Is now the time to buy shares in Universal Store?
By Chris Batchelor
In October-November 2020, five retailers listed their shares on the ASX.
The table below shows how they have panned out.
Universal Stores is the only one with a materially positive return.
Mydeal.com.au was taken over by Woolworths in September 2022 at a 5% premium to the listing price, however prior to the takeover announcement it were trading at $0.65.
Zebit had declined 97% before being delisted in April 2022, only 18 months after listing.
Dusk is down 18%.
Adore Beauty's listing was a private equity exit and raised the most capital at $270 million. It is down a massive 86% to date.
Universal is an Australian based retailer that specialises in men and women's casual fashion and accessories with a particular focus on the youth market.
It currently has a network of 93 stores and is growing its footprint at a rapid pace. It added six stores in the most recent half year. 76 stores are branded Universal Store, seven are branded Perfect Stranger and 10 are Thrills.
The Thrills group of stores was added via an acquisition that was completed in October 2022.
Sales for the group have grown very strongly over the past five years with a compound annual growth rate of 19%. This has consisted of in-store sales growth, new store openings, growth in online sales, the launch of the Perfect Stranger concept brand and the acquisition of Thrills. The company is targeting over 100 Universal stores across Australia and New Zealand up from the current 76.
Sales dipped in 2022 as a result of the extended lockdowns, but are forecast to rebound strongly in FY23. Indeed first-half revenue growth was 35% but this is cycling against the period where a lot of stores were closed in the prior year.
Despite the constant talk of inflation and the rising cost of living, consumer confidence has proven very resilient. This is driven by the fact that unemployment is only 3.5% a level not seen since the 1970s. Consequently retail sales have remained buoyant to date. Rising interest rates may eventually start to dent that, but given Universal's younger demographic, it will be less exposed.
Most importantly, sales growth has been backed up with profits. The business is highly profitable with gross margins approaching 60% and operating margins in the mid-teens. Return on equity is almost 20% and return on capital employed is above 17%.
A popular summary statistic used to measure fundamental momentum (that is changes in profit and loss, balance sheet and cash flow items) is the Piotroski F-score which looks at the movement across profitability, liquidity, and efficiency. Universal Stores' Piotroski score is 7 out of 9. This combined with the factors above results in a Stockopedia Quality score of 97 placing it in the top 3% of all ASX listed companies.
The balance sheet is strong with cash exceeding financial debt. As with many retailers it has a high level of lease liabilities as it leases its bricks and mortar premises. This results in gross gearing of 57%. When looking at the risk of bankruptcy, the Altman Z-score is a well-established measure and Universal is well within the zone considered safe.
Cash flow is also strong. Operating cash flow typically exceeds reported profits which is a sign of a healthy business. The liquidity and efficiency ratios are also healthy.
The chairman of Universal is Peter Birtles, the former managing director and CEO of Super Retail Group. He joined Super Retail in 2001, and was managing director and CEO from 2006 to 2019. During this time the business grew substantially into one of the leading retailers with a market capitalisation of $2.8 billion.
In terms of its valuation, Universal is competitively priced. Most of the value metrics are about the middle of the range for its industry. This reflects the fact that it is a strong operator as was highlighted by the comparison at the top of the article. The forecast PE ratio is 10.7, and the dividend yield is 6.2% fully franked.
These are still very attractive numbers especially considering that EPS growth is forecast to be 40% in 2023 and a further 17% in 2024. Often there is a trade-off between growth and value, but in this case the growth is still be priced at a reasonable valuation.
Warren Buffett is often quoted as saying "he would rather pay a fair price for a great business, than a great price for a fair business". With an overall Stockopedia StockRank of 97, and a Value Rank of 73, Universal Stores looks more like the former than the latter.
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