There’s a new kid on the block, although I’m sure many would already be familiar with fashion retailer Universal Store Holdings Ltd (ASX: UNI).
The company made its public debut on Monday this week, which unfortunately coincided with the worst outage on the ASX in four years.
ASX retail shares have been some of the favourites this year but have been swapped out recently for re-opening plays such as those in the travel sector. Is now a good time to buy shares in Universal?
What does Universal do?
If you’re in Universal’s target demographic of around 16-35, there’s a good chance you’ve shopped at, or at least heard of, this group before. Universal is a speciality retailer for men’s and women’s apparel, operating through 65 physical stores across Australia as well as an online platform.
The majority of its revenue (70%) is generated through retailing third-party branded products, with the remaining portion from its five private brand products across womenswear, menswear and other accessories.
Financial performance
Retail is undoubtedly a tough space to be in. Competition is high, margins are usually low, and the outlook for discretionary spending doesn’t look all too great right now. Despite the circumstances, it appears Universal has done quite well over these last few years.
Financial data only dates back to FY18, so in that regard, it’s not an extremely long track record. However since then, Universal has managed to grow its revenue and pro-forma EBIT at an annual compound growth rate (CAGR) of 25% and 32%, respectively.
Revenue growth is supported by the continual opening of new and profitable stores. The company has typically opened between 5-10 new stores per year, with management indicating that it has the potential capacity for 40-60 additional stores across Australia and New Zealand.
Could the Universal share price be a buy?
Universal will have to continue to roll out new stores in well thought out locations to drive sales growth, although this isn’t the only thing that will help its bottom line. The company also relies on like-for-like sales growth, as well as operating leverage which will increase margins as the company expands.
Keeping up with current trends is a never-ending headwind that requires a lot of time and money to be able to stay ahead. While it seems Universal has done well so far, I still consider this to be major risk moving forward.
The valuation seems a little bit stretched with a trailing P/E ratio of 27 at the time of writing. There’s definitely some optimism priced into that, in my opinion. It makes it even harder that the company isn’t tracked by analysts, or that management isn’t going to release any long-term earnings guidance.
In my view, it’s slightly speculative buying shares in a company this expensive without any sort of rough idea of the possible earnings growth to justify the price tag.
As a result, Universal shares are a hold for me right now. I’d like to see how retailers perform coming out of the Christmas period when most of the government stimulus drops off. This is one for my ASX watchlist though.
If I had to pick an ASX retailer right now, I’d go with Baby Bunting Limited (ASX: BBN) because I think it’s more of a defensive play. If you’d like to know more, read my in-depth article on Baby Bunting shares.
