Shares in jewellery retailer Lovisa (LOV) have been hit hard this year, but there may yet be growth ahead for the fast fashion icon, once near-term headwinds abate, according to one Morningstar analyst.

Lovisa had staged an impressive rally since bottoming out in June last year. Shares in the company more than doubled in the six months to January 2023, but have since declined rapidly to be more than 13% down year-to-date.

The fall in share price comes amid rising concerns of a recession and a pullback in discretionary spending, particularly within the younger demographics Lovisa markets to.

Data from the Australian Bureau of statistics suggests that discretionary spending among Australians has remained relatively flat, following a seasonal post-Christmas dip.

Stickier-than-expected inflation and rising interest rates are continuing to put pressure on everyday spending, which could lead to shoppers cutting back further on non-essentials—like jewellery.

ABS stats

Morningstar analyst Johannes Faul, who recently initiated coverage on Lovisa, notes that in the near-term, the company still has material headwinds to face.

“In the short run, the outlook for Lovisa is subdued by rising macroeconomic pressures on its customers,” he says.

“We expect like-for-like sales growth to slow materially to about 2% in fiscal 2024, down from an estimated 14% in fiscal 2023.”

Morningstar also expects the company’s new store openings—a key driver of growth—to slow from an estimated 130 in fiscal 2023 to around 100 per year in 2024 and 2025.

Further, the tight competition in the fast fashion jewellery market means Lovisa has little protection if a slowdown does occur.

“While Lovisa's fast fashion jewellery resonates with millennials, competition is intense, barriers to entry are low, merchandise is generally not branded, and its business strategy is replicable,” he says.

“Unbranded and lower-value products encourage price competition. Also, despite impressive global sales growth, meaningful and maintainable cost advantages are elusive.”

But while an expected slowdown in discretionary spending would likely translate to slower growth for Lovisa, the longer-term outlook appears more promising.

Lovisa could ‘double’ footprint by 2030


While the near-term presents some challenges for Lovisa, Faul says once these headwinds abate, the company’s growth prospects appear stronger.

“Our long-term forecast of solid like-for-like sales growth and new store openings more than offsets weaker near-term expectations. We anticipate demand for fashion jewellery to rebound as inflationary pressures on the consumer subside."

Once those pressures do subside, Morningstar forecast store opening rates to once again improve, driving organic growth over the next several years.

“Lovisa's sales growth is driven by mid-single-digit like-for-like sales growth and its organic store network expansion, particularly in the United States and Europe,” Faul says.

“Our estimate of Lovisa's long-term store count is the largest revenue growth driver.”

Faul sees Lovisa’s expanding place into the US market as integral to the forecast growth, but that growth won’t come without competition.

“Success in the newly entered and massive North American market depends on its store format and product offering resonating with a broad customer base by differentiating itself from incumbent fashion retailers, including Claire's,” he says.

With this new growth market on the horizon, Morningstar expects Lovisa to double its global footprint by fiscal 2030, to a global network of about 1500 stores from just over 700 currently—a trajectory Faul says is underpinned by strong fundamentals.

“Lovisa is a global jewellery retailer with a proven and standardised business model, relatively high operating margins, and a long runway of organic opportunities to underpin strong sales and earnings growth over the rest of this decade."

Shares in Lovisa are trading close to Morningstar’s assessed fair value estimate of $22.00 apiece.

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