Lovisa Holdings Limited Annual Report 2017

Plain-text annual report

LOVISA HOLDINGS LIMITED ANNUAL REPORT 2017 P / 1 ACN 602 304 503 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only 2 / P Lovisa Holdings Limited Annual Report - 2 July 2017 For personal use onlyCONTENTS Overview Chairman’s and MD’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 Financial Statements Setting the scene Business performance Asset platform Risk and capital management Other information Signed Reports Directors’ declaration Independent auditor’s report Lead auditor’s independence declaration ASX information Shareholder information P / 3 04 10 12 34 35 36 37 38 40 46 52 62 74 75 79 82 Lovisa Holdings Limited Annual Report - 2 July 2017 For personal use only OUR BRAND MOVING GLOBALLY 4 / P • 288 Stores in 13 Countries • First Spanish Store Opened in June 2017 • 120 new products arriving weekly • New Franchise territories in Vietnam and Bahrain • Bank Facilities refinanced to 2020 Lovisa Holdings Limited Annual Report - 2 July 2017 For personal use onlyHIGHLIGHTS EBIT up 68% $40.7m $29.0m NPAT up 75% Revenue up 16.5% $178.7m Like For Like sales +10.3% Final Dividend 7.6 CPS Fully Franked P / 5 Total Stores 288 Net increase of 38 stores Lovisa Holdings Limited Annual Report - 2 July 2017 For personal use onlyOverview 6 / P WHITE CITY LONDON Lovisa Holdings Limited Annual Report - 2 July 2017 For personal use only Overview GLOBAL REACH P / 7 KEY Owned Stores Franchise STORE NUMBERS Owned FY16 FY17 Franchise FY16 FY17 Aus/NZ Australia 144 145 Asia Middle East Total Franchise - 16 16 4 19 23 TOTAL STORES 250 288 New Zealand 18 Asia Singapore Malaysia Africa South Africa 19 14 36 Europe United Kingdom 3 Spain - 18 21 19 50 11 1 Total Owned 234 265 Lovisa Holdings Limited Annual Report - 2 July 2017 For personal use only Overview 8 / P ABOUT LOVISA LOVISA WAS BORN FROM A DESIRE TO FILL THE VOID FOR FASHION FORWARD AND DIRECTIONAL JEWELLERY THAT IS BRILLIANTLY AFFORDABLE. Now trading from 288 stores in 13 Countries. 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. Lovisa Holdings Limited Annual Report - 2 July 2017 For personal use onlyOverview P / 9 Lovisa Holdings Limited Annual Report - 2 July 2017 For personal use onlyChairman’s Report CHAIRMAN’S & MANAGING DIRECTOR’S REPORT 0 1 / P Global roll-out continued in 2017 with strong earnings growth, a strengthened balance sheet and disciplined control of CODB. OVERVIEW FINANCIALS It is very pleasing to report that Lovisa Holdings Limited (Lovisa) has delivered a record result for the year ended 2nd July 2017 with sales, profits, cash flow and dividends all significantly up on the prior year. This result was driven by a combination of sales growth, margin improvement and lower cost of doing business underpinned by emphasis on ensuring our retail offer resonates with our customers. The company continued its international expansion with a net increase of 38 new stores which included three new markets. Following strong operating cash flows Lovisa refinanced and repaid its debt facilities ensuring the company is well positioned to accelerate its international growth plans. Revenue for the year was $178.7m being a 16.5% increase on the prior year. Sales momentum was strong throughout the year with same store growth of 10.3% driven predominantly by on-trend ranges and price increases introduced during the second half of 2016 to offset foreign currency pressures. Trading margins increased to 78.8% from 74% in the prior year following a reduction in sales and markdown activity and more disciplined inventory management. This increase in trading margins was delivered despite AUD currency headwinds on the prior year and we estimate that on a constant currency basis trading margins would have lifted a further 500 bps. The Company’s Cost of Doing Business (CODB) decreased during the year despite the continued investment in both management bench strength and the opening of a net 38 new stores. While Lovisa continues to invest in its international operating structure ahead of the curve, importantly the key retail metrics of labour, rent and distribution all experienced reductions in percentage to sales ratios during the year. Lovisa Holdings Limited Annual Report - 2 July 2017 For personal use onlyChairman’s Report