Consumer cyclical

Universal Store flags major drop in underlying FY22 earnings as inflation/interest rates bite

Wed 15 Jun 22, 12:50pm (AEST)
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Key Points

  • Management now expects FY22 underlying earnings to drop by a third on FY21
  • Cost of living increases are becoming evident in the apparent in the market
  • To capture increasing macro uncertainty, Macquarie recently downgraded Universal to Neutral from Outperform

Universal Store (ASX: UNI) opened -2.90% lower this morning after the smallcap fashion chain retailer guided to seriously lower underlying earnings in FY22 with revenue for the year also likely to be down.

In light of rising interest rates and soaring inflation, management now expects sales for FY22 to be between $205m and $207m, against sales of $210.8m in 2021.

Underlying earnings are now likely to be between $30m and $31m against earnings of $44m in 2021.

Other highlights within the retailer’s trading update were:

  • Total sales growth for 2H 6.9% with online sales growth of 27.3%

  • 1H sales down -8.2% with 25% of trading days being lost

  • Aided by growth in 2H and new store openings, YTD sales are down - 2.3% on 2021

  • YTD like-for-like sales, including online, down -2.8%

Cost of living increases are biting

Commenting on the trading update, management notes while sales momentum in the second half in pleasing, interest rate hikes and other increases in costs of living have become more apparent in the market.

However, as previously flagged, the company will continue to invest in new office and distribution centre projects, technology – all necessary investments for scale and continued growth.

“We are mindful of the ‘cost of doing business’ challenges across supply and service chains impacting the retail sector.”

In terms of its supply chains, the company is experiencing some delayed delivery of third-party brands.

The company expects to finish FY22 with inventory in line with plan and net cash of more than $20m.

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Universal Store share price over 12 months.

What brokers think

Universal’s share price is down -58.88% over one year, and since the start of 2022 has fallen from $7.20 to $3.31.

Consensus is Moderate Buy.

Based on Morningstar’s fair value of $7.53 the stock appears to be undervalued.

Based on the four brokers that cover Universal (as reported on by FN Arena) the stock is currently trading with 94.1% upside to the $6.62 price target.

Citi recently initiate coverage on Universal (16/05/22) with a Buy recommendation and target price of $5.83.

Based on new store rollouts and margin expansion opportunities, the broker believed the retailer could generate a 10% compound annual growth rate (CAGR) for its earnings per share (EPS) from FY21 to FY24.

Citi also suspects the retailer’s projected A&NZ store rollout target of 100+ could be understated and expected the earnings margin to expand 100 bps over FY21 to FY25.

In an attempt to capture increasing macro uncertainty and the potential hit on consumer apparel, Macquarie recently (08/06/22) downgraded its rating on Universal to Neutral from Outperform.

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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