Should you buy the Lovisa dip?

Lovisa (ASX: LOV) shares experienced a sharp 10.4% selloff on Monday after John Cheston – the Managing Director at Smiggle – was announced as the new CEO from June 2025.

Previous indications suggested that current Chief Executive Victor Herrero was content in the role and wanted to remain, according to Citi. Mr Herrero is highly regarded by the market given his extensive background in global retail, including 13 years at Spanish multinational Inditex.

Lovisa remains one of the top performing stocks in the discretionary space, up 20% year-to-date and 42% in the past twelve months. Despite the management changes, consensus still expects the company to deliver earnings growth 18% in FY26, 17% in FY27 and 12% in FY28.

CEO transition: Pros and Cons

Morgan Stanley says the new CEO has widened the company's risk profile around store rollouts. Their note highlighted several pros and cons of this executive change:

Pros:

• Lovisa and Smiggle are similar businesses (e.g. fashionable accessories, vertically integrated, global expansion, high gross margins)

• Cheston is a highly regarded retail executive

• New incentive targets imply some upside risks to analyst growth forecasts

• New CEO remuneration package is likely to lower investors' ESG concerns around the previous package

Cons:

• Herrero was highly regarded by the market given his experience at Inditex (owner of Zara)

• Cheston appears to have less experience outside of ANZ

• Herrero's departure will likely raise questions around the company's store roll-out, especially in China

The note downgraded Lovisa from Overweight to Equal-weight on the basis that the stock has rallied 53% over the last six months and currently trading on a FY25 forward price-to-earnings ratio of 29.

Roll outs and remuneration

The analysts at Citi were quite critical of Smiggle's store roll outs under Mr Cheston. "When Mr. Cheston was running Smiggle, the plan was for a material UK rollout which doesn’t appear to have eventuated," the report said.

Premier's first-half FY16 result outlined plans to open 100 new Smiggle stores in the UK by Christmas 2016, and a further 40-60 stores per year from 2017 to 2019.

"As of today, the company has ~108 stores in the UK according to the company’s website, with the business shifting to a wholesale strategy."

Remuneration also raised eyebrows – Mr Cheston's maximum compensation package was $21 million over three years or 71% below Mr Herrero.

The short-term incentives provide Mr Cheston up to $2.35 million per annum under the below performance hurdles:

• Year-on-year EBIT growth of less than 18%: Nil

• Year-on-year EBIT growth of 18%: $188,000

• Year-on-year EBIT growth of 30% or greater: $2,350,000

Citi analysts noted that the remuneration package could see upside to current consensus expectations of 18%, 17% and 12% over FY26-28.

Downgrades galore

Brokers including Canaccord Genuity, Evans and Partners, Morgan Stanley and Barrenjoey downgraded their ratings from Buy to Neutral on Tuesday. This might explain why the stock experienced an extended selloff, down 7% in early trade before recouping some its early losses.

Putting it all together: All leadership transitions come with risk and for a stock that's rather priced-to-perfection – some investors aren't keen to stick around. However, Lovisa's growth trajectory remains relatively sound, according to consensus expectations. While Mr Cheston's short-term incentives could drive some upside risks to what the market is expecting.