Lovisa Holdings Limited (LOV) Earnings Call Transcript & Summary

Thank you for standing by, and welcome to the Lovisa Holdings Limited FY '26 Full Year Results Briefing. [Operator Instructions] And finally, I would like to advise all participants that this call is being recorded. I'd now like to welcome John Cheston, Global CEO, to begin the presentation. John, over to you.

Many thanks, Paulie. Good morning, everyone, and thank you for taking the time to dial in today. On the call today, you have our Executive Deputy Chairman, Mark McInnes; our Group CFO, Chris Lauder; and myself, John Cheston, Global 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 now. I'll do a page turn through the highlights of the presentation, and we're happy to take questions at the end. If we firstly turn to Page 3, we will talk through some of the highlights of the year. I'm pleased today to present another strong result for FY '26. Our store rollout maintained the momentum built in the first half, opening 75 new stores in the second half to take the full year count to 160 new stores opened and now taking store network to 1,136 stores at financial year-end. This allowed us to deliver growth in total sales of 17.6%, which included comparable store sales up 2% on prior year. A highlight of this performance was the delivery of close to 30% growth in both the Americas and European markets, reflecting the focus on growing these markets with quality stores. Our gross margin continued its consistent growth, up 60 basis points to 82.6%. We continue to invest in the cost structure of the business to support ongoing growth in stores and online, with all of this combining to deliver EBIT of $158.2 million, up 14.1% and NPAT of $95.6 million, up 10.7% which has allowed the Board to announce an increased final dividend of $0.33, up 22% on prior year to be paid in October. As you will all know, we opened first trial stores of our potential new global brand Jewells in the U.K. in June last year. And the results of the Jewells business are included in the reported FY '26 results for the full period in the current year that I just noted, and we will talk to further today. As Jewells continues to be in its start-up phase, we will not specifically be talking about its performance as part of today's results. However, its impact is included in the numbers we will be talking to. If we turn to Page 5, you can see the sales performance for the period that shows the benefits of our continued store network expansion with consistent sales growth over a number of years. Looking to our regions, growth was once again strong in the European and Americas markets at close to 30% for each market for the financial year, with those regions continuing to provide consistent new store growth. The APAC regions continue to be our biggest opportunity through a renewed focus on operational excellence with structural changes to our operations team in place and now starting to deliver benefits. I'd now like to hand over to Chris Lauder, our CFO, to talk through our financials. Thanks, Chris.

Thanks, John. Good morning, all. If we turn to Page 6, gross profit was $775.3 million at an 82.6% gross margin, up on last year by 60 basis points and represents a continuation of the strong year-on-year margin growth we've seen over a sustained period with 270 basis points of improvement since FY '23 alone. This result has been delivered from our continued focus on sourcing, ongoing promotional efficiency and improved shrinkage. We continue to focus on the efficiency of our inventory position and are very pleased that we've been able to maintain our inventory in a good state. Turning to Page 7. I'll talk about profit. As you can see, we've again been able to deliver strong growth in profit, continuing the consistent trend over a number of years while continuing to invest into the business with a focus on service and management structures, technology and supply chain to support our constantly growing business, while at the same time, also being able to invest in the start-up phase of the Jewells business. Turning to Page 8, you'll see that the cash generated by the business has again been a highlight with cash from operations before interest and tax of $294.5 million for the financial year, up 21%, reflecting tight management of our working capital and the continuing operational strength of the business. Cash capital expenditure for the period was $58.5 million, predominantly for new store fit-outs as well as store refurbishments and investment into support technology. Cash interest and lease payments were also higher than prior year due to the growth in the store network. Turning to Page 9. You will see that the balance sheet remains strong with a clean inventory position and significant liquidity available to fund growth. The strong profit result for the period and continued strong cash flow and balance sheet position has allowed the Board to announce a final dividend of $0.33 per share, up 22% on prior year, taking full year dividends to $0.86 and representing the distribution of 100% of earnings for the financial year. I'll now hand back to John.

