Lovisa Holdings Limited
Annual Report 2016

Plain-text annual report

LOVISA HOLDINGS LIMITED 2016 annual report ACN 602 304 503 For personal use onlyLovisa was born from a desire to fill the void for fashion forward and directional jewellery that is brilliantly affordable. For personal use onlyFor personal use onlyFor personal use onlyContents Company overview Chairman’s report Directors’ report Financial statements Consolidated statement of financial position Consolidated statement of profit or loss and other comprehensive income Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the financial statements Setting the scene Business performance Asset platform Risk and capital management Other information Signed reports Directors’ declaration Independent auditors’ report Lead auditor’s independence declaration ASX information Shareholder information Corporate directory 12 16 36 37 38 39 40 42 48 54 64 74 75 77 80 84 For personal use only2016 OVERVIEW our brand moving globally Established in 2010 Listed on the Australian stock exchange in 2014 Each store contains an average of 2,500 product lines 120 new product lines in store every week Vertical integration from supply to point of sale 6 LOvISA HOLDINgS LImIteD ANNuAL RepOR t - 3 JuLy 2016 For personal use onlytotal store numbers 250 npat $16.6M gross profit up 9.8% to $114m territory highlight succesful uk pilot program undertaken final dividend of 2.ocps fully franked revenue up 14.3% to $153m lfl sales +5.5% For personal use only2016 OVERVIEW flagship opening chadstone australia 8 LOvISA HOLDINgS LImIteD ANNuAL RepOR t - 3 JuLy 2016 For personal use onlyFor personal use only2016 OVERVIEW 3 UK TRADING FROM 250 STORES IN 10 COUNTRIES aus uk nz saf mAL kuwait sing uae saudi oman 10 16 MIDDLE EAST 36 SOUTH AFRICA Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlyour movement SUPPLY & WAREHOUSE To stay ahead of trend, Lovisa utilises daily inventory monitoring software and airfreight to move product to store locations within 48 hours from our centrally located warehouses in Melbourne and Hong Kong. CHINA SUPPLIERS LOVISA WAREHOUSE SUPPLIERS HONG KONG WAREHOUSE INDIA SUPPLIERS THAILAND SUPPLIERS 19 14 SINGAPORE MALAYSIA 144 AUSTRALIA MELbOURNE WAREHOUSE 18 NEW ZEALAND 11 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlyChairman & Chief Executive’s REPORT Following the success of the 2015 Initial Public Offering, 2016 has been a year of consolidation for Lovisa with the strengthening of the Board and Management and the continued expansion of the company’s global footprint. 12 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlyLovisa continues to generate strong cash flow with operating cash at $23.3m after tax. Capital expenditure totalled $9.3m for the year and relates predominantly to new store openings and refurbishments of current stores upon lease renewal to Lovisa’s new concept fit out. The final payment for the South African acquisition in 2015 of $250k was made during the year. Net debt reduced by $2.4m to $7.3m at year end. international store expansion During the year the company increased its store network to 250 stores. The company’s international expansion continued with store openings in South Africa, Singapore, Malaysia, New Zealand and the UK. The company’s flagship store at Chadstone reopened in June 2016 following a relocation during the year. A total of 43 new stores opened or were relocated during the year with the expected closures associated with the South African and previous Australian and NZ acquisitions driving the net increase of 11. overview We are pleased to report that Lovisa Holdings Limited has delivered a solid result for the year ended 3 July 2016. The company reported a net profit after tax of $16.6m and a gross margin of 74%. This result was driven by a combination of strong sales growth and increased gross profit underpinned by our ongoing focus on customer service despite significant currency headwinds. While the result reflects a reduction on the prior year, the underlying business performance remains strong and demonstrates the strength of the Lovisa brand and integrated model. We estimate that after adjusting for the devaluation of the Australian dollar on stock purchases gross profit would have increased by 15.2% and gross margin would have lifted by 8bps on the prior year. We continued to expand and optimise our store network to drive growth and performance with 43 (gross) new stores opened in the Fy16 and a portfolio of 250 stores at year end. Importantly, our UK pilot has proven successful to date and the Board has resolved to proceed with the roll out strategy. financials The company reported a statutory net profit after tax of $16.6m following continued strong same store sales growth and the addition of a further 11 stores across the globe, offset by currency headwinds associated with the Australian dollar and the South African rand. This result reflects a decrease of 6% on the company’s 2015 proforma net profit after taking into account the exceptional items related to the company’s IPO in 2015. Lovisa achieved revenue of $153.5m, up 14.3% on FY15 with strong same store sale growth of 5.5%. International sales now make up 36% of the Group’s revenue with franchise income increasing 40% to $848k. Trading in the June quarter was particularly strong as we saw the benefit of retail price increases during the year. Sales in South Africa lifted 71% in the year following the 2015 acquisition with additional stores offsetting planned closures. New Zealand sales lifted 30% following the refurbishment of a number of its stores along with a further 4 stores opening during the year. Gross profit increased by $10.1m to $113.6m despite a significant devaluation of the Australian dollar and South African rand. We have estimated that on a constant currency basis from the prior year, gross profit would have increased by 15.2% to $119.3m and gross margins would have increased to 77.7%. The Cost of Doing Business (CODB) remained consistent at 54% despite a conscious decision to increase both Board and Management bench strength along with additional investment in our international footprint. Distribution costs increased in line with overseas expansion. The result includes a $1.1m foreign exchange loss predominantly from the depreciating South African rand on the company’s working capital. Earnings before interest and tax were $24.2m with financing costs marginally up on the prior year following a full twelve months of financing facilities in place. Earnings per share was 15.8 cents per share compared to FY15 proforma earnings of 16.8 cents per share. The balance sheet continues to be healthy with low operating leverage reflected in our solid fixed charge cover of 2.18 times and gross leverage of 0.52. Disciplined inventory management in the second half has seen inventory levels consistent with the prior year despite store growth and currency headwinds. 13 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlyuk pilot program In November 2015 Lovisa embarked on a pilot program to determine the feasibility of the UK market. The outcome of the pilot program was that stores have traded within the KPI’s set at the outset of the pilot program. Following this successful pilot program the Board resolved to proceed with the rollout with additional stores expected to be trading by Christmas. We will continue to take a disciplined and patient approach to expanding in the UK market, being particularly careful to ensure we secure good sites at the right rental rates. We consider the UK market a significant growth market for Lovisa and stepping stone for further Northern Hemisphere expansion. board and management changes During the year the company announced a number of Board and Management changes reflecting the company’s intention to increase its capability to facilitate its global expansion. Michael Kay joined the Board in April as Chairman. Michael, a qualified lawyer brings a wealth of commercial experience most recently as CEO and managing Director of ASX listed macmillan Shakespeare and previously as CEO of national insurer AAMI. Paul Cave stepped down as Chairman upon Michael’s appointment. Paul agreed to serve as Interim Chairman following the sudden unexpected death of David Carter on the 28th January 2015 and the Board would like to take this opportunity to thank Paul for his valuable contribution to the Board and Company as Chairman. In addition to Michael, James King joined the Board in May and will service as Audit, Business Risk and Compliance Committee Chairman. James also brings a wealth of experience serving most recently on the boards of JB Hi Fi and Pacific Brands and with Fosters Group as Managing Director of Carlton & United Breweries and Managing Director, Fosters Asia. Graeme Fallet joined the company in April as Chief Financial Officer and Company Secretary following the resignation of Iain Sadler. Steven Doyle joined the company as Global General Manager in November 2015 and Armando Pedruco joined as Global Sales Manager in December 2015. These appointments strengthen our capabilities and position the company well in anticipation of strong offshore growth over the coming years. 14 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlydividends The Directors declared a final dividend of 2.0 cents per share fully franked for the year ended 3 July 2016. While this equates to a reduction in the payout ratio from the prior year the Directors have considered the expected investment in international store growth in the coming years and consider it prudent to ensure the company can fund its medium term growth objectives whilst not materially increasing its operating leverage. The final dividend will be paid on 27th October 2016. outlook It has been a positive start to the year and in July we opened our first Vietnam franchise store with early sales encouraging. We expect FY17 to be a year of further growth for Lovisa as we continue to open new stores in all current markets and are targeting to open between 20 to 30 stores during the year. Lovisa are a dedicated and determined fast fashion jewellery retailer with deep specialist expertise. Coupled with the additional board and management capability and based on the strength of our integrated model, we have a solid platform for further growth and a confident outlook. Michael Kay Non-Executive Chairman Shane Fallscheer Chief Executive Officer 15 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only directors’ report Details of the qualifications and experience of each Director in accordance with the requirments of the Corporation Act have been included below. MICHAEL KAY independent non-executive director & chairman Shane Fallscheer Chief Executive Officer & Executive Director Appointed 13 April 2016 Appointed 6 November 2014 Shane Fallscheer is the Chief Executive Officer, Managing Director and founder of Lovisa. He has 29 years of experience in retailing operations across Australia, UK and US markets. He was previously in senior management roles with retailers including: General Manager, Sanity Australia; Chief Executive Officer, Sanity UK; Chief Executive Officer, Diva; and Global Retail Chairman and Chief Operating Officer, Rip Curl USA. • • Chairman of the Board Chairman of the Remuneration and Nomination Committee • Member of the Audit, Business Risk and Compliance Committee A qualified lawyer, Michael Kay brings a wealth of commercial experience to Lovisa. Michael was CeO and managing Director of listed salary packaging business McMillan Shakespeare, a position he held for six years. Previously, Michael was CeO of national insurer AAmI after serving in a variety of senior roles with that firm. Prior to joining AAMI, he spent 12 years in private legal practice. Michael became Chairman of ASX listed litigation funder, IMF Bentham Ltd (ASX : IMF) in July 2015 and is Chairman of Apply Direct Ltd (ASX : AD1). Michael has also been a non-executive Director of TFS Corporation (ASX : TFC) since February 2015 and is a non-executive Director of Royal Automotive Insurance Pty Limited. Michael holds a Bachelor of Laws from Sydney University. 16 DIReCtORS’ RepORt Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlyTracey Blundy Non-Executive Director paul cave independent non-executive director james king independent non-executive director Appointed 6 November 2014 Appointed 6 November 2014 Appointed 17 May 2016 • Member of the Audit, Business Risk and Compliance Committee • Member of the Remuneration and Nomination Committee Tracey joined BB Retail Capital in 1981 and is the nominated representative of BB Retail Capital on the Board of Lovisa. Over the past 35 years, she has held a number of senior executive positions across BB Retail Capital’s brands, including Chief Executive Officer of Sanity Entertainment and Bras n Things. She is a Board- level advisor across the BB Retail Capital portfolio bringing in-depth knowledge and expertise on retail operations and roll-out strategy. Tracey was a founding shareholder of Lovisa in 2010, and has since been a senior advisor to the Company’s management team. tracey is currently a Director of BB Retail Capital Pty Limited, Bras N things pty Limited and BB Retail Property Pty Limited. • Member of the Audit, Business Risk and Compliance Committee • Chairman of the Audit, Business Risk and Compliance Committee • Member of the Remuneration and • Member of the Remuneration and Nomination Committee Nomination Committee Paul is a Non-Executive Director of Domino’s pizza enterprises Ltd since 2005 and the Chairman and Founder of BridgeClimb. Paul was made a Member of the Order of Australia in 2010 for his services to the tourism industry. Paul has previously worked in marketing and general management roles for B&D Roll A-Door and also founded the Amber Group in 1974, which he sold in 1996. Paul was a founding Director of Chris O’Brien Lifehouse at the Royal Prince Alfred Hospital, and founding Director of InterRisk Australia Pty Ltd. He is a patron of the Hunter Melanoma Foundation, and holds a Bachelor of Commerce from the University of New South Wales. James has over 30 years’ experience as a Director and an Executive in major multinational corporations in Australia and internationally. He was previously with Foster’s Group Limited as managing Director Carlton & united Breweries and Managing Director Foster’s Asia. Prior to joining Foster’s, he spent six years in Hong Kong as President of Kraft Foods (Asia Pacific). He is currently a non- executive Director of Pacific Brands, Navitas Ltd and a member of Global Coaching Partnership. Previously James was a Director of JB Hi-Fi Limited, Trust Company Ltd, a member of the Council of Xavier College and Chairman of Juvenile Diabetes Research Foundation (Victoria). James holds a Bachelor of Commerce from University of New South Wales and is a Fellow of the Australian Institute of Company Directors. DIReCtORS’ RepORt 17 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only1. DIRECTORS’ The Directors of Lovisa Holdings Limited (the ‘Company’) present their report together with the Consolidated Financial Statements of the Company and its controlled entities (the ‘Group’ or ‘Consolidated Entity’) for the financial year ended 3 July 2016. Director M Kay t Blundy P Cave S Fallscheer J King N Osborne Board Audit and Risk Remuneration & Nomination Number attended Number held Number attended Number held Number attended Number held 2 12 12 11 1 4 2 12 12 12 1 4 1 5 5 - 1 2 1 5 5 - 1 2 2 6 6 - - 2 2 6 6 - - 2 • Neil Osborne was a Director of Lovisa Holdings Limited from his appointment on 1 April 2015 until his resignation on 17 November 2015. • Graeme Fallet was appointed Company Secretary on 14 April 2016. He is also the company’s Chief Financial Officer. Mr Fallet is a Chartered Accountant and a Member of the Institute of Company Directors. • Iain Sadler was Company Secretary of Lovisa Holdings Limited from 6 November 2014 until his resignation on 13 April 2016. • Michael Kay was appointed as Chairman and independent non-executive Director on 13 April 2016. • James King was appointed as an independent non-executive Director on 17 May 2016. 1.1 Directors Interests in Shares The relevant interest of each Director in the Company at the date of the report is as follows: Director M Kay (1) P Cave (2) T Blundy (3) S Fallscheer (4) J King Ordinary Shares in the Company 250,000 1,000,000 1,153,005 4,490,000 - (1) Shares held by Doveton Kay Investments Pty Ltd ATF Doveton Kay Investments Trust and M&S Kay Superannuation Fund Pty Ltd ATF M&S Kay Superannuation Fund (2) Shares held by P.B.C. Investments Pty Limited (3) Shares held by Coloskye Pty Ltd (4) Shares held by Centerville Pty Ltd 18 DIReCtORS’ RepORt Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only 2. Principal Activities The principal activity of the Group during the financial year was the retail sale of fashion jewellery and accessories. The business has 250 retail stores in operation at 3 July 2016 including 16 franchise stores. the group opened an additional 43 stores during the year and closed 32 stores. There was no significant change in the nature of the activities of the Company during the period. 3. Dividends Dividends paid to members during the financial year were as follows: Final ordinary dividend for the year ended 30 June 2015 of 4.07 cents (2014-758.73 cents) per fully paid share fully franked paid on 30 October 2015 Interim ordinary dividend for the year ended 30 June 2016 of 6.67 cents (2015-6.67 cents) per fully paid share 75% franked (2015: fully franked) paid on 29 April 2016 Total dividends paid 2016 $000's 4,273 7,004 11,277 2015 $000's 7,587 7,004 14,591 In addition to the above dividends, since the end of the financial year the Directors have recommended the payment of a final dividend of $2,100,000 (2.00 cents per fully paid share) expected to be paid on 27 October 2016. The dividend will be fully franked. DIReCtORS’ RepORt 19 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only 4. Review of Operations The analysis below reflects the Group’s performance at a statutory level. Actual FY2016 and Actual FY2015 results relate to the performance of all Lovisa group companies for the entirety of both years. The following summary of operating results and operating metrics reflects the Group’s performance for the year ended 3 July 2016: Proforma Consolidated $000 gross margin % EBITDA (Proforma) NPAT (Proforma) NPAT (Statutory) Basic Earnings per share (Proforma) Basic Earnings per share (Statutory) 4.1 Financial Performance 2016 74% 30,256 16,553 16,553 15.76c 15.76c 2015 77% 30,830 17,602 30,598 16.76c 29.14c For the year ended 3 July 2016 the Company reported a net profit after tax of $16.5 million following continued strong same store sales growth of 5.5% and the addition of a further 43 stores across the globe offset by higher cost of sales due to the weakening Australia dollar and a higher level of markdowns. This result reflects a decrease of 6% on the Company’s 2015 Proforma net profit after taking into account the reversal of the put option and other costs associated with the IPO. During the year the Company suffered headwinds associated with the decreasing Australian dollar and the devaluation of the South African Rand. The analysis below reflects the Group’s performance on a ‘proforma’ basis and a statutory basis. Proforma Consolidated $000 Sales Gross profit Operating expenses eBItDA eBIt Net profit after tax (NPAT) FY2016 153,461 113,562 83,306 30,256 24,222 16,553 A reconciliation of the statutory and proforma results has been included below. $’000 Consolidated Statutory eBIt Change in provision for share buy back IpO costs proforma eBIt Statutory Consolidated $’000 Sales Gross profit Operating expenses Change in provision for share buy back eBItDA eBIt Net profit after tax (NPAT) FY2016 153,461 113,562 83,306 - 30,256 24,222 16,553 FY2015 134,260 103,461 72,631 30,830 24,829 17,602 FY2015 134,260 103,461 74,746 14,756 43,471 37,470 30,598 Change 14.3% 9.8% 14.7% (1.9%) (2.4%) (6.0%) FY2015 37,470 (14,756) 2,115 24,829 Change 14.3% 9.8% 11.4% (100%) (30.4%) (35.4%) (45.9%) 20 DIReCtORS’ RepORt Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only4.1 Financial Performance (continued) 4.1.4 Operating Expenses 4.1.1 Sales STRONG revenue growth (A$m) MAINTAINING COST OF DOING BUSINESS 14.3% 60% 50% 40% 30% 20% 10% 0% 54% 54% Fy15 Fy16 NUMBER OF STOREs IN OFFSHORE MARKETS GROWING 160 140 120 100 80 60 40 20 0 300 250 200 150 100 50 0 Fy15 Fy16 The Company’s Cost of Doing Business was consistent with the prior year and is predominantly from the opening of new stores, additional investment in the Lovisa global rollout working capital and foreign currency losses associated with repatriating cash from its offshore businesses. During the year Lovisia significantly increased its investment in its offshore rollout and management capacity to facilitate its global expansion. The Board considers it imperative that Lovisa resources itself in anticipation of strong offshore growth during the next three years. Distribution costs increased in line with the offshore expansion as stock was managed through the Company’s Hong Kong Distribution Centre and shipped to South Africa, United Kingdom, Singapore and Malaysia. Other costs increased predominantly from foreign exchange losses associated with the devaluation of the South African Rand. 4.1.5 Earnings Earnings before interest and tax was $24.2m being a decrease of 2.4% on underlying EBIT from the prior year after excluding one-off items associated with the IPO. Financing costs associated with the Company’s debt facilities increased due to debt facilities only being in place for the post IPO period in FY15. Net Profit after Tax after adjusting for one off items associated with the IPO decreased by 6% to $16.5m. 4.1.6 Cash Flow The Company’s operating cash flow improved during the year with $23.3m generated from operations after tax and financing payments. Capital expenditure of $9.3m relates predominantly to new store openings and refurbishments of current stores upon lease renewal. The final payment for the South African acquisition in 2015 of $250,000 was made during the year. Fy12 Fy13 Fy14 Fy15 Fy16 AUSTRALIA OFFSHORE The Company’s reported revenue was $153.5m being a 14.3% increase on the prior period from strong like for like sales of 5.5% and the addition of a net 11 new stores. The offshore expansion continues with a UK pilot program of 3 stores at June to determine the feasibility of the UK market. An additional franchise territory in Vietnam opened in July 2016. 