Lovisa Holdings Limited (ASX:LOV), a AU$1.25B small-cap, is a retail company operating in an industry which has experienced a structural shift in terms of digitalization. Physical store retailers faced the inevitable challenge of building up an online presence in order to enhance their omnichannel capabilities. Retail analysts are forecasting for the entire industry, a positive double-digit growth of 18.85% in the upcoming year , and a whopping growth of 35.44% over the next couple of years. This rate is larger than the growth rate of the Australian stock market as a whole. Below, I will examine the sector growth prospects, and also determine whether Lovisa Holdings is a laggard or leader relative to its retail peers. View our latest analysis for Lovisa Holdings
What’s the catalyst for Lovisa Holdings’s sector growth?
E-commerce continues to be the fastest growing sales platform for consumer goods, changing the landscape for retailers. A large number of store closures and bankruptcies illustrates the shift in consumer preferences and increasing online competition. Over the past year, the industry saw growth of 8.34%, though still underperforming the wider Australian stock market. Lovisa Holdings leads the pack with its impressive earnings growth of 44.60% over the past year. However, analysts are not expecting this industry-beating trend to continue, with future growth expected to be 10.91% compared to the wider retail sector growth hovering in the teens next year.
Is Lovisa Holdings and the sector relatively cheap?
Retail companies are typically trading at a PE of 16.47x, in-line with the Australian stock market PE of 17.18x. This illustrates a fairly valued sector relative to the rest of the market, indicating low mispricing opportunities. Furthermore, the industry returned a similar 10.99% on equities compared to the market’s 11.75%. On the stock-level, Lovisa Holdings is trading at a higher PE ratio of 37.3x, making it more expensive than the average retail stock. In terms of returns, Lovisa Holdings generated 72.80% in the past year, which is 61.81% over the retail sector.
Next Steps:
Lovisa Holdings is a retail industry laggard in terms of its future growth outlook. In addition to this, the stock is trading at a PE above its peers, meaning it is more expensive on a relative earnings basis.If Lovisa Holdings has been on your watchlist for a while, now may not be the best time to enter into the stock. If growth and mispricing are important aspects for your investment thesis, there may be better investments in the retail sector. However, before you make a decision on the stock, I suggest you look at Lovisa Holdings’s fundamentals in order to build a holistic investment thesis.