It’s mixed reviews for Australian low-price jeweller Lovisa (ASX:LOV).
On the one hand, stockbroker and wealth management firm Morgans is telling investors to buy, with a 12-month target price of $35.
On the other, global investment bank UBS is telling investors to sell, with a 12-month target price of $27.
That being said, both sides shared these comments when Lovisa’s share price was at around $28.20 at the close of market on Monday afternoon earlier this week.
As of 4:00pm Tuesday, Lovisa’s share price hovered at around $26.90, likely driven by the fact that Lovisa’s half year results were below market expectations.
Let’s go reverse alphabetical order and start with the good. In its note to investors, Morgans analysts said Lovisa’s like-for-like sales for the first half of FY25 were less than they had expected at just a 0.1 per cent uplift. Morgans was betting on a 1 per cent LFL sales lift.
“This caused total sales to grow by just 8.8 per cent in 1H25, a slower pace than we’re used to, although the rollout of new stores was very slightly better than forecast,” Morgans analysts said.
By contrast, Lovisa’s gross margin was “exceptional”, rising 170 basis points to 82.4 per cent. Morgans called it a new record that was 90 basis points higher than they had predicted.
“Operating costs rose by 12.1 per cent, which was faster than sales, but the higher gross margins meant the EBIT margin rose 30 bps to 22.2 per cent,” Morgans noted. “EBIT of $90.2 million was up 10.7 per cent but 3 per cent below our estimate.
“The effective tax rate was pushed up by the timing of the recognition of tax losses in new markets, meaning NPAT grew by 6.5 per cent, less than EBIT, and was 6.3 per cent below [our] forecast.”
Despite the less than expected results, Morgans highlighted two key factors that should drive up the share price ahead.
The first is Lovisa’s ongoing store rollout, which Morgans analysts predicts to hit a thousand stores globally by FY25 end. Lovisa finished the first half with 943 stores, with 16 net new stores being added since then.
With outgoing CEO Victor Herrero expected to step down on May 31 (with that role being taken over by former Smiggle managing director John Cheston), Morgans analysts said they won’t be surprised to see Herrero target that date or before to reach 1,000 stores.
“The company has made it clear it expects to achieve more store openings in FY25 than in FY24, on a net and a gross basis,” Morgans noted. “Last year, Lovisa added 128 stores on a gross basis and 99 on a net basis. For FY25, we forecast a gross add of 130 and a net add of 103.
“It is our view that the company has a subscale presence in the majority of these markets except ANZ, which sets up a great opportunity for long-term growth. We see markets such as Vietnam, Mexico, Romania, Spain and Italy as especially underpenetrated.
“China is also substantially subscale with a single store in Guangzhou, but we think it is not unlikely it will open second and third stores soon.”
The second key factor that Morgans analysts claim should drive up the share price ahead is Lovisa’s “impressive” gross margins.
According to Morgans, Lovisa’s gross margins have increased by 410 basis points since the first half of FY22.
“The improvement was driven by ongoing management of pricing structures, including good discipline with promotional pricing,” Morgans analysts wrote. “Cost prices well-managed with suppliers and we believe the number of suppliers was streamlined.
“Shrinkage was actively controlled during the period, which had a positive effect on margins. Lovisa is focused on improving its gross margins still further, though we have taken a conservative standpoint and forecast 81.7 per cent in 2H25 and 82 per cent in FY26.”
As a wrap-up, Morgans analysts believe Lovisa has the ingredients to become a truly global brand.
“Ongoing investment will be needed to expand Lovisa’s multinational network and to take it into new markets, including China, but the company has the capacity to fund this, and the returns could be stellar.”
But not everyone is gung-ho on Lovisa. Analysts at investment bank UBS is retaining its sell rating due to concerns about the pace and size of a recovery in Lovisa’s LFL sales and net new store growth.
According to UBS, revenue for the first half of FY25 was below market in Asia, Africa, Europe and ANZ, which was partially offset by stronger Americas – 3 per cent above market.
EBIT was also below market but above UBS estimates, while NPAT was below market and UBS estimates.
UBS analysts did concede that the first second weeks improved, with total sales up 12.9 per cent and LFL sales up 3.7 per cent, but noted that trading in the second half may get more difficult.
“An improvement in LFL sales growth is desired, with the overall backdrop (youth consumer that socialises, low ticket price) key supports,” UBS analysts wrote. “Yet net new store growth is the majority of network sales growth driver.”
UBS analysts said net store growth was “modest” for the first 20 weeks, with more stores opened in the subsequent 13 weeks to date. The analysts expect robust store growth for the remainder of the second half.
“However, we note that (1) LOV store growth is lumpy; (2) the pace of net store growth is unlikely to positively surprise (UBSe below mkt); and (3) FY23 (172 net openings) appears to be the exception with 100-120 more likely despite operating in more markets.”
UBS also weighed in on Lovisa’s EBIT margins growth of 37 basis points to 22.2 per cent. “[But] this was gross margin expansion (+171bps) driven as pricing & sourcing costs were well managed, while CODB/Sales rose 134bps due to operating de-leverage and growth investments (supply chain, team, technology).
“Gross margin expansion is a less durable source of EBIT margins vs lower CODB/Sales as they are easier to compete away. This emphasises the requirement for LOV to grow LFL sales and mature operations in recently entered markets where it is currently less efficient.”
The other challenge for Lovisa which may have a material impact ahead is the current class action lawsuit that was launched by more than 300 former staff. Adero Law is representing.
Over a dozen key claims have been made by the members in the lawsuit, including allegations that employees were regularly required to arrive at work 15-20 minutes before the start of their shift, regardless of whether they were rostered to open the store or start later in the day.
Adero was told that the staff were not paid overtime or at all for the additional 15-20 minutes worked before the start of their shift.
Employees were also required to stay back at the end of their closing shift to clean up or balance the till, and allegedly were not paid for the additional time.
Lovisa shared a statement to the ASX last month saying it will defend the class action proceedings.
“The company takes its obligations under the Fair Work Act and the Lovisa Enterprise Agreements of 2014 and 2022 very seriously, including obligations to pay overtime, and has processes in place to monitor compliance with employment laws,” Lovisa reported.