Universal Store Holdings (ASX: UNI): Solid Growth, Strategic Expansion, Stable Margins, Strong Dividend History – Buy at $9.11

Key Takeaways Universal Store Holdings (ASX: UNI) has delivered strong growth, with a 19.3% increase in sales for the first 17 weeks of FY25, driven by strong performances from its Universal Store and Perfect Stranger brands. The company’s youth-oriented fashion portfolio, including over 50 premium brands and a growing number of private labels, positions UNI well for further growth as consumer confidence improves. With plans to open up to 15 new stores this fiscal year and investments in systems and team expansion, UNI is poised for long-term success. We maintain a “buy” rating with a target price of $9.11, offering a 13% upside. ___ Universal Store Holdings Limited (ASX: UNI) is a popular retailer known for its premium youth fashion, offering everything from apparel to footwear, accessories, and gifting. The company operates mainly through two segments: Universal Store, which focuses on trendy, casual wear for men and women, and CTC, which designs and sells youth fashion brands like THRILLS and Perfect Stranger. With over 50 premium brands in its portfolio, about half of UNI’s sales come from private and sister brands. The company operates 100 physical stores and online platforms, using a multi-channel strategy to engage its youthful audience, typically aged 16 to 35. UNI has been growing steadily, with a 19.3% jump in sales during the first 17 weeks of FY25. The strong performances of Universal Store and Perfect Stranger have been key drivers of this growth. The company is also expanding its footprint with plans for more store openings this year, which is part of its long-term growth plan. With its focus on the latest trends and a growing portfolio of private brands, UNI is really tapping into what appeals to young shoppers. What’s really impressive about UNI is how it’s managing to grow while staying profitable. Despite the challenges of inflation, the company has kept its gross margins stable, largely thanks to the success of its private brands. It’s also investing in its systems and team to support further expansion. With a strong dividend history and a target price of $9.11, showing a 13% upside, UNI is a solid pick for long-term investors looking for both growth and reliable returns.

Sales Momentum and Operational Performance: Universal Store is off to a stellar start for FY25, reporting a 19.3% year-over-year jump in group direct-to-customer (DTC) sales for the first 17 weeks. Universal Store (US) itself saw sales climb 15.5%, led by a robust 13.8% increase in like-for-like (LFL) sales. Perfect Stranger (PS) really stood out, delivering a phenomenal 111.1% sales growth, with LFL sales up 29.9%. Cheap Thrills Cycle (CTC) also contributed with a 7.4% uptick in sales, though its wholesale channel faced challenges, declining 16.8% during the period. Improving Consumer Confidence: Consumer confidence is finally stabilizing after a rocky 2024, creating a much-needed tailwind for UNI. As economic pressures ease, discretionary spending is picking up, particularly among the younger crowd that aligns perfectly with UNI’s target demographic. This shift is great news for the company’s youth-oriented fashion lines, which cater to evolving lifestyle and apparel trends contributed by improving sentiment. UNI’s ability to adapt its product offerings and maintain solid private brand performance positions it well to capitalize on these developments. As consumer confidence continues to recover, we see plenty of upside potential for both in-store and online growth across UNI’s core brands. Strategic Expansion and Investments: The company is making steady progress with its FY25 store expansion plan, aiming to open 9-15 new locations. So far, three stores have opened, and four more are on track to launch before Christmas, including three Universal Store locations and a Thrills store. Careful site selection and ongoing lease negotiations for 12 holdover locations underpin this strategy. Beyond expansion, UNI is investing in its team and technology, rolling out new point-of-sale and enterprise resource planning systems to support its growth ambitions. Despite these investments and inflationary headwinds, the company is managing costs effectively, keeping gross margins stable. Valuation and Growth Potential: To assess UNI’s intrinsic value, we have employed multiple approaches, including relative valuation methods to compare the company with its competitors. These methods include Price-to-Sales, Price-to-Earnings, and Price-to-Book multiples. In addition, we have incorporated a 10-year Discounted Cash Flow (DCF) Revenue Exit Model, using a discount rate of 9.8% and a terminal revenue multiple of 2.2x. Given UNI’s strong fundamentals, we remain optimistic about its revenue growth, projecting a steady annual growth rate between 27.7% and 28.6%. Furthermore, recognizing the company’s solid dividend history, we applied a Discounted Dividend Multi-stage Model, assuming a perpetuity growth rate of 6.5% and a discount rate of 10.5%. We anticipate stable dividend growth in the range of 10.6% to 27.1%. By averaging the estimated fair value from each of these models, we arrive at an estimated valuation of $9.11 per share, representing a potential upside of +13% relative to the market price at the time of analysis. That said, we are issuing a long-term “buy” rating for UNI with a target price of $9.11 per share. UNI has demonstrated a strong track record, raising its dividend for four consecutive years. The company also benefits from impressive gross profit margins and is currently trading at a relatively low P/E ratio in comparison to its expected near-term earnings growth. Over the past year, UNI has delivered strong returns and operates with a moderate level of debt. However, it is trading at a slightly high Price-to-Book multiple.

