Whilst the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) may have bounced higher today, the same cannot be said for fashion retailer Lovisa Holdings Ltd (ASX: LOV). Its share price took an almighty 13% plunge shortly after the market opened following the release of its preliminary final report which revealed a sharp drop in profits.
Although Lovisa posted a 14.3% rise in sales to $153.4 million, profit after tax dropped a hugely disappointing 45.9% to $16.5 million. The drop in profit was the result of a higher cost of sales due to the weakening Australian dollar and a higher level of markdowns.
Same store sales were up 5.5% on last year, which I would normally view very positively. But if the company is relying on markdowns to achieve this heightened level of sales then I wouldn't personally pay too much attention to the metric on this occasion.
Management did paint a reasonably positive picture for the year ahead. The company plans to open upwards of 30 new stores in FY 2017, with same store sales growth expected to be in the range of 3% to 5%. Furthermore it also expects to improve its trading margin as a result of hedging against currency devaluations and a reduction in markdowns thanks to inventory levels returning to normal.
Whilst Lovisa did deliver on its guidance and its performance is by no means as worrying as struggling retailer Surfstitch Group Ltd (ASX: SRF), it certainly isn't as impressive as my favourite Australian retail company Premier Investments Limited (ASX: PMV).
The company behind the Smiggle and Peter Alexander brands has impressed me this year with its strong performance. Although the market now has high expectations, I do feel it is likely to deliver on them.
Based on today's result Lovisa's shares are trading at approximately 18x full year earnings. Whilst this is a big discount to Solomon Lew's Premier Investments, I would still choose the latter of the two if I were looking at gaining exposure to Australia's retail sector today.