4.1.2 Gross Profit Margin CONSISTENT GROSS MARGINS 79% 79% 76% 77% 74% 100 80 60 40 20 0 Fy12 Fy13 Fy14 Fy15 Fy16 The Company’s Gross profit increased by 9.8% to $113.6m against a back drop of a significant weakening of the Australian dollar affecting the Company’s stock purchases. the decrease in the Australian dollar resulted in the Company’s Gross Margin reducing to 74%. 4.1.3 Change in value of put option liability In previous years the Company made provision for the buy- back of shares from Centerville Pty Ltd, a private vehicle owned by the CEO. As a result of the IPO, the provision was reversed in FY2015. DIReCtORS’ RepORt 21 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only 4.2 Financial Position Statutory Consolidated Trade receivables and prepayments Inventories Trade payables and provisions Net working capital Property, plant & equipment Intangible assets and goodwill total funds employed Net debt Net derivative liability Net deferred tax balances Net assets/equity Net working capital Actual FY2016 $’000 2,293 15,034 (14,995) 2,332 13,123 2,073 17,528 (7,271) (909) 1,823 11,171 Actual FY2015 $’000 2,147 15,012 (16,274) 885 10,400 1,610 12,895 (9,657) 30 3,541 6,809 Change FY15/FY16 % 6.8% 0.1% (7.9%) 163.5% 26.2% 28.8% 35.9% (24.7%) (3130.0%) (48.5%) 64.1% The Company’s working capital continues to be a focus with inventory levels managed at prior year levels despite the cost of goods increasing due to currency changes and the increase of a net 11 stores after closures. Working capital includes both security deposits for landlords and cash reserved for Bank Guarantees issued to landlords. Property, plant and equipment Capital expenditure during the year largely reflects fit-out costs associated with new stores and fixed asset renewal costs for existing stores reaching the end of their lease term. Fit-out costs are depreciated over the lifetime of the store lease. FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 Australia 45 54 160 166 146 144 New Zealand Singapore South Africa Malaysia United Kingdom Middle East* 6 0 0 0 0 0 6 0 0 0 0 0 6 6 0 3 0 0 14 10 11 7 0 2 14 15 36 15 0 13 18 19 36 14 3 16 Total 51 60 175 210 239 250 * Franchise Stores Net debt The Company’s net debt reduced to $7.3m which reflects a $2.4m reduction on the prior year. 22 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only5. business strategies Lovisa has achieved rapid growth since it was founded, with revenue growing from $25.5 million in FY2011 to $153.5 million in FY2016, representing a compound annual growth rate of 43.2%. This historical growth has been driven by Lovisa’s swift store roll out. The Group continues to focus on its key drivers to deliver growth in sales and profit growth. Growth pillar Business Strategy Section Strategy Risks Achievements International expansion 5.2 • Continue to leverage current international territories • Leverage the Company’s capital in large international markets • Complete UK pilot program and roll out UK territory • Consider franchise partners for selected territories • Expand into new international markets, targeting one new territory per annum • Streamline and optimise supply base in Asia • Optimise air and sea freight whilst maintaining speed to market operating model • Consider Northern Hemisphere distribution centre Streamline global supply chain 5.3 Enhance existing store performance 5.4 • Optimise and improve existing store network • Continue to target high traffic shopping precincts Brand proliferation 5.5 • Continue to leverage online social media to connect with customers and increase brand loyalty • Competition (6.2) • Retail environment and general economic conditions (6.3) • Failure to successfully implement growth strategies (6.4) • Net 13 stores opened outside of Australia during the year including 3 stores in the United Kingdom and 3 franchise stores • Exchange rates (6.5) • product sourcing or supply chain disruptions • Competition (6.2) • Retail environment and general economic conditions (6.3) • Prevailing fashions and consumer preferences may change (6.6) • Prevailing fashions and consumer preferences may change (6.6) • Privacy breaches • Over 34% of product was moved through the HK warehouse (30% FY15) • Re-engineering of supply chain to accomodate sea freight • 32 stores in sub-optimal locations closed during the year • Fy16 LFL sales growth of 5.5% • Increased social media engagement Lead and pre-empt trends 5.1 • Stay on trend with shifts in jewellery and accessory market • Continue to provide a high quality and diverse product offering • Prevailing fashions and consumer preferences may change (6.6) • Continued strong LFL growth being testament in ability to identify trends 5.1 Lead and Pre-Empt Trends Product innovation is a core component of Lovisa’s competitive advantage. Its customers expect a broad range of fashionable products that are in line with the latest global fashion trends. In order to meet this expectation, Lovisa employs a product team of more than 20 people who are responsible for Lovisa’s forward range planning, designs, product development, production, visual merchandising and merchandise planning, ensuring Lovisa is continually meeting market demand. Whilst product teams are based in Melbourne and London, its team members travel the world to identify global trends. In addition, its product teams meet with suppliers in China, India, Thailand and other parts of Asia frequently. As Lovisa is frequently developing new products in response to evolving fashion trends, it does not register patents on its product designs. This is consistent with practices in the fast fashion industry. DIReCtORS’ RepORt 23 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only5.2 New Store Rollouts & International Expansion One of the key attributes of the Group’s success has been the ability to identify and secure quality retail store sites in locations with high pedestrian traffic. This typically involves securing leases in AA, A or B grade rating shopping centres and malls. Lovisa has refined its global store model based on what it understands to be the optimal store size, location and format. The combination of a 50 square metre floor space and a homogenised layout allows Lovisa to have strict criteria when identifying and securing potential store sites in new regions, facilitating the roll-out of stores quickly, at low cost. On average, it takes approximately 14 days to fit out a new Lovisa store. The key driver of future growth for Lovisa is the continued international store roll-out. Lovisa has proven it is capable of successfully operating profitably in international territories, having established its initial portfolio of company owned stores in Australia, New Zealand, Singapore, Malaysia and South Africa and supporting franchised stores in Kuwait, the United Arab Emirates, Oman and Saudi Arabia. During the year, Lovisa commenced a pilot program in the UK with the Board approving the continued rollout of the UK market on 22 August 2016. The Group plans to remain nimble and opportunistic in expanding and moving into new markets, such that if opportunities arise, the Group may accelerate its plans to enter a new market or continue to grow an existing market. Likewise it will defer its entry into a new market if it considers that appropriate opportunities aren’t presented at the relevant time. Lovisa’s objective is to fully maximise its footprint in its current territories within the medium term (1-2 years) and target to achieve 20 - 30 new stores per annum. 5.3 Streamline Global Supply Chain Lovisa’s third party suppliers are currently located in mainland China, India and Thailand. Stock is inspected by Lovisa’s quality control team in China. Once manufactured, stock is transported to Lovisa’s leased warehouse in Melbourne, Australia (for stock to be sold in Australian and New Zealand stores) or its third party operated warehouse in Hong Kong (for stock to be sold in all other countries). There is sufficient capacity in Lovisa’s third party operated Hong Kong warehouse to handle further international growth. Lovisa constantly reviews its supply chain process for potential efficiency gains and cost reductions in order to generate higher gross margins. This includes improvements in its global warehouse and logistics program and the consolidation and rationalisation of its supplier base. 5.4 Enhance Existing Store Performance Lovisa’s store roll-out in Australia is largely complete with 144 stores in operation as at 3 July 2016. Subject to the availability of attractive sites, Lovisa will still seek to open a small number of new stores per year in Australia for the foreseeable future. This growth is expected to be supplemented by store optimisation and improvement initiatives. Lovisa believes it will be able to enhance profitability through improvements to its store portfolio and operations. This includes the closure of 11 company owned stores in sub-optimal locations in Australia during FY2017 while the rationalisation of stores associated with the April 2015 DCK South Africa acquisition is now complete. 5.5 Brand Proliferation Lovisa supports the growth in its brand through social media and promotional activity that matches our customer base, and our International footprint. Efforts are focussed on social media, rather than traditional media, as we believe it connects us directly to our customers in a way that suits their lifestyle. The brand is also developed through the customer in-store experience – on trend product, cleanly merchandised, focussed imagery, and the store “look and feel”. Stores are located in high foot traffic areas, in high performing centres. 24 DIReCtORS’ RepORt Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only6. material business risks 6.1 Business Risks The business risks faced by the Group and how it manages these risks are set out below. Further information surrounding how the Group monitors, assesses, manages and responds to risks identified is included within Principle 7 of the Company’s Corporate Governance statement. 6.2 Competition The fast fashion jewellery sector in which Lovisa operates is highly competitive. While the costs and time that would be required to replicate Lovisa’s business model, design team, IT systems, store network, warehouse facilities and level of brand recognition would be substantial, the industry as a whole has relatively low barriers to entry. The industry is also subject to ever changing customer preferences. Lovisa’s current competitors include: • specialty retailers selling predominately fashion jewellery; • department stores; • fashion apparel retailers with a fashion jewellery section; and • smaller retailers (i.e. less than five stores) that specialise in the affordable jewellery segment. Competition is based on a variety of factors including merchandise selection, price, advertising, new stores, store location, store appearance, product presentation and customer service. Lovisa’s competitive position may deteriorate as a result of factors including actions by existing competitors, the entry of new competitors (such as international retailers or online retailers) or a failure by Lovisa to successfully respond to changes in the industry. To mitigate this risk, Lovisa employs a product team of more than 20 people to meet market demands as described in section 5.1. Management believe it would take a number of years for a new entrant to establish a portfolio of leases comparable with Lovisa in premium store locations with substantial barrier to entry costs as detailed above. 6.3 Retail Environment and General Economic Conditions As Lovisa’s products are typically viewed by consumers to be ‘discretionary’ items rather than ‘necessities’, Lovisa’s financial performance is sensitive to the current state of, and future changes in, the retail environment in the countries in which it operates. However, with an average retail spend of $20 per transaction, macro market performance has minimal impact for Lovisa. Lovisa’s main strategy to overcome any downturn in the retail environment or economic conditions is to continue to offer our customers quality, affordable and ontrend products. 6.4 Failure to Successfully Implement Growth Strategies Lovisa’s growth strategy is based on its ability to increase earnings contributions from existing stores and continue to open and operate new stores on a timely and profitable basis. This includes the opening of new stores in both Australia and overseas. Lovisa’s store roll-out program is dependent on securing stores in suitable locations on acceptable terms, and may be impacted by factors including delays, cost overruns and disputes with landlords. The following risks apply to the roll out program: • new stores opened by Lovisa may be unprofitable; • Lovisa may be unable to source new stores in preferred areas, and this could reduce Lovisa’s ability to continue to expand its store footprint; • new stores may reduce revenues of existing stores; and • establishment costs may be greater than budgeted for. Factors mitigating these risks are that fit-out costs are low with minimal standard deviation in set-up costs across sites and territories through our small store format and homogenous store layout, minimising potential downside for new stores. The Group assesses store performance regularly and evaluates store proximity and likely impact on other Lovisa stores as part of its roll-out planning. When entering new markets, Lovisa assesses the region, which involves building knowledge by leveraging a local network of industry contacts, and aims to secure a portfolio of stores in order to launch an operating footprint upon entry. The Group plans to remain nimble and opportunistic in expanding and moving into new markets, such that if opportunities arise, the Group may accelerate its plans to enter a new market or continue to grow an existing market. Likewise it will defer its entry into a new market if it considers that appropriate opportunities aren’t presented at the relevant time. Regular investigation and evaluation of new stores and territories is undertaken by management to ensure that the group’s store footprint continues to expand. 6.5 Exchange Rates The majority of inventory purchases that are imported by Lovisa are priced in USD. Consequently, Lovisa is exposed to movements in the exchange rate in the markets it operates in. Adverse movements could have an adverse impact on Lovisa’s gross profit margin. The Group’s foreign exchange policy is aimed at managing its foreign currency exposure in order to protect profit margins by entering into forward exchange contracts specifically against movements in the USD rate against the AUD. The Group does not currently hedge its foreign currency earnings. The Group monitors its working capital in its foreign subsidiaries to ensure exposure to movements in currency is limited. 6.6 Prevailing Fashions and Consumer Preferences May Change Lovisa’s revenues are entirely generated from the retailing of jewellery, which is subject to changes in prevailing fashions and consumer preferences. Failure by Lovisa to predict or respond to such changes could adversely impact the future financial performance of Lovisa. In addition, any failure by Lovisa to correctly judge customer preferences, or to convert market trends into appealing product offerings on a timely basis, may result in lower revenue and margins. In addition, any unexpected change in prevailing fashions or customer preferences may lead to Lovisa carrying increased obsolete inventory. To mitigate this risk, Lovisa employs a product team of more than 20 people to meet market demands as described in section 5.1. As the Group responds to trends as they occur, this drives store visits by customers and significantly reduces the risk of obsolete stock. DIReCtORS’ RepORt 25 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only7. Events subsequent to reporting date Since the end of the financial year the Directors have recommended the payment of a final dividend of $2,100,000 (2.00 cents per fully paid share) expected to be paid on 27 October 2016. The dividend will be fully franked. No other matters or circumstance has arisen since 3 July 2016 that has significantly affected, or may significantly affect: (a) the Group’s operations in future financial years, or (b) the results of those operations in future financial years, or (c) the Group’s state of affairs in future financial years. 8. Likely developments Information on likely developments is contained within the Review of Operations section of this annual report. 9. Remuneration Report 9.1 Remuneration Overview the Board recognises that the performance of the group depends on the quality and motivation of its team members employed by the Group across Australia and internationally. the group remuneration strategy therefore seeks to appropriately attract, reward and retain team members at all levels of the business, but in particular for management and key executives. The Board aims to achieve this by establishing executive remuneration packages that include a mix of fixed remuneration, short term incentives and long term incentives. the Board has appointed the Remuneration and Nomination Committee whose objective is to assist the Board in relation to the Group remuneration strategy, policies and actions. In performing this responsibility, the Committee must give appropriate consideration to the Company’s performance and objectives, employment conditions and external remuneration relativities. Further information surrounding the responsibilities of the Remuneration and Nomination Committee is included within Principle 8 of the Company’s Corporate Governance statement. 