Earnings before interest and tax (EBIT) was $40.7m being a 68% increase on EBIT from the prior year. Financing costs decreased during the year due to less reliance on debt facilities resulting in Net profit after tax increasing 75.5% to $29.0m with EPS lifting to 27.7 cents. The Company’s cash flow was strong with operating cash conversion at 109% resulting in cashflow from operating activities lifting $17.9m to $50.4m. Capital expenditure predominantly into new stores and existing store refurbishments was $8.8m. Free cash flow after debt repayments and dividends was $6.2m. CAPITAL MANAGEMENT The balance sheet was strengthened significantly during the year with the company repaying all its debt and ending the financial year with net cash reserves of $11.0m. During the year Lovisa refinanced its bank facilities for a further three years and took the opportunity to increase its available debt facilities to $30m and adjust its covenant package to be more in line with the company’s international rollout ambitions. In addition, as part of the refinancing our bank has agreed to additional acquisition finance subject to due diligence of $15m if an acquisition opportunity was to present itself. DIVIDENDS Following the strong earnings performance the Directors declared a final dividend of 7.6 cents per share fully franked for the year ended 2nd July 2017. The final dividend will be paid on 26th October 2017. OUTLOOK It has been a relatively positive start to the year and we expect 2018 to be a year of further profitable growth for Lovisa as we continue to open new stores in our current markets and continue due diligence on other markets. We will update shareholders upon success of any pilot programs we are undertaking in new territories. We are targeting to open 20 to 30 stores for the 2018 financial year. The key success drivers of Lovisa derive from our ability to offer on-trend and well priced fast fashion jewellery to our customers supported by a talented and enthusiastic team. Your Board and Management team remain committed to maintaining and enhancing these capabilities. We look forward to another exciting and successful year. INTERNATIONAL STORE EXPANSION During the year the company increased its store network to 288 stores. The company’s international expansion continued with store openings within its existing international markets of South Africa, Singapore, Malaysia, New Zealand and the United Kingdom. We continue to be diligent in ensuring store location and rent economics meet our internal hurdles before signing long term leases. We are engaged with Landlords across Asia and Europe ensuring Landlords are familiar with the Lovisa Brand and the company’s financial strength. In May, Lovisa South Africa agreed to purchase 17 stores from Klines South Africa. This transaction has accelerated the rate of growth in South Africa and takes to maturity the anticipated roll-out program in this territory (subject to some minor store rationalisation) and allows management to focus on other international opportunities. In June Lovisa opened its first company owned store in Spain as part of a pilot program. We continue to perform due diligence on other markets. During the year Lovisa opened two new Franchise territories in Bahrain and Vietnam. Michael Kay Non-Executive Chairman P / 1 1 Shane Fallscheer Managing Director Lovisa Holdings Limited Annual Report - 2 July 2017 For personal use only THE DIRECTORS REPORT 2 1 / P Lovisa Holdings Limited Annual Report - 2 July 2017 For personal use onlyP / 1 3 Lovisa Holdings Limited Annual Report - 2 July 2017 For personal use onlyDirectors’ Report THE DIRECTORS 4 1 / P Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyDirectors’ Report Details of the qualifications and experience of each Director in accordance with the requirements of the Corporation Act have been included below. Michael Kay Shane Fallscheer Tracey Blundy Paul Cave James King Michael Kay Independent Non-Executive Director & Chairman Appointed 13 April 2016 Chairman of the Board Chairman of the Remuneration & Nomination Committee Member of the Audit, Business Risk & 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 is Chairman of ASX listed litigation funder, IMF Bentham Ltd (ASX : IMF) and is Chairman of Apply Direct Ltd (ASX : AD1). Michael has also been a non-executive Director of Quintis Limited (ASX : QIN) since February 2015 and is a non-executive Director of Royal Automotive Club Insurance (WA). Michael holds a Bachelor of Laws from The University of Sydney. Shane Fallscheer Managing Director Appointed 6 November 2014 Paul Cave Independent Non-Executive Director Appointed 6 November 2014 Member of the Audit, Business Risk & Compliance Committee Member of the Remuneration & 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. P / 1 5 Shane Fallscheer is the Managing Director and founder of Lovisa. He has 30 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. James King Independent Non-Executive Director Appointed 17 May 2016 Chairman of the Audit, Business Risk & Compliance Commitee Member of the Remuneration & Nomination Committee Tracey Blundy Non-Executive Director Appointed 6 November 2014 Member of the Audit, Business Risk & Compliance Committee Member of the Remuneration & 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 36 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. Tracey was previously a Director of Aventus Capital Limited. 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 Navitas Ltd and a member of Global Coaching Partnership. Previously James was a Director of ASX listed JB Hi-Fi Limited, Trust Company Ltd, Pacific Brands and Tattersalls, 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. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyDirectors’ Report 6 1 / P 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 2 July 2017. Board Audit and Risk Remuneration & Nomination Number attended Number held Number attended Number held Number attended Number held 11 11 10 11 11 11 11 11 11 11 4 4 3 - 4 4 4 4 - 4 4 4 4 - 4 4 4 4 - 4 Director M Kay T Blundy P Cave S Fallscheer J King 1.1 Company Secretary 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. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only Directors’ Report 1.2 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 (5) 4. REVIEW OF OPERATIONS The following summary of operating results and operating metrics reflects the Group’s performance for the year ended 2 July 2017: Consolidated Gross Margin % EBITDA ($000) NPAT ($000) 2017 79% 2016 74% 46,243 30,256 29,046 16,553 Basic Earnings per share 27.66c 15.76c Ordinary Shares in the Company 250,000 1,000,000 1,153,005 4,490,000 34,000 4.1 Financial Performance (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 (5) Shares held by King Family Super Fund For the year ended 2 July 2017 the Group reported a net profit after tax of $29.0 million following continued strong same store sales growth of 10.3% and the addition of a further net 38 stores across the globe assisted by an increase in gross margin on the back of retail price increases first implemented in the first half of 2016. This result reflects an increase of 75.5% on the Group’s 2016 net profit. 2. PRINCIPAL ACTIVITIES Consolidated $’000 FY2017 FY2016 Change The principal activity of the Group during the financial year was the retail sale of fashion jewellery and accessories. Sales 178,746 153,461 16.5% The business has 288 retail stores in operation at 2 July 2017 including 23 franchise stores. There was no significant change in the nature of the activities of the Group during the period. 3. DIVIDENDS Dividends paid to members during the financial year were as follows: 2017 2016 $000's $000's 2,100 4,273 10,500 7,004 Final ordinary dividend for the year ended 30 June 2016 of 2.00 cents (2015: 4.07 cents) per fully paid share fully franked paid on 27 October 2016 Interim ordinary dividend for the year ended 30 June 2017 of 10.00 cents (2016: 6.67 cents) per fully paid share fully franked (2016: 75% franked) paid on 28 April 2017 Total dividends paid 12,600 11,277 In addition to the above dividends, since the end of the financial year the Directors have recommended the payment of a final dividend of $7,980,000 (7.60 cents per fully paid share) expected to be paid on 26 October 2017. The dividend will be fully franked. Gross profit 140,822 113,562 24.0% Operating expenses 94,579 83,306 13.5% 46,243 30,256 52.8% 40,704 24,222 68.0% 29,046 16,553 75.5% P / 1 7 EBITDA EBIT Net profit after tax (NPAT) 4.1.1 Sales STRONG REVENUE GROWTH (A$M) . m 7 