Thank you for standing by, and welcome to the Lovisa Holdings Limited FY 'twenty Half Year Results Conference Call. All participants are in a listen only mode. I would now like to hand the conference over to Mr. Shane Managing Director. Please go ahead.
Good morning, everyone, and thanks for taking the time to dial in. On the call today, you have myself, Shane Felschier, Managing Director and Chris Lauder, our CFO. As you're aware, we published our half year results to the ASX this morning, so we'd like to talk you through them. I'll do a page turn through the presentation, and we are happy to take any questions at the end. If we now turn to page four, we'll talk through some of the detail.
We've delivered a solid result across most markets with EBIT up 10.7% to $40,400,000 excluding the impact of the new lease accounting standard. For the sake of clarity, all of the numbers we will talk to today and included in our presentation are after removing the effect of the new accounting standard, so that they are comparable to the prior year numbers, which have not been restated. Total sales were up 22.2% as a result of the continued new store rollout with same store sales at 2.1% for the period. Our gross margin decreased to 79% as a result of lower USD purchase rates continuing through the period, with price increases not able to offset that impact. We continued our global rollout strategy with a net 49 store openings in the half.
The U. S. Rollout is gaining momentum with 21 stores opened during the period and stores now trading across eight states as of today. We continue to invest in the structure of the business to support our global growth profile as we roll out new territories, including investment into global operational structures as well as continued investment into e commerce as we grow our Australian and New Zealand sites and launch into more markets. Pleasingly, we were able to hold cost of doing business flat from last year.
Cash flow from operations was $46,000,000 and cash conversion at 98%, reflecting the investment into working capital to support the store rollout. Net cash flow reflected an increase in CapEx spend in the period. And with that, the Board has declared a fully franked interim dividend of $0.01 5, being a reduction of AUD $0.03 on prior half year, reflecting the high payout level in prior year as we returned surplus cash to shareholders and introduced debt onto the balance sheet. If we turn to the financial overview on Page five, as I noted earlier, revenue for the period was up 22.2% with comparable store sales up 2.1%. We are pleased that we have been able to deliver both positive comparable store sales during the period as well as strong store sales growth from the new store rollout.
In an environment where we are still not seeing any major trends in the fashion jewelry sector as we saw a couple of years back. We continue to make important investments into both people and process to drive the growth of the store network and to support what is an increasingly globalized business. And in spite of this, we were able to hold our cost of doing business flat on last year. The new store rollout and significant increase in CapEx spend during the current and prior half resulted in a 48% increase in depreciation, which impacted on earnings and combined with the lower gross margin due to currency movement resulted in EBIT increasing 10.7% to $40,400,000 with earnings of $0.02 $63 per share. If we turn to page six, we've spoken to the sales increase of 22.2% to $162,800,000 and the factors behind it.
This chart shows the progression in the company's sales over the past six years. It's very pleasing to be able to continue to present a sales growth chart showing such a consistent increase. At the same time, as delivering a strong store rollout, we were also able to deliver piercing services to just under 300 of our stores around the world during the period, as well as the targeted price increases to offset currency movement. However, neither of these things were a major contributor to comparable store sales. On page seven, you will see that we have had growth in total sales across all regions with the exception of Asia, which was impacted by store closures in Singapore in the prior year and weaker comps again, both Singapore and Malaysia.
It was very pleasing to see strong sales growth across Australia and New Zealand in the period with solid comps as well as an increasing contribution from online in the face of continuing challenging retail condition. Our growth in the European and U. S. Markets accelerated in the period with four new stores in The UK, 10 new stores in France and 21 in The U. S.
