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Edited Transcript of LOV.AX earnings conference call or presentation 22-Aug-19 12:30am GMT

Full Year 2019 Lovisa Holdings Ltd Earnings Call

MELBOURNE Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Lovisa Holdings Ltd earnings conference call or presentation Thursday, August 22, 2019 at 12:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Chris Lauder

Lovisa Holdings Limited - CFO & Company Secretary

* Shane Roland Fallscheer

Lovisa Holdings Limited - MD & Executive Director

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Conference Call Participants

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* Josephine Little

Morgans Financial Limited, Research Division - Senior Analyst

* Julian Mulcahy

Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst

* Sam Haddad

Bell Potter Securities Limited, Research Division - Industrials Analyst

* Sam Teeger

Citigroup Inc, Research Division - Analyst

* Shaun Weick

Macquarie Research - Analyst

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Presentation

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Operator [1]

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Thank you for standing by, and welcome to the Lovisa Holdings Limited Fiscal '19 Full Year Results. (Operator Instructions)

I would now like to hand the conference over to Mr. Shane Fallscheer, Managing Director. Please go ahead.

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Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [2]

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Good morning, everyone. Thanks for taking the time to dial in.

On the call today, you have myself, Shane Fallscheer, Managing Director; and Chris Lauder, our CFO.

As you're aware, we published our full year results to the ASX this morning, and we would like to talk you through those results.

I'll now do a page turn through the presentation, and we're happy to take any questions at the end.

If we now turn to Page 4, we will talk through some of the detail. We've had a solid result in a more difficult trading period than we've experienced in recent times, with EBIT up 2.8% to $52.5 million. Total sales were up 15.3% as a result of the continued new store rollout with same-store sales more challenging at 0.5% negative like-for-like. However, it was pleasing that we were able to return to positive comps in the second half to improve on that minus 1.8% like-for-like store sales during the first half.

Our gross margin increased to 80.5% as a result of the benefits of a high USD hedge rate continuing through the period, combined with disciplined inventory management. We continued our global rollout strategy with a net 64 store openings, with U.S. rollout gaining momentum with 18 stores opened during the financial year and store trading in California, Texas and Florida during the financial year.

We continue to invest in the structure of the business to support our global growth profile as we roll out new territories, including investment into our global operational structure as well as the upfront investment into e-commerce, which we launched into the Australia and New Zealand markets in October 2018, and the U.K., in July 2019.

Pleasingly, cash flow from operations was again strong, rising 10.1% to $66.7 million for the year, with operating cash conversion of 107%. And with that, the Board have declared a fully franked final dividend of $0.15 being a lift of $0.01 on prior year and taking the full year dividend to $0.33, a $0.06 increase on the prior year.

If we turn to the financial overview on Page 5, as I noted earlier, revenue for the year was up 15.3%, with comparable store sales down 0.5%. Just to talk to that for a moment, whilst we are generally happy with our execution on meeting our customers' product needs, we've not seen the same major trends in the fashion jewelry sector as we've seen in recent years. That said, we are happy that we've been able to deliver strong growth from these stores and are well positioned to react and to deliver whatever trends prevail in the market. We were also pleased that we were able to deliver positive comparable store sales for the second half.

We've continued to make important investments in both people and process to drive the growth of the store network and to support what is an increasingly globalized future, which when combined with negative comp sales growth has resulted in CODB percentage being higher than the year prior.

The new store rollout and significant increase in CapEx during the year resulted in a 38% increase in the depreciation, which impacted our earnings with EBIT increasing 2.8% to $52.5 million, with earnings of $0.351 per share.

If we turn to Page 6, we've spoken to the sales increase of 15.3% to $250.3 million and the factors behind it. This chart shows the progression in the company sales over the past 5 years. Very pleasing to be able to present a sales growth chart showing such consistent increase. Importantly, we remain focused during the year on preserving our strong gross margins and have not chased sales at the expense of margins.

On Page 7, you will see that we've had growth in total sales across most regions, with the exception of Asia, which was impacted by net 4 store closures in Singapore, offsetting another solid year from Malaysia. While still delivering top line growth in the Australian and New Zealand market, Australia, in particular, was impacted by generally softer trading conditions in the first half. And that this market has historically outperformed over a number of years and has led to a relative negative comp for the year. Pleasingly, we were able to deliver positive comparable store sales for this region in the second half.

