened in Ivory Coast and Republic of Congo, adding another two new franchisees, a market to the network. We continue to focus on opportunities for expanding both our physical and digital store network, and our balance sheet remains strong with available cash and debt facility supporting continued investment in growth. To summarize the financial year on Slide 17. Our sales performance was solid for the year with a strong sales growth from network expansion offset by negative comp sales. Our global expansion delivered 128 new stores opened in the period, finishing the year with a total net worth of 900 stores. Gross margin were again outstanding at 81%, an improvement of 110 basis points on prior year, which was achieved along with a clean inventory position and growing on the 100 basis point improvement we delivered in prior year. This combined to deliver good profit growth with EBIT of $128.2 million, up 21.2% on prior year, an NPAT of $82.4 million, up 20.9% with our strong cash flow and balance sheet position, allowing the Board to announce a final dividend of $0.37 per share to be paid in October. Finally, I want to thank the entire global Lovisa team for the outstanding work they are doing to deliver these results. And with that, I want to thank you for your time today, and we are happy to take any questions.

[Operator Instructions]. The first question comes from the line of Garth Francis with MST Marquee.

Victor and Chris. Just the gross margin performance, and it's very strong into the second half. You mentioned pricing and promotion. Can you just give a little bit more color on were you able to put through pricing increases? Or was it just a better promotional activity management just in order to achieve that gross margin? And then also just perhaps some of the things around input costs with air and sea freight up.

So majority of it was price. So definitely we -- through price increases through the second half just as we did in the first half and in prior years. And as we've said a few times now that rather than big bang reprice the whole store and the whole store network were a bit more targeted now, specific ranges and specific markets. So it's kind of just an ongoing thing that's allowed us to deliver a bit of upside in gross margin from that, which is great. And we haven't seen any obvious impacts on our ability to sell through. And therefore, we haven't had to adjust our promotional strategies to offset that. So the gross margin pretty much flows straight through, which is great. And then on the input cost side, we've stayed a little bit in freight costs, so some pretty good work from the team on tendering some of those costs and the input cost coming out of China have been relatively stable. So it's allowed us to deliver what's a pretty strong outcome.

And then if I can, just on Australia. The stores you opened 10 there, but sales were flat. It's obviously a challenging market. Can you just maybe give us some color around the issues that you're facing and the actions taken to correct?

Yes. I think we've opened stores in Australia, but I guess it's a pretty mature market for us. So the stores that we're opening are not necessarily going to be your top traders. So they don't have as much of an impact on the overall total sales growth in the market. But definitely [ has been ], as you can see compared to some of the other markets, it's not trading as strongly as other parts of the world. But yes, I mean, that's the environment we're in, and we're focused on our own execution and what we can do to offset that. So we don't tend to give too much commentary market by market. We're doing everything we can to make sure we perform in the market.

Next question comes from the line of Shaun Cousins with UBS.

Maybe just a question for Victor. I'm just sort of curious, just the decision not to stay longer as CEO, just in that you've had a tremendous impact and you've opened up an enormous number of stores. I'm just sort of curious why you wouldn't want to stay longer in such a business, please?

I will serve -- thank you, Shaun, for your question. I will serve Lovisa for 4 fiscal years with this one, the next one. And I think it's time for me to -- I think that, as you mentioned, I've been impactful, and I think the company is performing very well and it's for me time to go somewhere else. And -- but at the same time, I am still one of the major shareholders. So I think for me, it's very important Lovisa and I've been working for 4 fiscal years here and growing the company. And we will -- I think that we are in really good hands and after my departure. And therefore, I think that there will be no doubt that we'll continue improving the results every year.

Next question comes from the line of Tom Camilleri with Wilsons Advisory.

Chris and Victor, I think I know you don't like to speak region by regional performance. But I think maybe just a question more strategically, on China. So it looks pretty clear that you're aiming to build a brand presence over there via the online marketplaces like JD.com and WeChat. How has the, I guess, progress and initial feedback on that method being to date? And I guess what's the rationale behind not opening physical stores concurrently with the online strategy? Is there any thinking behind that as well?

Thank you for your question. The main aim is we were very consistent since the beginning when we opened the store and in the last call we're saying that I think it will take time for us to learn about the Chinese market. For us, it's an important market because of the potential of the market, but I think we'll go step by step, the same as we were doing in a relevant market in the past. We are analyzing opening stores, but also I think that the e-commerce is having a presence on e-commerce in China as well is very important. So still an important market and potential market in the agenda. And we will continue evaluating new opportunities on real estate and also new opportunities on the online platforms.