9.2 Principles Used to Determine the Nature and Amount of Remuneration Key Management Personnel Key Management Personnel (KMP) have the authority and responsibility for planning, directing and controlling the activities of the consolidated entity, and comprise; 1. Non-Executive Directors 2. Managing Director and Chief Executive Officer 3. Chief Financial Officer 4. Global General Manager Non-Executive Director KMP Michael Kay Chairman Paul Cave James King Director Director tracy Blundy Director Executive KMP Shane Fallscheer Managing Director and Chief Executive Officer Graeme Fallet Iain Sadler Chief Financial Officer (Appointed 14 April 2016) Chief Financial Officer (Resigned 13 April 2016) Steven Doyle Global General Manager (Appointed 4 November 2015) 26 DIReCtORS’ RepORt Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only This report has been audited by the Company’s Auditor KPMG as required by Section 308 (3C) of the Corporation Act 2001. The Remuneration and Nomination Committee is governed by its Charter which was developed in line with ASX Corporate Governance Principles and Recommendations. The Charter specifies the purpose, authority, membership and the activities of the Remuneration and Nomination Committee and the Charter is annually reviewed by the Committee to ensure it remains consistent with regulatory requirements. A. Principles Used to Determine the Nature and Amount of Remuneration (a) Non-Executive Directors KMP Remuneration Non-executive Directors’ fees are determined within an aggregate Non-executive Director’s pool limit of $600,000. Total Non-executive Directors remuneration including non-monetary benefits and superannuation paid at the statutory prescribed rate for the year ended 3 July 2016 was $280,047. Michael Kay, the Non-executive Chairman, is entitled to receive annual fees of $150,000, which is inclusive of superannuation. Other Non-executive Directors are entitled to receive annual fees of $80,000 inclusive of superannuation. The Non-executive Directors fees are reviewed annually to ensure that the fees reflect market rates. There are no guaranteed annual increases in any Directors’ fees. None of the non-executive Directors participate in the short or long term incentives. (b) Executive remuneration Lovisa’s remuneration strategy is to; Short Term Incentive plan The Company operates a short-term incentive (STI) plan that rewards some Executives and Management on the achievement of pre-determined key performance indicators (KPIs) established for each financial year according to the accountabilities of his/her role and its impact on the organisation’s performance. KPIs include company profit targets and personal performance criteria. Using a profit target ensures variable reward is paid only when value is created for shareholders. No STI was payable for the 2016 year as the Company’s profit target was not met. Long Term Incentive plan The Company operates a long term incentive plan scheme. the plan is designed to align the interests of the employees with the interest of the shareholders by providing an opportunity for the employees to receive an equity interest in Lovisa. The plan provides flexibility for the Company to grant performance rights and options as incentives, subject to the terms of the individual offers and the satisfaction of performance conditions determined by the Board from time to time. The key terms associated with the Long Term Incentive plan are; • • A performance Option entitles the holder to acquire a share upon payment of an applicable exercise price at the end of the performance period, subject to meeting specific performance conditions. A performance Right entitles the holder to acquire a share for nil consideration at the end of the performance period, subject to meeting specific performance conditions. • Options and Performance Rights will be granted for nil consideration. • Offer a remuneration structure that will attract, focus, retain and reward highly capable people • No exercise price is payable in respect of the Performance Rights. • Have a clear and transparent link between performance and remuneration • Build employee engagement and align management and shareholder interest through ownership of Company shares • Ensure executive remuneration is set with regard to the size and nature of the position with reference to market benchmarks and the performance of the individual. Remuneration will incorporate at risk elements to; • • Link executive reward with the achievement of Lovisa’s business objectives and financial performance Ensure total remuneration is competitive by market standards. B. Remuneration Structure The current executive salary and reward framework consists of the following components; 1. Base salary and benefits including superannuation 2. Short term incentive scheme comprising cash 3. Long term incentive scheme comprising options and performance rights Base Salary and Benefits Base pay is structured as a total employment cost package which may be delivered as a combination of cash and non-cash benefits. Retirement benefits are delivered to the employee’s choice of Superannuation fund. The company has no interest or ongoing liability to the fund or the employee in respect of retirement benefits. DIReCtORS’ RepORt 27 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlythe Board has determined the threshold epS target as follows; EPS over the Performance Period % Exercisable Less than threshold 10% compound growth 12.5% compound growth 15% compound growth 17.5% compound growth Nil 20% awarded 40% awarded 60% awarded 80% awarded 20% compound growth 100% awarded Initial Public Offering Grant – Performance Rights In conjunction with the Initial Public Offering a number of Executives and Management were granted Performance Rights. The key terms associated with the IPO Grant are; • • The performance period ends 30 June 2017. The grant of Performance Rights are subject to performance conditions based on achieving the Company’s EPS over the performance period. • One third of the Performance Rights will vest on the achievement of the Company’s EPS Prospectus forecast. • • 50% of the remaining Performance Rights will vest on an aggregate EPS of 37.33 cents over the 2016 and 2017 financial year. The remaining 50% will vest on a straight line basis from 37.33 cents to 41.23 cents. During the year 20,000 Performance Rights lapsed. Initial Public Offering Grant - Options In conjunction with the Initial Public Offering the Managing Director Shane Fallscheer was granted 550,000 Options at a face value of $210,000. The key terms associated with these options are: • the performance period commences from the time of the Initial Public Offering and ends on 2 July 2017. • An exercise price of $2.30 is payable on exercise of the Options. The grant of options were subject to the following performance conditions; • One third awarded upon achievement of prospectus forecast. • 50% of the remaining options will vest on an aggregate EPS of 37.33 cents over the 2016 and 2017 financial year. • The remaining 50% will vest on a straight line basis from 37.33 cents to 41.23 cents. While the prospectus indicated that the options would be granted at or around listing the options have not in fact been formally issued. Following administrative delays the options were not issued within the 12 month waiver period. Not withstanding that the options were fully disclosed in the prospectus and the 2015 Annual Report the Company will seek shareholder approval for the issue of the options. FY2017 LTI – Performance Options In May 2016 a grant of Performance Options was made to Executives and Management as part of the FY2017 LTI. The key terms associated with the 2016 Grant are; • • • • • the performance period commences 4 July 2016 and ends 30 June 2019. The exercise price of the Performance Options is $2.10, which represents the 30 day VWAP to the date of grant. A total of 3,459,916 Performance Options were granted, 1,687,764 of these options are subject to shareholder approval. The expiry of the Performance Options is 12 months following the anniversary of the performance period. The grant of Performance Options are subject to performance conditions based on achieving the Company’s EPS over the performance period. 28 DIReCtORS’ RepORt Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only9.3 Details of Remuneration Details of the remuneration of the Directors and Key Management Personnel (KMPs) is set out below. Year Short Term Employment Benefits Post- Employment Long Term Benefits Share Based Payments Salary & Fees ($) Non- monetary benefits ($) Performance based payment ($) Super Contributions ($) Annual & Long Service Leave ($) Options/ Rights ($) Total ($) NON-EXEC DIRECTORS M Kay (1) P Cave (2) T Blundy (3) J King (4) N Osborne (5) D Carter (6) tOtAL NON-eXeC DIReCtORS 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 34,247 - 111,510 51,751 58,333 - 9,133 - 30,444 20,000 - 18,265 243,667 2015 90,016 EXEC DIRECTORS - - - - - - - - - - - - - - S Fallscheer (CEO) 2016 668,454 8,425 2015 619,986 20,825 OTHER KMP G Fallet (CFO and Co. Sec) (7) I Sadler (CFO and Co. Sec) (8) S Doyle (Global GM) (9) 2016 84,598 2015 2016 2015 2016 2015 - 246,045 216,988 382,519 - - - - - - - TOTAL EXEC 2016 1,381,615 8,425 3,253 - 10,593 4,916 21,667 - 867 - - - - 1,735 36,380 6,651 - - - - - - - - - - - - - - - - - - - - - - - - - - - - 37,500 - 122,103 56,667 80,000 - 10,000 - 30,444 20,000 - 20,000 280,047 96,667 30,000 96,415 100,489 903,783 30,000 70,983 4,291 6,493 - - 15,324 13,717 12,872 29,630 - - - - - - - - - 741,794 95,382 - 275,086 283,651 425,021 - - - - - - - - - - - - - - - - - - - - - - - 25,909 18,783 21,971 62,487 146,255 100,489 1,699,271 2015 836,974 20,825 25,909 48,783 92,954 - 1,025,445 (1) Appointed to the Board of Lovisa Holdings on 13th April 2016 (2) Appointed to the Board of Lovisa Holdings on 6th November 2014 (3) Appointed to the Board of Lovisa Holdings on 6th November 2014 (4) Appointed to the Board of Lovisa Holdings on 17th May 2016 (5) Appointed to the Board of Lovisa Holdings on 1st April 2015. Resigned as a Director on 17 November 2015. (6) Appointed to the Board of Lovisa Holdings on 6th November 2014. Ceased to be a Director on 27th January 2015. (7) Appointed on 14th April 2016 (8) Resigned on 13th April 2016 (9) Appointed on 4th November 2015 DIReCtORS’ RepORt 29 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only 9.4 Equity Remuneration Analysis - Audited Analysis of Performance Rights over Equity Instruments Granted as Compensation Details of the vesting profile of performance rights awarded as remuneration to each key management person are detailed below. performance Rights/Options granted Executive Director Number Value Performance period commences Included in Remuneration Mr S Fallscheer IpO LtIp* 550,000 210,000 18 December 2014 100,489 Fy17 LtIp* 1,687,764 400,000 4 July 2016 Mr G Fallet Fy17 LtIp 506,329 120,000 4 July 2016 Mr S Doyle Fy17 LtIp 1,265,823 300,000 4 July 2016 Mr I Sadler IpO LtIp 20,000 40,000 18 December 2014 * Subject to shareholder approval. 9.5 Options and Performance Rights Over Equity Instruments - - - - % vested in the period % forfeited in the period Financial period in which grant vests - - - - - - - - - 2 July 2017 30 June 2019 30 June 2019 30 June 2019 100 - The movement during the reporting period in the number of performance rights and options over ordinary shares in Lovisa Holdings Limited held directly or beneficially, by each key management person, including their related parties, is as follows: Held at 29 June 2015 Granted Exercised Forfeited Held at 3 July 2016 Vested during the year Vested and exercisable at 3 July 2016 Directors mr S Fallscheer - IpO LtIp* - Fy17 LtIp* Executive mr g Fallet - Fy17 LtIp mr S Doyle - Fy17 LtIp mr I Sadler - IpO performance Rights - - - - - 550,000 1,687,764 506 329 1,265,823 20 000 - - - - - - - - - 550,000 1,687,764 506 329 1,265,823 (20 000) - - - - - - - - - - - * Subject to shareholder approval. 30 DIReCtORS’ RepORt Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only 9.6 Consequences of Performance on Shareholder Wealth In considering the consolidated entity’s performance and the benefits for shareholder wealth, the Remuneration and Nomination Committee has regard to a range of indicators in respect of senior executive remuneration and linked these to the previously described short and long term incentives. The following table presents these indicators showing the impact of the Company’s performance on shareholder wealth, during the financial years: Fy 2016 Fy 2015 Net profit after tax ($000) 16,553 30,598 Dividends paid ($000) 11,277 14,591 Share price $2.28 $3.50 10. Insurance of officers and indemnities During the financial year, Lovisa Holdings Limited paid a premium of $37,000 (2015: $35,000) to insure the Directors and officers of the Group. The liabilities insured are costs and expenses that may be incurred in defending civil or criminal proceedings that may be brought against the officers in their capacity as officers of the Group, and any other payments arising from liabilities incurred by the officers in connection with such proceedings, other than where such liabilities arise out of conduct involving a wilful breach of duty by the officers or the improper use by the officers of their position or of information to gain advantage for themselves or someone else or to cause detriment to the Group. 11. Audit services 11.1 Auditors Independence Declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 77 and forms part of this Directors’ Report. 11.2 Audit and Non-Audit Services Provided by the External Auditor During the financial year ended 3 July 2016, the following fees were paid or were due and payable for services provided by the external auditor, KPMG, of the Consolidated Entity: Consolidated Entity Audit and assurance services Audit and review of financial statements IpO due diligence Other services IPO tax related services Tax compliance services Other accounting services 2016 $000 2015 $000 220 180 - - 47 107 374 342 176 70 40 808 the group may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s expertise and experience with the Group are important. The Board of Directors has considered the position and, in accordance with advice received from the Audit, Business Risk and Compliance Committee, is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The Directors are satisfied that the provision of non-audit services by the auditor did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: • all non-audit services have been reviewed by the Audit, Business Risk and Compliance Committee to ensure they do not impact the impartiality and objectivity of the auditor; and • none of the services undermine the general principles relating to auditor independence as set out in ApeS 110 Code of Ethics for Professional Accountants. 12. Proceedings on behalf of company No person has applied to the Court under section 237 of the Corporations Act 2001 for leave to bring proceedings on behalf of the company, or to intervene in any proceedings to which the Company is a party, for the purpose of taking responsibility on behalf of the Company for all or part of those proceedings. No proceedings have been brought or intervened in on behalf of the Company with leave of the Court under section 237 of the Corporations Act 2001. 13. Environmental Regulation The Company’s operations are not subject to any significant environmental regulations under either Commonwealth or State legislation. However, the Directors believe that the Company has adequate systems in place for the management of its environmental requirements and is not aware of any breach of these environmental requirements as they apply to the entity. 14. Rounding of amounts the Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 issued by the Australian Securities and Investments Commission, relating to the ‘rounding off’ of amounts in the Directors’ report. Amounts in the Directors’ Report have been rounded off in accordance with that Instrument to the nearest thousand dollars, or in certain cases, to the nearest dollar. Signed in accordance with a resolution of the Directors Michael Kay Non-Executive Chairman Shane Fallscheer Chief Executive Officer Melbourne, 22 August 2016 DIReCtORS’ RepORt LOvISA HOLDINgS LImIteD ANNuAL RepOR t - 3 JuLy 2016 31 For personal use only Contents Financial statements Consolidated statement of financial position Consolidated statement of profit or loss and other comprehensive income Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the financial statements Setting the scene Business performance A1 Operating segments A2 Revenue A3 Expenses A4 earnings per share A5 Dividends A6 Income taxes A7 Acquisition of subsidiary Asset platform B1 Trade and other receivables B2 Inventories B3 Property, plant and equipment B4 Intangible assets and goodwill B5 Impairment of property, plant and equipment & intangible assets and goodwill B6 Trade and other payables B7 Provisions B8 Employee benefits 36 37 38 39 40 42 42 43 44 44 45 45 47 48 48 48 48 50 50 51 51 52 For personal use only Notes to the financial statements cont’d Risk and capital management C1 Capital and reserves C2 Capital management C3 Loans and borrowings C4 Financial instruments – Fair values and risk management C5 Cash flows Other information D1 List of subsidiaries D2 Operating leases D3 Commitments and contingencies D4 Share-based payment arrangements D5 Related parties D6 Auditors’ remuneration D7 Deed of cross guarantee D8 parent entity disclosures D9 New standards and interpretations adopted by the group D10 New standards and interpretations not yet adopted Signed reports Directors’ declaration Independent auditors’ report Lead auditor’s independence declaration ASX information Shareholder information Corporate directory 54 54 55 55 56 62 64 64 64 64 65 67 68 68 71 71 72 74 75 77 80 84 For personal use onlyFor personal use onlyfinancial statements 35 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlyConsolidated Statement of Financial PositIon As at 3 July 2016 Consolidated ($000s) Assets Cash and cash equivalents Trade and other receivables Inventories Derivatives Total current assets Deferred tax assets Property, plant and equipment Intangible assets and goodwill Total non-current assets Total assets Liabilities Bank overdraft Trade and other payables Employee benefits - current Derivatives Provisions - current Current tax liabilities Total current liabilities Employee benefits - non current Loans and borrowings Provisions - non current Total non-current liabilities Total liabilities Net assets Equity Issued capital Common control reserve Other reserves Retained earnings Total equity Note C5 B1 B2 C4 A6 B3 B4 C5 B6 B8 C4 B7 B8 C3 B7 3 July 2016 8,295 2,293 15,034 - 25,622 1,823 13,123 2,073 17,019 42,641 3,566 8,350 1,594 909 655 1,487 16,561 401 12,000 2,508 14,909 31,470 11,171 28 June 2015 4,251 2,147 15,012 30 21,440 3,541 10,400 1,610 15,551 36,991 1,908 7,770 1,382 - 612 3,628 15,300 279 12,000 2,603 14,882 30,182 6,809 C1 208,526 208,526 (208,906) (208,906) (1,032) 12,584 11,171 (119) 7,308 6,809 The Notes on pages 40 to 72 are an integral part of these consolidated financial statements. 36 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlyConsolidated Statement of Profit or loss and other Comprehensive Income For the financial year ended 3 July 2016 Consolidated ($000s) Revenue Cost of sales Gross profit Salaries and employee benefits expense Property expenses Distribution costs Depreciation and amortisation expense Loss on disposal of property, plant and equipment IpO transaction costs Reversal of buy back of company shares Other expenses Operating profit Finance income Finance costs Net finance costs Profit before tax Income tax expense Profit after tax Other comprehensive income Items that may be reclassified to profit or loss: Cash flow hedges Foreign operations - foreign currency translation differences Other comprehensive income, net of tax Total comprehensive income Profit attributable to: Owners of the Company Total comprehensive income attributable to: Owners of the Company Total comprehensive income for the year Earnings per share Basic earnings per share (cents) Diluted earnings per share (cents) Note A2 A3 A3 A6 A4 A4 2016 153,461 (39,899) 113,562 (39,980) (25,881) (4,340) (6,034) (162) - - (12,943) 24,222 49 (723) (674) 23,548 (6,995) 16,553 (772) (257) (1,029) (1,029) 15,524 16,553 16,553 15,524 15,524 15.76 15.74 2015 134,260 (30,799) 103,461 (35,119) (23,261) (3,567) (6,001) (77) (2,115) 14,756 (10,607) 37,470 34 (284) (250) 37,220 (6,622) 30,598 - (275) (275) (275) 30,323 30,598 30,598 30,323 30,323 29.14 29.14 The Notes on pages 40 to 72 are an integral part of these consolidated financial statements. 37 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlyConsolidated Statement of CHANGES IN EQUITY For the financial year ended 3 July 2016 Attributable to Equity Holders of the Company Consolidated ($000s) Note Share Capital Common Control Reserve (Accumulated losses)/ Retained Earnings Share Based Payments Reserve Cash Flow Hedge Reserve Foreign Currency Translation Reserve Total Equity Balance at 30 June 2014 1,086 7 (8,699) Total comprehensive income for the year Profit Foreign operations - foreign currency translation differences Total comprehensive income for the year Transactions with owners of the Company Contributions and distributions Dividends A5 Total contributions and distributions Changes in ownership interests Acquisitions of subsidiaries through common control - - - - - - - - - - 208,914 (208,914) transaction costs C1 (1,474) - 207,440 (208,914) Total changes in ownership interests Total transactions with owners of the Company 30,598 - 30,598 (14,591) (14,591) - - - 207,440 (208,914) (14,591) Balance at 28 June 2015 208,526 (208,907) 7,308 Balance at 29 June 2015 208,526 (208,907) 7,308 Total comprehensive income for the year Profit Cash flow hedges Foreign operations - foreign currency translation differences Total comprehensive income for the year Transactions with owners of the Company Contributions and distributions employee share schemes Dividends Total contributions and distributions D4 A5 Total transactions with owners of the Company - - - - - - - - - - - - - - - - Balance at 3 July 2016 208,526 (208,907) 16,553 - - 16,553 - (11,277) (11,277) (11,277) 12,584 - - - - - - - - - - - - - - - - - - - - - - - - - - - - (772) - 156 (7,450) - 30,598 (275) (275) (275) 30,323 - (14,591) - (14,591) - - - - (1,474) (1,474) - (16,065) (119) 6,808 (119) 6,808 - - (257) 16,553 (772) (257) (772) (257) 15,524 116 - 116 116 116 - - - - - - - 116 (11,277) (11,161) - (11,161) (772) (376) 11,171 The Notes on pages 40 to 72 are an integral part of these consolidated financial statements. 