Should you buy, hold or sell Lovisa shares?

For many, Lovisa Holdings Ltd (ASX: LOV) might simply be another traditional retail outlet peddling affordable fashion jewellery. But not to us.

We view Lovisa as a standout, vertically integrated, technology-enabled, rapid response jewellery retailer.

Its robust store economics and promising growth trajectory have caught our attention. In 2014, Lovisa operated 210 stores in six countries. Fast forward to today and the brand has expanded to more than 800 stores across 39 countries, with aggressive expansion plans ahead. Here's what makes Lovisa's journey stand out.

What is the outlook for Lovisa?

Lovisa excels at bringing the latest trends from fashion runways or social media feeds to its customers quickly and at an affordable price point. There are a number of unique aspects to Lovisa's business model that make this possible.

Lovisa has total control over its product lifecycle. From development and design to sourcing and merchandising, everything is managed in-house. Its rapid logistics, in-house team, and agile third-party manufacturing setups ensure impressive gross margins (over 75%). This, in turn, allows the company to quickly adapt to ever-changing consumer tastes.

Lovisa employs a tech-driven strategy for product assortment and in-store displays, designed to optimise store economics.

The ability to track and measure the impact of these decisions in real time creates a virtuous feedback loop, informing future product development, supply chain management, and floor plan design, further driving growth in same-store sales.

With vast operational experience and competent management, Lovisa enjoys an upper hand during negotiations, a useful trait when securing premium store locations and favourable terms with third-party manufacturers.

These are all positive in their own right, but their combination provides Lovisa a competitive edge that is both rare and unique, fostering profit and capital growth over time.

How is Lovisa withstanding the retail downturn?

Concerns over the resilience of the consumer in the face of rising costs of living and interest rates have hit retailers hard over the past several months.

The prevailing market sentiment is pessimistic as questions over retailers' ability to effectively manage costs and inventory in the face of questionable demand have weighed on the share prices of many companies in the sector.

However, there are two factors that we think are misunderstood by the market with respect to Lovisa.

The first is that while same-store sales growth may be challenged in the short term, Lovisa's is primarily fuelled by its aggressive global expansion plans. If executed effectively, it can outgrow and more than offset any temporary weakness being experienced in its current storefronts.

Secondly, Lovisa operates at a very modest price point. With its average basket size hovering around $20, Lovisa caters to the value-conscious buyer, making it more resilient to overall consumer spending adjustments.

Should you buy, hold or sell?

As high-conviction investors, we believe that not all retailers are built the same and it is our job to identify the highest quality business we can find.

A quality franchise like Lovisa has the ability to weather short-term challenges that will invariably occur through economic cycles.

Having a long investment horizon also allows us to ignore short-term noise and capitalise on bouts of volatility should they present us with the opportunity to acquire companies at more attractive valuations. Lovisa, much like its offerings, remains a sparkling investment. Buy.

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