The growth in the European and U.S. markets accelerated in this period with 14 new stores in the U.K., 9 stores now trading in Spain, 8 in France and 19 in the U.S. South Africa again performed well, with sales up 9.6% for the period, aided by both comp sales growth and the benefit of additional stores opened in that period.

Turning to Page 8. Gross profit of $201.4 million was up 16% at an 80.5% margin, a 50 basis point improvement from last year as we continued to benefit from the tailwind of higher USD hedge rates in this period. We've maintained our focus on margins rather than chasing sales, with continued focus on inventory management and promotional effectiveness, resulting in a small improvement in margins on a constant currency basis in spite of the more challenging trading conditions. Whilst we've been able to deliver strong gross margins, as you can see from the chart on the right-hand side of the page, we are a fashion business, and therefore, our margins can experience some degree of volatility.

If you turn to Page 9, we'll talk through our cost of doing business. As we said previously, we've continued to reinvest into the growth trajectory of our business, which has put pressure on our CODB percentage throughout the year. We've invested in our senior executive team to ensure we have capability to execute in growing new markets; invested for the future and in relocation of our Asian logistics function from Hong Kong to China; and also have the impact of the launch of e-commerce in Australia, New Zealand and the U.K.

The rollout of stores in new regions has also had an impact on CODB with opening costs higher than normal [store wages] through the opening period, have an impact of overall cost of operating in newer markets. We expect these newer markets to operate at a slightly higher CODB than our more mature markets, and we remain focused on delivering efficiencies in these markets to (inaudible).

We continue to invest ahead of the growth curve to lay the foundation for future growth, while still remaining focused on keeping tight control of the underlying cost structure of the business.

I'll now hand you over to Chris Lauder, our CFO, to talk through cash flow and the balance sheet.

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Chris Lauder, Lovisa Holdings Limited - CFO & Company Secretary [3]

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Shane. Turning to Page 10, you'll see that the company's cash flow was again strong with cash from operations before interest and tax of $66.7 million followed by operating cash conversion of 107% as we continue to manage our working capital well in the face of the ongoing investment in the stocking out new stores.

Capital expenditure for the year was $24.1 million, predominantly from new store fit-outs and refurbishments on existing stores upon lease renewal. Overall, this represents an $8.9 million increase in the prior year as we build scale and grow the store network in new markets.

Cash dividends in the period were $12 million higher than the prior year at $33.8 million, as a result of the decision to distribute surplus cash to shareholders over the past 18 months, leaving us with a net cash outflow for the period of $10 million and closing cash on hand of $11 million.

Turning to the balance sheet. On Page 11, you can see that our balance sheet remains strong and reflects a significant investment made during the year into the store rollout. Our inventories are up on the same time last year, growing in line with the new store rollout, increased franchise stores, e-commerce and in preparation for coming store openings with disciplined inventory management, an important part of our business model.

As of June 2018, we finished the period with net cash, significant headroom in our covenants and $25 million of financing facilities available to fund the future growth of the business, which has all combined to allow us to maintain the increased final dividend level from the prior year and increase it slightly in line with the growth in profit of $0.15 per share.

As we continue the store rollout in our various territories, we will continue to assess on an ongoing basis the cash flow requirements of the store opening schedule and make future decisions on both dividends and capital structure of the business as required, reminding everyone that we do not target a specific dividend payout ratio.

I'll now hand back to Shane.

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Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [4]

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Thanks, Chris. If we turn to Page 12, a quick update on store numbers. Lovisa finished the year with 390 stores trading with a net 64 stores opening during the period, which comprises 17 new stores opened and 6 stores closed as well as 12 relocations as we continually optimize the store network. We now have 61% of the store network outside of Australia.

The U.K. store rollout has continued with 14 new stores added in the region for the period to take the total to 38 stores. However, momentum slowed in the second half, with only 2 new stores opening.

The rollouts in the U.S. and France continued with 8 stores now trading in France and 19 in the U.S. across California, Texas and Florida, and a strong pipeline of new stores on the way.

As we have said previously, building quality sites is key, and we will take a measured and diligent approach to moving forward in any new market we enter. As we enter large and new markets, a key learning has been to get leasing people on the ground in those markets right from the start to build a pipeline of sites as quickly as possible. We are pleased that now we have these resources in place. We've been able to drive more momentum in store rollouts through this financial year.

Turning to Page 13. I will now talk in more detail in relation to the U.S. market. As I mentioned earlier, we were trading from 19 stores in the U.S. at the end of the financial year, with 12 stores in California, 5 in Texas and 2 in Florida. We have now opened a further 9 stores in the U.S. since the year-end, including our first store in Chicago, Illinois.