38 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only Consolidated Statement of Cash Flows For the financial year ended 3 July 2016 Consolidated ($000s) Note 2016 2015 Cash flows from operating activities Cash receipts from customers Cash paid to suppliers and employees Cash generated from operating activities Interest received Interest paid Income taxes paid Net cash from operating activities Cash flows from investing activities Acquisition of fixed assets Proceeds from sale of property, plant and equipment Acquisition of subsidiary, net of cash acquired Net cash used in investing activities Cash flows from financing activities Repayment of shareholder loans Proceeds from cash advance facility Share issue costs Dividends paid Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the year Effect of movement in exchange rates on cash held Cash and cash equivalents at the end of the year 169,891 147,834 (137,475) (122,166) 32,416 25,668 49 (723) (8,404) 23,338 (9,282) 21 (250) (9,511) - - - (11,277) (11,277) 2,550 2,343 (164) 4,729 34 (284) (5,958) 19,460 (4,686) 206 (2,323) (6,803) (5,524) 12,000 (4,222) (14,591) (12,337) 320 1,845 178 2,343 C5 B3 A7 A5 C5 C5 The Notes on pages 40 to 72 are an integral part of these consolidated financial statements. 39 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlysetting the scene Basis of consolidation Business combinations Lovisa Holdings Limited (the “Company”) is a for-profit company incorporated and domiciled in Australia with its registered office at 41-45 Camberwell Road, Hawthorn East, Victoria 3123. The consolidated financial statements comprise the Company and its subsidiaries (collectively the “Group” and individually the “Group companies”). The Group is primarily involved in the retail sale of fashion jewellery and accessories. Lovisa Holdings Limited reports within a retail financial period. The current financial year represents a 53 week period ended on the 3 July 2016 (2015: 52 week period ended 28 June 2015). This treatment is consistent with section 323D of Corporations Act 2001. The consolidated financial statements of the Group for the financial year ended 3 July 2016 were authorised for issue by the Board of Directors on 22 August 2016. Basis of accounting The consolidated financial statements and supporting notes form a general purpose financial report. It: • Has been prepared in accordance with the requirements of the Corporations Act 2001, Australian Accounting Standards (AASBs) including Australian Accounting Interpretations, adopted by the Australian Accounting Standards Board (AASB) and International Financial reporting Standards (IFRS) and Interpretations as issued by the International Accounting Standards Board; • Has been prepared on a historical cost basis except for derivative financial instruments which are measured at fair value. Non-current assets are stated at the lower of carrying amount and fair value less costs to sell; • Presents reclassified comparative information where required for consistency with the current year’s presentation; • Adopts all new and amended Accounting Standards and Interpretations issued by the AASB that are relevant to the operations of the Group and effective for reporting periods beginning on or after 1 July 2015. Refer to note D9 for further details; and • Does not early adopt any Accounting Standards and Interpretations that have been issued or amended but are not yet effective except as disclosed in note D10. Use of judgements and estimates In preparing these consolidated financial statements, management has made a number of judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets, liabilities, income and expenses. Actual results may differ from these estimates. Judgements and estimates which are material to the financial statements are outlined below: Assumptions and estimation uncertainties Information about assumptions and estimation uncertainties that have a significant risk of resulting in a material adjustment within the financial year ended 3 July 2016 are included in the following notes: • Note A6 – recognition of deferred tax assets: availability of future taxable profit against which carry forward tax losses can be used; • Note B5 – impairment test: key assumptions underlying recoverable amounts, including the recoverability of goodwill; and • Notes B7 and D3 – recognition and measurement of provisions and contingencies: key assumptions about the likelihood and magnitude of an outflow of resources. The Group accounts for business combinations using the acquisition method when control is transferred to the Group. the consideration transferred in the acquisition is generally measured at fair value, as are the identifiable net assets acquired. Any goodwill that arises is tested annually for impairment (see note B5). Any gain on a bargain purchase is recognised in profit or loss immediately. Transaction costs are expensed as incurred, except if related to the issue of debt or equity securities (see note C1). the consideration transferred does not include amounts related to the settlement of pre-existing relationships. Such amounts are generally recognised in profit or loss. Any contingent consideration payable is measured at fair value at the acquisition date. If the contingent consideration is classified as equity, then it is not remeasured and settlement is accounted for within equity. Otherwise, subsequent changes in the fair value of the contingent consideration are recognised in profit or loss. Acquisition of entities under common control Lovisa Holdings Limited was incorporated on 6 November 2014. On 18 December 2014, as part of a reorganisation of the corporate structure of the Group, Lovisa Holdings Limited became the new holding company and parent company of the Group. As part of this restructure, Lovisa Pty Limited and Lovisa International Pte. Limited became subsidiaries of Lovisa Holdings Limited. The acquisition of Lovisa Pty Limited and Lovisa International Pte. Limited by Lovisa Holdings Limited falls outside the scope of IFRS 3 ‘Business Combinations’ as a common control transaction. There was no change in control of the group as a result of the internal reorganisation. In order to reflect the economic substance of the transaction, the consolidated financial statements of Lovisa Holdings Limited have been presented as a continuation of business with the pre-existing accounting book values of assets and liabilities of Lovisa Pty Limited and Lovisa International Pte. Limited as at 18 December 2014. Subsidiaries Subsidiaries are all entities over which the Group has control. The Group controls an entity when the Group is exposed to, or has rights to, variable returns from its investment with the entity and has the ability to affect those returns through its power to direct activities of the entity. The financial results of subsidiaries are included in the consolidated financial information from the date that control commences until the date that control ceases. The accounting policies of subsidiaries have been changed when necessary to align them with the policies adopted by the Group. Transactions eliminated on consolidation Intra-group balances and transactions, and any unrealised income and expenses arising from intra-group transactions, are eliminated. Foreign currency Functional and presentation currency These consolidated financial statements are presented in Australian dollars, which is the Company’s functional currency and the functional currency of the majority of the Group. the Company is of a kind referred to in ASIC Corporations (Rounding in Financial/Directors’ Reports) Instrument 2016/191 and in accordance with that instrument all financial information presented in Australian dollars has been rounded to the nearest thousand unless otherwise stated. 40 NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only Translation of foreign currency transactions transactions in foreign currencies are translated to the respective functional currencies of Lovisa at the exchange rates at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the reporting date are retranslated to the functional currency at the exchange rate at that date. Non-monetary assets and liabilities denominated in foreign currencies that are measured at fair value are retranslated to the functional currency at the exchange rate at the date that the fair value was determined. Non-monetary items in a foreign currency that are measured in terms of historical cost are translated using the exchange rate at the date of the transaction. Foreign currency differences arising on retranslation are recognised in profit or loss. Foreign operations The assets and liabilities of foreign operations are translated to Australian dollars at exchange rates at the end of the reporting period. The income and expenses of foreign operations are translated to Australian dollars at exchange rates at the dates of the transactions. Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and are translated at the exchange rates at the end of the reporting period. Foreign currency differences are recognised in other comprehensive income, and presented in the foreign currency translation reserve in equity. When a foreign currency operation is disposed of, the cumulative amount in the translation reserve related to that foreign operation is transferred to profit or loss on disposal of the entity. When the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely to occur in the foreseeable future, foreign exchange gains and losses arising from such a monetary item that are considered to form part of a net investment in a foreign operation are recognised in other comprehensive income, and are presented in the translation reserve in equity. About the Notes to the financial statements The notes include information which is required to understand the financial statements and is material and relevant to the operations, financial position and performance of the Group. Information is considered material and relevant if, for example: • The amount with respect to the information is significant because of its size or nature; • the information is important for understanding the • • results of the group; It helps to explain the impact of significant changes in the Group’s business; or It relates to an aspect of the group’s operations that is important to its future performance. Subsequent events There are no matters or circumstances that have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the Group, the result of those operations, or the state of affairs of the Group in future financial years. NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS 41 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only business performance This section highlights key financial performance measures of the Lovisa Group’s operating segments, as well as Group financial metrics incorporating revenue, earnings, taxation and dividends. A1 Operating segments (a) Basis for segmentation The Chief Operating Decision Maker (CODM) for Lovisa Holdings Limited and its controlled entities, is the Managing Director (MD). The Group has the following strategic divisions, which are its reportable segments. These divisions offer similar products and services, but are managed separately due to the allocation of management resources between these regional areas and assessed separately based on information provided to the MD and the Group’s management team. Internal sales reports of each segment are reviewed on a daily basis to monitor and evaluate segmental performance. The following summary describes the operations of each reportable segment. Reportable segments Australia & New Zealand Rest of World Operations Retail of women’s jewellery and accessories Retail of women’s jewellery and accessories (b) Information about reportable segments Information related to each reportable segment is set out below. Reportable Segments ($000s) Australia & NZ Rest of World Eliminations Total consolidated 2016 Restated 2015 2016 Restated 2015 2016 Restated 2015 2016 2015 108,401 102,212 45,060 32,048 - - 153,461 134,260 5,691 6,256 1,798 2,222 (7,489) (8,478) - - 114,092 108,468 46,858 34,270 (7,489) (8,478) 153,461 134,260 External revenues Inter-segment revenue Segment revenue Interest income Interest expense 1 4 (722) (283) 48 (1) 30 (1) Depreciation and amortisation (4,116) (4,522) (1,918) (1,479) Segment profit (loss) before tax and reversal of buy-back Reversal of buy-back of company shares 17,702 16,292 5,846 6,091 - 14,756 - - Segment profit (loss) before tax 17,702 31,048 5,846 6,091 - - - - - - - - - 49 34 (723) (284) (6,034) (6,001) 80 23,548 22,463 - - 14,756 80 23,548 37,219 All intra-segment revenue and expenses have been eliminated on consolidation in the information above. There are no differences in the measurements of the reportable segments’ assets and liabilities and the entity’s assets and liabilities. The 2015 result has been adjusted to reflect the updated transfer pricing policy implemented during the year. 42 NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only A1 Operating segments (CONTINUED) (c) Geographic information The segments are managed on a regional basis, operating in Australia and New Zealand with the Rest of the World consisting of Singapore, South Africa, Malaysia, the United Kingdom and the Group’s franchise stores in the Middle East. Geographic revenue information is included in Note A2. In presenting the following information, segment assets were based on the geographic location of the assets. ($000s) a) Australia b) New Zealand c) Singapore d) South Africa e) Malaysia f) United Kingdom total 2016 2015 Non-current assets (i) Non-current assets (i) 6,876 1,132 1,389 2,344 657 725 13,123 6,125 377 1,292 1,823 782 - 10,400 (i) Excluding financial instruments, deferred tax assets, employee benefit assets and intangible assets. A2 Revenue Revenue by nature and geography The geographic information below analyses the Group’s revenue by the country of domicile. In presenting the following information, segment revenue has been based on the geographic location of customers. ($000s) Sale of Goods Franchise Income Total Sale of Goods Franchise Income Total 2016 2015 a) Australia b) New Zealand c) Singapore d) South Africa e) Malaysia f) United Kingdom g) Middle East total 98,823 9,578 17,551 18,182 7,949 530 - 152,613 a) Revenue recognition and measurement - - - - - - 848 848 98,823 9,578 17,551 18,182 7,949 530 848 94,839 7,373 14,312 10,659 6,470 - - 153,461 133,653 - - - - - - 94,839 7,373 14,312 10,659 6,470 - 607 607 607 134,260 Revenue is recognised when the significant risks and rewards of ownership have been transferred to the customer, recovery of the consideration is probable, the associated costs and possible return of goods can be estimated reliably, there is no continuing management involvement with the goods, and the amount of revenue can be measured reliably. Revenue is measured net of returns and trade discounts. The following specific recognition criteria must also be met before revenue is recognised: Sale of Goods Revenue from the sale of fashion jewellery is recognised when the significant risks and rewards of ownership have been transferred to the buyer. Franchise income Franchise income, which is generally earned based upon a percentage of sales is recognised on an accrual basis. NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS 43 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlyA3 Expenses Expenses by nature Consolidated ($000s) Lease expense Salaries and employee benefits expense Wages and salaries Compulsory social security contributions Increase in liability for long-service leave Share-based payment expense Total salaries and employee benefits expense 2016 24,516 36,362 3,380 122 116 39,980 2015 22,087 32,252 2,793 74 - 35,119 Reversal of/(provision for) buy-back of company shares In previous years the Group made provision for the buy-back of shares from Centerville Pty Ltd, a private vehicle owned by the CEO. As a result of the IPO, and in accordance with the prospectus disclosures, the provision was reversed in FY2015. A4 Earnings per share (EPS) Calculation methodology The calculation of basic earnings per share has been based on the following profit attributable to ordinary shareholders and weighted-average number of ordinary shares outstanding. The calculation of diluted earnings per share has been based on the following profit attributable to ordinary shareholders and weighted-average number of ordinary shares outstanding after adjustment for the effects of all dilutive potential ordinary shares. EPS for profit attributable to ordinary shareholders of Lovisa Holdings Limited Basic EPS (cents) Diluted EPS (cents) 2016 15.76 15.74 2015 29.14 29.14 Profit attributable to ordinary shareholders ($000s) 16,553 30,598 Weighted average number of ordinary shares for basic EPS (shares)1 105,000,000 105,000,000 Weighted average number of ordinary shares and potential ordinary shares for diluted EPS (shares)1 105,193,666 105,000,000 1Due to the number of ordinary shares increasing subsequent to the reorganisation of the Group and associated capital, the calculation of basic and diluted earnings per share for FY2015 has been adjusted as if the transaction took place 12 months prior. Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share 105,000,000 105,000,000 2016 2015 Adjustments for calculation of diluted earnings per share: Options performance Rights 188,333 5,333 - - Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share 105,193,666 105,000,000 Information concerning the classification of securities i) Options and performance rights Options and performance rights granted to employees under the Lovisa Holdings Long Term Incentive Plan are considered to be potential ordinary shares. They have been included in the determination of diluted earnings per share if the required hurdles would have been met based on the company’s performance up to the reporting date, and to the extent to which they are dilutive. The options and performance rights have not been included in the determination of basic earnings per share. Details relating to the options are set out in note D4. 