South Africa again was a standout with sales up 15.9% for the period, aided by both comp sales growth and the benefit of additional stores opened. Turning to page eight, gross profit of $128,500,000 was up 19% at a 79% margin, which represented a 200 basis point decrease from last half year as we began to feel the effects of lower USD hedge rates in the period. Whilst we took action on prices globally to combat the impact of the lower Australian dollar, We were targeted in our approach to ensure that we were able to maintain our brand proposition for our customers and therefore, we were not able to offset the impact on gross margin of the currency movements during the period. As you can see from the chart on the right hand side of the page, we are a fashion business and therefore our margins can experience some degree of volatility, particularly in periods where we experienced large fluctuations in currency rates. If we turn to page nine, we'll talk to our cost of doing business.
As we've said previously, we've continued to reinvest in the growth trajectory of our business, which has put pressure on our CADV percentage over recent periods. And this half was no exception. Pleasingly though, we were able to deliver overall CADV percentage in line with last year. The rollout of stores in new regions has continued to have an impact on our CADV with opening costs and higher than normal store wages throughout the opening periods having an impact on the overall cost of operating in new markets. However, we've been able to deliver on some efficiencies in this area, which has helped to keep our CADV in line with last year.
We expect these newer markets to continue to operate at a slightly higher CADV than our more mature markets. However, remain focused on delivering further efficiencies across the business and that is We continue to invest ahead of the growth curve to lay the foundations for future growth, while still remaining focused on keeping tight control of the underlying cost structure of the business. I'll now hand you over to Chris Lauder, our CFO, to talk through cash flows and the balance sheet.
Thanks, Shane. Turning to Page ten, you'll see that the company's cash flow was again solid with cash from operations before interest and tax of AUD46 million and operating cash conversion close to 100% as we continue to manage our working capital well in the face of the ongoing investment in destocking our new stores. We did see a drop in cash conversion from the elevated level at the same time last year with trading term improvement delivered in the 2019 now annualized in the 2020 combined with a change in timing of new store openings and therefore working capital flow compared to December. Capital expenditure for the period was $19,800,000 predominantly from new store fit outs and refurbishments on existing stores upon lease renewal. Overall, this represents a $7,300,000 increase on the prior year as we build scale and grow the store network in new markets with higher store build costs.
Cash dividends were slightly higher than prior period of AUD 15,900,000.0, leaving us with a net cash inflow for the period of AUD 1,400,000.0 and closing net cash on hand of
AUD 12,600,000.0.
Turning to Page 11, you can see that our balance sheet remains strong and we've had significant investment made during the year end of the store rollout. Our inventories are up on the same time last year, growing in line with the new store rollout, increased franchise stores and the impact of circa 8% movement in average USD hedge rate year on year, with disciplined inventory management remaining an important part of our business model. As with prior periods, we finished the half with net cash and significant headroom in our covenants and GBP 25,000,000 of financing facilities available from the future growth of the business, which is all combined to allow us to declare a $0.15 interim dividend. Whilst this is lower than last year's interim dividend, this reflects the elevated payout ratio used last year to distribute surplus cash to shareholders and introduce a small amount of debt onto the balance sheet. As we continue the store rollout in our growth territories, we will continue to assess on an ongoing basis the cash flow requirements of the store opening schedule and like this one, make future decisions on both dividend and capital structure of the business as required, reminding everyone that we do not
target a specific dividend payout ratio. I'll now hand back to Shane. Thanks, Chris. If we turn to Page 12, a quick update on store numbers. Lavissa finished the period with four thirty nine stores trading, with a net 49 stores opening during the period.
We now have 65 of the store network outside Australia. In The UK, we opened four new stores during the period to take the total to 42 stores. The rollouts in The U. S. And France continued with 18 stores now trading in France at the end of the half and 40 in The U.
S. Across multiple states and a strong pipeline of new stores. As we have said previously, sourcing quality sites is key, and we'll take a measured and diligent approach to moving forward in any market we enter. Turning to page 13, I'll now talk in more detail in relation to The U. S.
Market. As I mentioned earlier, we were trading from 40 stores in The U. S. At the end of the half year, with 19 stores in California, seven in Texas, five in Florida, five in Illinois, two in Minnesota, one in New Jersey and one in Oregon. We've opened a further three stores in The U.
