Thank you for standing by, and welcome to the Lovisa Holdings Limited FY 2020 half-year results conference call. All participants are in a listen-only mode. There will be a presentation followed by a question and answer session. If you wish to ask a question, you will need to press the star key followed by the number one on your telephone keypad. I would now like to hand the conference over to Mr. Shane Fallscheer, 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 Fallscheer, 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 AUD 40.4 million, 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 on last year. Cash flow from operations was AUD 46 million, 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 have declared a fully franked interim dividend of AUD 0.15, being a reduction of AUD 0.03 on prior half year, reflecting the high payout level in prior year as we return surplus cash to shareholders and introduce 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've 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 continued 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. 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 growth margin due to currency movement, resulted in EBIT increasing 10.7% to AUD 40.4 million, with earnings of AUD 0.263 per share. If we turn to page six, we've spoken to the sales increase of 22.2% to AUD 162.8 million 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. 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 against 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 conditions.
Our growth in the European and U.S. markets accelerated in the period with four new stores in the U.K., 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 open.
Turning to page eight, gross profit of AUD 128.5 million 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 experience 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 CODB percentage over recent periods. This half was no exception. Pleasingly though, we were able to deliver overall CODB percentage in line with last year. The rollout of stores in new regions has continued to have an impact on our CODB, 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 CODB in line with last year. We expect these newer markets to continue to operate at a slightly higher CODB than our more mature markets.
However, remain focused on delivering further efficiencies across the business to manage this. 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. Let's turn to page 10. You'll see that the company's cash flow was again solid with cash from operations before interest and tax of AUD 46 million and operating cash conversion close to 100% as we continue to manage our working capital well in the face of the ongoing investment into stocking out new stores. We did see a drop in cash conversion from the elevated level at the same time last year, with trading term improvements delivered in the first half of 2019, now annualized in first half of FY 2020, combined with a change in timing of new store openings and therefore working capital flow compared to December last year. Capital expenditure for this period was AUD 19.8 million, predominantly from new store fit-outs and refurbishments on existing stores upon lease renewal.
Overall, this represents an AUD 7.3 million 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 the prior period of AUD 15.9 million, leaving us with a net cash inflow for the period of AUD 1.4 million and closing net cash on hand of AUD 12.6 million. Turning to page 11, you can see that our balance sheet remains strong and reflects the significant investment made during the year into 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 the 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 AUD 25 million of financing facilities available to fund the future growth of the business, which is all combined to allow us to declare a AUD 0.15 interim dividend. While 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. Like this one, make future decisions on both dividends 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. Lovisa finished the period with 439 stores trading, with a net 49 stores opening during the period. We now have 65% of the store network outside Australia. In the U.K., 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 Lovisa offer is resonating with the American consumer. Whilst 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 continued to put upward pressure on overall CODB and depreciation.
We obviously see the U.S. as a significant opportunity and continue to invest in the structures to support this. 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 targets. Turning now to page 14, I will talk to the European market. At half year-end, we were trading from 42 stores in the U.K., 18 in France, and nine in Spain. As we saw in the second half of FY 2019, rollout momentum in the U.K. has continued to be slower as we focus on only doing leasing deals in quality locations and appropriate rent. In relation to Spain, we are currently trading from nine stores as we focus on growing sales and operational improvement in this market.
As we discussed at year-end, our performance in this region has been inconsistent to date, and as a result, we've elected to slow any further store openings until we can deliver on the key metrics required to expand in this market. Pleasingly, we have seen some improved results from Spain in recent months, and we will continue to take a cautious approach on taking any new sites in Spain and will continue to focus on the stores that we are 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're used to. To page 15. Operationally, we'll 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 piercing 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 U.K., Europe, as well as Singapore.