I guess just to follow up. Is there anything specific like in the Chinese market that's like stopping you from rolling out stores at the moment? Or it's just a strategic decision?

So the good news is that we are already present in China. China has several peculiarities that we believe that is -- we have to be prudent in terms of how we will do the rollout of stores and try to learn from the Chinese customer and what is the right offering for them. These things -- it's a strategic decision since we opened the market. So we continue analyzing, understanding about the Chinese customer and from there we go.

Next question comes from the line of Alexander Mees with Morgans.

Chris, just firstly on the U.S., obviously, really good growth in the Americas as a whole. But just in the U.S. specifically, only one store opened in the second half. Just wonder if you could give some color as to why that slows and whether we can expect it to pick up the pace again.

Yes. At the end of the day, our store rollout, it depends a little bit on the opportunities that we are arriving at that particular moment to one particular store. As you saw, I think we grow significantly on this market, on Americas, and we will continue analyzing opportunities when we open in some -- in the U.S.. And yes, we opened one store during this last 6 months, but we will continue analyzing and let's see if we open more or over the next few coming months. But what is important to say is that for us, it's not really a race of opening stores and we open profitable stores, and whenever we have the opportunities. And this is how -- but I think the market for us is very, very strong. As you can see from our performance, and I think we are achieving with more than 200 stores. Actually, we have in the American -- in the U.S. market, 207 stores at this moment and we are in, I think, around 40 states. So the brand awareness is growing on a daily basis, let's put it this way. And I think we are very confident that it's a great market for the future as well for us.

Let me just to add to that, we opened a lot of stores in the U.S. in a real hurry and we spread them across a pretty wide geography as Victor just said, over 40 states. And that led us to just pause for a minute and just make sure we have the operational structures in place to support that store network and operate it efficiently. And we kind of held back a little bit on signing up too many stores for a period there. So you've just seen that flush through the second half that we didn't really have many stores that we were pushing hard to get deals. We're happy to sit out and hold that for better terms. -- for that reason. So yes, I guess you can see that we just opened the warehouse in the U.S. is strong commitment to the market in that perspective.

Chris that's actually a segue to my second question. With the opening of that warehouse in Columbus, should we expect to see even greater efficiencies in the U.S. in '25?

Without a doubt. That's the reason why we are opening. And I think it's also a long or strong bet for the future of the success of the company in America. So clearly, I think it's a great news, and we are very proud that I think we opened without any type of disruptions. And I think we are very happy and I believe that what is giving us is or what is giving you guys is a little bit the best for the market and not only for the market for Americas. And because we'll serve all the markets in America from Columbus, Ohio. So definitely great news for the future.

If I could just sneak one, last one in. Just with regard to the competitors' landscape. Clearly, it's been a difficult year. But do you get the sense that you've added market share over the course of '24 on a like-for-like basis? Obviously, with your commitment to e-commerce, I'm wondering if you're seeing increased competition from other e-commerce providers.

Yes, there is always competition, but I think our view in terms of competition is that we need to try to be and deliver better products, better customer service, better experience, so at the end of the day, we work really hard to be always leading the fashion in custom jewelry. And clearly, is something that we are -- is always in our -- part of our work, trying to understand what competitors are doing and trying to beat them always by in product and in customer service.

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

First one for me, just on gross margins again. So second half 2014 was 81.3%. And typically, first half -- typically second half is lower than the first half. So moving into fiscal '25, is it fair to say gross margin should be at least 81.3%, and are there any headwinds that you're facing in fiscal '25 that will cause us to not extrapolate that sort of number moving forward, please?

We're not giving any guidance on gross margin for FY '25, Ary.

Maybe the pluses and minuses into '25 in the context of what you were in the second half, please?

Yes. I think what we delivered in the second half, I guess you can argue is from a pricing perspective is baked in. So that's -- we don't have any plans to give that back. So I guess it's all dependent on can we continue to execute on product and deliver the same level of promotional activity as we have previously, the maths about what we normally see first half, second half and come up with what you think it should be. But yes, we think that what we've achieved in '24, is it good base for heading into '25.

One thing that I want to add is that we've been very consistent in terms of margin expansion over the last 3 fiscal years. And we will continue to try to do the same next year.

