Lovisa
Been a while since my last post, but something I’m going to be getting back into posting once a fortnight.
Lovisa
Lovisa’s a company I’ve owned since since late 2023, first accumulating shares at between $17-$20 and trimming when things got a bit expensive last year. Lovisa’s quite a simple business selling jewellery through its own chain of stores; cheap, good quality earrings, necklaces bracelets and the like for females with most pieces going for $10-$30 AUD.
The business was founded in 2010 by Shane Fallscheer who partnered with Brett Blundy, a now billionaire and his investment firm BB Retail Capital. They recognised a gap in the market for affordable, trend-driven jewellery to which they pursued through opening a chain of stores, that only sold in house products, allowing for them to control their entire supply chain from design to distribution, enabling an incredibly efficient, nimble and profitable retailer.
Since IPO in 2014 Lovisa has been able to grow from 167 stores and $91m in revenue to nearly 1000 stores and over $750m in revenue (a 22.6% CAGR).
Generally I don’t think brick and motar retailers have an as bright future with the increasing mix of sales from e-commerce leading to declining margins and ROIC as they fight the capital and fixed costs bases’.
In saying this, Lovisa is unique, being able to maintain profitability, >20% ROIC all throughout this growth and even paying a dividend. With 80% gross margins and an average EBIT margin of 18.6% over the past 8 years, looking blindly you wouldn’t be wrong for mistaking it with a software business- a good one at that. The model is so profitable due to the small size of the stores which maintain basic, open fit-outs allowing for a very dense number of SKU’s and low labour requirements, with customers able to serve themselves unlike traditional jewellery stores. You can see in the picture below stores are small and simple with the average investment needed to open a store just $250k with a payback of 4-8 months.
The other side of the business is the product, a great model is one thing, but success is pretty much entirely predicated on the product/s. Sales and demand show the designers are good, and people want these products. Its a hard space to have an true edge outside of talent but, as the business has scaled, now harnesses a tangible advantage over competition in their data. Every sale generates a point of data, which aggregated gives you very valuable information on what to produce more of, and what to cut down on, and is the co-ordination mechanism for the design and production team. Paired with this is an incredibly efficient and fast supply chain from design to distribution which allows Lovisa to hold minimal inventory and introduce/ remove products very quickly. Lovisa’s ability to sell products at high margins while maintaining high inventory turnover is a anomaly and underpins its ability to generate superior returns to competitors.
Most retailers with high inventory turnover (Woolworths, Costco, Bunnings, Kmart etc) typically maintain low margins, while most retailers with high margins (LVMH, Proud’s, Tiffany & Co, Hermès etc) typically maintain low inventory turnover. The very few that have both high inventory turnover and margins have to be vertically integrated and ultimately are able to generate superior ROIC like Lovisa.
Competition
A bits been made of the recent establishment of Harli + Harpa by Lovisa founder Shane Fallscheer in 2024, which is PE backed and opened their first 20 stores in 2024, with a plan to open 20 more in 2025. They have very simular (near identical) products, model and layout to Lovisa but position themselves a bit more upscale from a price, product and marketing perspective. I don’t really see them as a threat to Lovisa, at least not at their current scale but do like the business and think it will work. Seeing one of their stores (and overhearing my friend talk about it) it certainly comes across as a bit more classy and might not be a bad acquisition down the line. Aside from H+H retailers like Claires, Signet Jewellers, Pandora and Prouds are all competitors but have very different value propositions. Traditional retailers like Tiffany and co, Prouds and Signet are focused on high value, high margin products while you have e-commerce brands like Missoma and Mejuri which do offer simular products to Lovisa but don’t compete directly as they’re an online and can’t offer on demand purchasing.
Harli and Harpa and maybe Claire’s in the US which is focused on jewellery for kids are the only direct competitions from a business model perspective, and from a product and pricing perspective only Kmart, Walmart and the like would be comparable but Jewellery obviously isn’t there specialty…
Lovisa maintains a great niche in cheap, good quality jewellery for women which is able to be bought on demand. And while there are obviously many competitors attacking them from different angles, I think they have a very compelling value prop- of which is very hard to replicate especially from a back end (design + supply chain) perspective
Stores
The US is now Lovisa’s largest market with 209 of their 943 stores, followed by Australia (180), France (88), South Africa (83) then the UK (53). The Lovisa story and investment case is heavily predicated on the store rollout, which you can see in the figure above has slowed on both an absolute and relative basis. More diligence, landlord issues, weaker economic conditions, their scale and natural fluctuations in their ability to find new locations are all to blame.
Going forward my base case is for 9-13% store count growth p.a plus 1-3% growth in SSS. Altogether call that: 10-16% revenue growth through the cycle, which I think is an important thing to keep in mind when thinking about their growth trajectory. Economic conditions, same store sales, and managements ability to find quality new locations will always be cyclical and somewhat volatile, but the story hear is not picking the bottom of the cycle (like most retailers), but riding the structural growth of their store rollout.
There is no real limit to their store count, with the TAM so much larger than its current levels its not even worth worrying about. Lovisa would be easily able to grow at 15% p.a by just in-filling the US, UK and Europe for many years to come and for context Claires has about 1,400 stores in the US, 40% higher than Lovisa’s global count and 7x their US count.
Infilling and the opening new stores has and will come at a cost, with margins being on a steady decline for the last decade. From 2017-19 EBIT margins ranged between 21% and 24% but have been steadily decreasing as they’ve exhausted the best locations and are now left opening stores in less desirable locations (but are still very good). EBIT margins now sit at about 18% and I expect will continue to decline normalising at 15-16%.
At $24-$25 per share or 30x earnings I think shares are at about fair value. Shares are quite volatile, and will no doubt present ample buying opportunities as per history. Anything sub $21 I think is good value as long as the growth outlook remains strong…
Brett Blundy is the king pin here, experienced, successful and owns 40% of shares (through BB retail capital). And while theres a management team behind him, Brett is the one pulling the strings which has been the case from the start and to this day still approves every store opening himself. If Brett was to leave, or to sell down that would probably be a deal breaker for myself but as for now things look positive.
Can find my on twitter @BallerMania_18 or feel free to reach out via my DM’s on Substack