26 August 2020

Analyst
Sam Haddad 612 8224 2819 Lovisa Holdings (LOV)
Authorisation Ready to roll
Jonathan Snape 613 9235 1601

Recommendation Attention back on new stores, strong balance sheet at hand

Buy (unchanged) LOV announced underlying FY20 EBIT (post-AASB16) of $31.8m, broadly in line BPe
Price $33.1m. FY20 revenue was $242m (vs pcp: $250m), includes a 22% YoY lift in 1H20,
followed by a 32% YoY drop in 2H20 due to COVID-19 disruption. Key takeaways are:
$7.30
Target (12 months)  LOV is “ready to go” with new store deals in the USA, landlord engagement
back in motion: USA store metrics and range performance continue to be in line
$8.35 (previously $7.50) with LOV’s expectations with “good customer reaction and landlord engagement”.
Globally, LOV stated its attention is now returning to new site acquisition. Post 30
GICS Sector June, 8 new stores have opened including 5 in the USA. With traction rebuilding
Retailing with key USA landlords over the past few weeks, we expect store rollout to gather
pace again towards end-1H21 & in 2H21. In the USA and more broadly, we see
Expected Return tailwinds emerge over the medium-term with respect to site availability & rent as
Capital growth 14.4% other retailers reduce their store footprints on the back of COVID-19 disruption.
Dividend yield 1.7%  Albeit near-term outlook remains highly uncertain as approach key Dec-Qtr
Total expected return 16.1% period: We est. the Dec-Qtr (spring racing & Xmas) accounts for roughly 45-50%
Company Data & Ratios of LOV’s annual EBITDA. Prolonged COVID-19 disruption (return to lockdowns in
Enterprise value $943.0m Victoria & second wave risks) will therefore likely have a more material earnings
Market cap $796.3m impact vs the 4QFY20 impact. We have made a preliminary allowance for this.
Issued capital 109.1m
 …but most importantly, LOV’s balance sheet remains strong: Exiting FY20,
Free float ~65%
LOV had $20.4m net cash (albeit there will be rental arrears to catch up on) plus
Avg. daily val. (52wk) $4.0m
undrawn financing facilities of ~$45m. Also, in the midst of the COVID-19 fallout,
12 month price range $2.34 - $14.13
LOV was able to secure a limit increase / term extension on its financing facilities
which demonstrates a strong sign of confidence & support from LOV’s financier.

Price Performance
Earnings changes & Investment View: Retain Buy, PT $8.35
(1m) (3m) (12m) We have cut our near-term forecasts given ongoing COVID-19 disruption. However,
Price (A$) 6.74 7.54 12.30
Absolute (%) 7.57 -3.85 -41.06 given encouraging signs in the USA/France and LOV’s strong balance sheet, we have
Rel market (%) 7.25 -13.93 -35.16
reduced our beta assumption used in our DCF. The net effect is our FY21 EPS is cut
by -43% although there is no material change in FY22/FY23. Offset by model roll-
forward & our beta change, our PT increases to $8.35 (previously $7.50). While there
remain significant uncertainty on FY21 earnings, with a strong balance sheet at hand,
we believe LOV will be able to navigate the pandemic and retain our Buy rating.

Absolute Price Earnings Forecast

Jun Year end 2020a 2021e 2022e 2023e
$15.5
Sales (A$m) 242.2 255.7 348.4 402.9
$13.5
EBITDA (A$m) 82.2 79.3 120.7 139.5
$11.5
NPAT (reported) (A$m) 11.2 16.5 38.1 41.8
$9.5
NPAT (underlying) (A$m) 16.7 16.5 38.1 41.8
$7.5
EPS underlying (cps) 14.7 14.9 34.9 38.3
$5.5
EPS underlying growth (%) -55.3% 1.6% 133.8% 9.8%
$3.5
PER (on underlying EPS) (x) 49.7 48.9 20.9 19.0
$1.5 EV/EBITDA (x) 11.5 11.9 7.8 6.8
Aug Dec Apr Aug Dec Apr
Dividend (¢ps) 15.0 12.5 22.7 24.1
18 18 19 19 19 20
LOV S&P 300 Rebased Yield (%) 2.1% 1.7% 3.1% 3.3%
Franking (%) 50% 75% 75% 75%

