Automated Warehousing And Larger Format Stores Will Reshape This Beauty Retailer’s Long-Term Potential

Catalysts

About Lyko Group

Lyko Group is a Nordic beauty retailer that sells hair care, skin care, makeup, fragrance and related products through both online channels and physical stores.

What are the underlying business or industry changes driving this perspective?

• The new automated warehouse setup is intended to provide about 150% more capacity than before. This can support higher order volumes, improve delivery times and potentially lift revenue and operating margins as fixed logistics costs are spread over more sales.
• The plan to roll out around 100 larger format stores that showcase hair care, skin care, makeup and fragrance in one place is designed to capture beauty spending that still happens offline. This can support higher store sales density and contribute to group revenue and earnings.
• Rising brand awareness in Sweden, where management cites a move from 43% to 49%, combined with the ambition to be the starting point of beauty, can attract more repeat and first time customers. This can support top line growth and more efficient marketing spend as a share of sales.
• Growing traction in Lyko’s own brands, including strong demand during the campaign period and repeat use of consumable products, can support a richer product mix. This may help gross margin and earnings if own brands carry higher profitability than third party brands.
• The Lyko community and new Story format, together with retail media opportunities for brand partners, create more frequent digital touchpoints with customers. This can support higher conversion, increase order frequency and improve revenue while using marketing and content more efficiently.
• Early signs of Poland standing out in Europe selling wise, together with the option to open selective stores outside the Nordics, give Lyko a path to test profitable country by country growth. This can support long term revenue expansion and a better earnings profile for the international segment.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more optimistic perspective on Lyko Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Lyko Group's revenue will grow by 9.5% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -0.1% today to 7.3% in 3 years time.
• The bullish analysts expect earnings to reach SEK 380.8 million (and earnings per share of SEK 10.68) by about July 2029, up from -SEK 3.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SEK42.1 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 6.8x on those 2029 earnings, up from -362.3x today. This future PE is lower than the current PE for the SE Specialty Retail industry at 19.5x.
• The bullish 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 9.19%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Lyko has just completed two of the largest investments in its history, including a new automated warehouse funded largely with a SEK 377 million term loan and upcoming quarterly amortizations of SEK 13.75 million. If sales growth or efficiency gains are weaker than hoped, the higher fixed cost base and debt repayments could weigh on earnings and cash generation over several years and limit flexibility for further growth investments.
• The push to roll out around 100 larger stores, potentially including markets outside the Nordics, is being done without a fixed timeline and depends on store by store profitability. If physical retail demand does not justify the added rent, staffing and fit out costs, or if store payback periods stretch out, this expansion could dilute net margins and slow profit growth at group level.
• The European online segment is described as searching for a profitable business model, with rolling net sales hovering around SEK 135 million to SEK 140 million per quarter and a loss of SEK 6 million in the latest quarter. If Lyko does not manage to lift European sales above this plateau or continues to rely on heavy marketing to support demand, the drag on segment profitability could hold back group earnings.
• The own brand campaign offering 75% discounts in July created strong short term volumes but led to a materially lower gross margin for the quarter and SEK 11.7 million of one off logistics and personnel costs. If future growth in own brands depends on deep discounting or frequent heavy campaigns, that approach could pressure long term gross margins and reduce the benefit of higher margin private label sales.
• The ramp up of the new automation system and the handling of viral campaigns revealed capacity and process constraints, including cross orders between old and new systems, part shipments and longer delivery times that required customer compensation. If operational issues reappear in future peaks or as volumes rise, they could lead to higher fulfilment costs, weaker customer satisfaction and ultimately softer revenue and earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bullish price target for Lyko Group is SEK130.0, which represents up to two standard deviations above the consensus price target of SEK79.0. This valuation is based on what can be assumed as the expectations of Lyko Group's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK130.0, and the most bearish reporting a price target of just SEK55.0.
• In order for you to agree with the more bullish analyst cohort, you'd need to believe that by 2029, revenues will be SEK5.2 billion, earnings will come to SEK380.8 million, and it would be trading on a PE ratio of 6.8x, assuming you use a discount rate of 9.2%.
• Given the current share price of SEK71.0, the analyst price target of SEK130.0 is 45.4% 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.