Lovisa share price drops 7% despite 'solid' FY23 sales growth

Was the FY23 result a sparkling success?

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The Lovisa Holdings Ltd (ASX: LOV) share price is down 7.55% on Thursday after the company reported its FY23 earnings results. At the time of writing, shares in the jewellery retailer are trading at $20.99.

The earnings report is for the financial year ending 2 July 2023.

Lovisa share price down despite 'solid' results

Lovisa experienced comparable store sales growth of 6.3%, which the company described as "solid". It implemented price increases during the third quarter of FY22, which helped deliver growth in the first three-quarters of FY23, which saw minimal impact on sales volumes.

The company reduced its dividend and now has a "more appropriate capital structure" after distributing surplus cash in recent dividend payouts to shareholders. The board doesn't currently have a target dividend payout ratio and will continue to base dividends on the cash flow needs of the business and the strength of the balance sheet.

Despite investing heavily in new markets, new stores, and the structures to make them successful, it was pleased to say that the cost of doing business (CODB) remained "well-controlled", helping mitigate inflation pressures on labour and other costs.

What else happened in FY23?

Growth of the global store network was a "major driver" of total sales growth, with a net increase of 172 new stores over the year. Lovisa finished with 801 stores throughout the world, with the number of stores in the United States rising from 118 to 190 during FY23.

It opened its first store(s) in a number of countries during FY23, including Hong Kong, Taiwan, Namibia, Botswana, Spain, Italy, Hungary, Romania and Mexico. New stores and markets could be a key driver of the Lovisa share price over the next year or two.

It renegotiated its franchise contract with its Middle Eastern franchise partner, allowing the company to convert the UAE market to company-operated while the rest of the countries in the region remain as franchise operations.

The company is still looking to expand in existing and new markets.

During the FY23 second half, it also opened its new 5,000m2 company-operated warehouse in Poland, which aims to provide improved flexibility and improved service levels for stores. This will help manage store stock replenishment more efficiently.

It also noted it's looking to improve its overall digital capabilities and has more work to do.

What did Lovisa management say?

Lovisa CEO Victor Herrero said:

The company has been able to continue to deliver strong profit growth while investing in the structures to support our global expansion in the face of more difficult trading conditions in the second half, which leaves us well-placed as we move forward with store rollout in both existing and new markets.

I want to again thank the entire global Lovisa team for their exceptional work to deliver these results.

Outlook

In the first seven weeks of FY24, the business has seen comparable store sales decline by 5.8%, but total sales increase by 13.1%, year over year.

Since the end of FY23, it has opened 21 new stores and closed eight stores, including six UAE franchise stores which were closed as part of its exit from the previous franchise contract. It now has 814 stores.

Lovisa share price snapshot

After the release of the FY23 result, Lovisa shares are now down 9% year to date, while the S&P/ASX 200 Index (ASX: XJO) is up by 3.3%.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Lovisa. The Motley Fool Australia has recommended Lovisa. 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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