SOURCE: IRESS SECURITIES LIMITED

BELL POTTER SOURCE: BELL POTTER SECURITIES ESTIMATES
DISCLAIMER:
ACN 25 006 390 7721 THIS REPORT MUST BE READ WITH THE DISCLAIMER ON PAGE 6 THAT FORMS PART OF IT. Page 1
AFSL 243480
Lovisa Holdings (LOV) 26 August 2020

FY20 EBIT result broadly in line vs BPe

Headline Result
LOV announced underlying FY20 EBIT (post-AASB16) of $31.8m, broadly in line vs our
$33.1m estimate. Pre-AASB16 EBIT was $30.6m, down -41.6% vs pcp.
FY20 revenue was $242.2m, down -3.2% vs pcp. This includes a 22.2% YoY lift in 1H20,
followed by a 35.7% YoY drop in 2H20 due to COVID-19 disruption (resulting in temporary
store closures / lower foot traffic). Like-for-like (LFL) sales for the period since stores have
re-opened to end-FY20 was down -32.5%. LFL sales in the 1H21-to-date is down -19.0%.
During the year, LOV opened 45 net new stores which included 66 openings and 21
closures (including 9 tied to the exit from Spain).
As anticipated, FY20 gross margin contracted due to a lower FX hedge rate, reducing to
77.3% (FY19 at 80.5%). LOV declared no final dividend, although payment of the deferred
15cps (50%) interim was confirmed.
Figure 1 below provides a summary of the result.
Figure 1 – Actual vs expected summary
Actuals History (FY20 and beyond is post AASB-16) Actual Expected Actual vs
1H19 2H19 FY19 1H20 2H20 FY20 FY20e Expected
Total Revenue 133.2 117.1 250.3 162.8 79.4 242.2 238.1 1.7%
% - Growth (pcp) 12.3% 19.0% 15.3% 22.2% -32.2% -3.2%

EBITDA 40.7 21.6 62.3 64.9 17.3 82.2 81.2 1.3%

%-Margin 30.6% 18.5% 24.9% 39.9% 21.8% 34.0% 34.1% -0.1%
% - Growth (pcp) 6.2% 8.8% 7.1% 59.5% -20.0% 31.9%

Depn & Amort. -4.2 -5.6 -9.8 -6.2 -7.8 -14.1 -12.9 8.6%

EBIT 36.5 16.0 52.5 41.1 -9.3 31.8 33.1 -4.0%

%-Margin 27.4% 13.7% 21.0% 25.3% -11.8% 13.1% 13.9% -0.8%
% - Growth (pcp) 5.1% -2.1% 2.8% 12.7% -158.4% -39.4%

Net Interest 0.1 0.0 0.1 -2.2 -2.6 -4.8 -4.4

Profit before Tax 36.6 16.0 52.6 38.9 -11.9 27.0 28.6 -5.8%
Tax -11.1 -4.5 -15.6 -12.2 1.9 -10.3 -9.1
Associates/Minorities 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Underlying NPAT 25.5 11.5 37.0 26.7 -10.0 16.7 19.5 -14.6%
%-Margin 19.2% 9.8% 14.8% 16.4% -12.6% 6.9% 8.2% -1.3%
% - Growth (pcp) 2.7% 3.7% 3.0% 4.5% -186.9% -55.0%

Abnormals post tax 0.0 0.0 0.0 0.0 -5.4 -5.4 0.0

Reported NPAT 25.5 11.5 37.0 26.7 -15.5 11.2 19.5

DPS (¢ps) 18.0 15.0 33.0 15.0 0.0 15.0 0.0 15.0
SOURCE: BELL POTTER SECURITIES ESTIMATES

Outlook comments: LOV’s outlook is summarised by the following key points.