And just a follow-up on that one. The price increases, can I just clarify, you put obviously a price increase late in the first half of '24, and did you say you put another set of small incremental rand during the second half as well?

What we say is it's just part of our ongoing business, we are constantly looking at a range of price points market-by-market, wherever there's an opportunity for itself, it's not like we're putting through across the board price increases that give us a big WACC all of a sudden that's just consistent focus on that area.

Perfect. And then the cadence of store growth, I appreciate you don't give guidance, and it's very lumpy. But I mean, historically, the way the message has been is you try to sort of replicate what you did in the prior year or at least that. And I mean in FY '24, you opened about 128 stores. First 8 weeks, you're obviously just up in 8%, but again, it's lumpy, and you can extrapolate. Like -- How do we think about the cadence or a good run rate for your business moving forward? Is 128 stores maybe the right way of thinking about it in terms of gross openings, considering the U.S. should probably ramp back up as you exit that sort of consolidation phase?

Yes. I think naturally, we're probably disappointed statistically that we only opened 128 stores in FY '24 compared to the 200 or so in the previous year. So naturally, we'll be aiming for those sort of numbers in '25. You're right. We don't give guidance on how many we open and it definitely is lumpy. And the last quarter of F'24, I think we have some like 20-plus stores in June. So the previous couple of months, we barely opened anything and in July and August, where we do know and then had a bit of a rush in August. It's up and down, so you can't just speculate that first 8 weeks out and get your number, We're trying to go faster than that. We want to go faster than that, but we'll do it in a responsible way and make sure that we're opening profitable stores as always.

Last one, just on the like-for-like, the first 8 weeks, you sort of comp store sales of around 2%. You obviously put price increases through whatever that is, call it 1%, 2%, and you're cycling much easier comps as well. How do you all reconcile that with the fact that you haven't seen a volume impact from the price increases? Like that sort of still implies your volumes down or pretty weak on easy comps. What am I missing there, please?

Yes, what we said, we haven't had to do anything differently from a promotional perspective to keep a clean inventory position, yes? So we've been able to adjust price and get better gross margin outcomes and not have to pull a promotional lever because we've made mistakes. So that's the point we're trying to make. There's a lot of factors that go into comp sales, as you know, and total sales growth. And yes, I mean, we're not going to porter-part completely, I guess, 2% in the first 8 weeks. Cycling minus 5%, whatever it was last year. We're not happy with that outcome, and we -- that is pretty average in the scheme of comp sales in a good period. So yes, we want to do better than that, and we're focused on what we can do to deliver better numbers than that, kind of what it is.

Is it a fair comment that the price increases have not driven a sort of a decline in volume, like the volumes have sort of been impacted post raising prices in the rest of the pricing power is still there. Is that a fair comment?

Yes, there's nothing telling us that the pricing power is not there. So yes, I mean there's a lot of different factors that go into how much you sell. So we're not going to give you a breakdown of it or anything. But yes, we're still pretty happy with the -- when we make price adjustments to price that it works.

Next question comes from the line of Sam Teeger with Citi.

Just outside of the LTI impact, can you talk a bit more in terms of what's happening with the cost base? I would have thought a bit more leverage would have come through given how strong your gross profit dollar expansion was in FY '24 compared to FY '23.

Yes, makes sense. In inflation, obviously, so like everybody else, we've seen a lot of inflationary pressure, particularly on store wages, all wages, so that's one of the main reasons that we've had to adjust price to offset that, not necessarily chasing gross margin, but to make sure that we've put more gross profit dollars in the bank to offset. The cost increase is coming from inflation. So that's obviously had an impact. And then just generally, just reinvesting back into the structures of the business to be able to support the bigger store network and continue to grow, I mean, as we been saying repeatedly over and over again for the year, Sam, I'm of hearing it, probably. But we're not about delivering leverage. We're about investing in the business so that we can continue to grow. And as we expand, we need to put more heads in, we find new things to spend money on. So that we're match fit to keep doing that.

Got it. And just on the inflation with store wages, given often there's only one employee in a store, can you talk about besides raising prices, what other things you've been able to do to mitigate against the wage inflation?

