Our second largest holding in the portfolio is Lovisa (ASX:LOV), a fast-fashion retailer of women’s jewellery. GC1 has been an owner of LOV since late-2020, benefiting from a more than doubling in its share price over the past 24 months.
In the following post we are going to discuss the reasons why we like LOV as a long-term holding of Glennon Small Companies Limited (ASX:GC1).
What does Lovisa do?
Lovisa is a fast-fashion retailer, operating more than 650 stores spanning over 25 countries. The Company sources the latest fashion trends and makes them available for mass consumption in short time frames, at affordable prices. It typically takes between 8-10 weeks to deliver a new product from concept to shop floor, meaning Lovisa can introduce more than 100 new lines of jewellery each week.
The Company was founded in 2010 by former CEO and Managing Director, Shane Fallscheer, and BB Retail Capital, an investment company run by successful retail entrepreneur Brett Blundy.
5 Reasons Why We Like the Stock
1) Strong cash flow generative business model with attractive unit economics
The average LOV store is between 50-80 sqm and stocks more than 2,500 SKUs. It takes less than one month to fit out and open a new store and costs approximately A$300,000 (including inventory).
While fit-out costs and store sizes are largely consistent, average unit volumes and earnings per store vary by region. Notwithstanding, the average payback period on a new store is typically between six to nine months.
2) Long reinvestment runway
We estimate that Lovisa controls more than 20% market share in the ANZ fast-fashion jewellery industry across its ~180 ANZ stores. However, on a global scale, we estimate that LOV has less than a 1% share. As such, and despite increasing its store network ten-fold over the past decade, we believe the Company still has a long runway ahead to redeploy incremental capital at high rates within the current business.
3) Large insider ownership with a track-record of executing
Total insider ownership exceeds 40% with the chairman, Brett Blundy, indirectly owning the majority of these shares through BB Retail Capital.
Blundy’s track record in retail is impressive and revolves around a strong culture and strategy found among many of his current and former holdings such as Adairs, Accent Group, Bras N Things, Dusk, Honey Bridette and Sanity Entertainment.
4) Prudent capital structure
Lovisa has a strong balance sheet. At financial year-end, the Company had $24 million in net cash. LOV also has access to a further $40 million in undrawn borrowing facilities. The Company has total liquidity of more than $60 million, providing ample funds to rollout new stores and self-fund any strategic acquisitions in the future (such as the Beeline acquisition the Company made in 2021).
5) Comparable valuation
Due to the lower price points at which Lovisa sells its jewellery, relative to luxury jewellery brands such as Pandora and Tiffany & Co., we believe the Company has the potential to reach a greater number of consumers in less developed countries/countries with lower GDP per capita.
To put this into perspective, Lovisa’s market capitalisation is A$2.6b compared to Pandora’s market valuation of~A$7.8b (US$5b). Further, Tiffany & Co. was acquired by LVMH for US$15.8b in 2021 (equivalent to A$24.9b).