Lovisa reported 1H25 EBIT of $90 million, up 11%, slightly below consensus estimates of $92 million. With revenue growth stunted by flat comparable sales, gross margin was the standout, hitting a record 82.4% (up 170bp). The trading update signaled an improvement in trading momentum with LFL at 3.7% and the company is confident that the store rollout will reaccelerate. Cost growth gives us pause. Gross margins need to be maintained to offset cost growth if comparable sales don’t deliver, which is difficult with increasing competition. Given the lack of traction in Asia, we have removed the probability of an accelerated China rollout.

Lovisa’s AGM trading update revealed weakening sales trends and a slower pace of net new store openings. We expect to see a year of slower store openings, influenced by the CEO transition period being so drawn out. Increasing competition and promotional activity weighs on margins.

Lovisa has enjoyed a relatively low level of competition. The company has a moat related to the breadth of its frequently refreshed and low-price product offering. How defensive is that moat?  A new entrant in Harli + Harpa, led by ex Lovisa CEO, Shane Fallscheer will launch shortly. Lovisa has derisked its Australian exposure, but its domestic market remains a key funding source for its global expansion aspirations. There are early signs of weakness in Australia and increasing competition will put downward pressure on the highly attractive margins. The global expansion is the key driver of growth for Lovisa but the domestic market still matters.

Lovisa reported FY24 EBIT of $128 million, up 21%. Sales of $697 million, up 17.3% were a 2% miss to Visible Alpha consensus. The comparable sales trading update at 2.0%, while an improvement on 2H24 was lower than consensus expectation. Sales on a per store basis in A$ were lower across all segments. The gross margin performance was a highlight, delivering 81.2% in 2H24 and 80.9% for the full year, up 108bp. Elevated costs, especially wages and rents, suggest there is little operating leverage being realised so far.

We have written a detailed report on Lovisa, a global, affordable, fast fashion jewellery retailer with a strong growth opportunity. We forecast the store network to grow at a compound annual growth rate of 15% over the next four years with stores in existing and new markets. EBIT is forecast to grow at 23% annually over four years in our base case.