The Motley Fool

Can a 39% lift in dividends save the underperforming Lovisa share price?

Jewellery retailer Lovisa Holdings Ltd (ASX: LOV) will be hoping its big dividend increase will encourage investors to overlook the drop in same store sales this morning.

The Lovisa share price has been under pressure with the stock shedding 30% of its value over the past six months when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is down 4%.

It isn’t the only retailer facing worries of a slowdown although it’s one of the worst performers among its peers. The Kathmandu Holdings Ltd (ASX: KMD) share price and Premier Investments Limited (ASX: PMV) share price have fallen less than 20% and the Noni B Limited (ASX: NBL) share price has shed around 12% since August.

Earnings up but “comps” down

It’s not that Lovisa’s revenue and earnings aren’t growing. The company posted a 12.3% increase in revenue to $133.2 million and a 5.1% improvement in earnings before interest and tax (EBIT) to $36.5 million for the six months ended December 2018.

Management declared an 18 cents per share interim dividend and that’s almost a 39% increase over the same time last year. The increase seems a little disproportionate to me but I can understand why the company needed to throw a bone to investors.

But Lovisa is a victim of its own success. It’s comparable store sales (sales growth from stores that are opened for at least a year) fell 1.8% with management pointing to “more challenging trading conditions” and the strong performance from the previous period for the weak result.

I suspect investors will be more focused on the “comps” (comparable store sales growth) than the revenue uplift because of the company’s ambitious store rollout program.

Why comps are more important than revenue growth

The retailer is expanding its stores overseas with store numbers jumping by 40 outlets to 366 stores in 1HFY19 versus the same time last year.

Revenue is expected to increase when a retailer opens new stores, so that’s almost a given. Earnings generally won’t keep up with sales growth as the retailers will need to invest in opening new shops.

This is why the “comps” are important as this is the swing variable, particularly for retailers like Lovisa what is trading at a premium to the market and the sector. The stock is on a FY20 consensus price-earnings multiple of around 19 times.

Foolish takeaway

That’s not an issue for stocks with a sustainable double-digit net profit growth profile but I’m not sure if Lovisa quite fits that bill given its latest interim net profit growth was 2.7% (remember it had to invest in the store rollout) and its comps are weak.

Management said that comps are improving since the start of this calendar year but its still below its target of 3% to 5%.

There’re still opportunities for Lovisa to regain its “darling” status in 2019. I don’t think this result will be the catalyst that management is hoping for.

I would avoid Lovisa for the time being until we see more light at the end of the comps tunnel.

Motley Fool contributor Brendon Lau owns shares of Premier Investments Limited. The Motley Fool Australia owns shares of and has recommended Premier Investments Limited. 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 Scott Phillips.

NEW. Five Cheap and Good Stocks to Buy in 2019…

Our Motley Fool experts have just released a brand new FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.8% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.

CLICK HERE FOR YOUR FREE REPORT!