Expansion Into Zambia And E-Commerce Investments Will Drive Future Success

Key Takeaways

• Expansion into new markets and improved supply chain efficiency signal potential revenue and margin growth, supported by physical and digital strategies.
  
• Comprehensive growth strategy focuses on both mature and emerging markets, enhancing Lovisa's ability to capture long-term earnings opportunities.
  
• Slower store rollouts, inflationary pressures, and economic challenges in Asia could hinder growth and margins amid increased competition and higher taxes.

Catalysts

Engages in the retail sale of fashion jewelry and accessories.

• The expansion of Lovisa's global store network, with 57 new stores in the last half and plans to open the 50th market in Zambia, suggests continued potential for revenue growth as the company increases its physical retail presence worldwide.
  
• The improvement in gross margin, reaching 82.4%, can be attributed to effective pricing strategies, tight management of promotions, and better inventory and supplier management. This improvement is likely to positively impact net margins.
  
• The opening of new distribution centers, such as the one in Columbus, Ohio, enhances supply chain efficiency and supports future growth, potentially contributing to lower distribution costs and improved net margins.
  
• The continued investment in digital marketing, technology, and e-commerce capabilities supports the company's strategy to deliver an omnichannel experience, which can drive future sales and support revenue growth.
  
• Management's focus on expanding in both mature markets like the Americas and emerging markets, despite challenges in regions like Asia, suggests a comprehensive approach to capturing growth opportunities that could positively impact earnings in the long term.

Lovisa Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lovisa Holdings's revenue will grow by 14.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.7% today to 12.9% in 3 years time.
• Analysts expect earnings to reach A$139.4 million (and earnings per share of A$1.24) by about March 2028, up from A$85.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$178.6 million in earnings, and the most bearish expecting A$116 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.7x on those 2028 earnings, down from 31.3x today. This future PE is greater than the current PE for the AU Specialty Retail industry at 18.8x.
• Analysts expect the number of shares outstanding to grow by 0.56% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.67%, as per the Simply Wall St company report.

Lovisa Holdings Future Earnings Per Share Growth

Risks

• Slower pace of store rollouts compared to previous years could dampen long-term revenue growth if expansion does not meet expectations.
  
• Inflationary pressures on the cost base and flat comparable store sales could impact net margins if cost increases are not met with sufficient revenue growth.
  
• Higher effective tax rates, due to timing of recognition of tax losses in emerging markets, could put pressure on net profit margins.
  
• Economic challenges and slower market expansion in the Asian region present significant risks, potentially impacting revenue growth and requiring strategic adjustments.
  
• Increased competition and potential pressures from a U.S.-China trade war could affect pricing power and cost structures, impacting overall earnings stability.

Valuation

• The analysts have a consensus price target of A$28.643 for Lovisa Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$35.0, and the most bearish reporting a price target of just A$24.5.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$1.1 billion, earnings will come to A$139.4 million, and it would be trading on a PE ratio of 28.7x, assuming you use a discount rate of 7.7%.
• Given the current share price of A$24.27, the analyst price target of A$28.64 is 15.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.