0 7 $ . m 7 5 0 1 $ . m 3 4 3 1 $ . m 5 3 5 1 $ . m 7 8 7 1 $ FY13 FY14 FY15 FY16 FY17 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only Directors’ Report 4.1.1 Sales (continued) 4.1.3 Cost Of Doing Business NUMBER OF STORES IN OFFSHORE MARKETS GROWING DECREASE IN COST OF DOING BUSINESS 5 7 1 0 1 2 9 3 2 0 5 2 8 8 2 FY17 FY13 FY14 FY15 FY16 FY17 AUSTRALIA OFFSHORE % 4 6 % 1 6 % 4 5 % 4 5 % 3 5 FY13 FY14 FY15 FY16 FY17 The Group’s reported revenue was $178.7m, being a 16.5% increase on the prior year with comparable sales growth of 10.3% across the Group. Total Company sales were $177.6m being 16.3% up on last year. Franchise income increased by 32% to $1.1m following the addition of two new Franchise territories in Vietnam and Bahrain. The offshore expansion continued during the year with the addition of a net 38 stores across the Group including a trial Company store opened in Spain in June. The Group’s Cost of Doing Business (CODB) decreased during the year despite the continued investment in both management bench strength and the net opening of 38 new stores. While the Group continues to invest in its international operating structure ahead of the curve, importantly the key retail metrics of labour, rent and distribution all experienced reductions in percentage to sales ratios during the year. 4.1.4 Earnings Earnings before interest and tax (EBIT) was $40.7m being a 68% increase on EBIT from the prior year. Financing costs decreased during the year following strong cash flow and less reliance on debt facilities. Net profit after tax increased 75.5% to $29.0m with EPS lifting to 27.7 cents. 4.1.5 Cash Flow The Group’s net cash flow from operating activities increased $16.3m during the year to $39.6m. The Group’s cash flow before tax and financing costs was $50.4m. Capital expenditure of $8.8m relates predominately to new store openings and refurbishments of current stores upon lease renewal. During the year the Group repaid its cash advance facility and has net cash of $11m on hand at year end. 4.1.2 Gross Profit Margin LIFT IN GROSS MARGINS 8 1 / P % 8 FY13 7 % 6 FY14 7 % 7 FY15 7 % 4 FY16 7 % FY17 9 7 FY13 FY14 FY15 FY16 FY17 The Group’s Gross Profit increased by 24% to $140.8m. Gross Margin increased to 78.8% from 74.0% in the prior year following price increases introduced in 2016 along with reductions in clearance activity and average unit cost. In addition the Group experienced strong performances in a number of fashion trends throughout the year. This Margin increase was achieved on the back of continued currency headwinds associated with the Australian Dollar. We estimate that on a 2016 constant currency basis on stock purchases Gross Margin would have lifted by a further 500bps to 79.3%. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only 4.2 Financial Position 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 Directors’ Report Actual FY2017 $’000 3,615 13,127 (19,996) (3,254) 15,658 2,276 14,680 11,039 (805) 3,275 28,189 Actual FY2016 $’000 2,293 15,034 (14,995) 2,332 13,123 2,073 17,528 (7,271) (909) 1,823 11,171 Change FY16/FY17 % 57.7% (12.7%) 33.4% (239.5%) 19.3% 9.8% (16.2%) (251.8%) (11.4%) 79.6% 152.3% The Group’s net working capital strengthened during the year predominately from improved inventory management. Inventory levels decreased from $15.0m to $13.1m during the year despite an increase of 31 company owned stores and 7 Franchise stores. Property, plant and equipment Capital expenditure during the year reflects fit out costs associated with new stores and refurbishment of existing stores. Fit out costs are depreciated over the term of the lease. Debt facilities The Group refinanced its debt facilities during the year in line with its international growth expectations. The Group increased its debt facilities to $25m along with a $5m contingent liability facility predominately for issuance of Bank Guarantees and Letters of Credit to international landlords. Following the strong cash flow during the year the Group repaid its cash advance facility with net cash reserves of $11m at year end. P / 1 9 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only Directors’ Report 5. BUSINESS STRATEGIES Lovisa has achieved rapid growth since it was founded, with revenue growing from $25.5 million in FY2011 