S. Since December, including our first store in Arizona, taking us to eight states in total. Results to date indicate that the Levisa offer is resonating with the American consumer. Both operating costs in this market have been higher than some of our other markets so far, in particular new store build costs. We are happy with the progress and outcome to date in The USA, even though the expansion continues to put upward pressure on overall CADV and depreciation.
We obviously see The U. S. As a significant opportunity and continue to invest in the structures to support this. However, the eventual size and timing of the store rollout is dependent as always on being able to deliver quality stores that meet our internal criteria rather than hitting ambitious store number target. Turning now to page 14, I will talk to the European market.
At half year end, we were trading from 42 stores in The UK, 18 in France and nine in Spain. As we saw in the 2019, rollout momentum in The UK has continued to be slower as we focus on only doing leasing deals in quality locations and appropriate rents. In relation to Spain, we are currently trading from nine stores as we focus on growing sales and operational improvement As we discussed at year end, our performance in this region has been inconsistent to date. And as a result, we have elected to slow any further store openings until we can deliver on the key metrics required to expand in market.
Pleasingly, we have seen some improved results from Spain in recent months. However, we will continue to take a cautious approach on taking in new sites in Spain and we'll continue to focus on the stores that we're already trading in. In relation to France, we continue to be pleased with the performance of the stores we have opened to date and are focused on sourcing appropriate sites to grow this market. We have a leasing manager in place in France to support our growth. And again, we will not sacrifice quality of stores or our operating metrics to deliver on a store number target.
As with The U. S, our experience in this market to date has been that operating costs have been higher than our average and the store rollout is lower than we used to. Turning to Page 15. Operationally, we will continue to focus on improving the structure of the business and the way each department operates to best support our growth strategy, including a number of senior appointments in The U. S.
To support our expansion. We were able to execute on the rollout of purging services across all of our markets during the period, with close to 300 of our company owned stores now offering this service and a great customer response to date. We've also been trading online for over a year in Australia and New Zealand and are starting to gain some traction in this channel. We've also now launched e commerce into The UK, Europe as well as Singapore. Since the end of the half year, we have severed the relationship with our Vietnam master franchise and we are currently in negotiations with new partners to take over these markets.
On Page 16, we'll talk to the trading outlook for the remainder of the financial year. Trading for the month of January was in line with that achieved in the first half with comparable store sales of 2.1%. However, with the impact of store traffic due to the publicity surrounding the coronavirus, we've seen a slowing of our trading performance with second half comparable store sales now at 0.7% in negative and year to date at plus 1.7%, with our Singapore and Malaysian markets being the most impacted. As you will all be aware, a significant amount of our product is sourced from Chinese factories, and we are reliant on continued production for both replenishment of existing lines as well as to deliver the continued newness into our stores that our customers love. As you'll also be aware, our third party warehouse that supports our Northern Hemisphere and South African stores is in Jingdao, China.
The combination of these two factors means that we are currently experiencing disruption to our supply chain as the normal ramp up in production post Chinese New Year has been delayed, as has our warehouse that supports replacement into all markets, Australia and New Zealand. Whilst we are seeing teams return to work at our warehouse and across our supplier base, it may be some weeks before full production and logistics capabilities are restored, which is obviously heavily dependent on the ongoing containment efforts being undertaken by the Chinese government. As a result, whilst we're already seeing some impact on our stock levels in stores and our ability to move freight efficiently, the full impact of this disruption is likely to play out over coming months, with the ultimate size and impact therefore not able to be reliably estimated. We are focused on doing all we can to work with our suppliers to maintain stock levels in our stores and minimize the impact on our business. In addition to this disruption, currency headwinds will continue to have an impact on gross margin through the remainder of FY 2020 as our average USD purchase rate is expected to drop below USD 0.7.
