Global Expansion And E-commerce Investments Will Fuel Future Growth

Key Takeaways

• Global store expansion and strategic market entry in China, Vietnam, and Ireland aim to drive revenue by increasing the store footprint.
  
• Strong gross margins through strategic pricing, inventory control, and cost management are expected to enhance net margins and overall earnings.
  
• Slower store rollout, increased debt burdens, and declining comparable sales signal challenges in expansion and market adaptability, risking future growth and profitability.

Catalysts

Engages in the retail sale of fashion jewelry and accessories.

• The continued global store expansion, with a focus on key growth opportunities in new markets such as Mainland China, Vietnam, and Ireland, is expected to drive revenue growth by increasing the store footprint from 900 stores and opening presence in strategic markets.
  
• Strong gross margins achieved through strategic pricing and effective inventory management, along with cost control measures, are likely to support improved net margins, enhancing overall earnings.
  
• Investments in e-commerce capabilities, including new digital marketplaces and an omnichannel strategy, are aimed at increasing sales volume and customer reach, potentially boosting revenue from online sales.
  
• The establishment of a new warehouse in Columbus, Ohio, to support the growing Americas region reflects operational optimizations that may increase efficiency and reduce logistics costs, positively impacting net earnings.
  
• Ongoing reinvestment in the business, such as expanding management structures for operational excellence and pursuing profitable new store opportunities, is expected to contribute to sustainable long-term revenue and earnings growth.

Lovisa Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Lovisa Holdings's revenue will grow by 13.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 11.8% today to 14.1% in 3 years time.
• Analysts expect earnings to reach A$144.8 million (and earnings per share of A$1.27) by about February 2028, up from A$82.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$188.5 million in earnings, and the most bearish expecting A$114.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.0x on those 2028 earnings, down from 38.5x today. This future PE is greater than the current PE for the AU Specialty Retail industry at 18.9x.
• Analysts expect the number of shares outstanding to grow by 0.68% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.91%, as per the Simply Wall St company report.

Lovisa Holdings Future Earnings Per Share Growth

Risks

• The company has experienced a slowdown in store rollout, opening only 128 stores compared to 210 in the previous year, which may indicate potential challenges in expansion and impact future revenue growth.
  
• There is increased debt on the balance sheet with higher interest expenses due to more borrowings and rising interest rates, which may affect net earnings negatively if not managed carefully.
  
• Comparable store sales have been declining, noted by a 2% decrease compared to the previous year, which could signal challenges in maintaining customer interest or market saturation, affecting revenue and net margins.
  
• Inflationary pressures, especially on wages, have been significant, leading the company to rely on price increases to maintain gross profit margins. This strategy could lead to reduced competitive pricing power and impact sales volumes negatively over time.
  
• Execution risk in entering new markets like China and Vietnam involves uncertainties that may not align with Lovisa’s previous market experiences, potentially impacting revenue growth and profitability if these markets do not perform as expected.

Valuation

• The analysts have a consensus price target of A$28.56 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$36.0, and the most bearish reporting a price target of just A$23.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$1.0 billion, earnings will come to A$144.8 million, and it would be trading on a PE ratio of 27.0x, assuming you use a discount rate of 6.9%.
  
• Given the current share price of A$28.69, the analyst price target of A$28.56 is 0.5% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.