Thank you, Chris. So if we turn to Page 10, 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 financial year with 1,136 stores, trading in over 50 markets with 160 new stores opened in the financial year. We remain focused on continuing to grow the store network globally, and we're pleased that we're able to maintain the momentum from the first half through the second half of FY '26. The strong base we have built in the European market allowed that market to deliver the largest share of new store growth for the period with 76 new stores, including 34 in the United Kingdom and 20 in Germany and provides us with a very strong base to continue to expand from. In the Americas region, we were able to continue the momentum in our U.S. and Canadian store rollout with 44 new stores opened in the Americas during the period. We were also able to open 6 new franchisee markets in Réunion, Mauritius, Ghana, Kenya, Burkina Faso and Iraq. Turning to Pages 11 through 16. You will see some images of our latest store fit-out concept, which we call Series 5, which we have continued to roll out to new and refurbished stores around the world. This concept is designed to give a more refined and elevated feel to our stores and adds a new Piercing Studio store in store concept, along with new elements such as digital screens. To date, we have opened 53 stores under this concept with a strong pipeline of further investment in store look and feel coming for FY '27. On Page 17, I will talk to the trading update for the first 8 weeks of FY '27. Trading for the first 8 weeks of the new financial year saw total sales on a constant currency basis up 16.4% on the same period in FY '26, with comparable store sales for this period up plus 3% and showing an improving momentum through the month of August. We continue to focus on opportunities for expanding both our physical and digital store network with a long new store runway supporting continued store rollout momentum, and our balance sheet remains strong with available cash and debt facilities supporting continued investment in growth. To summarize the financial year on Slide 18, we were able to again deliver strong sales growth for the period with store network growth combined with comp sales up 2% to deliver total sales growth of plus 17.6%. Our global expansion delivered 160 new stores opened in the financial year, finishing the year with a total network of 1,136 stores. Gross margins were again outstanding at 82.6%, an improvement of 60 basis points on the prior year, which was achieved along with a clean inventory position. This combined to deliver strong profit growth with EBITDA of $301 million, up 20.9% on the prior year. EBIT of $158.2 million, up 14.1% and NPAT of $95.6 million, up 10.7% with our strong cash flow and balance sheet position, allowing the Board to announce a final dividend of $0.33 per share to be paid in October. We're also very pleased to be able to announce a solid start to the new financial year with total sales up 16.4% and comp sales up 3% for the first 8 weeks. I'd like to take this opportunity to thank our entire global team for the outstanding work they are doing to deliver these results. And with that, I'd like to invite you today to ask any questions you have. Many thanks.

[Operator Instructions] Your first question is from the line of James Wilson of Macquarie.

Just firstly, I mean, conscious you said that you're not going to give us any specific numbers around Jewells. But can you give us a sense of whether the trial was loss-making or profit-making in the second half of the year, please?

Thanks, James. We've not disclosed the second half. We did disclose it in the first half. I think our view would be a similar number in the second half to the first half. What we would say is we're excited with the new trial that we've got in our Brent Cross store in North London. We're seeing some very encouraging results coming through from that concept. It is a somewhat different iteration to the first concept and the initial signs are very encouraging. And then once we're in a position to give some more color on Jewells, we'll do so. But I think that's all we'd say on that today.

And your next question comes from the line of Garth Francis of MST Marquee.

The pace of stores slowed in the second half, and I appreciate that you made some commentary around making sure that any lease renewals were entered into with specific return hurdles in mind. Does that mean that we should expect a similar pace of stores, sort of 1.5 per week net openings for FY '27?

Look, we opened 160 over the financial year. I would be looking to a similar number to that in the FY '27. We've got a good pipeline established. We're focused on the markets we wish to open stores. We know where we're getting good traction. So I would see a similar number of stores in FY '27 to that of FY '26.

So a similar pace of closures as well then?

No, no, no. I mean, I'm talking to store openings. I mean, as I said, we said 160 last year. We'll be looking for a similar 160 for the new financial year. We assess all of our stores in terms of their profit. We'll take a decision on stores if we need to close some, if we need to refit some we need to relocate some. But I really wish for you to focus more on we're looking at 160 new store openings for FY '27.

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

Just want to focus on the ANZ region. The ANZ store performance looks like the average store revenue in the second half is down more than in the first half. Could you talk to what's driving this? And has there been any improvement as we go into FY '27 with the global comps more reflecting a quite strong level?