We continue our focus on expanding our new store network and continue to expect the increase in the store numbers in FY 2020 to be higher than FY 2019. We've opened three new stores since the December 2019, taking the store network to four forty two. We'll continue to invest in our support structures, in particular in The USA to support store network growth and the larger business. We'll continue to review opportunities in new markets. So in summary on page 17, we've achieved an EBIT of $40,400,000 for the first half of the year at 79% gross margin, being a solid result driven primarily from continued new store rollout and comparable store sales of 2.1% for the period.
Gross margins were lower for the period as a result of the impact of the lower Australian dollar. We've been able to maintain cost of doing business in line with last year despite the ongoing investments in support of the store rollout and higher average operating costs of our newer markets. We've opened a net 49 stores and closed the half year with four thirty nine stores trading across 16 countries and 65% of our stores are now trading outside of Australia, with store rollout momentum continuing in France and The U. S. We are pleased to be able to declare an interim fully franked dividend of $0.15 per share.
And with that, we're now happy to open it up to take any questions. Thank you.
Thank you. Your first question comes from Sam Pigar from Citigroup. Go ahead.
Hi, Shane. Hi, Chris. Sam. Six months ago, you indicated that new pilots are around six to twenty four months away. Is it fair to assume now that new pilots are likely in the next eighteen months, or has the thinking changed around this?
No. That'd be a fair indication. So, yep, in the next eighteen months, that that'd be right.
Right. And, okay, can you give a bit of an update on Spain? Because feedback over the last six months was that it was improving. What's stopping you from converting from a pilot to rollout now? Was Christmas sales a bit below expectations?
That's just a conservative approach, to be honest. We just need to make sure I mean, as I said, that we've got the positive is that we've got positive sales growth. However, we get to get to a point where we're comfortable to sort of push the button. So it's still it's still watching this space, and and we're still focused on the individual store performance before we go any further with it.
Do do do you feel like you're close, or is there still a lot of work to do in that market?
I wouldn't anticipate that we're gonna be doing much in Australia in the next six months other than continuing monitoring what we've got.
Got it. Alright. And then just in terms of the like for like sales update that you gave for the '20 to date, It's just based on six to seven weeks. We're just trying to calculate what February is down just to gauge what the like for likes are running at.
At the end of last week, however many weeks that was, six
weeks, seven weeks. I can't remember.
Okay. And last question. When will The U. S. Breakeven?
And did you end up adding the buying team over there over the last six months?
We intend to build a buying team. We haven't started that process yet. On the breakeven question, Chris, how do you
want to handle that? I'm not going to tell you when we're going to breakeven. Mean, it's some as we keep saying, we're investing a lot in the infrastructure behind it to drive the rollout. So that's soaking up a lot of the profit we're making from the stores. Within the next twelve to eighteen months, we'll be there, but that depends on how fast goes.
Okay. The
last bit of colour I'll give
you there is we're dialling in the heads in the Support Centre to make sure that we can move as seamlessly as possible through a rollout of stores. I think the positive way to look at it is that we're getting the structure right to keep rolling.
Your
next question comes from Jo Little from Morgan.
Just a couple of questions. Just trying to think about the gross margin in the second half. Two parts to that then. When did you kind of broadly speaking put up prices, I guess, in the first half? And how should we think about the second half hedge rate versus first half, please?
I'll start with the second half hedge rate. As we said, we expect that to drop below $0.70 in the second half. So we obviously do a little bit better than that in the first half. So we're at $0.71 given where the dollar has been at, it will be just below $0.70 So I think probably last year, were about 75% or 76%, I think, from memory. So it's a similar sort of impact in the second half in terms of that gap is what we had in the first half.
So I think you can pretty safely assume a similar decrease in margin first half, second half before any of the price impacts flow through.
And John, the pricing impacts, really September, October started rolling through. They're no means as dramatic as they were probably three to four years ago now. So we're not anticipating a massive recovery We're still we're still looking at what we can achieve per market. And as each market gets bigger and more mature, we can get a better base to measure where we can and can't go.