Results to date indicate that the Lovisa offer is resonating with our American customer. Whilst operating costs in this market have been higher than some of our other markets so far, in particular new store build costs, we're happy with the progress and outcomes to date in the U.S., even though the expansion is putting some upward pressure on our overall CODB and depreciation.

We obviously see the U.S. as a significant opportunity and continue to invest in the structure to support this. However, the eventual size and timing of the full rollout is dependent as always on being able to deliver quality stores that meet our internal criteria rather than being ambitious going on the target.

Turning now to Page 14, I will talk to the European market. At financial year-end, we were trading from 38 stores in the U.K., 8 in France and 9 in Spain. Whilst we've managed to open 14 stores in the U.K. during the financial year only 2 of these were in the second half. In relation to Spain, we're currently trading from 9 stores with 1 store opened in the second half as we focus on operational improvement in this market. As we discussed at the half year, our performance in this region has been inconsistent to date. And as a result, we've elected to slow any further store openings until we can deliver on the key metrics required to expand in this market. As a result, we will continue to take a cautious approach to take money in new sites in Spain and we'll continue to focus on the stores we're already trading in.

In relation to France, we continue to be pleased with the performance of the stores we've opened to date and the focus on building appropriate sites to grow this market. We have a leasing manager in place in France to support the growth of these markets. And again, we will not sacrifice quality of stores or our operating metrics to deliver on a store number target. As with the U.S., our experience in this market to date has been that operating costs have been higher than our average and the store rollouts slower than we're used to.

Turning to Page 15. Operationally, we continue to focus on improving the structure of the business and the way each department operates to best support our growth strategies.

Some key areas we've invested in during the period, on supply chain and IT systems, including we have moved our third-party logistics hub from Hong Kong to China to find economies in the picking and packing of orders and to be closer to our suppliers; we have changed our logistics provider in order to deliver a more efficient supply chain; we've upgraded our in-store point-of-sale hardware and software to ensure we can cater for the global languages and integrated EFTPOS in all regions; we've changed our global store labor management and rostering systems to ensure that we can effectively manage the growing workforce we have across our 9 company-owned territories and again in 3 different languages; we've replaced our finance system to ensure our back-end processes are able to keep pace throughout the rollout.

In addition to the projects I've just noted, we launched the lovisa.com e-commerce website in October 2018 in the Australian and New Zealand markets and lovisa.uk into the U.K. in July 2019. And we continue to refine our omnichannel upgrading model before launch into other markets.

We've also continued to invest in our operational structure with the appointment in November 2018 a number of important senior roles, including Chief Operating Officer, leaders in the U.S. and European African businesses. Each of these appointments bring with them significant long-term retail experience in quality global companies and are already adding a lot of value. We also made investments in regional store management and support functions in our growth markets.

On Page 16, we will talk through the Australian outlook for the new financial year. Trading since the end of the financial year has been a continuation of the improvement seen in the second half, with positive comparable store sales for the period back within our target comparable store sales range of 3% to 5%.

As noted at the half year, currency headwinds has begun to have an impact and will continue to do so through FY '20, as our average USD hedge rate is expected to fall below USD 0.70.

We continue our focus on expanding our store network and expect an increase in number of stores in FY '20 to be higher than FY '19, with 14 net new stores opened since the end of FY '19, taking the store network now to 404 stores. To deliver this, we'll continue to invest in our support structures, in particular, in the U.S.A. to support store network growth and the larger business.

So in summary, on Page 17, we've achieved an EBIT of $52.5 million for the financial year and 80.5% gross margin, being a solid result driven primarily from continued store net -- store rollout, offset by a decline in comparable store sales of 0.5% for the year, with positive comparable store sales in the second half.

We've again been able to deliver increased margins, benefiting from the high USD hedge rates during the period. We've invested in resources to support our global expansion and our disciplined approach to working capital management has resulted in strong cash conversion of 107%.

We've opened a net 64 stores and closed the financial year with 390 stores trading across 15 countries and 61% of our stores are now trading outside of Australia with store rollout gaining momentum in France and the U.S.

We are pleased to be able to again increase our dividend, taking the final dividend to a fully franked $0.15 per share.