44 NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only A5 Dividends The Board may pay any interim and final dividends that, in its judgement, the financial position of the Company justifies. The Board may also pay any dividend required to be paid under the terms of issue of a Share, and fix a record date for a dividend and the timing and method of payment. The following dividends were declared and paid by the Company for the year. Consolidated ($000s) 4.07 cents per qualifying ordinary share (2015: 758.73 cents) 6.67 cents per qualifying ordinary share (2015: 6.67 cents) 2016 4,273 7,004 2015 7,587 7,004 11,277 14,591 Dividends in relation to FY2014 of $7,587,000 were paid to shareholders of Lovisa Pty Ltd (share capital: $1,000,000), prior to the reorganisation of the Group. After the reporting date, the following dividends were proposed by the Board of Directors. The dividends have not been recognised as liabilities and there are no tax consequences. Consolidated ($000s) 2.00 cents per qualifying ordinary share (2015: 4.07 cents) Consolidated ($000s) Dividend franking account 2016 2,100 2,100 2015 4,274 4,274 2016 2015 Franking credits available for subsequent reporting periods based on a tax rate of 30.0% (2015: 30%) 2,308 2,543 A6 Income taxes Recognition and measurement Income tax on the profit or loss for the years presented comprises current and deferred tax. Income tax is recognised in the statement of profit or loss except to the extent that it relates to items recognised directly in equity, in which case it is recognised in equity. Current tax is the expected tax payable on the taxable income for the year, using tax rates enacted or substantially enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. The following differences are not provided for: reversal of buy back of company shares, goodwill not deductible for tax purposes, the initial recognition of assets or liabilities that affect neither accounting nor taxable profit, and differences relating to investments in subsidiaries to the extent that they will probably not reverse in the foreseeable future. The amount of deferred tax provided is based on the expected manner of realisation or settlement of the carrying amount of assets and liabilities, using tax rates enacted or substantively enacted at the balance sheet date. A deferred tax asset is recognised only to the extent that it is probable that future taxable profits will be available against which the asset can be utilised. Deferred tax assets are reduced to the extent that it is no longer probable that the related tax benefit will be realised. Additional income taxes that arise from the distribution of dividends are recognised at the same time as the liability to pay the related dividend is recognised. (a) Amounts recognised in profit or loss Consolidated ($000s) Current tax expense Current period Deferred tax benefit Origination and reversal of temporary differences 2016 2015 6,218 6,218 777 777 7,369 7,369 (748) (748) Total income tax expense 6,995 6,622 NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS 45 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlyA6 Income taxes (continued) (b) Reconciliation of effective tax rate Consolidated ($000s) Profit before tax from continuing operations Tax at the Australian tax rate of 30% (2015: 30%) Effect of tax rates in foreign jurisdictions Non-deductible expenses Tax exempt income Utilisation of carried-forward tax losses Current year losses for which no deferred tax asset is recognised (c) Deferred tax assets and liabilities reconciliation 2016 23,548 7,064 (384) 225 (8) (24) 122 2015 37,219 11,166 (577) 460 (4,427) - - 6,995 6,622 Consolidated ($000s) Property, plant and equipment Employee benefits Provisions Other items transaction costs Carry forward tax losses Deferred tax expense Net deferred tax assets Statement of financial position Statement of profit or loss 2016 (397) 719 754 43 704 - 2015 217 667 843 (75) 1,013 876 1,823 3,541 2016 563 (160) 92 (27) 309 - 777 2015 (75) (170) (288) 92 (381) 74 (748) Presented in the Statement of financial position as follows: Deferred tax assets 1,823 3,541 The defered tax assets recognised in 2015 based on provisional numbers of an acquisition have been derecognised when final numbers were trued up at 3 July 2016. Unused tax losses for which no deferred tax asset has been recognised total $907,000 (2015: nil). (d) Expected settlement of deferred tax balances Consolidated ($000s) Deferred tax assets expected to be settled within 12 months Deferred tax assets expected to be settled after 12 months Deferred tax liabilities expected to be settled within 12 months Deferred tax liabilities expected to be settled after 12 months 2016 1,604 863 2,467 302 342 644 2015 1,796 1,897 3,693 151 - 151 Net deferred tax assets 1,823 3,541 46 NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only A7 Acquisition of subsidiary On 10 April 2015 the Group acquired 100% of the stores and voting interests in DCK Jewellery South Africa (Pty) Ltd. (a) Consideration transferred The following table summarises the acquisition-date fair value of each major class of consideration transferred. Consolidated ($000s) Cash Deferred consideration Total consideration transferred 2,153 250 2,403 (b) Identifiable assets acquired and liabilities assumed The following table summarises the recognised amounts of assets acquired and liabilities assumed at the acquisition date. In thousands of dollars Property, plant and equipment Inventories Trade and other receivables Cash and cash equivalents Deferred tax assets Trade and other payables Total identifiable net assets acquired Measurement of fair values Note B3 Revised 19 434 234 (171) - (455) 61 The valuation techniques used for measuring the fair value of material assets acquired were as follows: Assets acquired Valuation technique Property, plant and equipment Items have been written-down to their net recoverable value based on whether the fixed assets would continue to be utilised by the business or replaced. Remaining asset values have been assessed by the Company to ensure valuation is in line with the expected benefits to accrue to the business over the remaining useful lives of the assets. Deferred tax assets Revised - Deferred tax assets of $984,000 have not been recorded on the basis the utilisation of carried forward tax losses is not expected to be fully realised in the immediate course of business due to the isolation of tax losses within the legal entity in accordance with provisional fair value acquisition accounting principles. Inventories The fair value was determined based on the estimated selling price in the ordinary course of business. All trade and other receivable balances were valued at cost and are fully recoverable. (c) Goodwill Goodwill arising from the acquisition has been recognised as follows: Consolidated ($000s) Consideration transferred Fair value of identifiable assets Goodwill recognised at 28 June 2015 Revision of fair value of identifiable assets Goodwill Note (a) 2,403 (1,045) 1,358 984 2,342 This adjustment relates to the acquisition of DCK Jewellery South Africa (Pty) Ltd, moving provisional numbers that were initially booked on acquisition through to final fair values. NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS 47 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only Asset Platform This section outlines the key operating assets owned and liabilities incurred by the Group. B1 Trade and other receivables Recognition and measurement Trade and other receivables are initially recognised at fair value and subsequently stated at their amortised cost using the effective interest method, less impairment losses. Consolidated ($000s) Trade receivables Deposits prepayments Other receivables Impairment of receivables Note 2016 375 1,214 610 94 2,293 2015 752 951 367 77 2,147 Recoverability of receivables is assessed monthly to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated. An impairment loss is recognised in profit or loss if the carrying amount of an asset exceeds its recoverable amount. The recoverable amount of the Group’s receivables carried at amortised cost is calculated as the present value of estimated future cash flows, discounted at the original effective interest rate (i.e. the effective interest rate computed at initial recognition of these financial assets). Significant receivables are individually assessed for impairment. Receivables with a short duration are not discounted. Information about the Group’s exposure to credit and market risks, and impairment losses for trade and other receivables is disclosed in Note C4. B2 Inventories Recognition and measurement Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Cost includes the product purchase cost, import freight and duties together with other costs incurred in bringing inventory to its present location and condition using the weighted average cost method. All stock on hand relates to finished goods. Costs of goods sold comprises purchase price from the supplier, cost of shipping product from supplier to warehouse, shrinkage and obsolescence. Warehouse and outbound freight costs are reported as distribution expenses. Inventories recognised as expenses during 2016 and included in cost of sales amount to $34,564,000 (2015: $26,764,000). During 2016 inventories of $4,801,000 (2015: $3,854,000) were written down to net realisable value and included in cost of sales. B3 Property, plant and equipment Recognition and measurement Owned Assets Items of property, plant and equipment are stated at cost less accumulated depreciation. Cost includes expenditures that are directly attributable to the acquisition of the assets. The cost of acquired assets includes estimates of the costs of dismantling and removing the items and restoring the site on which they are located where it is probable that such costs will be incurred. Subsequent costs The Group recognises in the carrying amount of an item of property, plant and equipment the cost of replacing part of such an item when that cost is incurred if it is probable that the future economic benefits embodied within the item will flow to the entity and the cost of the item can be measured reliably. All other costs are recognised in the profit or loss as an expense as incurred. Depreciation and amortisation Depreciation is recognised in profit or loss on a straight-line basis over the estimated useful life on all property, plant and equipment. Land is not depreciated. The residual value, the useful life and the depreciation method applied to an asset are re-assessed at least annually. Derecognition An item of property, plant and equipment is derecognised upon disposal or when no future economic benefits are expected from its use. Gains and losses on disposals are determined by comparing disposal proceeds with the carrying amount of the disposed asset and are recognised in the profit or loss in the year the disposal occurs. 48 NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlyB3 Property, plant and equipment (continued) Reconciliation of carrying amount Consolidated ($000s) Depreciation policy Cost Note Leasehold improvements Hardware and software Fixtures and fittings Office equipment Total Lease term 3 years 3 years 3 years Balance at 30 June 2014 20,621 1,879 431 Additions Acquisitions through business combinations A7 Disposals Effect of movements in exchange rates 4,012 - (1,502) 269 634 19 (67) 16 4 - - - 17 36 - - - 22,948 4,686 19 (1,568) 285 Balance at 28 June 2015 23,400 2,482 436 53 26,371 Balance at 29 June 2015 23,400 2,482 Additions Disposals Effect of movements in exchange rates Balance at 3 July 2016 8,379 (3,320) (306) 28,153 436 283 - - 53 26,371 - - - 9,282 (3,414) (327) 620 (94) (21) 2,987 719 53 31,912 Consolidated ($000s) Accumulated depreciation and impairment losses Balance at 30 June 2014 Depreciation Disposals Effect of movements in exchange rates Note Leasehold improvements Hardware and software Fixtures and fittings Office equipment Total (9,702) (1,251) (5,475) (447) 1,238 (79) 48 (7) (207) (61) - - (10) (11,170) (18) (6,001) - - 1,286 (86) Balance at 28 June 2015 (14,017) (1,657) (269) (27) (15,971) Balance at 29 June 2015 Depreciation Disposals Effect of movements in exchange rates (14,017) (1,657) (5,356) (535) 3,148 (20) 83 5 (269) (127) - - (27) (15,971) (16) (6,034) - - 3,231 (15) Balance at 3 July 2016 (16,245) (2,104) (396) (43) (18,789) Carrying amounts At 30 June 2014 At 28 June 2015 At 3 July 2016 10,919 9,382 11,908 628 825 883 224 167 323 7 25 10 11,778 10,400 13,123 NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS 49 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only B4 Intangible assets and goodwill Recognition and measurement Goodwill Goodwill arising on the acquisition of subsidiaries is measured at cost less accumulated impairment losses. Amortisation Goodwill is not amortised. (a) Reconciliation of carrying amount Consolidated ($000s) Cost Balance at 30 June 2014 Acquisitions through business combination Effect of movements in exchange rates Balance at 28 June 2015 Balance at 29 June 2015 Finalisation of purchase price adjustment from previous business combination Effect of movements in exchange rates Balance at 3 July 2016 Note Goodwill 259 1,358 (7) 1,610 1,610 984 (522) 2,073 B5 Impairment of Property, plant and equipment and Intangible assets and goodwill Recognition and measurement Impairment The carrying amounts of the Group’s property, plant and equipment, and intangible assets and goodwill, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated in line with the calculation methodology listed below. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. Calculation of recoverable amount The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment test Impairment testing for CGUs containing goodwill For the purpose of impairment testing, goodwill is allocated to the Group’s CGUs identified by country. The recoverable amount of each CGU was based on its value in use, determined by discounting the future cash flows to be generated from the continuing use of the CGU. Key assumptions used in the calculation of value in use were as follows: In Percent Discount rate Budgeted EBITDA growth rate (average of next five years) 2016 12.7% 5.0% 2015 12.7% 5.0% The discount rate was a pre-tax measure based on the rate of 10-year government bonds issued by the government in the relevant market and in the same currency as the cash flows, adjusted for a risk premium to reflect both the increased risk of investing in equities generally and the systemic risk of the specific CGU. Five years of cash flows were included in the discounted cash flow model with a long-term growth rate into perpetuity determined as the lower of the nominal GDP rates for the countries in which the CGU operates and the long-term compound annual EBITDA growth rate estimated by management. Budgeted EBITDA was based on expectations of future outcomes taking into account past experience, adjusted for the anticipated revenue growth with FY17 balances based on budgeted results. Beyond this period, revenue growth was projected taking into account the growth levels experienced over the past five years and the estimated sales volume and price growth for the next five years. If no growth was budgeted to occur no impairment would result. 50 NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only B5 Impairment of Property, plant and equipment and Intangible assets and goodwiLl (continued) Reversals of impairment An impairment loss in respect of goodwill is not reversed. In respect of other assets, impairment losses recognised in previous years are assessed at each reporting date for any indications that the loss has decreased or no longer exists. An impairment loss is reversed if there has been a change in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation, if no impairment loss had been recognised. There were no material reversals of impairment in the current or prior year. B6 Trade and other payables Recognition and measurement Liabilities for trade creditors and other amounts are carried at their amortised cost. Payables to related parties are carried at the principal amount. Interest, when charged by the lender, is recognised as an expense on an accrual basis. Consolidated ($000s) Trade payables Non-trade payables and accrued expenses 2016 4,292 4,058 8,350 2015 4,677 3,093 7,770 Trade payables are unsecured and are usually paid within 30 days of recognition. Information about the Group’s exposure to currency and liquidity risk is included in Note C4. B7 Provisions Recognition and measurement A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as a finance cost. A provision for dividends is not recognised as a liability unless the dividends are declared, determined or publicly recommended on or before the reporting date. Consolidated ($000s) Site restoration Straight line rent and lease incentive Onerous lease Other provisions Balance at 29 June 2015 Provisions made during the year Provisions used during the year Provisions released during the year Effect of movement in exchange rates Balance at 3 July 2016 Current Non-current 1,500 557 (319) - (17) 1,721 109 1,612 1,721 916 112 (232) - (5) 791 82 709 791 799 - (388) - - - 240 - - - Total 3,215 909 (939) - (22) 411 240 3,163 224 187 411 240 - 240 655 2,508 3,163 NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS 51 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only B7 Provisions (CONTINUED) Recognition and measurement (continued) (a) Site restoration Description In accordance with the Group’s legal requirements, a provision for site restoration in respect of make good of leased premises is recognised when the premises are occupied. The provision is the best estimate of the present value of the expenditure required to settle the restoration obligation at the reporting date, based on current legal requirements and technology. Future restoration costs are reviewed annually and any changes are reflected in the present value of the restoration provision at the end of the reporting period. The amount of the provision for future restoration costs is capitalised and is depreciated in accordance with the policy set out above. The unwinding of the effect of discounting on the provision is recognised as a finance cost. Key Estimates Expenditure to settle the restoration obligation at the end of the lease term is based on the Company’s best estimate. (b) Straight line rent and lease incentive Description Lease payments are recognised on a straight-line basis over the lease term. The lease incentive liability in relation to non-cancellable operating leases are offset against lease rental expense on a straight line basis over the lease term (generally three to five years). Key Estimates No major estimation required in the calculation of these provisions. c) Onerous leases Description Onerous leases arise when the cost of exiting an existing lease is greater than the loss on the sub-lease arrangement. In these circumstances, the best estimate is made of the expenditure required to settle the present obligation at the end of the reporting period with a provision made based on the least net cost alternative of exiting the lease. Provisions are based on the excess of the cash flows for the unavoidable costs in meeting the obligations under the lease over the unrecognised estimated future economic benefits from the lease. Where the Group has agreed to exit an existing lease early, these balances have been accrued for at year-end. Key Estimates • Sub-lease party to undertake rental in line with agreements • Expenditure to settle the lease at the end of the lease term is based on the Company’s best estimate B8 Employee benefits Recognition and measurement Long-term service benefits The Group’s net obligation in respect of long-term service benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The obligation is calculated using expected future increases in wage and salary rates including related on-costs and expected settlement dates, and is discounted using high quality Australian corporate bond rates at the balance sheet date which have maturity dates approximating to the terms of the Group’s obligations. Short-Term Benefits Liabilities for employee benefits for wages, salaries and annual leave that are expected to be settled within 12 months of the reporting date represent present obligations resulting from employees’ services provided to reporting date, are calculated at undiscounted amounts based on remuneration wage and salary rates that the Group expects to pay as at reporting date including related on-costs, such as workers compensation insurance and payroll tax. 52 NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only B8 Employee benefits (continued) Recognition and measurement (continued) Consolidated ($000s) Current Liability for annual leave Total employee benefit liabilities Consolidated ($000s) Non-Current Liability for long-service leave Total employee benefit liabilities 2016 2015 1,594 1,594 1,382 1,382 2016 2015 401 401 279 279 For details on the related employee benefit expenses, see Note A3. Defined contribution plans A defined contribution plan is a post-employment benefit plan under which an entity pays fixed contributions into a separate entity and will have no legal or constructive obligation to pay further amounts. Obligations for contributions to defined contribution plans are expensed as the related service is provided. Prepaid contributions are recognised as an asset to the extent that a cash refund or a reduction in future payments is available. NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS 53 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlyRisk and Capital Management This section discusses the Group’s capital management practices, as well as the instruments and strategies utilised by the Group in minimising exposures to and impact of various financial risks on the financial position and performance of the Group. C1 Capital and reserves Recognition and measurement Ordinary shares Initially, share capital is recognised at the fair value of the consideration received by the Company. Any transaction costs arising on the issue of ordinary shares are recognised directly in equity as a reduction of the share proceeds received. (a) Share capital On issue at beginning of year Reallocation as part of business reorganisation Issued as part of business reorganisation transaction costs On issue at end of year No. of Ordinary Shares Value of Ordinary Shares 2016 '000's 105,000 - - - 2015 '000's 1,100 (1,100) 105,000 - 2016 2015 '$000's '$000's 208,526 1,086 - - - (1,086) 210,000 (1,474) 105,000 105,000 208,526 208,526 All ordinary shares rank equally with regard to the Company’s residual assets. Share capital reallocated for statutory reporting purposes from being the share capital of Lovisa Pty Ltd and Lovisa International Pte Ltd in 2014 to being the share capital of Lovisa Holdings Limited, created as part of the internal reorganisation during the previous financial year. (i) Ordinary shares The Company does not have authorised capital or par value in respect of its issued shares. All issued shares are fully paid. The holders of these shares are entitled to receive dividends as declared from time to time, and are entitled to one vote