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Lovisa’s share price glitters in tough retail market

Investors affection towards the Lovisa Holdings Ltd (ASX: LOV) share price is deepening after the jewellery retailer posted its full year profit results that sent the stock jumping to a more than 52-week high.

The Lovisa share price gained 3.6% to $12.51 during lunch time trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index added 0.3% and as the consumer discretionary sector dipped into the red.

The outperformance of Lovisa stands in contrast to declines in other high-profile names in the sector. For instance, the JB Hi-Fi Limited (ASX: JBH) share price dropped 1.3% to $32.01, the Super Retail Group Ltd (ASX: SUL) share price fell 0.6% to $9.99 and the Breville Group Ltd (ASX: BRG) declined 2% to $15.36.

Higher dividend on stronger profits

But tough retail conditions couldn’t stop Lovisa from reporting a 15.3% improvement in revenue to $250.3 million as earnings before interest, tax, depreciation and amortisation expanded 7.1% to $62.3 million.

Management rewarded shareholders with a 1 cent increase to its final dividend of 15 cents per share, thanks to strong cash conversion of 107% and operating cash flow of $66.7 million.

What’s more, the weakening Australian dollar hasn’t been a drag on earnings thanks to the group’s currency hedge. While the group won’t get the same protection this year, management isn’t fazed.

Managing margin pressure

“Gross margin increased 50bps to 80.5% as we continued to benefit from higher USD hedge rates across the year,” said Lovisa’s managing director, Shane Fallscheer.

“We have maintained our focus on margin, with continued focus on inventory management and promotional effectiveness resulting in a small improvement in margin on a constant currency basis in spite of the more challenging trading conditions.”

It’s aggressive international expansion should also provide some natural hedging against the weakening Australia dollar, and it’s this store roll out program that has helped the group deliver the good result.

One small sales growth problem

The only thing tarnishing the news is the 0.5% decline in comparable store sales, which only measures sales growth in outlets opened for a year or more.

“Whilst we are generally happy with our execution of meeting customer needs in product and in store execution for the year, we have not seen the same major trends in the fashion jewellery sector as we have seen in recent years that have helped drive strong comparable store sales in prior years consistently above our target growth range,” said Mr Fallscheer.

However, any worries about comparable store growth is tampered by comments that the group is noticing an improvement in this metric in the second half of FY19 as sales growth is returning to management’s target of 3% to 5%.

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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. Connect with him on Twitter @brenlau.

The Motley Fool Australia owns shares of Super Retail Group 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.

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