CRASH: Why the Lovisa Holdings Ltd share price got hammered today

Credit: ryan melaugh

The share price of Lovisa Holdings Ltd (ASX: LOV) has been crushed this morning after the jewellery retailer updated its full-year earnings guidance. The shares fell as much as 40% at one point, hitting a low of $2.20, but are trading 32.1% lower at $2.50 at the time of writing.

So What: For the first half of financial year 2016 (FY16), the group achieved 8% growth in net profit after tax (NPAT) to $13.5 million, while revenue also rose 13.1% to $82.6 million. That included the impact of 11 new store openings but also like-for-like sales growth of 4.1%.

Unfortunately, those positives were completely offset by a decline in margins. Its gross margin fell to 75%, down from 78.3% in the first half of 2015, which was caused by a combination of heavy sales activity and the weak Australian dollar.

Indeed, the Australian dollar has fallen heavily in recent times and is currently fetching just over US 70 cents. A weak Australian dollar is great for net exporters, but for importers such as Lovisa and various other retailers it can act as a headwind on earnings potential.

Lovisa said its average USD buy rate during the first half of the year was US 77 cents (it’s down sharply since then, suggesting more pain to come), which was down from US 90 cents in the prior corresponding period (pcp). It was unable to cover the additional costs entirely, estimating a 1.2% hit to the gross margin as a result.

Heavy sales events contributed the remainder of the damage to the group’s margins, saying its sales events had lasted four weeks in the first half of 2016, compared to the two weeks of sales events in the pcp. Sales events can be great for boosting revenue, but influence the level of profit the company can make on each product sold.

Based on the performance in the first half, Lovisa told investors to expect full-year earnings before interest and tax (EBIT) to be between $23.5 million and $25.5 million, which assumes a gross margin of just 73.7%.

Now What: Consumers should expect Lovisa to hike its prices to try and cover the additional cost of goods, but that in itself is likely to impact the group’s sales. Of course, Lovisa isn’t the only retailer that could be hurt by further falls in the AUD with others such as Super Retail Group Limited (ASX: SUL) also exposed.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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