per share at general meetings of the Company. All rights attached to the Company’s shares held by the Group are suspended until those shares are reissued. (b) Nature and purpose of reserves (i) Common control reserve The Group’s accounting policy is to use book value accounting for common control transactions. The book value used is the book value of the transferor of the investment. Book value accounting is applied on the basis that the entities are part of a larger economic group, and that the figures from the larger group are the relevant ones. In applying book value accounting, no entries are recognised in profit or loss; instead, the result of the transaction is recognised in equity as arising from a transaction with shareholders. The book value (carry-over basis) is accounting on the basis that the investment has simply been moved from one Group owner to a new Group Company. In applying book value accounting, an adjustment may be required in equity to reflect any difference between the consideration received and the aggregated capital of the transferee. The adjustment is reflected in the ‘common control reserve’ capital account. (ii) Translation reserve The translation reserve reflects all foreign currency differences of the international entities upon translation to the Group’s functional currency. (iii) Hedging Reserve The hedging reserve comprises the effective portion of the cumulative net change in the fair value of hedging instruments used in cash flow hedges pending subsequent recognition in profit or loss as the hedged cash flows affect profit or loss. Cash flow hedges When a derivative is designated as a cash flow hedging instrument, the effective portion of changes in the fair value of the derivative is recognised in other comprehensive income and accumulated in the hedging reserve. Any ineffective portion of changes in the fair value of the derivative is recognised immediately in profit or loss. The amount accumulated in equity is retained in other comprehensive income and reclassified to profit or loss in the same period or periods during which the hedged item affects profit or loss. If the hedging instrument no longer meets the criteria for hedge accounting, expires or is sold, terminated or exercised, or the designation is revoked, then hedge accounting is discontinued prospectively. If the forecast transaction is no longer expected to occur, then the amount accumulated in equity is reclassified to profit or loss. 54 NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlyC1 Capital and reserves (CONTINUED) (b) Nature and purpose of reserves (continued) (iv) Share-based payments reserve The share-based payments reserve is used to recognise: • the grant date fair value of options issued to employees but not exercised • the grant date fair value of shares issued to employees • the grant date fair value of deferred shares granted to employees but not yet vested C2 Capital management The Group’s policy is to maintain a strong capital base so as to maintain investor, creditor and market confidence and to sustain future development of the business. The Board of Directors seeks to maintain a balance between the higher returns that might be possible with higher levels of borrowings and the advantages and security afforded by a sound capital position. In order to maintain or adjust the capital structure, the Group may adjust the amount of dividends paid to shareholders, return capital to shareholders or issue new shares. C3 Loans and borrowings Recognition and measurement Loans and borrowings are initially recognised at fair value less any directly attributable transaction costs. Subsequent to initial recognition, these liabilities are measured at amortised cost using the effective interest method. Consolidated ($000s) Current liabilities Bank overdraft Non-current liabilities Secured bank loans Note 2016 3,566 2015 1,908 12,000 12,000 Information about the Group’s exposure to interest rate, foreign currency and liquidity risk is included in Note C4. (a) Terms and debt repayment schedule Terms and conditions of outstanding loans are as follows: Consolidated ($000s) Currency Cash advance facility multi-option facility Corporate card facility Total interest-bearing liabilities AuD AuD AuD Nominal interest rate 3.89% 6.86% 17.99% 3 July 2016 28 June 2015 Year of maturity Face value Carrying amount Face value Carrying amount 2017 2016 2016 12,000 12,000 12,000 12,000 3,566 3,566 1,908 1,908 - - 78 78 15,566 15,566 13,986 13,986 The secured bank loans are secured by security interests granted by Lovisa Pty Ltd over all of its assets and the assets of Lovisa New Zealand Pty Ltd and Lovisa Singapore Pte Ltd in favour of the Commonwealth Bank of Australia (CBA). In addition, Lovisa Pty Ltd must ensure that the ‘EBITDA’ and ‘Total Assets’ of those members of the Group equal at least 75% of the ‘EBITDA’ and ‘Total Assets’ of the Group. Any such guarantor must grant security over all of their respective assets in favour of the CBA. NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS 55 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only C4 Financial instruments – Fair values and risk management C4 Financial instruments – Fair values and risk management (a) Fair values (a) Fair values Recognition and measurement Recognition and measurement A number of the Group’s accounting policies and disclosures require the measurement of fair values, for both financial and A number of the Group’s accounting policies and disclosures require the measurement of fair values, for both financial and non-financial assets and liabilities. non-financial assets and liabilities. The Group has begun to establish a control framework with respect to the measurement of fair values. This includes The Group has begun to establish a control framework with respect to the measurement of fair values. This includes overseeing all significant fair value measurements, including Level 3 fair values, by the CFO. overseeing all significant fair value measurements, including Level 3 fair values, by the CFO. The Group periodically reviews significant unobservable inputs and valuation adjustments. If third party information, such as The Group periodically reviews significant unobservable inputs and valuation adjustments. If third party information, such as broker quotes or pricing services, is used to measure fair values, then the Group assesses the evidence obtained from the broker quotes or pricing services, is used to measure fair values, then the Group assesses the evidence obtained from the third parties to support the conclusion that such valuations meet the requirements of IFRS, including the level in the fair value third parties to support the conclusion that such valuations meet the requirements of IFRS, including the level in the fair value hierarchy in which such valuations should be classified. Significant valuation issues are reported to the Group Audit, Business hierarchy in which such valuations should be classified. Significant valuation issues are reported to the Group Audit, Business Risk and Compliance Committee. Risk and Compliance Committee. When measuring the fair value of an asset or a liability, the Group uses market observable data as far as possible. Fair values When measuring the fair value of an asset or a liability, the Group uses market observable data as far as possible. Fair values are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows. are categorised into different levels in a fair value hierarchy based on the inputs used in the valuation techniques as follows. • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities. • Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. • Level 2: inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices). as prices) or indirectly (i.e. derived from prices). • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). • Level 3: inputs for the asset or liability that are not based on observable market data (unobservable inputs). If the inputs used to measure the fair value of an asset or a liability might be categorised in different levels of the fair value If the inputs used to measure the fair value of an asset or a liability might be categorised in different levels of the fair value hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the hierarchy, then the fair value measurement is categorised in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement. lowest level input that is significant to the entire measurement. The Group recognises transfers between levels of the fair value hierarchy at the end of the financial year during which the The Group recognises transfers between levels of the fair value hierarchy at the end of the financial year during which the change has occurred. change has occurred. The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels The following table shows the carrying amounts and fair values of financial assets and financial liabilities, including their levels in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at in the fair value hierarchy. It does not include fair value information for financial assets and financial liabilities not measured at fair value if the carrying amount is a reasonable approximation of fair value. fair value if the carrying amount is a reasonable approximation of fair value. 3 July 2016 3 July 2016 Carrying Amount Carrying Amount Fair Value Fair Value Consolidated ($000s) Consolidated ($000s) Note Note Hedging Hedging instruments instruments Loans and Loans and receivables receivables Other Other financial financial liabilities liabilities Total Total Level 1 Level 2 Level 1 Level 2 Level 3 Total Level 3 Total Financial liabilities Financial liabilities measured at fair measured at fair value value Derivatives Derivatives Financial assets not Financial assets not measured at fair measured at fair value value trade and other trade and other receivables receivables Cash and cash Cash and cash equivalents equivalents Financial liabilities Financial liabilities not measured at fair not measured at fair value value Bank overdrafts Bank overdrafts Secured bank loans Secured bank loans trade and other trade and other payables payables B1 B1 C5 C5 C5 C5 C3 C3 B6 B6 - - - - - - - - - - - - - - 909 909 909 909 2,293 2,293 8,295 8,295 10,588 10,558 3,566 3,566 12,000 12,000 909 909 909 909 - - - - 2,293 2,293 8,295 8,295 10,588 10,558 3,566 3,566 12,000 12,000 - - - - - - - - - - - - - - - - 8,350 8,350 8,350 8,350 15,566 15,566 8,350 8,350 23,916 23,916 - - - - - - - - - - - - - - - - - - 909 909 909 909 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 909 909 909 909 - - - - - - - - - - - - - - 56 NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlyC4 Financial instruments – Fair values and risk management (CONTINUED) (a) Fair values (continued) Recognition and measurement (continued) 28 June 2015 Carrying Amount Fair Value Consolidated ($000s) Note Hedging instruments Loans and receivables Other financial liabilities Total Level 1 Level 2 Level 3 Total Financial liabilities measured at fair value Derivatives Financial assets not measured at fair value trade and other receivables Cash and cash equivalents Financial liabilities not measured at fair value Bank overdrafts Secured bank loans trade and other payables B1 C5 C5 C3 B6 (30) (30) - - - - (30) (30) - - - - - - - 2,147 - 2,147 4,251 - 4,251 6,397 - 6,397 1,908 12,000 - 1,908 - 12,000 - 7,770 7,770 13,908 7,770 21,678 - - - - - - - - - (30) (30) - - (30) (30) - - - - - - - - - - - - - - - - - - - - - (i) Valuation technique and significant unobservable inputs The following tables show the valuation techniques used in measuring Level 2 and Level 3 fair values, as well as the significant unobservable inputs used. Financial instruments measured at fair value. Type Valuation technique Forward exchange contracts Market comparison technique: Fair value of forward exchange contracts is determined using forward exchange rates at the balance sheet date. These over-the-counter derivatives utilise valuation techniques maximising the use of observable market data where it is available. Significant unobservable inputs Inter-relationship between key unobservable inputs and fair value measurement Not applicable. Not applicable. Financial instruments not measured at fair value Type Valuation technique Significant unobservable inputs Secured bank loans Discounted cash flows. Not applicable. (ii) Transfers between Level 1 and 2 There were no transfers between Level 1 and Level 2 during the year. (iii) Level 3 fair values Transfer out of Level 3 There were no transfers out of Level 3 during the year. NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS 57 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only C4 Financial instruments – Fair values and risk management (CONTINUED) (b) Financial risk management The Group has exposure to the following risks arising from financial instruments: • credit risk (see (b)(ii)) • liquidity risk (see (b)(iii)) • market risk (see (b)(iv)) (i) Risk Management framework The Company’s Board of Directors has overall responsibility for the establishment and oversight of the Group’s risk management framework. The Board of Directors has established the Audit, Business Risk and Compliance Committee, which is responsible for developing and monitoring the Group’s risk management policies. The Committee reports regularly to the Board of Directors on its activities. The Group’s risk management policies are established to identify and analyse the risks faced by the Group, to set appropriate risk limits and controls and to monitor risks and adherence to limits. Risk management policies and systems are reviewed to reflect changes in market conditions and the Group’s activities. The Group, through its training and management standards and procedures, aims to maintain a disciplined and constructive control environment in which all employees understand their roles and obligations. The Audit, Business Risk and Compliance Committee oversees how management monitors compliance with the Group’s risk management policies and procedures, and reviews the adequacy of the risk management framework in relation to the risks faced by the Group. The Committee’s specific function with respect to risk management is to review and report to the Board that: a) the Group’s ongoing risk management program effectively identifies all areas of potential risk; b) adequate policies and procedures have been designed and implemented to manage identified risks; c) a regular program of audits is undertaken to test the adequacy of and compliance with prescribed policies; and d) proper remedial action is undertaken to redress areas of weakness. (ii) Credit risk Credit risk is the risk of financial loss to the Group if a customer or counterparty to a financial instrument fails to meet its contractual obligations, and arises principally from the Group’s receivables from customers and deposits placed for leased outlets. The Group’s credit risk on its receivables is recognised on the consolidated statement of financial position at the carrying amount of those receivable assets, net of any provisions for doubtful debts. Receivable balances and deposit balances are monitored on a monthly basis with the result that the Group’s exposure to bad debts is not considered to be material. Credit risk also arises from cash and cash equivalents and derivatives with banks and financial institutions. For banks and financial institutions, only independently rated parties with a minimum rating of ‘A’ are accepted by Lovisa. At the reporting date, the carrying amount of financial assets recorded in the financial statements, net of any allowances for impairment losses, represents the Group’s maximum exposure to credit risk. There were no significant concentrations of credit risk. Past due but not impaired As at 3 July 2016, no trade receivables were past due but not impaired (2015: nil). The other classes within trade and other receivables do not contain impaired assets and are not past due. (iii) Liquidity risk Liquidity risk is the risk that the Group will encounter difficulty in meeting the obligations associated with its financial liabilities that are settled by delivering cash or another financial asset. The Group’s approach to managing liquidity is to ensure, as far as possible, that it will have sufficient liquidity to meet its liabilities when they are due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Group’s reputation. Cash flow forecasts are updated and monitored weekly. In addition, the Group maintains the following lines of credit: • $12 million revolving cash advance facility that is secured by security interests granted by Lovisa Pty Ltd over all of its assets and the assets of Lovisa New Zealand Pty Ltd and Lovisa Singapore Pte Ltd in favour of the Commonwealth Bank of Australia (CBA). • $6 million multi option overdraft facility that is secured by security interests granted by Lovisa Pty Ltd over all of its assets in favour of the CBA. Exposure to liquidity risk The following are the remaining contractual maturities of financial liabilities at the reporting date. The amounts are gross and undiscounted, and include estimated interest payments and exclude the impact of netting agreements. 58 NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only- - - - - - - - - - - - - - C4 Financial instruments – Fair values and risk management (CONTINUED) (b) Financial risk management (continued) (iii) Liquidity risk (continued) 3 July 2016 Contractual cash flows Carrying amount Total 2 mths or less 2-12 mths 1-2 years 2-5 years More than 5 years Consolidated ($000s) Non-derivative financial liabilities Trade payables Bank overdrafts Secured bank loans Derivative financial liabilities Forward exchange contracts used for hedging: 4,292 3,566 4,292 3,566 12,000 12,000 4,292 - - - 3,566 - - - 12,000 19,858 19,858 4,292 3,566 12,000 - Outflow - Inflow total - - 25,633 6,861 18,772 (24,724) (6,532) (18,192) 909 909 329 580 - - - 28 June 2015 Contractual cash flows Consolidated ($000s) Non-derivative financial liabilities Trade payables Bank overdrafts Secured bank loans Derivative financial liabilities Forward exchange contracts used for hedging: - Outflow - Inflow Carrying amount Total 2 mths or less 2-12 mths 1-2 years 2-5 years More than 5 years 4,677 4,677 4,677 - 1,908 1,908 12,000 12,000 - - 1,908 - 18,585 18,585 4,677 1,908 - - 19,565 5,175 14,390 (19,595) (5,225) (14,370) (30) (30) (50) 20 - - - - - - - - - 12,000 12,000 - - - - - - - - - - The gross inflows/(outflows) disclosed in the above table represent the contractual undiscounted cash flows relating to derivative financial liabilities held for risk management purposes and which are usually not closed out before contractual maturity. The disclosure shows net cash flow amounts for derivatives that are net cash-settled and gross cash inflow and outflow amounts for derivatives that have simultaneous gross cash settlement. As disclosed in Notes C3, the Group has a secured bank loan which contains a loan covenant. A future breach of covenant may require the Group to repay the loan earlier than indicated in the above table. The interest payments on bank overdrafts and secured bank loans in the table above reflect market forward interest rates at the reporting date and these amounts may change as market interest rates change. The future cash flows on trade payables may be different from the amount in the above table as exchange rates change. Except for these financial liabilities, it is not expected that the cash flows included in the maturity analysis could occur significantly earlier, or at significantly different amounts. NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS 59 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlyC4 Financial instruments – Fair values and risk management (CONTINUED) (b) Financial risk management (continued) (iv) Market risk Market risk is the risk that changes in market prices – such as foreign exchange rates, interest rates and equity prices – will affect the Group’s income or the value of its holdings of financial instruments. The objective of market risk management is to manage and control market risk exposures within acceptable parameters, while optimising the return. The Group uses derivatives to manage market risks. All such transactions are carried out within the guidelines set by the Audit, Business Risk and Compliance Committee. The group also has begun to apply hedge accounting during the year in order to manage volatility in profit or loss. Currency risk The Group is exposed to currency risk to the extent that there is a mismatch between the currencies in which sales, purchases and borrowings are denominated and the respective functional currencies of Group companies. The presentation currency of the Group companies is the Australian dollar (AUD) which is the functional currency of the majority of Lovisa. The currencies in which transactions are primarily denominated are Australian dollars, Singapore dollars, US dollars and South African Rand. The Company’s foreign exchange policy is aimed at managing its foreign currency exposure in order to protect profit margins by entering into forward exchange contracts and currency options, specifically against movements in the USD rate against the AUD. The following table defines the range of cover that has been authorised by the Board relating to purchases over a defined period: Exposure Minimum Hedge Position Neutral Hedge Position Maximum Hedge Position purchases 0 to 6 months Purchases 7 to 9 months purchases 10 to 12 months Exposure to currency risk 60% 40% 30% 80% 50% 40% 100% 75% 50% The summary quantitative data about the Group’s exposure to currency risk as reported to the management of the Group is as follows: In thousands of Cash and cash equivalents Trade receivables Trade payables 3 July 2016 28 June 2015 SGD 1,920 - USD - 108 (127) (2,876) ZAR 1,951 10 (12) SGD 1,190 USD ZAR - 1,565 - 548 - (129) (3,521) (166) Net statement of financial position exposure 1,793 (2,768) 1,949 1,061 (2,972) 1,398 Sensitivity analysis A reasonably possible strengthening (weakening) of the USD, the SGD, or ZAR against all other currencies would have affected the measurement of financial instruments denominated in a foreign currency and affected profit or loss by the amounts shown below. The analysis assumes that all other variables, in particular interest rates, remain constant and ignores any impact of forecast sales and purchases. The translation of the net assets in subsidiaries with a functional currency other than the Australian dollar has not been included in the sensitivity analysis as part of the equity movement. There is no impact on equity as the foreign currency denominated assets and liabilities represent cash, receivables and payables. 