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Why the Lovisa share price is at risk of falling further over the coming weeks

Lovisa shares

The Lovisa Holdings Ltd (ASX: LOV) share price tumbled on Friday along with its peers, but the costume jewellery retailer may continue to lag ahead of its profit results in August.

This is the prediction from Morgan Stanley who’s warning that there is a 70% to 80% chance the Lovisa share price will fall over the next 60 days.

The bearish prediction stands in contrast to the recent re-rating of ASX retail stocks as Australia emerges from the COVID-19 shutdown.

Retail re-rating

Some retailers like JB Hi-Fi Limited (ASX: JBH) and Harvey Norman Holdings Limited (ASX: HVN) have benefitted from increased demand for IT equipment and electronics from stuck-at-home consumers.

Meanwhile, other retailers like Baby Bunting Group Ltd (ASX: BBN) and Kathmandu Holdings Ltd (ASX: KMD) have experienced a spike in online sales.

The sector also got a boost on news that the economic fallout from the coronavirus pandemic isn’t half as bad as what experts were predicting.

Left behind

But Lovisa may be among the worst placed retailers to benefit from these tailwinds. Morgan Stanley sees near-term risk to its share price as its store rollout in the US, UK and France may take six to 12 months to ramp up again.

This is significant as new store openings in those key markets are a major earnings driver for the group.

But these countries are having more trouble than Australia in flattening the coronavirus curve. The US may be particularly hard hit on fears of a second wave of infections as the number of Americans catching the virus surpassed two million.

All glammed up and nowhere to go

This may not be the only thing to weigh on Lovisa’s share price. Morgan Stanley doesn’t think the small cap retailer will benefit so much from the rebound in consumer spending in Australia.

The reason is social events like weddings are a big driver for jewellery demand and there are still strict limits on the number of people who can attend such gatherings.

Disconnected from online sales

Finally, Lovisa may not benefit significantly from the big shift to online shopping because the company doesn’t have a strong presence in this channel, explained Morgan Stanley.

If the broker is right, the company’s full year result announcement in August may be a sombre affair!

Morgan Stanley’s recommendation on Lovisa is “equal weight” (equivalent to a “hold”) and its price target on the stock is $6.50 a share.

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Returns as of 6th October 2020

Motley Fool contributor Brendon Lau has no position in any of the 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 Scott Phillips.

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