And with that, thank you for listening and happy to take any questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Sam Teeger and Citigroup.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [2]

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Congrats on the good result given the tough trading conditions. Look, I appreciate you guys need to invest in overheads to set the business up for growth. But if you can maintain comps in the 3% to 5% target range throughout the year, is it realistic that you guys can fund the investment you need to make, but also the shareholders can get reasonable profit growth? I'm just conscious that, Shane, some of your incentives have some pretty big growth numbers as well.

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Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [3]

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Is -- ultimately your question is, can we grow profit as well as grow the business for the future? Is that the question?

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Sam Teeger, Citigroup Inc, Research Division - Analyst [4]

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Yes. I think if you look at this year, given the comps required for June, it was difficult to get significant profit growth. But I guess if you can maintain comps around a 3% to 5% range for the whole year, can you fund whatever investment you need to make and also shareholders can get good profit growth.

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Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [5]

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So to answer your question, we -- I just want to be clear whether it's profit growth or dividend. And I'll get Chris to talk how we view dividend. But we're confident that we've dialed-in the heads to continue to grow our business. Obviously, hopefully, pleasingly, people are going to see that the expansion in France and the U.S. is probably ahead of where we thought we'd be. And with that comes the continuation of dialing-in the structures behind the scenes to keep that growing.

We've talked to -- we're hitting our internal metrics in the U.S. and France, however, we are finding that it's more expensive to operate in the mature markets as opposed to some of the more developing markets that we've enjoyed our growth during the last maybe 10 years now. So -- but we're focused on continuing to grow our business, dial-in the infrastructure required to make sure that we have a stable platform of growth, reminding everyone that we've done this numerous times around the world. And then of course, the [final] effect will be driving our sales.

As you touched on, when we're delivering flat comps and everything -- rents, et cetera, are going up, I'd say that, that's more challenging to provide the profit growth that we'd all be looking for. But we'd like to think we're delivering in the range of like-for-like growth that we've talked to, that that's going to fall through to the bottom end.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [6]

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Got it. And in terms of Spain, do you feel better or worse about the prospects for this market compared -- now compared to how you felt at the half year results?

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Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [7]

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Yes. It's a good question. We're probably feeling a bit better. But at the same time we're still not where we need to be. We've voiced openly to the market that there's no one lever to pull, otherwise, we would have pulled it. So we're focused on that market. Our European Manager, James Shepherd, that used to run Swarovski in Europe, he's now based in London putting through the focus. So we're seeing improvement from where we were. And really, our next step is really get through Christmas, trade Christmas. So European summer was good for us. But from our point of view, it's a case of get through Christmas, and then have another look at where we're tracking in that market.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [8]

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Got it. And last question, is the company continuing to research new markets for potential entry? And what's the potential for Lovisa to launch new pilots in new countries over the next couple of years?

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Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [9]

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Okay. It's a good question. So the answer is yes, we're always looking. The way I would look at it is don't be surprised if you saw another pilot program in the short term, short-term definition being probably next 6 months, but I'd also be surprised if somewhere in the next -- somewhere between 6 months and 24 months, I'd be very surprised if we weren't having other pilot programs in the market. So at the moment, our key focus, as you can see with the store numbers, especially in America, even with the amount of stores we've opened since July 30, our focus really there at the moment. But the macro focus of the business is to deliver great outcomes in France and the U.S. rather than sort of go and look at anything else. But at the same time, we're doing our research on other markets.

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Operator [10]

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Your next question comes from Shaun Weick and Macquarie Group.

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Shaun Weick, Macquarie Research - Analyst [11]

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So just a first one, probably ask one of Sam's questions but in a bit of a different way. I mean how should we be thinking about the leverage and incremental cost investment in FY '20? Will costs be growing in line with revenue? Or would you expect to potentially see some leveraged?

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Chris Lauder, Lovisa Holdings Limited - CFO & Company Secretary [12]

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Shaun, Chris here. I think the best way to look at it is, first don't assume any improvement in that cost of doing business percentage for FY '20 for all the reasons Shane was alluding to before that the newer markets are running at a higher operating cost to trade at stores and the existing network, the crux of it all is actually rolling out the stores. So we're creating a team before stores open and you're actually getting the stores up and running. So it's making it quite hard to pull that percentage down in the short-term as we're rolling out.

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Shaun Weick, Macquarie Research - Analyst [13]

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Okay. So I mean if they're growing together with each other, like revenue and expenses, that's not a bad way to think about it?

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Chris Lauder, Lovisa Holdings Limited - CFO & Company Secretary [14]

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Yes, that's right.