 As previously announced, 30 stores in Melbourne and 8 stores in New Zealand have
temporarily closed. Also, 19 stores in California & 2 stores in New York are temporarily
closed.
 LFL sales in first 8 weeks of FY21 (excluding closed stores) down -19.0%, which is an
improvement from 4Q20 LFL -32.5%.
 Since 30 June, 8 new stores have opened (including 5 new stores in the USA), taking
the store network to 443.
 In the USA, LOV noted “store metrics and range performance continue to be in line with
expectations with good customer reaction and landlord engagement”.

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Lovisa Holdings (LOV) 26 August 2020

 In France, stores continued to meet LOV’s expectations, “with ongoing rollout in

progress”.
 Whilst the overall pace of rollout program across all markets slowed in Q4 due to
COVID-19 with the focus of landlord negotiations on existing portfolios, our attention
is now returning to new site acquisition”.

Forecast changes
We have cut our near-term forecasts given ongoing COVID-19 disruption. However, given
encouraging signs in the USA/France and LOV’s strong balance sheet, we have reduced
our beta assumption used in our DCF (previously increased heading into pandemic fallout,
although reduction not yet reversed in full). The net effect is our FY21 EPS is cut by -43%
although there is no material (<3%) change in FY22/FY23. Offset by model roll-forward and
our beta assumption change, our 12-mth price target increases to $8.35 (previously $7.50).
Figure 2 summaries our forecasts changes for FY21e – FY23e.
Figure 2 – Earnings revisions summary
FY21e FY22e FY23e
Old New % Change Old New % Change Old New % Change
Revenue $m 294.3 255.7 -13.1% 356.1 348.4 -2.2% 404.1 402.9 -0.3%

EBITDA $m 94.7 79.3 -16.3% 121.1 120.7 -0.4% 137.5 139.5 1.5%

EBITDA Margin % 32.2% 31.0% -1.2% 34.0% 34.6% 0.6% 34.0% 34.6% 0.6%

Underlying NPAT $m 28.3 16.5 -41.9% 38.6 38.1 -1.4% 41.2 41.8 1.3%

Underlying EPS ¢ps 26.0 14.9 -42.5% 35.4 34.9 -1.4% 37.8 38.3 1.3%

DPS ¢ps 20 12 -37.4% 23 23 -1.5% 24 24 0.9%

SOURCE: BELL POTTER SECURITIES ESTIMATES

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Lovisa Holdings (LOV) 26 August 2020

Lovisa Holdings
Company Description
Lovisa Holdings Limited (LOV) is a leading specialist fast fashion jewellery retailer based in
a number of international markets. LOV is strategically focused on the affordable jewellery
segment targeting fashion conscious females aged 25 to 45. Under a vertically integrated
business model, LOV develops, sources and merchandises all of its Lovisa branded
products. Australia is LOV’s largest market exposure; however the company is embarking
on an international store rollout strategy with offshore territories currently including the UK,
the USA, France, New Zealand, Singapore, Malaysia, South Africa and, under a franchise
model, the Middle East & Vietnam. LOV also has a store pilot program underway in Spain.

Investment Strategy
We rate LOV Buy with a price target of $8.35. LOV has defined a 5 pillar growth strategy,
including: 1) international expansion; 2) streamline global supply chain; 3) enhance existing
store performance; 4) brand proliferation; and 5) lead and pre-empt trends. In regards to
the first pillar, LOV believes there is significant store footprint expansion potential into new
territories. New territory prospects include major northern hemisphere markets (such as the
UK) and other Asian markets such as Hong Kong, Japan, the Philippines and/or Thailand.

Valuation
Our blended PT is $8.35. Our DCF is $8.36 & our SOTP (EV/EBITDA basis) is $8.32. We
take a 75%/25% split to derive our price target.

