Aggressive Store Rollout And Costly Automation Will Pressure Margins And Earnings Ahead

Catalysts

About Lyko Group

Lyko Group operates an omnichannel beauty retail platform focused on hair care, skin care, makeup, fragrance and own-brand products across the Nordics and selected European markets.

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

• The aggressive roll out of up to 100 larger stores risks structurally higher fixed costs at a time when online penetration is still growing. This could compress operating leverage and net margins if in-store traffic and basket sizes disappoint.
• The heavy warehouse automation and capacity expansion, financed with term loans and upcoming amortizations, could lock Lyko into an inflexible cost base just as beauty e-commerce growth normalizes. This may limit future revenue growth while elevating downside risk to earnings.
• A renewed push into loss-making European markets, even with a focus on Poland, may require sustained marketing and localization spend in a highly competitive landscape. This could reduce the likelihood of segment breakeven and drag on group profitability for longer.
• Dependence on viral own-brand campaigns and community-driven engagement to drive traffic exposes Lyko to volatile demand patterns. This can force deep discounting, strain logistics and pressure gross margins when campaigns misfire or overshoot.
• Greater reliance on exclusive and trendy third-party beauty brands may increase supplier bargaining power over time. This could limit Lyko’s pricing flexibility and promotional freedom, which may cap future revenue growth and weigh on gross profit.

Assumptions

This narrative explores a more pessimistic perspective on Lyko Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Lyko Group's revenue will grow by 10.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 1.4% today to 2.2% in 3 years time.
• The bearish analysts expect earnings to reach SEK 110.1 million (and earnings per share of SEK 7.2) by about December 2028, up from SEK 54.6 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as SEK182.7 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 21.0x on those 2028 earnings, down from 38.2x today. This future PE is lower than the current PE for the SE Specialty Retail industry at 23.7x.
• The bearish 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 7.97%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The successful launch and ramp up of the new automated warehouse, which is already handling record volumes in and out with stable stock to sales levels at 13%, could materially improve delivery speed and operational efficiency, supporting higher revenue growth and better net margins over time.
• Rapidly rising brand awareness in Sweden, with recognition moving from 43% to 49% so that roughly every second beauty interested woman now thinks of Lyko, strengthens Lyko’s competitive position and could drive sustained customer acquisition and repeat purchasing, supporting long term revenue and earnings growth.
• The strong momentum in own brands, evidenced by viral campaigns on TikTok and Meta, a sharp spike in demand and an increasing share of sales at 8.5% on a rolling 12 month basis, can structurally lift gross margins and earnings as these products are repurchased over time.
• The fast sell out and scaling of seasonal and event driven concepts such as beauty calendars and collaborations like MinLen with the Princess of Sweden and Mamonde with Amorepacific, combined with an expanding Lyko community and new content formats like Stories, deepen customer engagement and could support higher average order values and improved revenue resilience.

Valuation

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

• The assumed bearish price target for Lyko Group is SEK120.0, which represents up to two standard deviations below the consensus price target of SEK134.0. 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 more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK157.0, and the most bearish reporting a price target of just SEK120.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be SEK5.0 billion, earnings will come to SEK110.1 million, and it would be trading on a PE ratio of 21.0x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of SEK136.4, the analyst price target of SEK120.0 is 13.7% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• 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.