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Shaun Weick, Macquarie Research - Analyst [15]

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Yes. Okay. Cool. And just on gross margins. I mean how should we be thinking about the FX headwind into next year? And I mean what's the opportunity for price increases to providing some sort of offset there?

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Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [16]

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It's Shane here. I'll talk to the first part of that and then I'll get Chris to talk to currency. So we constantly review each market, each style and how would that interact with each other. It's fair to say that we are constantly looking at price and what we can do to affect price and offset some of those currencies against it. There are probably some small wins for us as we mature in the Europe markets and U.S. can get a [bit more] of a market. There's probably some slight wins there. At the moment, we're looking at it as a business, and our margins are quite strong, product management and minimizing markdowns and being able to take good ranges, funding following the business, find ways to increase our margin there. But we are foreseeing that there's going to be a gap between our price increases and the current decline that Chris just talked about, but it's okay.

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Chris Lauder, Lovisa Holdings Limited - CFO & Company Secretary [17]

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So the currency decline, it's basically what we've been talking about for a while. I mean it's probably a bigger decline than what we talked about at the half year, as everybody has seen the dollar has dropped further than where it was, so it's now sitting in that 67% range. So in the release, we've said that we expect our hedge rates for FY '20 to drop below that $0.70 level. So at the moment, we're sitting around that mark so we'll offer that. But this closure in the second half that we -- is unhedged, it's under our hedging policies, so given where the spot rate is, expect that to drop down below $0.70.

So obviously that will have a reasonable impact on margin in the absence of any price impacts. So there it's about -- if you look at the numbers that we've disclosed in the release today, $0.05 or $0.06 of currency decline that we've got to get back, which is about 35 basis points of margin for each cent. So there's a reasonable impact there coming, which is consistent with what we have been talking about, probably a little bit more than what we had said at the half.

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Shaun Weick, Macquarie Research - Analyst [18]

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Yes. No, that's helpful. Just a final one from me. You've obviously called out expecting to grow store numbers ahead of FY '19. But how should we think about that in the context of the current run rate, like it looks quite strong, 14 stores in 6 weeks? And what's your expectations around, I guess, 1H versus 2H skew in the rollout?

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Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [19]

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Yes. Look, I think history is the best way to look at first half, second half split. And I haven't got those numbers in front of me, to be honest. But I think historically, if you look at the way the stores go through first half, second half, it may change. But if I was having to draw a line through anything, I'd probably point towards that as the best guide I could give you. I'm reminding everyone that Europe's just been on holidays for 4 to 6 weeks. So they don't work too hard through all this, it's basically slowed down any opportunities which I already have in the pipeline. And then you get into the Christmas season, which again sort of delays our ability to sort of activate new deals into January, February, March. Again, the guidance we've given is that we'll open more stores than we did last year, and that's been consistent over the last 3 to 4 years. And I think that the [finished] split first half, second half is the best thing I could point towards.

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Operator [20]

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Next question comes from Jo Little and Morgans.

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Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [21]

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Most of my questions have been answered, but perhaps a little bit more operationally in the U.S., maybe just a bit more of a feel, Shane, on your experience dealing with the landlords today. How many you're dealing with? Is it 3 to 5 store sizes? And just those store operating costs, are they still running at that, almost double the mature markets at $250 to $300.

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Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [22]

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Yes. Sure. So just to recap, each market, the way the landlord structure works differently in the U.S. is really predominantly, give or take 4 landlords that control a large percentage of the shopping centers that we're attracted to be in. So as always, there's been early adopters being landlords that embrace our brand before others. So that's been a positive and probably set a standard. We're now getting some, as you can see with the numbers that we're rolling through, we're getting some serious traction in getting stores open. And again, the momentum sort of builds from there. So I think, Jo, maybe 6 months ago when we may have spoken, we said we're sort of getting some landlords embracing our concept and others sort of standing off. And it's fair to say that, as you can see, there's still a number rolling through it. We're getting closer towards having most of the major landlords embrace our concept.

As far as store builds, yes, they're still expensive. And they are costing nearly twice as much as they cost in other markets of the world in order to get those stores built. Got a whole lot of crew working on that and finding ways to find economies there. But the reality is that the cost of building stores in America is higher than the average, hence why it's sort of affecting our depreciation. So the positive in all that is we're still hitting our internal triggers and numbers to satisfy our internal business to expand that market. But I mean every market's got its idiosyncrasies and this one seems to be that, unfortunately, it's more expensive than we'd like to build stores.