Risk to Investment Thesis

Key Investment risks include (but are not limited to):
 COVID-19: The substantial impact of COVID-19 on the global & domestic economies is
creating enormous volatility & uncertainty in global share markets. The forecasts in the
report may significant change if this situation continues for an extended period of time.
 Competition/barriers to entry: New competitors or aggressive behaviour from existing
competitors may impact LOV’s market position/profits. That said, we believe LOV’s fast
supply chain & responsiveness to customer demands helps against this risk.
 Store Rollout: LOV’s growth strategy is primarily based around store rollouts. Changes
to planned rollouts or unsuccessful rollouts in new markets may impact our forecasts.
 Changing Consumer Preferences/Merchandise risk: LOV must predict/respond to
fast changing fashion trends in order to provide appealing products.
 Economic Conditions & Consumer Sentiment: LOV’s products are of a discretionary
nature and hence sales are leveraged to economic conditions and consumer sentiment.
 Foreign exchange: LOV operates both locally and internationally and hence generates
sales and incurs costs in foreign currencies. Also, the majority of its imports are in $US.
 Product and Supply Chain: Products are manufactured in China, India and Thailand.
Hence exposed to sourcing, production, warehousing and supply chain disruption risks.
 Brand Deterioration: LOV is actively pushing for brand recognition. Deterioration in
brand equity due to poor products or service may lead to market share loss.
 Store Leasing: Failure to renew existing leases or obtain desirable new leases on
acceptable terms may impact LOV’s strategy of operating in high foot traffic areas.

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 Lovisa Holdings Recommendation Buy
as at 26 August 2020 Price $7.30
Lovisa Holdings (LOV) 26 August 2020
Target (12 months) $8.35