Yes. I mean it depends on the size of the store and the turnover of the store. You're talking about whether there's only one employer in the store. But yes, we've some stores, there's not much we can do because it becomes a fixed cost and you do have to have one person to take the doors open. So that's made it hard to mitigate that line, which is why we've seen that increase in cost. But we spend a fair bit of energy on logistics costs, which you can see through the P&L and a lot of tender processes to try and push those costs down. And focusing where we can on trimming costs as much as we can. But obviously, our primary focus is investing and growing more than cutting.

Sure. And I think Victor made a comment earlier on that the Australasian markets have been the most challenging. Any chance of getting a bit more color around that statement, please?

It's challenging. As you know, Sam, we are a global company. We don't comment on particular markets. At the end of the day, we are growing at 17% this last year, and we will continue to try to deliver good results over the next few years. The thing is that sometimes some particular region is not performing according to our standards, but instead of thinking, maybe it's much more that we need to be much more driven by operations and trying to improve the operations in that particular market or that particular region. So -- also, as you saw, for example, the U.S. this year or the Americas is better and then Europe is doing better. So this is -- with global companies at the same time, sometimes some regions are doing better and some regions are doing worse. But anyways, the overall result is still very encouraging for the future. And I think at the end of the day, instead of -- is a challenging -- I was mentioning that in Australasia is challenging, but it's at the same time, an opportunity to improve over the next few months.

Got it. And then lastly, just a clarification question. The slower rollout that we've seen in recent times, can you confirm that is more your own doing to improve your own processes as opposed to landlords have become incrementally tougher when it comes to asking rents or sites are getting harder to find?

Yes. We've been very consistent on this. We open profitable stores. And mainly whenever there are only -- there were only 128 stores or 127 stores this year. But at the same time, I think the future looks very encouraging as well. And also it's not kind of a mathematical formula, where every month we can say that we are going to open I don't know, 15 stores. No, It's a little bit different, as Chris was mentioning, we opened more than 20 stores in June, and we opened less stores in July. So clearly is our main focus and the landlords are not really the other way around. Right now, the brand awareness of Lovisa has been increasing over the last years. And I think right now, it's even easier to find good locations and finding profitable locations for us because the landlord knows us. And once you start in one market, it's very difficult because nobody knew you -- know you. But later on, it's easier for us to convince landlords that we have to be in the mall and that we are the right company for their mall. So I think the other way around, the more brand awareness you have, the easier is the real estate.

Got it. So then the slower rollout this is more your own doing to[indiscernible] your own processes if the awareness with landlords is improving.

Yes, I would have to say yes, and like this, but I think I give you some color.

Next question comes from the line of Benjamin Jones with JPMorgan.

Just a quick one on Victor's LTI expense. I think you've mentioned in the past that we can expect a more component in FY '25. Could you give an idea of what sort of quantum in '25 and then anything else we expect through the year on the front?

Yes, it's about $1.5 million probably work it out from the rem report. But yes, in that sort of vicinity. And then later in the year, obviously, when John joins, there will be some of his package coming in as well. But yes, I maybe call it, say, $2 million for CEO LTI in '25.

Great. And then just what you're seeing in terms of lease renewals, I mean, maybe give us some sort of clarity or context in terms of how many lease renewals you've executed through the year and what you're seeing in terms of pricing across the portfolio?

Yes. I mean it depends on location, honestly. Obviously, the top malls still extremely difficult and hard to negotiate with, as you'd expect because they've got the best properties. And everything else is fair game. So we're getting some good outcomes and some less good outcomes. But yes, there's no hard and fast rule across the board of what we're seeing, and it depends on the geography and all of those factors.

In any market, we have a malls, b malls, and c malls where we want to be. And definitely, we need to be on the malls as well because of the brand awareness because of the volumes because -- but also we need to balance as well with c malls. So at the end of the day, every market, now we have 46 markets. So it's easier to try to open a balance in terms of type of malls that where we are going to open our stores.

Yes, makes sense. And just one final one, if I may. On the Middle East, look like the [Dunbar ] franchisee stores coming down in that market. Can you just sort of talk to your expectations in terms of your footprint there? Is there a plan to move that to an entirely stored region?