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Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [23]

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Okay. Yes, makes sense. And just given the size -- potential size, sorry, of the U.S. market, can you give us some kind of feel of how much has been invested in that market outside of stores? Just to give us a bit of feel on that overhead structure -- support structure outside of stores.

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Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [24]

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Yes. Because we sort of -- I mean the benefit of having company-owned stores around the world, we sort of probably don't carve-out cost per market because there's no real need to. But to give you a guide, I mean there's no doubt to support generally in Australia, we've layered up in order to support the market. And then in-country, not in-stores, so if you threw a net over people either running, what we would call regional managers that are running groups of stores, the territory managers that may be sort of -- at the moment, we've got one on the West Coast, one on the East Coast and one in the middle. So if you threw a net over all of those guys, that's the people who support getting the shops built and HR teams, we're probably running at about 15 heads above store management level, they're still managing the cost into the stores. We're probably got at least 15 heads, with an average salary, call it, [USD 120], as an average, would be a best guide I could give you off the top of my head.

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Josephine Little, Morgans Financial Limited, Research Division - Senior Analyst [25]

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That's great. And perhaps just lastly, further on from Sam's question about new territories without wanting to get ahead of the sales, given what's going on today. But I mean I imagine -- sorry, Canada is a natural extension of the American market at some point?

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Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [26]

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It's an interesting one. It comes up every now and then and to be totally honest because it is a different landlord structure we probably just haven't gone there yet. I would imagine somewhere in the next 6 months, we'll throw some effort at having a bit of a closer look at Canada. So it's fair to say, a bit like Australia and New Zealand, that may be a logical progression, but I wouldn't go out and make that assumption as much as logic would say, we'll go and have a good look.

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Operator [27]

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The next question comes from Sam Haddad and Bell Potter Securities.

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Sam Haddad, Bell Potter Securities Limited, Research Division - Industrials Analyst [28]

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Congratulations on the result. My first question is just on the U.K. Do you feel comfortable with the 100 store target that you've previously published?

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Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [29]

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Yes. So we published that we believe there's the density of 100 stores or the capability in the U.K. of 100 stores. How long we take to get there really comes down to which deals come through and how frequent. So yes, we still believe there's an opportunity in the U.K. for 100 stores.

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Sam Haddad, Bell Potter Securities Limited, Research Division - Industrials Analyst [30]

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Okay. I just think Malaysia, that seems to be trading very well, and you're now at 25 stores versus your target of 20 to 25. And you sort of reassessed that, what's that target potential could be in that market given the population size [that's it's likely to be] in Australia?

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Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [31]

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The short answer in on target, you may see that we've probably taken targets out of the presentation because you can take Malaysia as an example. Initially, we always thought that Lovisa would trade and trade well in KLCC and the surrounding sort of suburbs. We're now pushing out into regional Malaysia, which are still big substantial shopping centers. So pleasingly, and again, for those of you that have followed our stock now from the start, I think when we came to market, South Africa was around 25 to 30 stores and we thought the capacity was not far from there, however, we keep pushing ahead. So Malaysia is a very strong territory for us, and we keep saying, "Right, let's go to the next 20 stores, the next 20 stores." So whilst we still get strong returns, we'll keep pushing that out. I mean Malaysia is not a 100-store market, probably not even a 50-store market. But it's a case of keep going until we've got a (inaudible) where we're not getting a decent return, but definitely not there yet pleasingly.

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Sam Haddad, Bell Potter Securities Limited, Research Division - Industrials Analyst [32]

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Okay. And just on fashion trends, you're starting a strong period of favorable fashion trends and congratulations on the results. Notwithstanding that, but what are you seeing looking forward in terms of your visibility?

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Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [33]

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Yes. I mean look, these things can come from anywhere. But we've talked in the past, when we've had some very strong news that we've had some tailwinds there from different categories, which we've talked about. I think the pleasing thing to correct our results for the year, that 0.5% negative like-for-like, was really off what we'd call a normalized period without any substantial tailwinds, and we're still in that place. So really, for us, from a product perspective it's just about working with what we've got, getting creative internally, but we're not foreseeing -- as much as we'd love them to come around the corner tomorrow, we're not foreseeing any tailwinds to sort of give the business that extra kick, when we get that kick we enjoy sort of profit flow through.

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Operator [34]

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Your next question comes from Simon Lu, Private Investor.