Table 1 - Financial summary

Jun Year end 2018 2019 2020 2021e 2022e 2023e Price $7.30
Profit & Loss (A$m) Recommendation Buy
Sales revenue 217.0 250.3 242.2 255.7 348.4 402.9 Diluted issued capital (m) 109.1
. . . Change 21.4% 15.3% -3.2% 5.6% 36.3% 15.6% Market cap ($m) 796.3
EBITDA 58.2 62.3 82.2 79.3 120.7 139.5 Target Price (A$ps) $ 8.35
. . . Change 25.9% 7.1% 31.9% -3.6% 52.2% 15.6%
Deprec. & amort. (7.1) (9.8) (14.1) (11.4) (14.1) (18.0) Jun Year end 2018 2019 2020 2021e 2022e 2023e
EBIT 51.1 52.5 31.8 27.6 59.5 66.9 Valuation Ratios
Net Interest 0.1 0.1 (4.8) (4.1) (5.1) (7.1) Underlying EPS (¢ps) 32.3 32.9 14.7 14.9 34.9 38.3
Pre-tax profit 51.2 52.6 27.0 23.5 54.4 59.7 . . . % change 20.8% 1.8% -55.3% 1.6% 133.8% 9.8%
Tax expense (15.2) (15.6) (10.3) (7.1) (16.3) (17.9)
. . . tax rate 30% 30% 38% 30% 30% 30% PE (on underlying EPS) (x) 22.6 22.2 49.7 48.9 20.9 19.0
Associates - - - - - - EV/EBITDA (x) 16.20 15.13 11.47 11.89 7.81 6.76
Minorities/Prefs - - - - - - EV/EBIT (x) 18.46 17.97 29.67 34.16 15.84 14.11
Underlying Net Profit 36.0 37.0 16.7 16.5 38.1 41.8 NTA ($ps) 0.37 0.44 0.48 0.46 0.56 0.74
. . . Change 23.8% 3.0% -55.0% -1.2% 131.4% 9.8% P/NTA (x) 19.69 16.73 15.22 16.00 13.10 9.92
Abs. & extras. - - (5.4) - - - Book Value ($ps) 0.40 0.48 0.51 0.49 0.59 0.77
Reported Profit 36.0 37.0 11.2 16.5 38.1 41.8 Price/Book (x) 18.14 15.35 14.21 14.85 12.31 9.46
DPS (¢ps) 27.0 33.0 15.0 12.5 22.7 24.1
Assumed AASB16 adjustment to Underlying EBITDA (37.5) (41.2) (48.2) (55.9) . . . % pay-out 78.9% 94.0% 95.3% 82.9% 64.9% 62.8%
Underlying EBITDA (Pre-AASB16) 44.7 38.1 72.5 83.6 Yield (%) 3.7% 4.5% 2.1% 1.7% 3.1% 3.3%
Franking (%) 100% 92% 50% 75% 75% 75%
Cashflow (A$m) Capital Return Payts (¢ps) - - - - - -
EBITDA 58.2 62.3 82.2 79.3 120.7 139.5
Working capital changes (1.3) 1.6 (0.8) (3.4) 6.2 (0.7) Performance Ratios
Net Interest Expense 0.1 0.1 (0.1) (4.1) (5.1) (7.1) Revenue growth (%) 21.4% 15.3% -3.2% 5.6% 36.3% 15.6%
Tax (13.9) (20.6) (3.5) (2.9) (17.0) (17.9) EBITDA growth (%) 25.9% 7.1% 31.9% -3.6% 52.2% 15.6%
Other operating items 3.7 2.8 2.2 7.8 2.0 2.9 EBITDA/sales margin (%) 26.8% 24.9% 34.0% 31.0% 34.6% 34.6%
Operating Cash Flow 46.8 46.2 80.0 76.7 106.8 116.7 EBIT/sales margin (%) 23.5% 21.0% 13.1% 10.8% 17.1% 16.6%
Capex (14.2) (23.4) (26.4) (26.5) (36.8) (39.7) Gross cash conversion (%) 104.1% 107.1% 101.6% 105.5% 106.8% 101.6%
Free Cash Flow 32.6 22.9 53.6 50.1 70.1 76.9 Free cash-flow yield (%) 4.0% 2.8% 6.5% 6.2% 8.8% 9.7%
Acquisitions (1.2) (0.8) (0.8) - - - ROE (%) 90.2% 70.9% 28.0% 31.9% 57.3% 49.7%
Disposals 0.1 0.1 1.6 - - - ROIC (%) 196.9% 119.6% 14.6% 8.8% 16.3% 15.4%
Payment of leases - - (31.9) (61.8) (65.1) (73.8) Capex/Depn (x) 2.0 2.4 1.9 2.3 2.6 2.5
Dividends paid (21.6) (33.8) (15.9) (15.9) (30.0) (26.8)
Other investing items - - - - - - Net interest cover (x) n/a n/a 6.6 6.7 11.6 9.4
Equity - 1.3 4.1 - - - Core Net Debt/EBITDA (pre-AASB16) (x) n/a n/a n/a n/a n/a n/a
Debt increase/(reduction) - - - 27.5 25.1 23.6 Net debt/equity (%) -46.5% -20.9% 251.3% 332.0% 324.7% 286.5%
Net debt/net debt + equity (%) -87.1% -26.4% 71.5% 76.9% 76.5% 74.1%
Balance Sheet (A$m)
Cash 21.1 19.2 20.4 20.4 20.4 20.4 Store assumptions
Receivables 4.9 7.4 7.9 10.8 9.1 10.5 Australia 151 154 152 152 152 152
Inventories & WIP 14.9 22.8 21.7 26.9 30.3 35.1 New Zealand 20 22 23 23 23 23
Other current assets 1.4 0.6 0.2 0.2 0.2 0.2 South Africa 56 61 62 62 62 62
Current Assets 42.3 50.0 50.2 58.3 60.0 66.2 Singapore 22 18 19 19 19 19
Receivables - - - - - - Malaysia 21 25 27 30 33 35
Assoc & investments - - - - - - The UK 24 38 42 44 46 48
Fixed Assets (PP&E) 22.4 38.4 46.1 61.2 83.9 105.6 Spain (pilot) 5 9 0 0 0 0
Right-of-use Assets - - 150.5 166.3 194.8 225.8 USA 1 19 48 70 112 159
Intangibles 3.6 4.4 3.9 3.9 3.9 3.9 France 2 8 21 28 39 52
Other mom-curr assets 4.5 6.4 9.3 9.3 9.3 9.3 Total Corporate Stores 302 354 394 428 486 550
Non Current Assets 30.5 49.2 209.8 240.8 292.0 344.7 Franchise Stores (Middle East / Vietnam) 24 36 41 41 50 56
Total Assets 72.8 99.2 260.0 299.0 352.0 410.9 Total Stores 326 390 435 469 536 606
Short term debt - 8.0 - - - -
Creditors 11.7 23.7 22.2 26.9 34.8 40.3 Half yearly (A$m) 1H18 2H18 1H19 2H19 1H20 2H20
Provisions 10.1 6.5 9.1 9.3 9.9 10.9 Sales revenue 118.6 98.4 133.2 117.1 162.8 79.4
Other curr liabilities - - 36.0 39.8 46.6 54.1 EBITDA 38.3 19.9 40.7 21.6 64.9 17.3
Current Liabilities 21.8 38.1 67.3 76.0 91.4 105.3 Deprec. & amort. (3.6) (3.5) (4.2) (5.6) (6.2) (7.8)
LT debt (incl. leases) - - 131.1 158.7 183.8 207.4 EBIT 34.7 16.3 36.5 16.0 41.1 (9.3)
Creditors - - - - - - Interest expense (0.0) 0.1 0.1 0.0 (2.2) (2.6)
Provisions 5.8 7.5 3.2 10.8 12.1 14.0 Pre-tax profit 34.7 16.4 36.6 16.0 38.9 (11.9)
Other non curr liabilities - - - - - - Tax expense (9.9) (5.3) (11.1) (4.5) (12.2) 1.9
Non Current Liabilities 5.8 7.5 134.3 169.4 195.9 221.5 . . . tax rate 28% 32% 30% 28% 31% 16%
Total Liabilities 27.6 45.6 201.7 245.4 287.3 326.8 Associates - - - - - -
Net Assets 45.2 53.7 58.4 53.6 64.7 84.1 Minorities - - - - - -
Share Capital 208.5 209.8 213.9 213.9 213.9 213.9 Underlying Net Profit 24.8 11.1 25.5 11.5 26.7 (10.0)
Reserves (206.6) (202.6) (197.3) (197.3) (197.3) (197.3) Abs. & extras. - - - - - (5.4)
Retained Earnings 43.4 46.5 41.8 37.1 48.1 67.6 Reported Profit 24.8 11.1 25.5 11.5 26.7 (15.5)
Shareholders Equity 45.2 53.7 58.4 53.6 64.7 84.1
Outside Equity Interests - - - - - -
Total Equity 45.2 53.7 58.4 53.6 64.7 84.1

