COVID-19 impacts dull Lovisa's profits

The standing down of staff, store closures and supply chain disruptions had a significant impact on jewellery retailer Lovisa's (ASX: LOV) full year profits.

The COVID-19 pandemic took the shine off Lovisa's profit after tax this financial year, down 69.7 per cent to $11.2 million.

However, a focus on digital during the fourth quarter led to the company growing online sales by 311 per cent in FY20, with growth of 382 per cent in Q4 and that trend continuing since the end of the financial year.

Overall, the company's revenue dipped moderately to $242.1 million, down 3.2 per cent from FY19.

"We are pleased with what our team has been able to achieve through the disruptions to our business over the past six months, and whilst it has had a temporary impact to sales and profitability we remain confident in our growth objectives and have been able to maintain the balance sheet strength required to deliver on them," says Lovisa managing director Shane Fallscheer.

"This leaves us very well placed for the future."

Before the COVID-19 pandemic hit the global economy, Lovisa was witnessing total sales increasing by 22.2 per cent.

It was in Q3 that the impacts of COVID-19 were felt by the jeweller, initially in its Asian markets, as economic activity slowed in response to events in China, and then escalating to full store closures globally by the end of March.

The second half was particularly hit by disruption to the company's supply chain, first with factory and warehouse closures in China and followed by freight disruption.

To this day Lovisa says it is still experiencing bottlenecks in freight deliveries, albeit to a lesser degree.

At the end of the financial year Lovisa was trading from 435 stores, with performance strongest in the Australia and New Zealand markets which were able to reopen earlier than its stores in the UK.

During the period Lovisa decided to exit the Spanish market, which it attributes to poor support from landlords through the lockdown period, resulting in nine store closures.

As a result, Lovisa's results were impacted by a $3.4 million impairment charge recognised in relation to this exit.

Additional impairment charges were taken across a "small number" of other stores in its global network, taking the total impairment recognised in FY20 to $4.5 million.

Lovisa says it bounced back in the fourth quarter, with cash flow returning to strong levels, and cash from operations before interest and tax of $51.7 million.

For the first eight weeks of FY21 Lovisa says it is still suffering from challenging trading conditions, with comparable store sales down 19 per cent. This is still an improvement on the fourth quarter of FY20 when sales were down by 32.5 per cent.

Lovisa still has 30 stores in Melbourne, 19 stores in California, two stores in New York and eight stores in New Zealand closed temporarily due to COVID-19 government lockdowns.

"Our strategic plan remains in place, we are ready to continue our store roll out and we continue discussions with our landlords globally as we believe current circumstances will create further opportunities," says Lovisa.

"Our balance sheet remains strong, with a continued net cash position above $20 million and undrawn cash debt facilities supporting investment in growth."

Shares in LOV are down 5.72 per cent to $7.09 per share at 10:19am AEST.

Updated at 10:40am AEST on 26 August 2020.