Yes. Now in UAE, we have six stores, and they are fully owned by Lovisa, and it was a strategic decision a couple of years ago to take over the takeover and close some stores and start opening our own stores. So we took over from the franchisee three stores, and we just opened another three stores. One of the stores is in Dubai Mall, which I believe at this moment is one of the best shopping malls in the world. I invite you all of you to -- if you stop over in Dubai to go and visit our store, is quite busy. So it's a great thing. And I think it was an strategy it was opportunistic in terms of we think that we will operate better UAE from our side, and we decided to do it. At the same time, we have several markets on franchisee model in Middle East and the potential is quite significantly high, and we will continue opening stores in those markets like Kuwait or Bahrain or Saudi Arabia.

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

So I guess, just given a follow-up on the store rollout, given the issues you've had in rolling out of historical cases. And we just want to, I think, be conservative in reflecting that forecast. So you've talked about pulling back in the U.S. temporarily. It sounds like you want to go back at that market again. You've also talked back to '23 levels of rollout. Like does that -- just to be clear, is that saying that the store roll accelerates into '25? Or should we be being conservative and be benchmarking towards more the levels we've seen year-to-date?

I would say that we are very optimistic on the future on a store rollout, the same as we were last year, but I think we found out only 128 stores that were according to our standards. The year before was 200 stores. So you can see more or less where we are going to end up. It's kind of -- will be doing 100 and 200 stores, I would say.

Thing what we're saying is that there's no capacity constraint internally to be able to open stores. It's a matter of getting the right deals and at the right time. And I know that's not helpful for you guys because you're trying to work out how many and when. But obviously, could just look at the last couple of years and take an average.

I think you talked to qualitatively the differences in profitability by region. So I mean, particularly in the context of your comments around the U.S. and rolling out a bit too quickly there. Are there any particular regions that are more profitable or less profitable on a contribution margin basis, I imagine that [ ANZ ] is probably more profitable, just being more mature?

Yes. I mean definitely, there are variations between markets, and we've talked about it historically that some markets are extremely profitable because they're low cost of doing business and the strong sales performers and mature markets. South Africa, for example, kind of well known as a strong profit generator for us. And then obviously, market with a strong average sales per store, generally tend to deliver the most profitability. Yes, we're not going to go into market-by-market economics other than to say that can impact on the profitability if we're rolling out more stores in markets that lower turnover per store or lower profit post than it can be here. An impact and it can go the other way as well. So it kind of depends where we're opening the stores and where we can get the deals done.

Okay. But there seems to be implicit in your comments that you think you can do a lot there in the U.S. from a profit perspective. Is that fair?

Yes, Ed. I mean we operationally stretched ourselves pretty thin there. So has an impact on our ability operate effectively. So yes, we think we're doing better there at the moment, and you can see that in the numbers.

Okay, sure. And then I mean just will ask the question if you don't answer that's fine, the key, the benefit of price increases in the second half, like similar questions are in regards to trading update, but it is a little bit difficult to say pick apart what the puts and takes are to your comps. Maybe is there particular regions that performed well probably?

Yes. I mean it's not just a flat performance across the board consistently in every market. So some are better than others and it depends on which month you're looking at and all that sort of stuff that we're not going to give you really anymore. Detail on the topic.

At the end of the day, also, it's about the product offering. And clearly, whenever we have a good product offering, it does -- there is no resistance on price and on any type of problematic that you can have. So we always concentrate on having the best offering for our customers and for new potential customers. And the important thing is that we open that we have a global product offering that is working in 46 markets. And that's very important because it's giving us flexibility that maybe one particular market for any kind of things is not working, but at the same time, other markets are performing better. And that's -- the overall outcome is that we grew by 17.2% last year. And I think this is something which is quite a thing to celebrate and to understand that I think everything is driven by the appealingness of the product to our customers.

And then just one more if I might. So I appreciate you can't talk to the rollout intentions there. But just given the online presence, can you talk to just overall sales in the country, how that's tracking, what the general receptiveness is? Is there any sort of quantitative figure you can give us to -- to give us some color on how you're going there?

Not right now.

Okay. Just last question for me. Sorry, I've taken quite a bit of time. But just the long-term store rollout chain in the U.S. I guess, the more negative clients you speak to a bit worried about some of the leases you've been signing up there. Are you comfortable that in the long term, is efficient supply adds grade malls to have a long-term option hasn't been diminished. I appreciate you're taking your time being selected signing up deals now. But just is there any change to your long-term view of the market?