60 NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlyC4 Financial instruments – Fair values and risk management (CONTINUED) (b) Financial risk management (continued) (iv) Market risk (continued) Sensitivity Analysis (continued) Effect in thousands of dollars 3 July 2016 SGD (5 percent movement) USD (5 percent movement) ZAR (5 percent movement) 28 June 2015 SGD (5 percent movement) USD (5 percent movement) ZAR (5 percent movement) Interest rate risk Profit or loss Strengthening Weakening (85) 132 (93) (51) 142 (67) 94 (146) 103 56 (156) 74 The Group is subject to exposure to interest rate risk as changes in interest rates will impact borrowings which bear interest at floating rates. Any increase in interest rates will impact Lovisa’s costs of servicing these borrowings which may adversely impact its financial position. This impact is not assessed to be material. Increases in interest rates may also affect consumer sentiment and the level of customer demand, potentially leading to a decrease in consumer spending. Exposure to interest rate risk The interest rate profile of the Group’s interest-bearing financial instruments as reported to the management of the Group is as follows: Consolidated ($000s) Variable-rate instruments Financial liabilities Nominal amount 2016 15,566 15,566 2015 13,908 13,908 Cash flow sensitivity analysis for variable rate instruments At 3 July 2016, if interest rates had changed by +/- 100 basis points from the year end rates with all other variables held constant, pre tax profit for the year would have been $122,000 lower/higher (28 June 2015 - $55,000 lower/higher), as a result of higher/lower interest expense from variable rate borrowings. There is no additional impact on equity. (c) Derivative assets and liabilities The Group holds derivative financial instruments to manage its foreign currency risk exposures. Recognition and measurement Derivative financial instruments are recognised initially at fair value; any directly attributable transaction costs are recognised in profit or loss as they are incurred. Subsequent to initial recognition, derivative financial instruments are measured at fair value, and changes therein are generally recognised in profit or loss. Determination of fair values A number of the Group’s accounting policies and disclosures require the determination of fair value, for both financial and non- financial assets and liabilities. Fair values have been determined for measurement and / or disclosure purposes based on the following methods. Forward rate contracts The fair value of forward exchange contracts is based on their quoted price, if available. If a quoted price is not available, then fair value is estimated by discounting the difference between the contractual forward price and the current forward price for the residual maturity of the contract using a credit-adjusted risk-free interest rate (based on government bonds). NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS 61 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlyC4 Financial instruments – Fair values and risk management (CONTINUED) (c) Derivative assets and liabilities (continued) Forward rate contracts (continued) The following table provides details of the derivative financial assets and liabilities included on the balance sheet: Consolidated ($000s) Current Investments Forward exchange contracts 2016 (909) (909) 2015 30 30 The following table indicates the periods in which the cash flows associated with cash flow hedges are expected to occur and the carrying amounts of the related hedging instruments. Consolidated ($000s) Forward exchange contracts: Assets Liabilities 2016 2015 Expected Cash Flows Expected Cash Flows Carrying Amount Total 12 mths of less More than 1 year Carrying Amount Total 12 mths of less More than 1 year - (909) (909) - (909) (909) - (909) (909) - - - - - - - - - - - - - - - A loss of $3,000 was included in other expenses on foreign currency derivatives not qualifying as hedges. C5 Cash flows Recognition and measurement Cash and cash equivalents comprise cash balances, and cash in transit and call deposits. Bank overdrafts that are repayable on demand and form an integral part of the entity’s cash management are included as a component of cash and cash equivalents for the purpose of the statement of cash flows. Consolidated ($000s) Bank balances Cash and cash equivalents in the statement of financial position Bank overdrafts used for cash management purposes Cash and cash equivalents in the statement of cash flows 2016 2015 8,295 (3,566) 4,729 4,251 (1,908) 2,343 62 NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlyC5 Cash flows (continued) Reconciliation of cash flows from operating activities Consolidated ($000s) Note 2016 2015 Cash flows from operating activities Profit Adjustments for: Depreciation Loss on sale of property, plant and equipment (Reversal of)/provision for buy back of company shares A3 Transaction costs taken to profit and loss Share based payments Fair value adjustment to derivatives C4 Exchange differences Change in inventories Change in trade and other receivables Change in deferred tax assets Change in derivatives Change in trade and other payables Change in current tax liabilities Change in provisions and employee benefits Net cash from operating activities 16,553 30,598 6,034 162 - - 116 3 1,154 24,022 (146) (23) 734 30 580 (2,141) 282 23,338 6,001 77 (14,756) 2,115 - - 933 24,968 (6,761) (113) (2,330) (30) 1,562 1,440 724 19,460 NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS 63 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlyOther Information This section includes mandatory disclosures to comply with Australian Accounting Standards, the Corporations Act 2001 and other regulatory pronouncements. D1 List of subsidiaries Set out below is a list of material subsidiaries of the Group. All subsidiaries are wholly owned, unless otherwise stated. Name Lovisa Australia Pty Ltd Lovisa Pty Ltd Lovisa International Pte Ltd Lovisa Singapore Pte Ltd Lovisa Accessories Pty Ltd DCK Jewellery South Africa (Pty) Ltd Lovisa New Zealand Pty Ltd Lovisa Malaysia Sdn Bhd Lovisa UK Ltd Lovisa Global Pte Ltd D2 Operating leases Recognition and measurement Principal place of business Australia Australia Singapore Singapore South Africa South Africa New Zealand malaysia United Kingdom Singapore Leases are classified at their inception as either operating or finance leases based on the economic substance of the agreement so as to reflect the risks and benefits incidental to ownership. Operating leases The minimum lease payments of operating leases, where the lessor effectively retains substantially all of the risks and benefits of ownership of the leased item, are recognised as an expense on a straight-line basis. The lease incentive liability in relation to the non-cancellable operating leases are offset against lease rental expense on a straight line basis over the lease terms (generally three to five years). (a) Leases as lessee The Group has a number of lease commitments related to the operation of its retail stores. The leases typically run for a period of 3 to 5 years, with an option to renew the lease after that date. Leases typically have an annual rental increase linked to CPI or a fixed annual increase. (i) Future minimum lease payments The future minimum lease payments under non-cancellable leases are payable as follows: Consolidated ($000s) Less than one year Between one and five years More than five years 2016 14,574 21,280 364 36,218 2015 14,454 19,039 83 33,576 D3 Commitments and contingencies (a) Guarantees Lovisa has guarantees outstanding to landlords and other parties to the value of $670,000 at 3 July 2016. (b) Capital commitments and contingent liabilities There are no capital commitments or contingent liabilities that exist at 3 July 2016 and 28 June 2015. 64 NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only D4 share-based payment arrangements The grant-date fair value of equity-settled share-based payment awards granted to employees is generally recognised as an expense, with a corresponding increase in equity, over the vesting period of the awards. The amount recognised as an expense is adjusted to reflect the number of awards for which the related service and non-market performance conditions are expected to be met, such that the amount ultimately recognised is based on the number of awards that meet the related service and non-market performance conditions at the vesting date. For share-based payment awards with non-vesting conditions, the grant-date fair value of the share-based payment is measured to reflect such conditions and there is no true-up for differences between expected and actual outcomes. (a) Descriptions of the share-based payment arrangements the Board has issued share option programmes that entitle key management personnel and senior management to purchase shares in the Company. Under these programmes, holders of vested options are entitled to purchase shares at the market price of the shares at the grant date. Currently, these programmes are limited to key management personnel and senior management. The key terms and conditions related to the grants under these programmes are as follows; all options are to be settled by physical delivery of shares. At 3 July 2016 the Group has the following share-based payment arrangements: (i) Share option programmes (equity-settled) FY2017 LTI - Performance Options Grant date/employee entitiled Options granted On 18 may 2016 Number of instruments (000’s) Vesting conditions Contractual life of options 3,460 20% compound increase in EBIT over 3 years, with 3 years a decrease in the number of options vesting down to a minimum of 10% compound EBIT growth over the 3 year period in line with the table below. total share options 3,460 The Board has determined that the threshold EPS target is 10% compound growth over the 3 year period and the stretch EPS target is 20% compound growth over the 3 year period. Company’s EPS over the Performance Period % of Performace Options that become exercisable Less than threshold equal to threshold Between threshold and stretch Nil 10% compound growth - 20% awarded 12.5% compound growth - 40% awarded 15% compound growth - 60% awarded 17.5% compound growth - 80% awarded Stretch 20% compound growth - 100% awarded No expense has been recognised in relation to these options as the performance period is the period from 4 July 2016 through to 30 June 2019, with the expense to be recognised over the vesting period as service is provided. 1,687,764 of these options are subject to shareholders approval. Initial Public Offering - Performance Options Grant date/employee entitiled Options granted Number of instruments (000’s) Vesting conditions On 23 December 2014 550 As per table below total share options 550 Contractual life of options 2.5 years The achievement of forecast EPS for FY15 (15.62c) will result in the award of one third of the options. The remaining two thirds of Options are subject to a performance condition based on the Company’s EPS over FY16 and FY17 (EPS Hurdle). The Board has determined that the threshold EPS target is 37.33c and the stretch EPS target is 41.23c over FY16 and FY17. NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS 65 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only D4 share-based payment arrangements (continued) (a) Descriptions of the share-based payment arrangements (continued) i) Share option programmes (equity-settled) (continued) Company’s EPS over the Performance Period % of Performace Options that become exercisable Less than threshold equal to threshold Nil 50% awarded Between threshold and stretch 50% - 100%, on a straight-line sliding scale Stretch 100% awarded These options are subject to shareholder approval. (ii) Performance rights (equity-settled) On 18 November 2015, the Group granted 20,000 and 16,000 performance rights to the former CFO and Head of Product respectively, which entitle them to acquire a Share for nil consideration at the end of the performance period, subject to satisfaction of specific performance conditions. The 20,000 performance rights were cancelled upon the resignation of the former CFO. (b) Measurement of fair values (i) Equity-settled share-based payment arrangements The fair value of the employee share options and performance rights (see (a)(i) and (a)(ii)) have been measured using the Black- Scholes formula. Service and non-market performance conditions attached to the transactions were not taken into account in measuring fair value. The inputs used in the measurement of the fair values at grant date of the equity-settled share-based payment plans were as follows. Fair value at grant date Share price at grant date 30 day vWAp share price at grant date Exercise price Expected volatility (weighted-average) Expected life (weighted-average) Expected dividends Risk-free interest rate (based on government bonds) Share option programme IPO LTI $0.386 $2.300 N/A $2.300 34% 2.5 years 4.67% 2.23% FY2017 LTI $0.237 $2.050 $2.100 $2.100 24.70% 3 years 5.11% 1.86% Expected volatility has been based on an evaluation of the historical volatility of the Company’s share price. (c) Reconciliation of outstanding share options The number and weighted average exercise prices of share options under the share option programmes (see (a)(i)) and performance rights (see (a)(ii)) were as follows. Number of options Weighted average exercise price Number of performance rights granted during the year Forfeited during the year Exercised during the year Outstanding at 3 July Exercisable at 3 July 2016 000’s 4,010 - - 4,010 - No options were issued or on issue in FY2015. (d) Expenses recognised in profit or loss For details on the related employee benefit expenses, see Note A3. 2016 $ $2.13 - - $2.13 - 2016 000’s 36 (20) - 16 - 66 NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlyD5 Related parties (a) Parent and ultimate controlling party Lovisa Holdings Limited is the parent entity and ultimate controlling party in the Group comprising itself and its subsidiaries. Material subsidiaries of the Group are listed in note D1. (b) Transactions with key management personnel (i) Key management personnel compensation The key management personnel compensation comprised the following: Consolidated ($000s) Short-term employee benefits Post-employment benefits Share based payment Other long term benefits 2016 1,390 62 100 146 1,699 2015 884 49 - 93 1,025 Compensation of the Group’s key management personnel includes salaries and non-cash benefits (see Note A3). Detailed remuneration disclosures are provided in the Remuneration report on pages 26 to 31. (ii) Key management personnel and Director transactions A number of key management personnel, or their related parties, hold positions in other companies that result in them having control or joint control over these companies. The aggregate value of outstanding balances relating to key management personnel and entities over which they have control or joint control were as follows: Consolidated ($000s) Transaction values for the year ended Balance outstanding as at Director Transaction 3 July 2016 28 June 2015 3 July 2016 28 June 2015 S Fallscheer Centerville Loan Receivable t Blundy Coloskye Loan Receivable - - (593) (43) - - - - Loans receivable from key management personnel were short-term loans over which interest was not charged. Any interest not charged would be trivial given the short-term nature of these loans. No write-downs or allowances for doubtful receivables have been recognised in relation to any loans receivable from key management personnel. (c) Other related party transactions Consolidated ($000s) 3 July 2016 28 June 2015 3 July 2016 28 June 2015 Transaction values for the year ended Balance outstanding as at a) Loans Loan Receivable Shareholder loan payable b) Expenses Expense recharges c) Sales Recharges - - 394 3 (65) 5,524 333 - - - (28) 2 - - (22) - Transactions between the Lovisa Group and BB Retail Capital and its related parties have been disclosed above due to BB Retail Capital continuing to be in a position of holding significant influence in relation to the Group, with representation on the Board of Directors. Lovisa has, and will continue to benefit from the relationships that its management team and BB Retail Capital have developed over many years of retail operating experience. BB Retail Capital currently provides certain property management services to Lovisa on an arm’s length basis including managing negotiations with landlords for new leases and lease renewals. This arrangement provides Lovisa with a strong potential negotiation partner when dealing with landlords, however the arrangement is also flexible as it can be cancelled at Lovisa’s discretion, after giving three months’ notice. Non property management related expense recharges are also priced on an arm’s length basis. All outstanding balances with other related parties are priced on an arm’s length basis and are to be settled in cash within two months post the end of the reporting year. None of the balances are secured. No expense has been recognised in the current year or prior year for bad or doubtful debts in respect of amounts owed by related parties. NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS 67 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only D6 Auditors’ remuneration Consolidated ($) a) KPMG Audit and review services Auditors of the Company - KPMG Australia Audit and review of financial statements Network firms of KPMG Australia Audit and review of financial statements Total remuneration for audit and review services Other services Auditors of the Company - KPMG Australia 2016 2015 199,240 108,000 20,760 220,000 72,000 180,000 In relation to other assurance, taxation and due diligence services 137,250 612,600 Network firms of KPMG Australia In relation to other assurance, taxation and due diligence services Total remuneration for other services Total remuneration of KPMG b) Non-KPMG audit firms Audit and review services Audit and review of financial statements Total remuneration for audit and review services Other services In relation to other assurance, taxation and due diligence services Total remuneration for other services Total remuneration of non-KPMG audit firms Total auditors remuneration D7 Deed of cross guarantee 16,842 154,092 374,092 18,978 18,978 165 165 19,143 393,235 15,536 628,136 808,136 19,213 19,213 20,353 20,353 39,566 847,702 Pursuant to ASIC Class Order 98/1418 (as amended) dated 13 August 1998, the wholly-owned subsidiaries listed below are relieved from the Corporations Act 2001 requirements for preparation, audit and lodgement of financial reports, and Directors’ reports. It is a condition of the Class Order that the Company and each of the subsidiaries enter into a Deed of Cross Guarantee. The effect of the Deed is that the Company guarantees to each creditor payment in full of any debt in the event of winding up of any of the subsidiaries under certain provisions of the Corporations Act 2001. If a winding up occurs under other provisions of the Act, the Company will only be liable in the event that after six months any creditor has not been paid in full. The subsidiaries have also given similar guarantees in the event that the Company is wound up. The subsidiaries subject to the Deed are: • Lovisa Australia Pty Ltd • Lovisa Pty Ltd Both of these companies became a party to the Deed on 18 June 2015, by virtue of a Deed of Assumption. A consolidated statement of profit or loss and other comprehensive income and consolidated statement of financial position, comprising the Company and controlled entities which are a party to the Deed, after eliminating all transactions between parties to the Deed of Cross Guarantee, at 3 July 2016 is set out as follows. 