to $178.7 million in FY2017. The Group continues to focus on its key drivers to deliver growth in sales and profit growth. Growth pillar International expansion Strategy Risks Achievements Business Strategy Section 5.2 • Continue to leverage current international territories • Leverage the Company’s capital in large international markets • Competition (6.2) • Retail environment and general economic conditions (6.3) • Roll out UK territory and • Failure to Streamline global supply chain 5.3 investigate other Northern Hemisphere markets • Consider franchise partners for selected territories • Expand into new international markets, targeting one new trial 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 successfully implement growth strategies (6.4) • Exchange rates (6.5) • Product sourcing or supply chain disruptions 0 2 / P Enhance existing store performance 5.4 • Optimise and improve existing store network • Continue to target high traffic shopping precincts • Judicious pricing Brand proliferation 5.5 • Continue to leverage online social media to connect with customers and increase brand loyalty 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 5.1 Lead and Pre-Empt Trends • 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 • Prevailing fashions and consumer preferences may change (6.6) • Net 37 stores opened outside of Australia during the year including 8 stores in the United Kingdom, a trial new store in Spain with 8 franchise stores opened during the year • Over 36% of product was moved through the HK warehouse (FY16: 34%) • Re-engineering of supply chain to accommodate sea freight • FY17 LFL sales growth of 10.3% • We continue to close stores in sub-optimal locations • Increased social media engagement • Continued strong LFL growth being testament to an ability to identify 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. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyDirectors’ Report 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, South Africa and the United Kingdom and supporting franchised stores in Kuwait, the United Arab Emirates, Oman, Bahrain and Saudi Arabia. During the year, Lovisa also opened its first store in Vietnam and commenced a pilot program in Spain. Lovisa will continue to explore other markets through pilot programs and will advise shareholders upon successful completion of those pilot programs. 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 are not 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 at least one new territory a year. The history of Lovisa stores is as follows: FY2013 FY2014 FY2015 FY2016 FY2017 Australia New Zealand Singapore South Africa Malaysia United Kingdom Spain Middle East* Vietnam* Total * Franchise Stores 160 6 6 - 3 - - - - 166 14 10 11 7 - - 2 - 146 144 145 14 15 36 15 - - 13 - 18 19 36 14 3 - 16 - 18 21 50 19 11 1 19 4 P / 2 1 175 210 239 250 288 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 145 stores in operation as at 2 July 2017. 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 planned closure of some company owned stores acquired from Klines South Africa in June 2017. 5.5 Brand Proliferation Lovisa supports the growth of 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. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only Directors’ Report 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. 2 2 / P 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 due to 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 a low average retail spend 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 on trend 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 homogeneous 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 are not 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 associated with its cost of goods. 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. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyDirectors’ Report 7. EVENTS SUBSEQUENT TO REPORTING DATE Since the end of the financial year the Directors have recommended the payment of a final dividend of $7,980,000 (7.60 cents per fully paid share) expected to be paid on 26 October 2017. The dividend will be fully franked. No other matters or circumstance has arisen since 2 July 2017 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. P / 2 3 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyDirectors’ Report 9. REMUNERATION REPORT - AUDITED A. Principles Used to Determine the Nature and Amount of Remuneration 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 Group’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; 4 2 / P 1. Non-Executive Directors 2. Managing Director 3. Chief Executive Officer 4. Chief Financial Officer Non-Executive Director KMP Michael Kay Chairman Paul Cave James King Director Director Tracy Blundy Director Executive KMP Shane Fallscheer Managing Director Steven Doyle Chief Executive Officer (Appointed 25 October 2016) Graeme Fallet Chief Financial Officer 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) Non-Executive Directors KMP Remuneration Non-executive Directors’ fees are determined within an aggregate Non-executive Directors’ 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 2 July 2017 was $390,000. 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; • Offer a remuneration structure that will attract, focus, retain and reward highly capable people • • • 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 The mix of fixed and at risk components for each Senior Executive as a percentage of total target remuneration for the 2017 financial year is as follows Senior Executive Shane Fallscheer Steven Doyle Graeme Fallet Fixed remuneration At risk remuneration 67% 50% 67% 33% 50% 33% Note: the above assumes each KMP receives their maximum STI and LTI in the relevant period. If this is not the case, then the mix would change in favour of the fixed remuneration %. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only Directors’ Report 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. 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. Long Term Incentive plan The Company operates a long term incentive plan. 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. • No exercise price is payable in respect of the Performance Rights. Performance Conditions The Board considers EPS Growth the most appropriate performance condition as it aligns the interest of shareholders with management. 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 100% of Performance Rights vested with an aggregate EPS of 43.42 cents achieved over the 2016 and 2017 financial years. 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. During the year 100% of these options vested with an aggregate EPS of 43.42 cents achieved over the 2016 and 2017 financial years. FY2017 LTI – Performance Options In May 2016 and August 2016 a grant of Performance Options was made to the Managing Director, 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 for the May granted options, and $2.63 for the August granted options, which represents the 30 day VWAP to the date of grant. A total of 3,459,916 Performance Options were granted in the May grant and 411,764 in the August grant. 1,687,764 of these options were subject to shareholder approval. The expiry of the Performance Options is 12 months following the end of the performance period. The grant of Performance Options are subject to performance conditions based on achieving the Company’s EPS over the performance period. The Performance Options granted to the Managing Director were approved at the 2016 AGM. The Board has determined the threshold EPS Target as follows; EPS over the Performance Period % Exercisable Less than threshold 10% compound growth 12.5% compound growth 15% compound growth 17.5% compound growth Nil 20% awarded 40% awarded 60% awarded 80% awarded 20% compound growth 100% awarded P / 2 5 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyDirectors’ Report 9.3 Details of Remuneration Details of the remuneration of the Directors and Key Management Personnel (KMPs) is set out below. Year Short Term Employment Benefits Post- Employment Benefits Long Term Benefits Salary & Fees ($) Non- monetary benefits ($) Performance based payment ($) Super Contributions ($) Annual & Long Service Leave ($) Share Based Payments Options/ Rights ($) Total ($) NON-EXEC DIRECTORS M Kay (1) P Cave T Blundy J King (2) TOTAL NON-EXEC DIRECTORS 2017 2016 2017 2016 2017 2016 2017 2016 2017 136,986 34,247 73,059 111,510 60,000 58,333 73,059 9,133 343,104 2016 213,223 EXEC DIRECTORS - - - - - - - - - - 6 2 / P S Fallscheer 2017 607,025 22,023 2016 668,454 8,425 - - - - - - - - - - - - 13,014 3,253 6,941 10,593 20,000 21,667 6,941 867 46,896 36,380 - - - - - - - - - - - - - - - - - - - - 150,000 37,500 80,000 122,103 80,000 80,000 80,000 10,000 390,000 249,603 30,000 65,891 245,144 970,083 30,000 96,415 100,489 903,783 OTHER KMP S Doyle (3) 2017 546,118 2016 382,519 2017 2016 367,217 84,598 G Fallet (4) TOTAL EXEC - - - - 225,000 19,616 47,787 100,000 938,521 - 12,872 29,630 - 425,021 60,000 21,250 30,299 40,000 518,766 - 4,291 6,493 - 95,382 2017 1,520,360 22,023 285,000 70,866 143,978 385,144 2,427,370 2016 1,135,571 8,425 - 47,163 132,538 100,489 1,424,186 (1) Appointed to the Board of Lovisa Holdings on 13th April 2016 (2) Appointed to the Board of Lovisa Holdings on 17th May 2016 (3) Appointed Global General Manager on 4th November 2015 and appointed CEO on 25 October 2016 (4) Appointed Chief Financial Officer on 14th April 2016 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only Directors’ Report 9.4 STI Remuneration Analysis Analysis of STI included in remuneration Details of STI bonuses awarded as remuneration to each key management person are detailed below. Grant Date STI awarded ($) STI awarded as % of maximum STI % of STI award forfeited S Doyle G Fallet 15 August 2017 15 August 2017 225,000 60,000 75% 75% 25% 25% 9.5 Equity Remuneration Analysis 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 Number Value $ Performance period commences Included in Remuneration $ % vested in the period % forfeited in the period Financial period in which grant vests S Fallscheer IPO LTIP 550,000 210,000 18 December 2014 111,811 100 FY17 LTIP 1,687,764 400,000 4 July 2016 133,333 S Doyle FY17 LTIP 1,265,823 300,000 4 July 2016 100,000 G Fallet FY17 LTIP 506,329 120,000 4 July 2016 40,000 - - - - - - - 2 July 2017 30 June 2019 30 June 2019 30 June 2019 P / 2 7 9.6 Options and Performance Rights Over Equity Instruments 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 4 July 2016 Granted Exercised Forfeited Vested during the year % Vested and exercisable at 2 July 2017 Held at 2 July 2017 Directors S Fallscheer - IPO LTIP 550,000 - FY17 LTIP 1,687,764 Executives S Doyle - FY17 LTIP 1,265,823 G Fallet - FY17 LTIP 506,329 - - - - - - - - - - - - 550,000 100 550,000 1,687,764 1,265,823 506,329 - - - - - - Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only Directors’ Report 9.7 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 Group’s performance on shareholder wealth, during the financial years: FY 2017 FY2016 FY2015* Net profit after tax ($000) 29,046 16,553 17,602 Dividends paid ($000) 12,600 11,277 14,591 Share Price $3.69 $2.28 $3.50 * Pro-forma result as disclosed in 2015 Lovisa Holdings Ltd Annual Report KMP Shareholdings The following table details the ordinary shareholdings and the movements in the shareholdings of KMP (including their personally related entities) for FY2017. No. of shares Held at 3 July 2016 Shares Purchased Held at 2 July 2017 8 2 / P Non-executive Directors M Kay 250,000 T Blundy 1,153,005 - - - 250,000 1,153,005 1,000,000 1,000,000 - 34,000 34,000 P Cave J King Executive Directors S Fallscheer 4,490,000 - 4,490,000 Executive S Doyle G Fallet - - 164,000 164,000 - - Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyDirectors’ Report 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 Group 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 P / 2 9 Michael Kay Non-Executive Chairman Shane Fallscheer Managing Director Melbourne, 23 August 2017 10. INSURANCE OF OFFICERS AND INDEMNITIES During the financial year, Lovisa Holdings Limited paid a premium of $43,000 (2016: $37,000) 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 79 and forms part of this Directors’ Report. 