Not really. I think we'll be -- I think we've been doing this for the last -- or we've been very consistent over the last few years, actually since the beginning of the company, and we will continue trying to have the right mix between A malls, B malls and C malls. And once we achieved, for example, I was mentioning in Dubai, we opened a great A+ mall, which is Dubai Mall, but I think we opened a couple of malls that are b mall, so I mean we are trying to create a balance and -- but there's still plenty of malls all over the index 46 markets and other markets that we will open as well. So definitely, I think there will be always a mix of different shopping malls and also as we mentioned before, is whenever we need to close one store because I think that's shopping mall for any particular reason is not performing. We will not be -- well on closing that particular store. So I think that we are trying to use the great balance in order to be in all the stores that we believe we can perform well.

Next question comes from the line of Mark Wade with CLSA.

Look, you are now in nearly 50 countries, is the one size fits all model still working?

Yes, it's amazing what has been created 14 years ago. And I was lucky to -- or I'm lucky to be the CEO of a company which is performing very well in almost 50 markets, as you just said. Actually, I hope that this year will celebrate the 50th market, and it's a great thing. But as I mentioned before, I think it's a question of product, and I think we are obsessed on having always the right product to beat competition, to have the great response from our customers worldwide. I think we are in five continents and performing in every single continent. So I think it's quite a unique company and also adding a lot of flexibility in terms of one particular market cannot perform well for few months, but at the same time, there will be several other markets. And the company also has 0 excuses on everything, which is macro -- the macroeconomical environment or the theme of every single year. So we concentrate and we focus on performing well, trying to always being a very operational consistent that we operate the stores properly. We operate our website platforms properly as well and trying always to improve and to always understand what is the win in every single thing that we do in the company.

Yes. Okay. That's great. And I think I know the answer, but just for the record, the rate of like-for-like sales growth that's got no bearing whatsoever on your desired pace of rollout in other new or existing markets. In other words, you're not perturbed that there's a drag on sales per store if you go into, I don't know, Gabon something like that. You just full steam ahead, where are the opportunities?

Yes. You're right. So we focus on the opportunities to open profitable stores. So yes, that's it.

Makes sense. No, that's fine. And last one, just I think that's always bugged me a bit was like it's fast fashion, but COGS to inventory is only like it's now below 2 turns a year, which has struck me as extraordinary local fast fashion. Is it just that Ohio, DC that's been the latest drag in that downward trend? Or was there something more to it?

I think it's still over 2. But yes, you're right. I mean, it's not -- our stock turns are not as fast as what you would expect them to be exactly like you said, which is partly because of the our business model is. So it's having a really wide range for the customer, and that's what they expect. So we have a long tail. And we have to manage through that and work hard to keep our inventory fresh and efficient. But again, you're right. Thankfully, our product cost is quite low and our gross margins are high so allow us to get away with it some.

Next question comes from the line of John Campbell with Jefferies.

Just a couple of questions because I know we're getting near the end here. But in terms of e-commerce and digital, what roughly is the share of sales at present?

We don't share that. We never have and we never ever will. So growing part of our business.

It's a growing percent of sales, yes. And so if -- assuming obviously, you're putting a lot of effort into e-commerce and you assuming success, you keep growing that share. I presume that has eventually had some impact on gross margin overall, potentially negatively.

Yes, not particularly. I mean it's not -- we don't use e-commerce as a clearance platform necessarily. So its gross margins are still pretty strong.

Even though you have to pay away some margin, I presume, to some of your partners.

Yes, not a big enough part of [ I guess ] the impact that we're [indiscernible].

Okay. And look, just two more questions. There's been a lot of talk about store rollout. But particularly on the U.S. market, are there any characteristics of the U.S. market in terms of landlord key terms that make it sort of more difficult to commit to leases? Or is it really just a matter of getting more logistics as you are with that warehouse and you'll continue to roll out? Like is there anything unique, I suppose, about the U.S. market.

Is when I asked it too much.

And longer terms?

Not really. At the end of the day, it's more cost to build a store in the U.S. than building in, I don't know, in let's say, in China, for example. But -- at the same time, I think all the landlords are a little bit of -- always a bit dilution in terms of the rates that they are asking. But having said that, we work with them in order to try to have partnership. I think we are with the main landlords in the U.S. They know us, the Simos, the Main Street, the Brookfield of the world or the U.S. And clearly, we work with them in order to try to open several stores with them. But at the same time, individual landlords that we work with them on a work with them in order to try to find a great location for us. But clearly, I think the U.S. -- the difference between the U.S. and other markets is the cost of building stores that is higher than other places. But also we try to cope with that. So it's not really -- there is no much difference. Every lender wants to charge the highest rent possible, and we try to get the best deal possible. So that's the negotiation with the lenders.