Strong Performance in Direct-to-Customer Sales: Universal Store Holdings Limited (UNI) has kicked off FY25 with a solid start, showing a 19.3% jump in direct-to-customer (DTC) sales compared to the same period last year. This growth comes from strong performances across its key brands: Universal Store (US), Perfect Stranger (PS), and Cheap Thrills Cycle (CTC). Universal Store brand saw a 15.5% rise in total sales, with a solid 13.8% increase in like-for-like (LFL) sales, although there was a 7.0% drop when compared to the previous year. PS stood out with an exceptional 111.1% growth in total sales and 29.9% growth in LFL sales. Meanwhile, CTC posted a 7.4% increase in total sales and 12.3% in LFL sales, continuing its momentum despite challenges in the wholesale sector. Focus on Margins and Cost Control: UNI has managed to keep its gross margins steady, similar to the second half of FY24, thanks to its private brand portfolio, like Neovision and Luck & Trouble, continuing to perform well. However, the cost of doing business (CODB) has crept up by about 1% from the previous year, driven by inflation and increased investment in team capability. The company’s gross profit margin for FY24 improved by 110 basis points, reaching 60.1%, which reflects better sourcing and stronger private brand penetration. Even with rising costs, UNI has done a good job of protecting its margins and managing its expenses, showing its ability to balance growth with cost control. Challenges in the Wholesale Segment: The wholesale side of UNI’s business, especially for CTC, has faced some headwinds in FY25. CTC’s wholesale sales are down 16.8% year-to-date as of September 2024, largely due to challenges in the Australian wholesale market, excluding Universal Store brand. That said, UNI has been able to offset some of these losses by focusing on its DTC channels, where the business continues to see solid growth. For instance, PS has seen a 60.6% rise in online sales compared to last year. The DTC channel is becoming an even more strategic part of the business, and UNI’s efforts to strengthen its online presence and physical stores should help keep the company on track despite challenges in the wholesale space. Revenue Growth and Profitability: UNI has seen solid revenue growth, with group sales hitting $288.5 million for FY24, a 9.7% increase over the previous year. These results came from the continued strength of Universal Store brand, the expansion of PS, and the integration of CTC. The company’s underlying EBIT for FY24 reached $47.1 million, up 16.6%, which is a strong result, especially considering the market challenges. Gross profit margins grew to 60.1%, an increase of 110 basis points, reflecting the success of its private brand strategy and cost management. UNI also reported a 45.3% increase in net profit after tax (NPAT), reaching $34.3 million, which shows that despite market fluctuations, the company is able to drive profitability. With $14.3 million in net cash as of June 2024, UNI is in a healthy financial position, giving it the flexibility to continue investing in growth while maintaining solid cash flow.

The company has increased its dividend for four consecutive years. For FY24, UNI declared a final dividend of 19 cents per share, bringing the total dividend for the year to 35.5 cents per share, an impressive 61.4% increase year-on-year. With solid earnings and a focus on maintaining healthy cash flow, we are convinced that UNI will continue providing attractive returns to its investors going forward.