On Wednesday, RBC Capital adjusted its stance on Lovisa Holdings Ltd (LOV:AU), downgrading the stock from Sector Perform to Underperform and lowering the price target to AUD25.00 from the previous AUD28.00. The move follows the company's fiscal year 2024 results, which have raised concerns for the analyst.
The financial performance of Lovisa Holdings for FY24 merely met expectations due to a significant reduction in CEO compensation, which was $12 million compared to the $22 million RBC Capital had estimated. This factor played a pivotal role in the company achieving its EBIT targets.
Additionally, Lovisa Holdings reported like-for-like sales (LFLs) growth of 2%, which did not keep pace with inflation. This suggests that, in real terms, there may have been a decline in LFL volume. This is a worrying sign for the company's core sales metrics.
Another point of concern for RBC Capital is Lovisa Holdings' increased focus on emerging and developing markets. This strategic move is seen as adding more risk to the company's profile, considering the inherent volatility and unpredictability of these markets.
The report also highlighted a decrease in operating leverage. Despite a 17% growth, this only translated into a 5.6% increase in pre-long-term incentive (LTI) EBIT growth. The implication is that higher revenues are not effectively converting into proportional increases in earnings before interest and taxes.
Finally, the analyst noted that issues within the company, particularly executive turnover, could pose additional challenges in the upcoming year. This management instability is seen as a factor that could contribute to the elevated risk profile for Lovisa Holdings.
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