Are we ready for stardom?

Jewellery chain Lovisa and its $21m CEO Victor Herrero eye ASX stardom (copyright link)

Lovisa opened a net 85 new stores over financial 2022 and a net 47 over the first 19 weeks of financial 2023 to take total stores to 676 across 26 countries.

UBS estimates Mr Herrero will grow the group to 1166 stores by financial 2026 in addition to 52 franchised stores in the Middle East. Earnings per share are forecast to roughly double from 76.8¢ in financial 2023 to $1.54 in financial 2026.

Return on invested capital

The broker thinks Lovisa can generate a return on invested capital (ROIC) of 45.4 per cent in financial 2023 rising to 67.5 per cent in financial 2026 while rolling out more stores.

A high ROIC means a company has to invest less capital to generate higher earnings growth. In that sense, it shows why many investors argue ROIC is the most important financial metric to prove a company’s potential to deliver high shareholder returns.

Lovisa’s gross margin in financial 2022 also reached 78.9 per cent. This is exceptionally high for a retailer and beats gross margins at apparel retailers like Zara and Uniqlo.

To put it bluntly, the jewellery Lovisa buys is cheap and doesn’t cost much to manufacture, before it sells it to customers at a huge mark-up. If it diversified into handbags or apparel the gross margin would fall.

It also generates high ROIC as the store rollouts earn fast profits on relatively fixed operating costs. If a store rollout plan doesn’t deliver the desired ROIC, Lovisa will abandon it.

In Spain in 2020 it complained of high rents demanded by landlords and exited the market. It’s now expected to target the US, Canada, and Europe for much of its expansion.

If it can increase store count, profit margins, and total profit per store on a high ROIC you have a potent combination likely to produce a big sharemarket winner even after a 13-fold rise since 2014.

However, this potential is only on paper and comes with risk, chiefly, competition from the likes of Clare’s, Pandora, Accessorise, and Swarovski. UBS also flags Mr Herrero’s incentive package (mainly made up of share options) as a profit margin headwind adding an estimated $17.3 million to costs in financial 2023 and $7.3 million in financial 2024.

Still, experienced management at retailers doesn’t come cheap. We’ve already seen Accent Group, Super Retail Group, and JB Hi-Fi post strong results on the back of good inventory management this earnings season.

While Kogan, City Chic, and Best & Less flagged inventory problems as the pandemic-boom reversed faster than expected to harm their share prices.

Superstar retailer Lovisa hands down its numbers on February 22.