Yes, that's very helpful. Last question was the famous Taylor Swift effect, was that material in the second half?

Well, for example, Taylor Swift continue going to Europe. So I think at the end of the day, the dealership in Australia was important, but also in Europe, was impactful for us. And all these kind of things are always adding to the company. And being a global company, we follow a little bit the Taylor Swift effect and particularly on that particular range. But definitely, it was a great, great news for us, and we will continue trying to adapt to the next Taylor Swift concert or the next Taylor or next singer that is really focused on wearing jewelry and so which was -- great for us.

Next question comes from the line of Wei-Weng Chen with RBC Capital Markets.

So apologies, I'm reasonably new to the Lovisa story. I've missed the first chunk of your global rollout. But what I do see is new markets, incremental markets in the second half in FY '25 are largely sort of franchise markets in some pretty printer markets. So I guess what are the factors that drive, I guess, which markets you roll out into? And are existing markets saturated that you need to look into places like Guadalupe, which has a population of less than 200,000 for growth?

Actually, Guadalupe has a lot of potential, at least two or three stores because, as you may know, 200,000 people, but at the same time, plenty of French tourism there. So maybe they have around 5 million tourists a year, which is kind of one of these Caribbean markets where the retail is quite developed. But anyway, that's not the important thing is because you mentioned. What is important is that I think Europe is becoming a reality as itself. All the euro currency markets are becoming a kind of very important with -- in our store mix and our product mix. And I think that's the important thing. We opened a second store in Spain, in Barcelona. We opened several stores in France, almost having 90 stores in France. I think we opened 12 store last year in France. And also Germany is becoming a relevant market for us. But all we treat it or we tend to treat it as kind of a market and I think it's becoming the -- one of the main drivers of our growth.

And then just a question on, I guess, earnings versus operating leverage. So EBIT increased $22 million year-on-year. But LTIs fell about 15%. So is it correct to say that on about $100 million of incremental revenue EBIT kind of only grew mid-single digits? And if so, how do we think about operating leverage kind of ex LTIs going forward?

I think that's a point I was trying to make before that we've invested back in the business at the same time as we've had inflationary impacts on wages and things like that. So that's what you're seeing in those numbers. You can the math. So that's baked in at the moment. So we're going to basically keep building the store network and leverage the cost base that we've got we're always looking for new things to invest in.

Next question comes from the line of Johannes Faul with Morningstar.

Chris, I had a question on the warehouse in the U.S. How many stores can that service? What's the capacity for that warehouse?

A lot more than currently servicing. So it's quite a large space and we've fitted out to obviously support what we've currently got and then some. But yes, there's plenty of room in that warehouse to cover growth.

Okay. And on that third-party logistics in China, are you able to scale that capacity back? Or will you be running duplicate costs now without the additional warehouse in the U.S.?

Yes, we can definitely scale, that's the idea. The other aspect of that, though, is that as we grow the business further in market service from that warehouse then we may not need to.

Got it. Okay. And then on wages, globally, the development, it's quite difficult for us to see from here. But just on average, what kind of wage inflation are you expecting over the next 12 months globally? Is it quite similar to what we're seeing in the U.S. with the minimum wages increase this year?

Yes. I mean we're subject to the minimum wage increases that everybody else is. So that's kind of the answer to your question. You've already got the answer basically where the wage inflation is running. That's what we're subject to.

Yes. And I was just wondering what is roughly your expectation globally across all your markets on a average in terms of impact.

Yes. I mean we're not going to put a number out there on that. It varies by market, we'll deal with whatever that number is in each market.

Next question comes from the line of Chamithri Ratnapala with Bell Potter Securities.

Chris and Victor. Just keen to hear how many [ piercing ] studios have you got across the store network. And with those stores that have got them more recently over the last 2 years, have you seen good comp group?

Yes. The whole point is that whenever you open a store in a new market, always there is kind of a ramp-up. And therefore, it takes a while to understand or to the customer to be interested on our product and all these things. But clearly, yes, we are seeing great performance or great news from several of the markets that we opened. And also, as you know, over the last 2 years also, we opened several stores in the U.S. But the U.S. is -- we treat it as a continent. So sometimes you open new states that they don't know us. And as you see, the performance of the States is quite -- we are quite proud of the performance in the States. So clearly, it's driven by better comps in the States, yes.

