Australia fashion retailers have faced a challenging few years due to a sluggish economy, cautious consumer spending, increasing competition, and rising rental costs.
International retailers have expanded their local presence while low wage growth and falling house prices have constrained consumer spending. Brands including Metalicus, Maggie T, Espirit, and Shoes of Prey have shuttered or left Australian shores.
Retail sales recorded sluggish growth of 0.4% in August, below market expectations of 0.5% growth. Revenue in Australia's clothing apparel market is anticipated to grow by 2.3% annually to 2023, just slightly above the rate of population growth.
Fast fashion races ahead
The fast fashion sector is outperforming retail in general as consumers seek cheaper alternatives in the face of subdued income growth. Revenue growth for the fast fashion industry has been 11.8% annualised for the 5 years to 2019, and is expected to grow by 4.4% in 2019.
The fashion jewellery market in Australia has recorded annual growth of 0.8% in the five years to 2019, with branded fashion jewellery increasing in popularity. One retailer that is succeeding in capturing consumer spend is Lovisa Holdings Limited (ASX: LOV). The Lovisa share price has been on the tear since the start of 2019, increasing 135% from $5.69 in early January to around $12.99 currently.
Lovisa leads the way
Fashion jewellery retailing has a low market share concentration, however Lovisa has managed to capture more than 5% of industry revenue. Fashion jewellery and accessories are generally low cost items that offer consumers the opportunity to indulge and update their look on a budget. Lovisa's range includes earrings, necklaces, rings, bracelets, watches, hair accessories, and body jewellery. Piercing services are offered instore.
The retailer is following an aggressive international expansion plan, opening net 64 stores in FY19 across Australia, Europe, South Africa, and the United States. Now with 421 stores across 15 countries, Lovisa moves product to store locations within 48 hours from warehouses in Melbourne and China using daily inventory monitoring software and airfreight.
Lovisa recorded an increase of 15.3% in revenue in FY19, up to $250.3 million from $217 million in FY18. Gross margin was 80.5%, up 0.5% from 80% in FY18, assisted by tight inventory management and a stronger USD hedge rate during the period. Capital expenditure of $24.1 million was incurred, predominantly relating to new store openings and refurbishment of existing stores upon lease renewal.
Earnings before interest, taxes, depreciation and amortisation (EBITDA) increased by 7.1% from $58.2 million in FY18 to $62.3 million in FY19. Gross profit of $201 million was recorded, up 16% from $173 million in FY18. Net profit after tax (NPAT) of $37 million was reported in FY19, an increase of 3% over FY18. Basic earnings per share were 35.09 cents in FY19, up 0.85 cents from 34.24 cents in FY18.
Lovisa's cost of doing business increased to 56% in FY19 from 53% in FY18 largely due to investing ahead of the curve to support the opening of new stores and the ongoing store rollout plan. Same store sales were down 0.5%. Debt facilities remained undrawn for much of the year and net cash of $11.2 million was on hand at the end of the financial year.
Lovisa has grown rapidly, with revenue increasing tenfold from $25.5 million in FY11 to $250.3 million in FY19. Lovisa listed in 2015 at which point revenue (for FY15) was $134.3 million and the company had 239 stores (390 stores at 30 June 2019).
In an update this morning, Lovisa announced an improvement in trading conditions, with comparable store sales up 2.3% for the 17 weeks since the end of FY19. Thirty one new stores have been opened since the end of FY19, with 33 stores trading in the US. Currency headwinds are expected to have an impact, however, as the average USD hedge rate falls below US$0.70.
The retailer plans to continue its aggressive expansion, leveraging its roll out to the US, UK, and France and investigating other Northern Hemisphere markets. Lovisa also plans to target new international markets, targeting one new trial territory per year. Given it has been predicted that the Australian fashion jewellery market is reaching saturation point, international expansion may be key to Lovisa's continued growth.
Life is short, buy the shoes
Accent Group Ltd (ASX: AX1) is a footwear retailer with 420 stores across 10 retail banners and exclusive distribution rights for 10 international brands across Australia and New Zealand. Brands include The Athlete's Foot, Dr Martens, Platypus, Timberland, Vans, Sketchers, CAT, TAF and Hype DC. Accent's share price has increased 26% this year from $1.19 in January to around $1.52 currently.
Accent released its annual report last week showing a record year of trading and profit growth in FY19. Underlying EBITDA was $108.9 million, an increase of 22.5% on the previous year. Total sales were 935.3 million, while gross profit was 56.1%, an increase of 130 basis points over FY18. Accent opened 54 new stores and closed 21 stores during the year, while digital sales nearly doubled, increasing by 93%.
NPAT was up 22.5% for FY19 to $53.9 million. Dividends in FY19 were 8.25 cents per share, fully franked, up 22.2% for the year. Underlying earnings per share were 10.02 cents and the payout ratio was 82%. Accent plans to open more than 40 new stores in FY20 focusing on the Dr Martens, Hype DC, Platypus, Sketchers, Cat, Merrell, and Vans brands.
Accent also plans to trial a new footwear concept called PIVOT. Focused on servicing a "sport and street inspired value conscious consumer", it will carry brands including Nike, Converse, Adidas, Sketchers, Cat, and Vans. The first stores and website are expected to open in the second half of FY20.
Accent is targeting profit growth in the low single digits for FY20, with sales in the first 7 weeks of the financial year up 2.7%. Dividend payments are expected to be aligned to NPAT, with the Board committed to returning excess cash to shareholder and growing dividends over time.
Foolish takeaway
Fashion retailers, like many consumer discretionary stocks, can go in and out of fashion with investors as economic news influences sentiment. More so than many retailers, fashion retailers are uniquely exposed to the whims of the populace. The power of social media means products can take flight overnight and crash just as quickly.
Just remember that savvy investing never goes out of style.
