Shine Goes Off Lovisa

Ouch, another retailer hits the dump button with an earnings downgrade from budget jewellery retailer Lovisa (LOV), and down went the shares.

Dick Smith led the way (though Fantastic Furniture confirmed its upgraded earnings on Monday), Woolworths is facing a rotten interim and full year results. Yesterday it was the turn of Lovisa which saw its shares plunge 40% in the wake of a weak trading update and lowered earnings guidance.

Lovisa was floated by Brett Blundy’s BB Retail Capital 14 months ago at $2 a share. The update was issued late on Wednesday, after trading had finished.

Yesterday the shares dropped from the start of trading and lost more than 30% in a matter of minutes.

They lost 35.5%, or $1.31 to close at $2.37 and in the process destroying its reputation as one of the most successful of the recent floats.

LOV 1Y – Lovisa tanks on weak earnings forecast

Lovisa revealed a weaker-than-expected December-half result and warned that full-year earnings could fall as much as 5% as gross margins were squeezed by the weaker Aussie dollar and discounting.

Earnings before interest and tax for the six months ending December rose 3.4% to $17.9 million – well below market forecasts of more than $19 million. Revenue jumped 13.1%, but that didn’t translate into the bottom line as gross margins fell 3.3 percentage points.

As a result, Lovisa now expects full-year earnings before interest and tax of between $23.5 million and $25.5 million, compared with $24.8 million in 2015 and markets forecasts as high as $26 and $28 million.

Lovisa shares had hit an all time high of $3.78 in December on the back of favourable reactions to an expansion move into the UK market – given the contraction in profit margins and the greater competition locally, the company will be under pressure to curb its expansion and fix its Australian problems.

Lovisa describes itself as a fast-fashion retailer (a bit like clothing groups, Uniglo of Japan or Zara of Spain) with a vertically integrated business model. It designs, develops, sources and sells 100% Lovisa-branded products.

Chairman Paul Cave said yesterday the weaker Australian dollar had had a bigger-than-expected negative impact in the December half, pushing up Lovisa’s cost of goods by 15% and squeezing gross margins.

The company recovered more than half the lost margin by raising prices, but this took longer to flow through to profits as the company had to quit existing stocks to start selling the higher priced products. That in turn saw Lovisa start discounting to shift the old priced stock and clear space for the new higher priced Christmas range.

Investors are now watching two other companies floated by BB Retail Capital – manchester retailer Adairs Group (which listed in June and Aventus Retail Property which floated in October.

Lovisa currently has more than 240 stores across Australia, New Zealand, Singapore, Malaysia and South Africa, as well as franchises in Saudi Arabia, the UAE, Kuwait and Oman.

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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