Since the end of the half year, we've severed the relationship with our Vietnam master franchise, and we are currently in negotiations with new partners to take over this market. 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 at 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 a year to date at +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 units into our stores that our customers love. As you will also be aware, our third-party warehouse that supports our Northern Hemisphere and South African stores is in Qingdao, 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 replenishment to all markets, excluding 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 $0.70 . 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 end of December 2019, taking the store network to 442. We'll continue to invest in our support structures, in particular in the U.S.A., to support store network growth and the larger business, and we'll continue to review opportunities in new markets.
In summary, on page 17, we've achieved an EBIT of AUD 40.4 million 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 low Australian dollar. We've been able to maintain Cost of Doing Business in line with last year, despite the ongoing investment 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 439 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 AUD 0.15 per share. With that, we are now happy to open it up to take any questions. Thank you.
Thank you. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press star two. If you are on a speakerphone, please pick up the handset to ask your question. Your first question comes from Sam Teeger from Citigroup. Please go ahead.
Hi, Shane. Hi, Chris. Six months ago, you indicated that new pilots are around 6- 24 months away. Is it fair to assume now that new pilots are likely in the next 18 months, or has your thinking changed around this?
No, that'd be a fair indication. Yes, in the next 18 months, that'd be right.
Right. 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?
No, it's just a conservative approach, to be honest. We just need to make sure. As I said, the positive is that we've got positive sales growth. However, we're yet to get to a point where we're comfortable to push the button. It's still watch this space, and we're still focused on the individual store performance before we go any further with it.
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 going to be doing much in Spain in the next six months other than continuing monitoring what we've got.
Got it. All right. Just in terms of the like-for-like sales update you gave for the second half of 2020 to date, 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, so however many weeks that was. Six weeks, seven weeks, I can't remember.
Okay. Last question, when will the U.S. break even, 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 break-even question, Chris, how do you want to handle that?
We're not going to tell you when we're going to break even. As we keep saying, we're investing a lot in the infrastructure behind it to drive the rollout. That's soaking up a lot of the profit we're making from the stores. Hopefully, within the next 12 to 18 months, we'll be there, but that depends on how fast.
Right. Okay. Thanks.
At the moment, the last bit of color I'll give you there is we're dialing in the heads in the support center 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.
Got it. All right. Thank you.
Once again, if you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Your next question comes from Josephine Little from Morgans. Please go ahead.
Morning, Shane, Chris. 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. We expect that to drop below $0.70 In the second half, we obviously did a little bit better than that in the first half. We're at $0.71. Given where the dollar's been at, it'll be just below $0.70. I think probably last year we were about $0.75 or $0.76, from memory. It's a similar sort of impact in the second half in terms of that gap is what we had in the first half. I think you can pretty safely assume a similar decrease in margin first half, second half, before any of the price impacts flow through.
Jo, on the pricing impact, really September, October started rolling them through. They're by no means as dramatic as they were probably three to four years ago now. We're not anticipating a massive recovery from that point of view. 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. If there were further gains, it's really about a macro pricing structure in say, the U.S.A. or Europe, and whether that can leverage. We're also ensuring that we stay true to who we are, which is a value-oriented retailer, whether customers are happy with our pricing.
Yeah. Okay, great. I guess previously you'd said pricing could potentially recover maybe half the FX impact. It sounds like that's still broadly in line with your thinking.
I think in the first half we didn't deliver that clearly.
You got the full in the second. Yeah. Okay.
Yeah. At best, that's what we would be able to deliver.
Yes.
You have to get.
Okay, great. I think at the end of the last financial year, you thought CODB 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? The swing factor, I suppose, is this impact from coronavirus and the supply chain. All else being equal, setting that stuff aside, would you still be thinking that that would play out in the second half?
Yeah. That's what we're aiming for. We said that the full year that if we can deliver flat this year, we'd be doing pretty well with all the upward pressures there just because of the higher cost markets that we're rolling out in. All of that's still there. If we can deliver that for the full year, we'll be pretty happy.
Great. Shane, just on the trading update, it's a 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 far much more impacted.
Yeah. 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. Honestly, Josephine, 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 sort of look for an answer anywhere you want to look, so to speak. 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. When that dries up, it sort of does have an impact on our stores. To answer your question as best I can is, Singapore and Malaysia are significantly down.
