Next Investors logo grey

Will soft Michael Hill update rub off on Lovisa

Published 10-JAN-2017 16:22 P.M.


2 minute read

Hey! Looks like you have stumbled on the section of our website where we have archived articles from our old business model.

In 2019 the original founding team returned to run Next Investors, we changed our business model to only write about stocks we carefully research and are invested in for the long term.

The below articles were written under our previous business model. We have kept these articles online here for your reference.

Our new mission is to build a high performing ASX micro cap investment portfolio and share our research, analysis and investment strategy with our readers.

Click Here to View Latest Articles

There could be implications for highflying Lovisa Holdings (ASX: LOV) after dual listed jewellery group Michael Hill International (MHJ) provided a relatively uninspiring trading update on Monday.

One of the key disappointments was the subdued like-for-like sales growth in Michael Hill branded stores.

Management noted that both its Australian and New Zealand operations had experienced a difficult first half, impacted by choppy macro conditions and earlier than expected discounting by competitors in the lead up to Christmas.

While LOV is more of a fashion accessories operation rather than a jewellery chain there are similarities in their product mix.

Furthermore, Lovisa has operations in both Australia and New Zealand. As at the end of October the company had 262 stores with 148 located in Australia and 18 in New Zealand.

Australia and New Zealand accounted for more than 60% of sales in fiscal 2016, and while the company’s diversification into overseas markets such as Singapore, Malaysia, South Africa and the United Kingdom could assist in insulating it from macro trends in the Asia-Pacific region, recent comments by MHJ remain pertinent.

However, what should provide some reassurance for LOV investors is the fact that it provided profit guidance in December, indicating first half earnings before interest and tax in a range between $26 million and $28 million.

Importantly, at this point the company noted that gross margins were a stronger than forecast, tracking at around 77%, indicating that the company had at that stage not been affected by competitor discounting.

Furthermore, same-store sales growth was in excess of 10%.

Morgans expecting big things from Lovisa

Morgans CIMB which is forecasting a net profit of $24.4 million in fiscal 2017 is bullish on the group having increased its share price target from $3.43 to $4.26 on the back of the profit guidance.

However, the company’s shares have run hard in the last eight months increasing from $1.85 to hit a high of $4.10, representing an increase of approximately 120%.

Yesterday’s closing price of $3.95 implies a fiscal 2017 PE multiple of 17.2 relative to Morgans fiscal 2017 forecasts.

It should be noted that historical data in terms of earnings performance and/or share trading patterns should not be used as the basis for an investment as they may not be replicated. Those considering this stock should seek independent financial advice.

This is broadly in line with the sector average, and it is worth noting that few of LOV’s peers in the broader consumer discretionary sector can match its forecast growth profile over the next three years, which is supported by an aggressive international store rollout strategy.

With retail sales data being released today and the likelihood that some investors may be mulling over MHJ’s commentary, LOV may be a stock to watch.

General Information Only

S3 Consortium Pty Ltd (S3, ‘we’, ‘us’, ‘our’) (CAR No. 433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information and is for informational purposes only. Any advice is general advice only. Any advice contained in this article does not constitute personal advice and S3 has not taken into consideration your personal objectives, financial situation or needs. Please seek your own independent professional advice before making any financial investment decision. Those persons acting upon information contained in this article do so entirely at their own risk.

Conflicts of Interest Notice

S3 and its associated entities may hold investments in companies featured in its articles, including through being paid in the securities of the companies we provide commentary on. We disclose the securities held in relation to a particular company that we provide commentary on. Refer to our Disclosure Policy for information on our self-imposed trading blackouts, hold conditions and de-risking (sell conditions) which seek to mitigate against any potential conflicts of interest.

Publication Notice and Disclaimer

The information contained in this article is current as at the publication date. At the time of publishing, the information contained in this article is based on sources which are available in the public domain that we consider to be reliable, and our own analysis of those sources. The views of the author may not reflect the views of the AFSL holder. Any decision by you to purchase securities in the companies featured in this article should be done so after you have sought your own independent professional advice regarding this information and made your own inquiries as to the validity of any information in this article.

Any forward-looking statements contained in this article are not guarantees or predictions of future performance, and involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, and which may cause actual results or performance of companies featured to differ materially from those expressed in the statements contained in this article. S3 cannot and does not give any assurance that the results or performance expressed or implied by any forward-looking statements contained in this article will actually occur and readers are cautioned not to put undue reliance on forward-looking statements.

This article may include references to our past investing performance. Past performance is not a reliable indicator of our future investing performance.