Lovisa Holdings Ltd Climbs 13% on Higher Profits

Lovisa Holdings Ltd [ASX:LOV] jumped up 13.4% to a high of $3.98 per share this morning. The fashion and jewellery retailer is now valued at around $410 million.

What happened?

Originally, Lovisa expected FY17 earnings before interest and tax (EBIT) of $35.5 million. But this morning, the company increased their guidance on the back of strong trading in the second half of FY17. Lovisa now expects FY17 EBIT of between $38.5–39.5 million.

Managing director Shane Fallscheer said:

We are particularly pleased the strong result we reported in the first half has continued despite the cycling of the 2016 price increases and the exit of the Eqiup brand from the market.

Our continued focus on ensuring a clean inventory position and merchandising offer has seen our margins stay strong with limited sale and mark down activity.

Lovisa also commented on their expansion progress. The company acquired 17 fashion accessory stores from Klines South Africa. A majority of Klines stores will be rebranded as Lovisa. The handover of the stores will begin in June 2017.

Lovisa will also roll out four more stores in the UK by June. They also expect to have 13 stores trading in the UK by late August.

What now?

The stock is trading at a price-to-earnings (P/E) ratio of around 17-times.

Compared to peers Noni B Ltd [ASX:NBL] (P/E of 60-times) and Premier Investments Ltd [ASX:PMV] (P/E of 19.97-times), Lovisa might be a little on the cheap side.

But Lovisa’s price-to-book (P/B) value of 12.75-times, which is far higher than their peers, might lead us to believe that the stock is overvalued.

Which one should we use? Because Lovisa is a retailer, they’re focused more so on sales than accumulating assets. So I’d suggest you focus on earnings and sales.

But going off Lovisa’s current earnings is not enough. You need to consider what will happen one, two, even five years from now.

Will their expansions in South Africa and the UK contribute to the bottom line? Can they outcompete hundreds of other retailers in their market?

These are questions you should have some idea about before investing in Lovisa.

Regards,

Härje Ronngard,

Junior Analyst, Money Morning

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