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Lovisa share price falls as fashion retailer reports sharp drop in profits

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Lovisa Holdings Ltd (ASX: LOV) shares have fallen more than 3% in today’s trade after the retailer released its financial results for the year ended 30 June 2020 (FY20). The accessories and jewellery retailer saw profits plunge nearly 50% after it was forced to shutter stores due to lockdowns. 

What does Lovisa do?

Lovisa is a fast-fashion accessories and jewellery retailer with stores in multiple jurisdictions worldwide. The company opened 66 new stores in FY20, ending the year with a total of 435 stores. Lovisa operates a vertically integrated business model, developing, designing, sourcing, and merchandising 100% of its Lovidsa branded products. 

What did Lovisa report?

Lovisa reported a 3.2% decline in revenue, which was down to $242.2 million. This was a result of COVID-19 disruptions in the second half of the year. In the first half of the financial year, the retailer had seen strong growth in total sales both from the increased store network and comparable store sales growth.

Lovisa began to see the impacts of COVID-19 in the third quarter, initially in its Asian markets, but this quickly escalated to store closures globally by the end of March. Supply chain disruptions were also experienced during this period, initially due to factory and warehouse closures in China, followed by freight disruption and bottlenecks. These factors combined to result in total sales for the second half being down 32.2% on FY19.

The business was able to begin re-opening in mid-April with the majority of stores now trading. Closures are still impacting stores in Melbourne, California, New York, and New Zealand. Efforts on the digital business have been refocused with improved execution and expanded geographical reach. The digital business saw sales growth of 382% in the fourth quarter compared to the prior corresponding period. Nonetheless, the overall drop in sales flowed through to earnings, with Lovisa reporting a 28.3% decline in earnings before interest, taxes, depreciation and amortisation (EBITDA) for FY20, which fell to $44.7 million. Net profit after tax dropped 47.8% to $19.3 million, from $37 million in FY19. 

Managing director Shane Fallscheer said:

We are pleased with what our team has been able to achieve through the disruptions to our business over the past 6 months, and whilst it has had a temporary impact to sales and profitability we remain confident in our growth objectives and have been able to maintain the balance sheet strength required to deliver on them. This leaves us well placed for the future.

What is the outlook for Lovisa? 

Lovisa says trading for the first 8 weeks of FY21 has seen challenging conditions continue in most markets. Comparable store sales for this period were down 19%, an improvement on the 32.5% decline seen in Q4 FY20.

Eight new stores have been opened since the end of the financial year, with the store network currently at 443 stores. The balance sheet remains strong with a net cash position of above $20 million and undrawn debt facilities. This will enable Lovisa to continue its strategic plans and store roll out. 

At the time of writing, the Lovisa share price is down more than 3% to $7.28 per share.

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Motley Fool contributor Kate O'Brien 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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