Core Net debt/(cash) $m (21.1) (11.2) (20.4) (6.7) (6.4) (9.8)

Net debt/(cash) [incl. leases] $m (21.1) (11.2) 146.7 178.1 210.0 241.1

SOURCE: BELL POTTER SECURITIES ESTIMATES

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Lovisa Holdings (LOV) 26 August 2020

Research Team
Recommendation structure
Staff Member Title/Sector Phone @bellpotter.com.au
Buy: Expect >15% total return on a TS Lim Head of Research/Banks 612 8224 2810 tslim
12 month view. For stocks regarded Analysts
as ‘Speculative’ a return of >30% is Lafitani Sotiriou Diversified Financials/Fintech 613 9235 1668 lsotiriou
expected. John Hester Healthcare 612 8224 2871 jhester
Hold: Expect total return between -5% Tanushree Jain Healthcare 612 8224 2849 tnjain
and 15% on a 12 month view Elyse Shapiro Healthcare 613 9235 1877 eshapiro
Steven Anastasiou Industrials 613 9235 1952 sanastasiou
Sell: Expect <-5% total return on a James Filius Industrials 613 9235 1612 jfilius
12 month view Sam Haddad Industrials 612 8224 2819 shaddad
Alex McLean Industrials 612 8224 2886 amclean
Speculative Investments are either start-up
Hamish Murray Industrials 613 9235 1813 hmurray
enterprises with nil or only prospective
Chris Savage Industrials 612 8224 2835 csavage
operations or recently commenced
Jonathan Snape Industrials 613 9235 1601 jsnape
operations with only forecast cash flows, or
Damien Williamson Industrials 613 9235 1958 dwilliamson
companies that have commenced
Peter Arden Resources 613 9235 1833 parden
operations or have been in operation for
David Coates Resources 612 8224 2887 dcoates
some time but have only forecast cash
Stuart Howe Resources 613 9235 1856 showe
flows and/or a stressed balance sheet.
Associate
Such investments may carry an Joseph House Associate Analyst +61 3 9235 1624 jhouse
exceptionally high level of capital risk and
volatility of returns.

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