Universal Store (ASX:UNI): Positioned to benefit in FY25 as Millennials and Gen Z spend with a vengence

Let’s take a look at Universal Store (ASX:UNI), a chain of casual fashion stores aimed at Millennial and Gen Z customers (think 18-35 year olds). It is a good business, but was hit by perceptions that its customers will cut back their spending because they feel the brunt of the cost of living crisis. We think the company’s FY24 results and its more than doubling in the last 12 months shows that talk of the demise of their spending power was greatly exaggerated. And the revised Stage 3 tax cuts could provide a further windfall into the next 12 months.

 

Introduction to Universal Store (ASX:UNI)

What do young people want? The ever-allusive question that is asked over and over again in the media and by parents is, in part, the basis of the fashion industry. We know they spent a lot on experiences (just look at the Taylor Swift tour), as well as on fashion. The latter is a broad term that can include unhealthy dieting habits, but also can include good clothes. That is what Universal Store provides, at value for money pricing.

This company’s history dates back to 1999 and it spent nearly 2 decades in the hands of its founders before being sold for $100m to a buyout consortium led by private equity firm Five V Capital, which exited soon after the IPO as did Brett Blundy.

 

Can the stock rebound?

Universal Store listed in November 2020 with an enterprise value of $290m and is now worth $390m, even in spite of COVID-19 store closures and the cost of living crisis. Admittedly, it is off its all time highs, but we think has scope to rebound in the year ahead for reasons which we will come to.

Universal Store has 79 stores across Australia, which tend to be in major shopping centres, as well as a further 20 or so stores exclusive for particular brands like Perfect Stranger, and the group makes 14% of its sales online. Both curated third-party products and private brand products are sold in-house, although the former dominates.

 

 

It has solid technology, enabling stock to be automatically order based on what is popular with customers rather than what management thinks might be popular several months down the track.

 

Good results (all things considered)

Let’s go back to FY22, the year that begun amidst the Delta lockdowns and included the start of the cost of living crisis.

Universal Store made $208m in sales, down 1.4% from FY21, underlying EBITDA of $35.7m (down 27%) and an NPAT of $21.1m (down 21%). This represented a margin drop from 14.4% to 10.1%. And keep in mind that FY22 included new stores that were not open in FY21, so like-for-like sales were down 3% overall and nearly 10% just in brick and mortar stores. 3,192 trading days were lost, resulting in a sales impact of $20m. You can see investors were not too happy.

 

 

Now, let’s go forward 12 months to FY23. Total Sales were up $263.1m, up 26.5% overall, although like for like sales were only up 1.2%. It made underlying EBIT of $40.4m, up 24%) and an NPAT of $23.6m, up 15%. Not bad in the rising interest rate environment. This was because the company was better able to manage inventory and offset costs of doing business.

In FY24, sales grew 10% to $288.5m, EBIT increased by 17% to $47.1m and its profit rose 45% to $34.23m. The company closed the period with $14.3m net cash and 102 physical store locations, 80 of which were Universal and the rest were either Perfect Stranger of Thrills. The company paid 35.5cps in dividends throughout the year. You can see that sales grew, but the company maintained disciplined cost control. The company achieved this through consolidation of its other brands, direct sourcing of private brands and it reduced international freight imports.

 

No guidance, but analysts see top and bottom line growth

The company has not given specific financial guidance, but told investors to expect 4-6 Universal Store sites, 4-6 Perfect Stranger stores and 1-3 Thrills stores. It revealed that for the first 6 weeks for FY25, US sales increased 15% and Perfect Stranger Sales increased 90% (or 24% on a like for like basis).

Analysts covering the company expect $326.1m in revenue and a $36m profit in FY25, followed by $359.2m in revenue and a $40.7m profit. And so, despite the company’s share price doubling in the last year, it is still only at a P/E of 14.9x and a PEG of 1.3x.

 

But can it achieve this?

We appreciate investors may be sceptical that this can be achieved. Yes, we know millennials have less money than Baby Boomers or Gen Z. But we think they are still willing to spend on items that provide value for money like Universal does. Or sometimes, to go all out on big occasions when Taylor Swift comes to town. Forget about spending on tickets, just look at how many people lined up to buy merchandise outside the venue 2 days before the first concert in Sydney – fans are expected to spent $66m on merchandise alone.

And in FY25, we are excited about the impacts the updated Stage 3 tax cuts will have, they will get a larger tax cut than they otherwise would have and would be more likely to spend it rather than spend it.

 

Ticking ESG boxes…Millenials will like that!

Turning to ESG, we mentioned the positive element of helping younger people look and feel good without unhealthy diets or cosmetic surgery. There is even more to like here. By 2025:

• 100% of its bags and online mailers will be reusable, recyclable or compostable,
• 50% of all cotton and polyester (at least) will be procured from certified recyclable sources,
• The proportion of electricity coming from renewables for the support office and distribution centre will be maximised (although there is not a formal target for this),
• There’ll be 1 million customer educational touchpoints on responsible use and care of garments

And on top of all this, it is targeting zero waste to landfill from DC operations by 2030. It has also audited 100% of its Tier 1 factories and intends to have 100% of its Tier 2 factories audited this year.

 

Paying dividend, but you should be in it for the growth

Dividend investors aren’t forgotten here either. The company paid out 35.5c per share in FY24 which is a 5% yield on an annualised basis. Obviously, we would recommend against thinking it is as reliable as Big Banks for paying dividends, although this yield certainly is nothing to be snuffed at.

But the biggest opportunity here, given all of the above, is for growth investors. As it continues to grow its store network, and Millennials and Gen Z customers start spending again, we expect it to be reflected in the company’s top and bottom lines.

 

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