I think the most important thing I'd like everybody to acknowledge is we're a global business. We've got over 1,100 stores. We've seen 30% growth in the Americas. We've seen 30% growth in Europe, and we've got a very, very long runway of store openings. So we look at our business in a global perspective. We are fortunate in some regards that over the years, we've built a global business, one of only very few Australian global businesses. So we look to talk to the global number and the growth that we've delivered over the financial year. We're insulated in some regards, and we're naturally hedged in some regards to the business over in Australia and New Zealand. So I'd really prefer people to look at us as a global business and the great growth we're delivering as a global entity.

Your next question is from the line of Sam Teeger at Citi.

I wanted to ask on working capital. It seemed pretty strong with a 13% reduction in inventory despite 18% sales growth. Has there been any structural efficiencies in inventory efficiency that we should think about going forward? Or are there some one-off benefits in '26?

Yes. We're always looking to improve our inventory efficiency down to that sort of BAU, and we've definitely made some improvements there. But a big part of that movement is just the movement in spot translation rates at the end of the financial year. So if you just look at the rates, that's cool. You can see equivalent decrease in trade creditors and inventory on both sides of the balance sheet.

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

Just a question on the efficiency of the business as you see it today. I understand you're talking at a global profile. So let's do that. You have invested hard into the cost base in FY '26, setting up support structures and other structures globally, obviously, noting the inventory comment you just sort of talked to. But to what extent do you feel you have now invested heavily in the business and maybe willing to let more sort of operating leverage flow through in forward-looking periods?

Look, our focus is always to manage our cost of doing business as tightly as we can. We're fully okay with a business that has a strong margin if we can deliver comp sales growth, which are acceptable. If we can continue with that strong margin delivery that we continue to execute and we can manage our CODB tightly, we're all fully aware that the operating leverage of that will filter down to the bottom line. So our focus has remained and will always remain on comp sales, on managing costs, on managing our margin and seeing that filter through to the bottom line.

And your next question comes from the line of Aryan Norozi of Jarden.

If I can sneak 2 little ones. Just on the result, you had about $8 million of impairment losses and loss on sale on PP&E in the second half of '26, which obviously hurt the result. To what extent is that sort of repeatable? And then also, did you book a tariff benefit in the gross margin in the second half, please?

Yes. Aryan, you can obviously see in the store count that we closed 43 stores in the financial year and relocated, I think it's 12. So that's mainly, as you said, loss on sales, just loss on disposal where you close stores and you've still got a written down value, so you got to write it off. So that and the ongoing review process of our store network that we always do means that some stores will close and we'll have to raise impairment provisions against or write-off. So basically, that number is just reflective of that number of store closures for the period. What was your second question?

Sorry, the tariff. Did you benefit from tariff refunds in the second half? And to what extent did that help the 83% gross margin, please?

Yes. Well, I mean, on a full year basis, the tariffs are in there and then they came back. So there's no impact from the tariffs in the full financial year. So there's a little bit of movement between the first half and the second half. But yes, it's full year so there is not an impact.

Your next question is from the line of Chenny Wang of Morgan Stanley.

Just wanted to see if we could get an update on how the new Series 5 stores are trading versus the existing fleet and maybe what that uplift looks like? And I guess maybe secondarily to that, just given you've rolled out that concept globally, interested in the consistency of the uplift across regions.

We don't give color in terms of the uplift we get from a Series 5 or whatever iteration. We don't give that level of detail. Obviously, it's sufficiently acceptable for us to be rolling out 53 stores and to continue to roll it out in the next financial year. So I take that as a positive. Chris quite rightly always says it's part of doing business. I mean, you have to keep reinvesting in your fleet and keep relevant. So some of it is a necessity to do just to ensure we're relevant to our customers. But clearly, it's been sufficiently acceptable for us to continue to roll this proposition out.

There is a question from the line of John Campbell at Jefferies.

So just back to store rollout. A few years ago, I believe you were struggling to open stores in the U.S. that basically met your return hurdles effectively, as I understand it, because rents were too high and they required key money and larger footprints and other things. But that seems to have turned around in the last period or probably the last year or so, and you're opening more stores in North America. Can you just comment on whether leasing terms have got better over there and it's generally easier for you?