Yep. Okay. Great. Thank you. 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 coronavirus wouldn't impact your strategy on the timing of store rollout, particularly in the next six months, aside from just general fit-out availability.
Yeah, it's a good question. 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. 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 air freight our stock out of China into each market, more than once a week. 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.
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. As far as this wouldn't change our strategy on opening stores.
Okay, great. Thanks, guys. I'll leave it to someone else.
Thanks.
Thank you. Your next question comes from Sam Haddad from Bell Potter Securities. Please go ahead.
Hi, Shane. Hi, Chris. Most of my questions have been asked, but just further on the store rollout profiles. Should we assume, like last year, that the SKU will be weighted to the first half? Just in terms of the key markets, will it remain the U.S. and France in terms of the rollouts in the next six months or so?
I think it may jump around a bit, if you look at the ratio of where we're opening stores, you'd assume that the ratio is going to remain reasonably consistent. 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. Any deals not done in sort of October, November and the first half December really get picked up again mid to late January, and therefore that has a flow on impact of when those stores will open. The historical split is probably a reasonable guide.
Okay.
Yes, go ahead.
Just on CODB, the percentage of sales and ignoring coronavirus impacts, should we start to expect scale benefits in FY 2021? 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, 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. As we gain our presence in the northern hemisphere, there's going to be a structure required to support those stores. Our goal is to get our CODB 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. I know that may sound a political answer, that's actually how we operate internally.
Yeah. I don't really have much more to add to that other than if we are seeing that l everage come through, then it could mean that we've run out of investment into the future. 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.
Just talking about 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?
Yeah, 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. It's an assumption as you open more stores that that will start leveling out. Theoretically, if we decide to take another step into another market and we gear up another four or five heads to do that, then that can bring it back to the pack pretty quickly. If you'd 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. We are an energized business with the capacity, the energy, and the desire from both management and the board to do more.
If that comes with a further investment of heads and a short-term impact to CODB, then we'll take that for the long term.
Just on your U.S. store metrics, are those the payback period there still around 2.5 x the average store? Is that where we're still tracking?
As in longer than the average store, you mean?
Yeah.
Yeah. We're still seeing much higher CapEx spend there per store than we are in any other market. 2.5 is probably pretty close. Obviously that's coming through in the total CapEx spend that you saw on store fit outs in the first half. Obviously currency has inflated that even more in the half compared to last year. Yeah, we're still seeing that. We're making some headway into it, but not as much as we'd like.
Okay. Thanks for your help.
Thank you. The next question comes from Julian Mulcahy from Evans & Partners. Please go ahead.
Hi, guys. 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 the chemist shops and et cetera would charge for that service, it seems to be a pretty attractive offer. When do you think it's actually going to have an impact on the business?
We've rolled that out as per our statement, we're just at around 300 stores now. We've trained the team, which transaction value is higher than our average. We're just ramping up. Like to think as we establish ourselves in that market reminding everyone that each country has a different culture of where they get their ears pierced. In America, for instance, it's common practice, retailers do piercing, whereas in Australia, we've shifted the focus away from arguably chemists or beauticians and so on. We'd like to think it's going to start adding more to our sales in the next 6-12 months as we gain a name for that space.
Right. Just with the U.K., you've had 2/2 of sort of slowing in terms of finding stores. Is it about to open up or is this a permanent sort of rollout right now?
Look, at the moment, we're probably in those I think our numbers will run along at the more recent averages, largely because, one, we've got our focuses elsewhere. We're getting better returns in France. America's obviously a city market price. The U.K. 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 U.K. recently. We're still looking at those opportunities, but if anything, we're waiting for them to present themselves rather than proactively chasing down every deal in the U.K.
Cool. Thanks, guys.
Thank you. There are no further questions at this time. I'll now hand back to Mr. Fallscheer for closing remarks.
Thank you for dialing in. I'll look forward to probably catching up with most of you over the next two days. Thanks again. Bye-bye.