68 NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlyD7 Deed of cross guarantee (CONTINUED) Statement of profit or loss and other comprehensive income and retained earnings Consolidated ($000s) Revenue Cost of sales Gross profit Salaries and employee benefits expense Property expenses Distribution costs Depreciation Loss on disposal of property, plant and equipment IpO transaction costs Reversal of buy-back of company shares Other expenses Finance income Finance costs Profit before tax Tax expense Profit after tax Other comprehensive income for the year, net of tax Total comprehensive income for the year, net of tax Retained earnings at beginning of year Dividends recognised during the year Retained earnings at end of year 2016 100,387 (26,507) 73,880 (32,198) (17,035) (767) (3,726) (184) - - (3,075) 1 (706) 16,189 (4,736) 11,453 (772) 10,681 250 (11,277) 426 2015 96,431 (24,075) 72,356 (29,460) (16,970) (675) (4,181) (76) (2,115) 14,756 (4,841) 4 (283) 28,515 (4,551) 23,964 - 23,964 (9,123) (14,591) 250 NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS 69 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlyD7 Deed of cross guarantee (CONTINUED) Statement of financial position Consolidated ($000s) Assets Cash and cash equivalents Trade and other receivables Inventories Derivatives Total current assets Deferred tax assets Property, plant and equipment Investments Total non-current assets Total assets Liabilities Bank overdraft Trade and other payables Employee benefits - current Current tax liabilities Derivatives Provisions - current Total current liabilities Employee benefits - non-current Loans and borrowings Provisions - non current Total non-current liabilities Total liabilities Net assets Equity Issued capital Common control reserve Share based payments reserve Cash flow hedge reserve Retained earnings Total equity 3 July 2016 28 June 2015 2,055 6,587 10,062 - 18,704 1,541 6,876 210,000 218,417 237,121 3,566 6,474 1,404 874 909 357 13,584 401 12,000 1,916 14,317 27,901 1,107 14,725 9,256 30 25,118 2,430 6,125 210,000 218,555 243,673 1,908 13,273 1,225 2,471 - 595 19,472 279 12,000 2,221 14,500 33,972 209,221 209,701 208,526 208,526 925 116 (772) 426 925 - - 250 209,221 209,701 70 NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlyD8 Parent entity disclosures ($000s) Result of parent entity Profit for the year Other comprehensive income Total comprehensive income for the year Financial position of parent entity at year end Current assets total assets Current liabilities Total liabilities Total equity of parent entity comprising of: Share capital Share based payments reserve Accumulated losses Total equity (a) Parent entity accounting policies 2016 13,208 - 13,208 - 210,826 2,074 2,074 208,526 116 110 208,752 2015 5,183 - 5,183 - 211,013 4,307 4,307 208,526 - (1,820) 206,706 The financial information for the parent entity, Lovisa Holdings Limited, has been prepared on the same basis as the consolidated financial report, except as set out below. Investments in subsidiaries Investments in subsidiaries are accounted for at cost. (b) Parent entity contingent liabilities The parent entity did not have any contingent liabilities as at 3 July 2016. (c) Parent entity guarantees in respect of the debts of its subsidiaries The parent entity has entered into a Deed of Cross Guarantee with the effect that the Company guarantees debts in respect of certain subsidiaries. Further details of the Deed of Cross Guarantee and the subsidiaries subject to the deed are disclosed in Note D7. D9 New standards and interpretations adopted by the group The Group has applied the following standards and amendments for the first time for the annual reporting year ending 3 July 2016: • AASB 2015-3 Amendments to Australian Accounting Standards arising from the Withdrawal of AASB 1031 Materiality • AASB 2015-4 Amendments to Australian Accounting Standards - Financial Reporting Requirements for Australian group’s with a Foreign Parent The adoption of these standards did not have any impact on the current year or any prior year and are not likely to affect future years. NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS 71 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only D10 New standards and interpretations not yet adopted A number of new standards and amendments to standards are effective for annual periods beginning after 1 July 2015; however, the Group has not applied the following new or amended standards in preparing these consolidated financial statements. New or amended standards IFRS 9 Financial Instruments Summary of the requirements IFRS 9, published in July 2014, replaces the existing guidance in IAS 39 Financial Instruments: Recognition and Measurement. IFRS 9 includes revised guidance on the classification and measurement of financial instruments, including a new expected credit loss model for calculating impairment on financial assets, and the new general hedge accounting requirements. It also carries forward the guidance on recognition and derecognition of financial instruments from IAS 39. IFRS 9 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted. Possible impact on consolidated financial statements the group is assessing the potential impact on its consolidated financial statements resulting from the application of IFRS 9 however the impact of the new standard is not expected to be material. IFRS 15 Revenue from Contracts with Customers IFRS 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaces existing revenue recognition guidance, including IAS 18 Revenue, IAS 11 Construction Contracts and IFRIC 13 Customer Loyalty Programmes. IFRS 15 is effective for annual reporting periods beginning on or after 1 January 2018, with early adoption permitted. Adoption of IFRS 15 is not expected to have a material impact on the Group’s future revenue recognition. IFRS 16 Leases IFRS 16 removes the classification of leases as either operating or finance leases – for the lessee – effectively treating all leases as finance leases. Short-term leases (less than 12 months) and leases of low-value assets are exempt from the lease accounting requirements. There are also changes in accounting over the life of the lease. This will result in the recognition of a front-loaded pattern of expense for most leases, even when constant annual rentals are paid. Lessor accounting remains similar to current practice. As a lessee with a substantial portfolio of operating leases, the implementation of IFRS 16 is expected to have a material impact on the future statutory performance of Lovisa Holdings Limited. A summary of the key impacts are as follows: • • • EBITDA: increases because no operating lease expense is included Equity: decreases as carrying amount of right-of-use asset reduces faster than the reduction of the lease liability in the early years of the lease Profit before tax/EPS: Decreases as amortisation and interest expense recognised is greater than operating lease expense in the early years of the lease The overall income statement impact is profit neutral over the course of a lease. 72 NOteS tO tHe CONSOLIDAteD FINANCIAL StAtemeNtS Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlysigned reports 73 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlyDirectors’ declaration 1. In the opinion of the Directors of Lovisa Holdings Limited (‘the Company’): (a) the consolidated financial statements and notes that are set out on pages 36 to 72 and the Remuneration report in the Directors’ report, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 3 July 2016 and of its performance, for the financial year ended on that date; and (ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and (b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable. 2. There are reasonable grounds to believe that the Company and the group entities identified in Note D7 will be able to meet any obligations or liabilities to which they are or may become subject to by virtue of the Deed of Cross Guarantee between the Company and those Group entities pursuant to ASIC Class Order 98/1418. 3. The Directors have been given the declarations required by Section 295A of the Corporations Act 2001 from the Chief Executive Officer and Chief Financial Officer for the financial year ended 3 July 2016. 4. The Directors draw attention to the Basis of Accounting for the consolidated financial statements set out on page 40, which includes a statement of compliance with International Financial Reporting Standards. Signed in accordance with a resolution of the Directors. ________________________________________________ Shane Fallscheer Director Melbourne 22 August 2016 74 SIgNeD RepORtS Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only independent audit report to the members of lovisa holdings limited Independent auditor’s report to the members of Lovisa Holdings Limited Report on the financial report We have audited the accompanying financial report of Lovisa Holdings Limited (the company), which comprises the consolidated statement of financial position as at 3 July 2016, and consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year ended on that date, basis of accounting set out on page 40, notes A1 to D10 comprising a summary of significant accounting policies and other explanatory information and the directors’ declaration of the Group comprising the company and the entities it controlled at the year’s end or from time to time during the financial year. Directors’ responsibility for the financial report The directors of the company are responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the financial report that is free from material misstatement whether due to fraud or error. In the basis of accounting set out on page 40, the directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements, that the financial statements of the Group comply with International Financial Reporting Standards. Auditor’s responsibility Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by the directors, as well as evaluating the overall presentation of the financial report. We performed the procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act 2001 and Australian Accounting Standards, a true and fair view which is consistent with our understanding of the Group’s financial position and of its performance. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Profession Standards Legislation. SIgNeD RepORtS 75 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlyindependent audit report to the members of lovisa holdings limited (CONTINUED) (i) Auditor’s opinion Independent auditor’s report to the members of Lovisa Holdings Limited In our opinion: Report on the financial report (a) the financial report of the Group is in accordance with the Corporations Act 2001, including: We have audited the accompanying financial report of Lovisa Holdings Limited (the company), giving a financial position as which comprises the consolidated statement of financial position as at 3 July 2016, and at 3 July 2016 and of its performance for the year ended on that date; and consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year ended on that date, complying with Australian Accounting Standards and the Corporations Regulations basis of accounting set out on page 24, notes A1 to D10 comprising a summary of significant 2001. accounting policies and other explanatory information and the directors’ declaration of the (b) the financial report also complies with International Financial Reporting Standards as disclosed Group comprising the company and the entities it controlled at the year’s end or from time to on page 40. time during the financial year. fair view of the Group’s true and (ii) Report on the remuneration report Directors’ responsibility for the financial report We have audited the Remuneration Report included in paragraph 9 of the directors’ report for the The directors of the company are responsible for the preparation of the financial report that gives year ended 3 July 2016. The directors of the company are responsible for the preparation and a true and fair view in accordance with Australian Accounting Standards and the Corporations presentation of the remuneration report in accordance with Section 300A of the Corporations Act Act 2001 and for such internal control as the directors determine is necessary to enable the 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit preparation of the financial report that is free from material misstatement whether due to fraud or conducted in accordance with auditing standards. error. In the basis of accounting set out on page 24, the directors also state, in accordance with Australian Accounting Standard AASB 101 Presentation of Financial Statements, that the Auditor’s opinion financial statements of the Group comply with International Financial Reporting Standards. In our opinion, the remuneration report of Lovisa Holdings Limited for the year ended 3 July 2016, Auditor’s responsibility complies with Section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the financial report based on our audit. We conducted our audit in accordance with Australian Auditing Standards. These Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report is free from material misstatement. KPMG An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the financial report that gives a true and fair view in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. An audit also includes Maurice Bisetto evaluating the appropriateness of accounting policies used and the reasonableness of accounting Partner estimates made by the directors, as well as evaluating the overall presentation of the financial report. Melbourne We performed the procedures to assess whether in all material respects the financial report 22 August 2016 presents fairly, in accordance with the Corporations Act 2001 and Australian Accounting KPM_INI_01 Standards, a true and fair view which is consistent with our understanding of the Group’s financial position and of its performance. PAR_SIG_01 PAR_NAM_01 PAR_DAT_01 PAR_POS_01 PAR_CIT_01 We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Profession Standards Legislation. 76 SIgNeD RepORtS Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only Lead auditor’s independence declaration under Section 307C of the Corporations Act 2001 Lead Auditor’s Independence Declaration under Section 307C of the Corporations Act 2001 To: the directors of Lovisa Holdings Limited I declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 3 July 2016 there have been: (i) (ii) no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. KPMG Maurice Bisetto Partner 22 August 2016 Melbourne KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. Liability limited by a scheme approved under Profession Standards Legislation. SIgNeD RepORtS 77 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only78 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlyasx information 79 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use onlyASX additional information Additional information required by the ASX Limited Listing Rules and not disclosed elsewhere in this report is set out below. CORPORATE GOVERNANCE STATEMENT The Board of Directors of Lovisa Holdings Limited is responsible for the corporate governance of the Group. The Lovisa Holdings Board of Directors is committed to achieving best practice in the area of corporate governance and business conduct. Lovisa Holding Limited’s Corporate Governance Statement outlines the main corporate governance principles and practices followed by the Group. These policies and practices are in accordance with the ASX Corporate Governance Council’s Corporate Governance Principles and Recommendations (3rd Edition) unless otherwise stated. Details of the Company’s Corporate Governance Statement as well as key policies and practices and the charters for the Board and each of its committees are available on the Company’s website (http://investors.lovisa.com.au/corporate- governance), including performance against measurable objectives. The Corporate Governance Statement will be lodged with ASX at the same time that this Annual Report is lodged with ASX. The Corporate Governance Statement includes details of the main corporate governance practices in place throughout the reporting period (unless otherwise stated) in relation to the corporate governance principles and recommendations published by the ASX Corporate Governance Council and are current as at 27 September 2016 and have been approved by the Board. The Board is comfortable that the practices are appropriate for a Company of Lovisa Holdings’ size. Shareholdings (as at 7 september 2016) Substantial shareholders The number of shares held by substantial shareholders and their associates are set out below: Shareholder BB Retail Capital Pty Ltd Grahger Capital Securities Pty Ltd Renaissance Smaller Companies Pty Ltd Commonwealth Bank of Australia Voting rights Ordinary shares Refer to Note C1 in the financial statements. Options There are no voting rights attached to options. Rights There are no voting rights attached to rights. Number 43,207,500 7,432,210 6,645,635 5,270,661 Redeemable preference shares There are no voting rights attached to redeemable preference shares. Non-redeemable preference shares There are no voting rights attached to non-redeemable preference shares. Distribution of equity security holders Range 1 - 1,000 1,001 - 5,000 5,001 - 10,000 10,001 - 100,000 100,001 and over Total Number of equity security holders Units % of Issued Capital 238 588 231 251 36 119,389 1,867,266 1,873,586 7,102,794 94,036,965 1,344 105,000,000 0.11 1.78 1.78 6.76 89.56 100.00 The number of shareholders holding less than a marketable parcel of ordinary shares is 51. 80 ASX ADDItIONAL INFORmAtION Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only Securities Exchange The Company is listed on the Australian Securities Exchange. The Home exchange is Sydney. Other information Lovisa Holdings Limited, incorporated and domiciled in Australia, is a publicly listed company limited by shares. Twenty largest shareholders The names of the twenty largest holders of quoted equity securities are listed below: Name BB Retail Capital pty Ltd HSBC Custody Nominees (Australia) Limited Citicorp Nominees pty Limited J p morgan Nominees Australia Limited National Nominees Limited Centreville Pty Ltd grahger Capital Securities pty Ltd Sandhurst trustees Ltd grahger Capital Securities pty Ltd uBS Nominees pty Ltd BNP Paribas Noms Pty Ltd grahger Retail Securities pty Ltd mrs vanessa Louise Speer Coloskye pty Ltd grahger Retail Securities pty Ltd PBC Investments Pty Limited RBC Investor Services Australia Nominees Pty Limited BNP Paribas Nominees Pty Ltd Mr Robert Thomas & Mrs Kyrenia Thomas Truebell Capital Pty Ltd Number of ordinary shares held Percentage of capital held 43,207,500 41.15 7,252,581 6,129,476 5,798,867 4,766,602 4,490,000 3,000,000 2,133,269 2,000,000 1,789,394 1,361,025 1,304,414 1,227,460 1,153,005 1,100,000 1,000,000 784,654 783,834 645,000 460,000 6.91 5.84 5.52 4.54 4.28 2.86 2.03 1.90 1.70 1.30 1.24 1.17 1.10 1.05 0.95 0.75 0.75 0.61 0.44 Total Balance of register 90,387,081 14,612,919 Grand total 105,000,000 86.08 13.92 100.00 ASX ADDItIONAL INFORmAtION 81 Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only taking inspiration from high fashion couture runways and current street style, lovisa delivers new product lines in store every week. For personal use only For personal use onlyCORPORATE DIRECTORY Company Secretary Graeme Fallet, Chief Financial Officer and Company Secretary Principal Registered Office Lovisa Holdings Limited 41-45 Camberwell Road Hawthorn East VIC 3123 +61 3 9831 1800 Location of Share Registry Link Market Services Limited Tower 4 727 Collins Street Melbourne Victoria 3000 +61 3 9615 9800 Stock Exchange Listing Lovisa Holdings Limited (LOV) shares are listed on the ASX. Auditors KPMG 147 Collins Street Melbourne Victoria 3000 Website www.lovisa.com.au 84 ASX ADDItIONAL INFORmAtION Lovisa HoLdings Limited annuaL RepoRt - 3 JuLy 2016For personal use only 

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