Here’s why Lovisa Holdings Ltd shares got hammered today

Photo: Lovisa Prospectus

Whilst the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) may have bounced higher today, the same cannot be said for fashion retailer Lovisa Holdings Ltd (ASX: LOV). Its share price took an almighty 13% plunge shortly after the market opened following the release of its preliminary final report which revealed a sharp drop in profits.

Although Lovisa posted a 14.3% rise in sales to $153.4 million, profit after tax dropped a hugely disappointing 45.9% to $16.5 million. The drop in profit was the result of a higher cost of sales due to the weakening Australian dollar and a higher level of markdowns.

Same store sales were up 5.5% on last year, which I would normally view very positively. But if the company is relying on markdowns to achieve this heightened level of sales then I wouldn’t personally pay too much attention to the metric on this occasion.

Management did paint a reasonably positive picture for the year ahead. The company plans to open upwards of 30 new stores in FY 2017, with same store sales growth expected to be in the range of 3% to 5%. Furthermore it also expects to improve its trading margin as a result of hedging against currency devaluations and a reduction in markdowns thanks to inventory levels returning to normal.

Whilst Lovisa did deliver on its guidance and its performance is by no means as worrying as struggling retailer Surfstitch Group Ltd (ASX: SRF), it certainly isn’t as impressive as my favourite Australian retail company Premier Investments Limited (ASX: PMV).

The company behind the Smiggle and Peter Alexander brands has impressed me this year with its strong performance. Although the market now has high expectations, I do feel it is likely to deliver on them.

Based on today’s result Lovisa’s shares are trading at approximately 18x full year earnings. Whilst this is a big discount to Solomon Lew’s Premier Investments, I would still choose the latter of the two if I were looking at gaining exposure to Australia’s retail sector today.

Before making an investment in Premier Investments or any other share for that matter, I would highly recommend taking a look to see if you own one of these three wealth-destroying shares. Each could be harming your portfolio and may be best swapped out if you ask me.

3 Rotten Shares to Sell, and 1 to Buy Today

After a double-digit rally for the ASX since 2016 lows, investors should be on high alert. You'll find a full rundown below of 3 shares we think you should avoid today plus one top pick worth buying, even if the market turns south and the RBA keeps rates at an "emergency low." Simply click here to uncover these stocks.

Motley Fool contributor James Mickleboro has no position in any stocks mentioned. 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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.