Changes that Retailers Should be Looking At; Lens on Jewellery Retailer, Lovisa

Summary

• Metropolitan Melbourne is under strict stage 4 restrictions with night curfews and limitations on going out of 5km of distance.
• New restrictions are again harsh on retailers that were trying hard to recover from the impacts of the previous lockdown.
• Jewellery retailer, Lovisa has announced a temporary closure of all its 30 stores across the Melbourne city.
• July business update of Lovisa had highlighted a whopping 256 per cent growth in online business during Q4 and strong balance sheet with net cash of AUD 21 million at end-FY20.

Amid the new restrictions in Melbourne, retailers in the city are again at the receiving end of the COVID crisis. During the first wave of the virus, there had been a major transformation in the sector. Retailers that re-opened stores post the first lockdown were trying hard to get in-store customers back and recover from the impacts of the lockdown. They were following all the government guidelines to ensure staff and customers' safety.

However, the retailers' efforts and the government's plans to re-open phase-wise got a speed breaker blow after Victoria emerged as the hotspot of coronavirus cases in Australia, and recently when Melbourne city entered the stage four restrictions.

Must read: Consumer Spending and Confidence dips due to COVID-19 outbreak in Victoria

Once again, only retail stores providing essential services are allowed to remain open and customers have to depend on home delivery and click and collect services to purchase their items. Non-essential retailers are again dependent on their online sales for revenue.

The restrictions are tougher this time, with night curfew in place, strict limitations on going out anywhere more than 5km, and limits on going out for exercise. There is a widespread business shut down for at least a period of six weeks.

Also read: Significant Shift Towards e-retailing, Is Brick-and-Mortar Model at Perpetual Risk?

Reportedly, retailers are in talks with the Federal and Victorian state governments for income support to the staff stood down during the second phase of the crisis.

In that backdrop, let us discuss the impact of these restrictions on jewellery retailer, Lovisa Holdings.

Lovisa Temporarily Closed All Stores Across Melbourne

On 6 August 2020, Lovisa Holdings Limited (ASX:LOV) released an update on its business in the wake of stage 4 restrictions in Melbourne. The Company confirmed that all its 30 stores across the city will temporarily remain closed from 6 August until the government restrictions get lifted.

Moreover, in the US, government shutdown orders resulted in the temporary closure of 19 of Lovisa's stores in California from 14 July. Since March 2020, two stores in New York have been closed, and LOV is awaiting government confirmation to re-open these two stores.

Other than metropolitan Melbourne, California and New York stores, all stores globally remain open and trading. Located in Melbourne city, LOV's Global Support Centre and Australian Distribution Centre will continue functioning, while monitoring and following all government guidelines. Lovisa's digital stores will continue to trade all around the world.

The July business update by the Company post the closure of its global store network, with most stores closed by end-March 2020, due to pandemic conditions, had highlighted that the stores had begun to re-open from mid-April. However, now due to the new restrictions by the Victorian government, all stores in Melbourne city will again remain closed.

Business Update for Full Year Ended 28 June 2020

Sales Report for Full Year: The disruptive trading conditions throughout Q4 had a significant impact on sales during this period. As per LOV's sales report for the year ended on 28 June 2020, sales revenue (excluding franchise revenue) stood at AUD 237 million. Last year (FY19), sales revenue was noted at AUD 249 million. For the FY20 period, comparable store sales, since the stores re-opened, based on the actual days each store traded, were down by 32.5 per cent on the previous year.

Lovisa's best performance was witnessed in Australia and New Zealand, as the markets were open for the most extended period, and trading could happen with minimum restrictions.

Online Business: During the lockdown, the industry witnessed a boom in online shopping. For Lovisa, online business saw a whopping 256 per cent year-on-year growth during Q4.

Balance Sheet and Liquidity: Lovisa maintained a strong balance sheet with inventory levels well managed, thanks to Board's decisive action on costs and cash management since the pandemic. The net cash at financial year-end was AUD 21 million, compared to AUD 11 million at June 2019 and AUD 13 million at December 2019. Moreover, LOV held undrawn financing facilities of AUD 44 million.

Business Forecast: LOV mentioned that in the current uncertain situation, giving any estimates on trading conditions would be difficult. Hence, the Company did not provide any update on the expectations of future trading patterns.

Cost Structure: Amid the previous temporary closure of store networks, Lovisa took decisions to manage the cost structure. The arrangements included stand-down of team members across markets.

Retained Staff Members: The Company decided to reinstate most of the team members to continue the business uninterrupted in the future. Wage subsidies were made available to the team, worldwide, however in most cases, as the team returned to work, the wages subsidies were no longer available to such employees.

Negotiations with Landlords Underway: Discussions were underway regarding rent subsidies throughout the lockdown period and beyond. The centralised operating model helped manage both the temporary shutdown of stores and challenges associated with the re-opening of stores.

Lovisa Exited Spain: The store rollout in Spain was put on hold due to performance below expectations. There was some improvement in this regard before the shutdown. However, there was no support from the landlords in Spain, hence the Company decided to exit this market.

Stock Information - On 7 August 2020, LOV last traded at AUD 6.200, moving upward by 3.333 per cent from its previous close. The Company has a market cap of AUD 644.76 million.

Good Read: Retail Spending and Stocks That Have Become Dearer