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Unidentified Participant, [35]

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Just a quick question here. Obviously, we're expanding in the U.S., just a question around the U.S. trade war with China. And if there's any [expressions] in the trade war, have you got any sort of plans around -- mitigants around tariffs or potential batting off importing materials from China?

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Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [36]

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Look, I mean we keep an eye on that. Our simplistic view is that we'll deal with it if and when as the rest of the world will. It's fair to say there'll be a lot of people that have to react accordingly if something like that happens. But there's only so much you can prepare with the sort of mass media bouncing around with all different sort of connotations of where it's going to land.

So the short answer is, if something is going to affect us, it's going to affect everyone. And then everyone en masse will have to react accordingly. And I'd like to think we're small enough and nimble enough to react faster and get the best outcome we can achieve versus some of the bigger guys in town that's probably a bigger beast to move if they have to move. So we're relaxed insofar as we'll keep an eye on things. If and when we'll react, we're small enough to react, probably faster than most. That's all I can probably say on that point.

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Unidentified Participant, [37]

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Okay. And one other question. On the same-store sales. Is the sort of overall sense of sales, is that localized in any sort of particular area? Or are you seeing global -- a trend sort of more on a global scale?

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Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [38]

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Yes. Look, as I've talked to in the past, it's very rare for us to get any major outliers. So it's usually within a reasonably tight cluster performance, from the highest to the lowest. And that's reasonably consistent being, again, reminding everyone that we create and generate our own product. As much as we have differentiation in ranges around the world, the bulk of our ranges go out around the world at the same time and because the world's become very global in trends as well, so that is a trend for the good or bad that washes around the world at the same time. So the movement between markets on like-for-like, there isn't a huge amount of variance between the highest and lowest.

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Operator [39]

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Your next questions comes from Julian Mulcahy and Evans & Partners.

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Julian Mulcahy, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [40]

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Shane, you mentioned that in the U.S., there's still some landlords that are sort of not quite embracing the system, and I recall within the U.K., it took a while for them to get it, and they got it and they were throwing stores at you. When do you think that tipping point is reached in the U.S.?

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Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [41]

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Throwing stores at us is your words, just to clarify. So well, I think I probably answered that question earlier with Jo. When you enter any new markets, you've got probably the believers and you've got the nonbelievers and then you've got the people that -- well, they're too small to worry about for now. And then as you gain momentum, produce your results, pay your rents on time, deliver great-looking stores, all the way down to delivering a great team behind the counter, but adding value to the overall shopping center, that's fair to say that anyone that sort of is sitting off usually comes to the table. I'd like to think with the numbers that we've shown you, the fact that we've opened another group of stores around 6 weeks, it's fair to say that most of them are starting to sort of come around, who we are, what we can deliver to the market. Ideally, [upgrade] to the market upgrade to the customers that are shopping in their malls. So we are -- we're probably seeing that now after a fairly heavy lifting, a lot of moving, a lot of presentations on who we are and what we bring different to the market.

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Julian Mulcahy, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [42]

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And in the offerings they're putting up, are they still including a bunch of dud sites? Or are they giving you a better mix?

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Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [43]

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Yes. Again, your wording, not mine. So it's fair to say some of the standoff is about the certain centers that we can't afford to go in, in order to -- as much as we want to expand across America, just to recap for the other people that may be dialing in, there's a lot of shopping centers in America, we've 'highlighted the malls that we want to be in as the first round of expansion. And again, part of our discipline is that typically, we won't take stores in order to get the ones we want, and we're not a fan of packaged deals. Again, Lovisa in the U.S. simply can't afford to take on a center that makes much less in case of work [trends] because if it doesn't work, we just can't afford to weigh ourselves down. The operating platform of income to run those stores, we cannot produce we believe the sort of growth. So the long-winded explanation is that we're not willing to take some of the smaller stores that the landlord may -- would like to see us in, in order to get to the ones that we want to be in to [settle with] type of growth in the U.S.

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Julian Mulcahy, Evans & Partners Pty. Ltd., Research Division - Senior Research Analyst [44]

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Okay. And just finally, I mean you look at across your markets, some in there are fairly mixed economic conditions, mainly sort of weaker and you've had no tailwind of a fashion trend, so would it be fair to say that you're pretty much immune from sort of consumer spending because you're basically dealing with kids that are probably not necessarily worried about the overall environment?