Sorry, I meant Victor, the piercing studio, the stores, which now have the piercing studios?

Yes, the [piercing ] studio is that, yes, we are starting to develop a new studio, and we opened two for the time being, one in Victoria Gardens in Melbourne and another one in Wallaby in Melbourne as well. And yes, it's going to be like a shop-in-shop experience inside the store. And yes, we are very proud of the development on the business studio area, and we will roll out in most of the market from now on. Thank you for asking that question because it's true that we are doing that. And I think we opened Wallaby we reopened Warby last week. And with the piercing studio and so far, it's so good and the performance is quite good, particularly because we didn't have piercing facilities before. But anyway, it's a great shopping shop. And I think it's an uplift in the customer experience in the piercing area. So we are very proud and happy with that.

That's great. And the second question is, within the comp growth in the second half versus where you've started FY '25. Are the markets mix or the market performance relatively similar? Or have some markets changed in that performance?

Yes. I think the trajectory is pretty similar, to be honest. -- you look at sort of back half of FY '24 into '25 across the board, market is performing pretty consistently where they were. So it's not like it hasn't shifted markedly from Q4 into Q1 of FY '24.

Thank you, and thank you for bringing in the piercing studio. I'm very happy because we are very proud of that.

Next question comes from the line of Charles Forth, Private Investor.

Great. A couple of questions on dividend. And also why slower roll out? I know you -- the way you are to ask these questions. But Asian Mega City with massive populations like South Korea, Thailand, where the market is so huge. And is there a structural reason? Is there a problem with why we're not in Japan, Korea or Thailand?

It's a great question because actually I was in Tokyo on [indiscernible] in Spain and basically being bid by competition, as you may know, Tokyo to find [Technical Difficulty] trend for custom jewelry. But anyway, at the end of the day, we open certain [indiscernible].

Can you mute your lines, Please Charles? [indiscernible].

Sorry, I didn't knew about that.

Okay, I was saying that I think the priority for us, we opened 19 over the last year last few years, 20 markets. And clearly, Korea, clearly, Japan, there will be plenty of other markets and Thailand as well as you mentioned, they will have, at one point of time, our offering and our Lovisa product offering. But I think we have to prioritize. I think we open great markets like Vietnam, China -- Mainland China and Ireland this year and also several other markets with -- on our franchisee model. But clearly, I think all these markets are in our list and will come rather sooner than later.

Right. Great. That's a really good to hear. That's fantastic. Just one question probably more for Chris, on the dividend. And I know the Chairman Brett, obviously, has always kept the debt very, very low. Is there a reason why we've never looked at dividend in the investment plan where we retain those funds and just keep keeping debt even lower than it is?

I guess our strategy over the last couple of years has been a pick bit onto the balance sheet to get more in capital structure and we're there now. So we basically, we're interested in spending our cash on growing the business and opening stores or returning it to shareholders. That's the dividend policy strategy. No plans for a dividend reinvestment plan at the moment.

Next question comes from the line of Aryan Norozi with Barrenjoey.

Just last one. Just the expected impact from the potential tariff in China on the U.S. So obviously, Trump is out there talking about a 5% tariff on. China is important to the U.S., you guys obviously import products into the U.S.? And maybe just parallel with what happened in, I think it was 2017 last time that happened. And just what a 60% rise in your COGS sort of could do to your gross margins? How should we just think about that risk or impact, please?

Any particular tariff from any particular country and particularly in the U.S., we'll try to sort it out. For the time being, we cannot speculate because it's not yet established. And at the same time, it's true that I think our supply chain is based in some of the -- our main suppliers are based in Asian markets, but at the same time, we'll deal with that as we deal with COVID when they closed some of the ports in China and when we found alternatives. So anything that is going to be on a macro perspective basis, we will try to deal with that by trying to improve our operations and trying to be more efficient. And well, if there is tariff in the U.S., we'll try to deal with that -- with the less impact cost impact for us.

[Operator Instructions]. There are no further questions at this time. I'll now hand back to Mr. Herrero for closing remarks.

Thank you very much all for attending this call. and we will talk to you guys in 6 months' time in the next call. Thank You.

Thank you. That does conclude our conference for today. Thank you for participating. You may now disconnect.