So if there were further gains, it's really about a macro pricing structure in say The USA or Europe and whether that can leverage. But we're also ensuring we stay true to who we are, which is a value orientated retailer where the customer is happy Yes. With our
Okay, great. So I guess previously, you'd said pricing could potentially recover maybe half the FX impact. So it sounds like that's still broadly in line with your thinking.
I think in the first half, we didn't deliver that clearly.
But you got the full in the second, yes. Okay.
Yes. At best, that's what we would be able to deliver.
Okay, great. And I think at the end of the last financial year, you thought CADB as a percentage of sales would roughly be flat, and you've delivered on that in the first half. I guess my question is how do you see that into the second half? I mean the swing factor, I suppose, is this impact from coronavirus and the supply chain. But all else being equal, setting that stuff aside, would you still be thinking that, that would play out in the second half?
Yes. That's what we're aiming for. So we said that the full year that if we can deliver flat this year, we'd be doing pretty well with all the output pressures there just because of the higher cost markets that we're rolling out in. And that all of that's still there. So if we can deliver that for
the full year, we'll be pretty happy.
Great. And Shane, just on the trading update, I mean, they're just at this very small amount of weeks conscious of that. But can you give us a feel for your Asian markets, how much they've kind of traded down versus the rest of the world? I imagine they've been four months so much more impacted.
Yes. So we're not in a position to give you comps, but I think it's a fair way to say that Singapore and Malaysia are significantly down. The other markets are feeling and honestly, Joe, it's impossible to measure about what's being impacted by foot traffic and what's being impacted by our supply chain because you can look for an answer anywhere you want to look, so to speak. But in general speaking, the issue for us as we have done our best to describe is our fast fashion business relies on the factories and the warehousing and everything shipping on a weekly or more frequently than that basis. So when that dries up, it sort of does have an impact on our stores.
But to answer your question as best I can is Singapore and Malaysia is significantly down.
Yes. Okay. Great. Thank you. And just really lastly, sorry, on the store rollout, which is really good momentum there.
I think I know the answer here, but just confirming that corona wouldn't impact your strategy on the timing of store rollout, particularly in the next six months aside from just general fit out availability?
Yes, good question. So no, as far as our strategic decision to open stores, that wouldn't affect us. We are getting some short term impact of having stores ready to open and we can't get stock into them. So reminding everyone that the warehousing and distribution for all stores except Australia and New Zealand stores comes out of our China warehouse. It's a short term issue.
But in simple terms, because there's so many reminding everyone that we airfreight our stock out of China into each market more than once a week. And because all the airlines are now restricted into China, even when the warehouses come back up to speed, our stock is now sort of being drip fed onto the planes to get it back around the world. So short, short term issue is there's a few stores in America that may be delayed if we can't get the stock to them in time to stock out. It's a really short term issue that you're talking weeks, not anything major. But as far as this wouldn't change our strategy on opening stores.
Your next question comes from Sam Hedde from Bell Potter Securities.
Most of my questions have been asked, but just further on the store rollout profiles. And so should we assume, like last year, that the SKU will be weighted to the first half? And just in terms of the key markets, will it remain The U. S. And France in terms of the rollout in the next six months or so?
Yes. I think I mean, it may jump around a bit. But if you look at the ratio of where we're opening stores, you'd assume that the ratio is going to remain reasonably consistent. And then if you look at the first half, second half split, the historical first half, second half split is usually going to be a fair indicator of what's going to happen, reminding everyone that landlords sort of clear out through December and January in a lot of markets. Everything sort of slows down before it starts ramping up again.
So therefore, any deals not done in sort of October, November, and December really get picked up again mid to late January. And therefore, that has a flow on impact of when those doors will open. So the historical split is is probably a reasonable guide. Is my Okay.