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Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [45]

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Yes. I think I think the macro trends are always going to affect the retailers en masse, but keeping in mind our average transaction value hovers at around AUD 20 around the world, it's fair to say that going shopping in Lovisa is probably the equivalent of maybe [ticketing] a lot of markets of the world. And again, our success across places like Malaysia and South Africa, as opposed to France, and the big developed markets, I mean it's fair to say that our average customer, whether it's the 15-year old girl or the 45-year old, they're all buying some fashion jewelry. And it's fair to say that the market we seem to have found that niche in is disposable income and/or the willingness to spend around the amount of money that I just spoke to and even probably significant in both those markets.

Now again, if you look at South Africa, you've got around 50 stores in a population of maybe 6 million. And in Australia we've got 150 stores in a population of less than half that, so it's probably married to where our brand fits in the position of that and who it's going to.

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Operator [46]

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Your next question comes from [Matthew Hubert] and [Environment Capital Management].

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Unidentified Analyst, [47]

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Congratulations on solid progress and developing the brand. Just a question on the cash tax expense. Just noticed that, that's ticked up a fair bit in relation to the same sort of metrics in FY '18. Just wondering is that just timing issues? Can you just walk us through that?

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Chris Lauder, Lovisa Holdings Limited - CFO & Company Secretary [48]

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Yes. [Matt], it's Chris here. Yes, definitely timing issues. So just balancing payment from the previous year. So we had extra tax payments in relation to 2017 that came through in 2018. So 2018 in relation to 2019, and we've basically paid all the tax for 2019 within the financial year. So you see the tax payable on the balance sheet is pretty low at the end of the financial year. So it was just realignment of the timing of payments.

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Unidentified Analyst, [49]

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Okay. And should we expect that cadence to pretty much remain the same, do you think, going into the next financial year?

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Chris Lauder, Lovisa Holdings Limited - CFO & Company Secretary [50]

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Yes. Yes.

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Operator [51]

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Your next question comes from Sam Teeger and Citigroup.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [52]

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Just some very quick follow-ups. Can you just provide a bit more color in terms of what's driven the improvement in the like-for-likes in FY '20 so far? Is it price, volume, exits or something else? And to what extent are you seeing like-for-like momentum build each week, particularly as normal Australian consumers are getting their tax refunds?

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Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [53]

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I mean keep in mind tax rate refunds are isolated only to Australia this time of year and 60% of our business is not in Australia these days. I'll try and answer your question as best I can.

The recovery in like-for-likes, sometimes just is simple as what we're cycling the year before and from memory we're cycling half the numbers, first half to the second half. So therefore, to recover in the second half as in the 6-month period just closed, we're cycling easier numbers to cycle over in simple terms. A combination of where did that recovery come from, that's really a combination of everything. Price, as I said, we're constantly looking for opportunities to increase our price so that we can gain there. And volumes have slightly increased as well. So sort of slight marginal increase in price and volumes are giving us the outcomes that we're seeing there.

As far as like-for-like growth in the first period, I think we're comfortable to say that we're trading in our range, but we're not about -- we don't want to start giving commentary on weeks to weeks and whether that's trending up or down over such a short cycle of time.

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Sam Teeger, Citigroup Inc, Research Division - Analyst [54]

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Sure. And last question, just how many store closures would you anticipate in FY '20 versus FY '19?

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Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [55]

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Again, we give a net number, and we said the net number is going to be larger than last year. As far as store closures it's -- the way to look at our business, if we have an average lease tenure around the world of around 5 years, in 400 stores, that's give or take 80 leases a year that get renegotiated in some way, shape or form. Now that's not an exact number, but that's just sort of a rough math.

So we don't have -- we're not looking down the barrel of anything significant. But it not only takes a few negotiations not to go our way. The thing that we're determined to do is not win new leases that aren't commercially viable for us and aren't -- if the offer isn't commercial and we don't believe it's a fair and reasonable offer for the site, history says that we'll walk away from that site and come back when it's in line with what we believe it should be for that location. And so it's a hard question to answer. But again, history is probably the best guide to what will happen in the future.

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Operator [56]

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There are no further questions at this time. I'll now hand back to Mr. Fallscheer for closing remarks.

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Shane Roland Fallscheer, Lovisa Holdings Limited - MD & Executive Director [57]

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Thanks for your time this morning. We're conscious you've got a very busy few weeks. And again, I'll look forward to seeing a lot of you over the next few days as we get out and on the road. So thanks again. We'll talk soon.

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Operator [58]

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That does conclude our conference for today. Thank you for participating. You may now disconnect.