Perfect Stranger And Neovision Will Broaden Retail Opportunities

Key Takeaways

• Expansion of store network, with Perfect Stranger brand focus, aims to drive revenue growth through higher conversion rates than online sales.
  
• Increased private brand penetration and premium pricing strategies are expected to boost gross margins and earnings.
  
• Negative impacts in the CTC wholesale segment and rising operational costs pose threats to profit margins, with intense competition and currency fluctuations adding further risk.

Catalysts

Designs, wholesales, and retails fashion products for men and women in Australia.

• Universal Store Holdings plans to expand its store network significantly, with a focus on the Perfect Stranger brand aiming for over 60 stores. This expansion is expected to drive revenue growth as brick-and-mortar stores tend to have a higher conversion rate than online sales.
  
• The company is increasing its private brand penetration. With private brands like Neovision now comprising a significant portion of sales, this strategy is likely to boost gross margins due to higher margins on owned brands versus third-party brands.
  
• Investment in team capabilities and a new leadership structure aims to support future growth, enhance operational efficiencies, and improve retail execution, potentially leading to improved net margins and earnings.
  
• There is a strategic emphasis on enhancing the direct-to-consumer (DTC) channels for their CTC brand, which could improve revenue stability and margin resilience by reducing reliance on the problematic wholesale channel.
  
• The company is actively pursuing prudent pricing strategies and maintaining premium pricing despite market discounting pressures. This disciplined pricing, combined with product exclusivity, is likely to sustain or increase gross margins and earnings.

Universal Store Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Universal Store Holdings's revenue will grow by 10.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.9% today to 11.3% in 3 years time.
• Analysts expect earnings to reach A$47.0 million (and earnings per share of A$0.62) by about May 2028, up from A$24.9 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as A$40.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.0x on those 2028 earnings, down from 24.1x today. This future PE is lower than the current PE for the AU Specialty Retail industry at 21.0x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.65%, as per the Simply Wall St company report.

Universal Store Holdings Future Earnings Per Share Growth

Risks

• Continued weakness and negative impacts in the CTC wholesale segment, reflected by the $13.6 million impairment charge against CTC goodwill, could hurt revenue and net margins if the market conditions persist and recovery strategies are slow to take effect.
  
• The increase in the cost of doing business, up 170 basis points primarily due to cost inflation and team capability investments, may challenge net margins if not offset by stronger sales growth.
  
• Heavy discounting practices by competitors in the market pose a risk, as they may force Universal Store to lower prices, potentially impacting both gross margins and overall revenues if the trend continues.
  
• The potential impact of currency fluctuations, particularly the AUD-USD exchange rate, could affect profit margins due to increased costs of goods sold, especially if the Australian dollar remains weak or declines further without sufficient hedging.
  
• The potential cannibalization within existing markets, mentioned in regard to Neovision's expansion, could limit revenue growth for individual product lines or stores if not carefully managed.

Valuation

• The analysts have a consensus price target of A$9.913 for Universal Store 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$10.53, and the most bearish reporting a price target of just A$8.6.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$417.5 million, earnings will come to A$47.0 million, and it would be trading on a PE ratio of 20.0x, assuming you use a discount rate of 7.7%.
  
• Given the current share price of A$7.81, the analyst price target of A$9.91 is 21.2% 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.