“Expectations are very high coming into this result,” a local long-short fund manager, who is betting against the stock and was not authorised to speak publicly about the trade, told The Australian Financial Review.
“It’s been priced for perfection,” the fund manager, citing the stock’s historically high share price, mounting global headwinds for retailers and declining same-store sales as the reasons behind the fund’s short bet.
“Some of the new stores may not be achieving the level of economics that the market analysts have been expecting.”
Analysts had become increasingly divided on the Lovisa stock as the half-year report approached. UBS downgraded Lovisa to neutral last month, noting that the shares had rallied substantially (up 48 per cent) since November and pointing to growing signs that the store rollout was losing steam.
Jarden, which upgraded the stock to a buy in November, has held firm on its valuation, even as its analyst Ed Woodgate cautioned that investors should be “buying for the long term” as there “may be surprises before then”.
“Like every other retailer, Lovisa is facing a tough consumer environment,” he said in a note this month.
“While the trading update may be weak as Lovisa has to cycle one more period of strength and the net store rollout may disappoint, we expect investors will start to look long term once the worst of the bad news is in the rearview.”
Funds are divided, too
Funds also appear similarly divided on the stock. Hyperion, ECP Asset Management and Fidelity are among those holdings large long positions, based on recent filings.
QVG’s Chris Prunty, who counts the stock among the largest holdings in the firm’s long-short fund, is bullish on the outlook.
“We like Lovisa because the return on capital on new stores is very high, and they have a long runway to open stores in existing markets like the US and new ones like China,” he said.
“We understand the market has some concerns around the generosity of the CEO’s remuneration package, but we believe that if he can replicate half the success he had as Zara’s head of APAC, then he will have been underpaid,” he said.
One Lovisa short-seller says the stock could slip as much as 30 per cent – should the fund’s thesis behind the short play out.
“What we’ve seen with companies on high multiples in the past is that when you start to see cracks in the business, the market tends to be a bit more forgiving, until the cracks become the crevices,” the short-seller said, citing Domino’s Pizza and Pro Medicus as two stocks to have suffered this fate in recent weeks.
That said, funds that have been holding Lovisa for some time might not blink at the near-term dip short-sellers are betting on. The shares are up more than 1000 per cent since it listed in 2014 and more than 150 per cent in the past five years.