And just on just on COD, the percentage of sales and ignoring coronavirus impacts, should we start to expect scale benefits in FY '21? Should that percentage start to improve? Or is it more 2022 from where you're sitting at the moment?
I'll throw you to Chris in a sec. I think that it may not be the answer you want, but we're continually assessing new markets, continually assessing the structure required to expand into the markets we are and continue to look at new markets. And as we gain our presence in the Northern Hemisphere, then there's going be a structure required to support those stores. So our goal is to get our CADB tracking backwards. If you look at the sort of historical graph, our inward focus is to get that graph moving back down.
However, we also will put in structure when and if we see it's required to achieve the outcomes that we require gearing up for the future. So I know that may sound a political answer, but it's actually how we operate internally. Yes. And I mean, just
don't really have much more to add to that other than if we are seeing that leverage come through, then it could mean that we've run out of investment into the future. So it's not necessarily a bad thing if we continue to invest in CODB because it means that we're driving that store rollout as hard as we can. I think
Just looking at The U. S. Alone, in theory, that's more of a scalable market because of the large store opportunity on your cost base. Is that a fair assumption?
Yes. I mean, it's a fair assumption that we're in America. We've got a country manager. We've got two or three or four reasonably experienced senior people underneath that have been there for a period of time. So it's an assumption as you open more stores that, that start leveling out.
But then theoretically, we decide to take another step into another market and we gear up another four or five heads to do that, then that can sort of bring it back to the pack pretty quickly. So if you look at it another way, we've upgraded a couple of our systems, and they're now in place. We've got the headcount reasonably right for where we stand today. But we are an energized business with the capacity, the energy and the desire from both management and the board to do more. And if that comes with a further investment of heads in a short term impact of SAIDB, we'll take that for the long term.
And just on your U. S. Store metrics, so that is the payback period there still around 2.5 times the average store. Is that where we're still tracking?
As in longer than the average store, you mean? Yes. Yes. And we're still seeing much higher CapEx spend there per store than we are
in any other market. Year 2.5
is probably pretty close. And yes, obviously, that's coming through in the total CapEx spend that you saw and still fit out in the first half. And obviously, currency has inflated that even more in the half compared to last year. So yes, we're still seeing that. We're making some headway into it, but not as much as we'd like.
Your next question comes from Julien McCohy from Evans and Partners.
Can I just ask about the piercing service that you've rolled out? You said it hadn't contributed much to like for like yet. But given the cost that like chemist shops and executive would charge for that service, it seems to be pretty attractive offer. When do you think it's actually going to
have an impact on the business?
Yes. So we've rolled that out as per our statement. So we're just at around 300 floors now. We've trained the team which transaction value is higher than our average. So we're just ramping it up.
So I'd like to think as we establish ourselves in that market, reminding everyone that each country has a different culture. In America, for instance, it's common practice. Retailers do piercing, whereas in Australia, it's probably we shifted the focus away from arguably chemists or beauticians and so on. So we'd like to think it's going to start adding more to our sales in the next six to twelve months as we sort of gain momentum gain a name for that space.
Right. And just with The UK, mean, you've had two halves of slowing in terms of finding stores. Is it about to open up? Or is this a sort of permanent sort of rollout right now?
Look, at the moment, we're probably in those I think our numbers will sort of run along at the more recent averages, largely because I mean, one, we've got our focuses elsewhere. We're getting better returns in France, America is obviously market for us. And expectations are still very high from the landlords. We're moving into opportunities when they present themselves. We just opened in Birmingham Bullring, which is a top three center or top two center in The UK recently.
So we're still looking at those opportunities. But we sort of, if anything, we're waiting for them to present themselves rather than proactively chasing down every deal in The UK.
There
are no further questions at this time. I will now hand back to Mr. Forshef for closing remarks.
Thank you for dialing in. I look forward to probably catching up with most of you over the next two days. So thanks again. Bye bye.