11.2 Audit and Non-Audit Services Provided by the External Auditor During the financial year ended 2 July 2017, the following fees were paid or were due and payable for services provided by the external auditor, KPMG, of the Consolidated Entity: Consolidated Entity 2017 $000 2016 $000 Audit and assurance services Audit and review of financial statements Other services Tax compliance services Other accounting services 230 220 129 86 445 47 107 374 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. Lovisa Holdings Limited Annual Report - 2 July 2017For 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 consolidated financial statements 0 3 / P Setting the scene Business performance A1 Operating segments A2 Revenue A3 Expenses A4 Earnings per share A5 Dividends A6 Income taxes 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 34 35 36 37 38 40 40 41 42 42 43 43 46 46 46 46 48 48 49 49 50 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only Notes to the consolidated 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 auditor’s report Lead auditor’s independence declaration ASX information Shareholder information Corporate directory P / 3 1 52 52 53 53 54 60 62 62 62 63 63 66 67 68 70 70 71 74 75 79 82 84 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only 2 3 / P Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyFINANCIAL STATEMENTS P / 3 3 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyFinancial Statements CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 2 July 2017 Consolidated ($000s) Assets Cash and cash equivalents Trade and other receivables Inventories 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 4 3 / P Note C5 B1 B2 A6 B3 B4 C5 B6 B8 C4 B7 B8 C3 B7 C1 2 July 2017 12,744 3,615 13,127 29,486 3,275 15,658 2,276 21,209 50,695 1,705 10,001 2,075 805 1,042 3,819 19,447 608 - 2,451 3,059 22,506 28,189 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 11,171 208,526 (208,906) (461) 29,030 28,189 208,526 (208,906) (1,032) 12,584 11,171 The Notes on pages 38 to 71 are an integral part of these consolidated financial statements. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyFinancial Statements CONSOLIDATED STATEMENT OF PROFIT OR LOSS & OTHER COMPREHENSIVE INCOME For the financial year ended 2 July 2017 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 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 A6 A4 A4 2017 178,746 (37,924) 140,822 (45,276) (28,683) (4,464) (5,539) (785) (15,371) 40,704 142 (404) (262) 40,442 (11,396) 29,046 41 90 131 131 29,177 29,046 29,046 29,177 29,177 27.66 27.25 P / 3 5 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 The Notes on pages 38 to 71 are an integral part of these consolidated financial statements. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyFinancial Statements CONSOLIDATED STATEMENT OF CHANGES IN EQUITY As at 2 July 2017 Attributable to Equity Holders of the Company Consolidated ($000s) Note Balance at 29 June 2015 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 Employee share schemes D4 Dividends A5 Total transactions with owners of the Company Share Capital Common Control Reserve Retained Earnings 208,526 (208,907) 7,308 - - - - - - - - - - - - - - 16,553 - - 16,553 - (11,277) (11,277) 12,584 6 3 / P Balance at 3 July 2016 208,526 (208,907) Balance at 4 July 2016 208,526 (208,907) 12,584 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 Employee share schemes Dividends Total transactions with owners of the Company D4 A5 - - - - - - - - - - - - - - Balance at 2 July 2017 208,526 (208,907) 29,046 - - 29,046 - (12,600) (12,600) 29,030 Share Based Payments Reserve Cash Flow Hedge Reserve Foreign Currency Translation Reserve Total Equity - - - - - 116 - 116 116 116 - - - - 440 - 440 556 - - (772) - (119) 6,808 - - (257) 16,553 (772) (257) (772) (257) 15,524 - - - (772) (772) - 41 - 41 - - - - - - 116 (11,277) (11,161) (376) 11,171 (376) 11,171 - - 90 29,046 41 90 90 29,177 - - - 440 (12,600) (12,160) (731) (286) 28,189 The Notes on pages 38 to 71 are an integral part of these consolidated financial statements. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyFinancial Statements CONSOLIDATED STATEMENT OF CASH FLOWS For the financial year ended 2 July 2017 Consolidated ($000s) Note 2017 2016 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 cash advance facility 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 197,296 (146,931) 50,365 142 (404) (10,471) 39,632 (8,800) - - (8,800) (12,000) (12,600) (24,600) 6,231 4,729 79 11,039 169,891 (137,475) 32,416 49 (723) (8,404) 23,338 (9,282) 21 (250) (9,511) - (11,277) (11,277) 2,550 2,343 (164) 4,729 P / 3 7 C5 B3 A5 C5 C5 The Notes on pages 38 to 71 are an integral part of these consolidated financial statements. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyNotes to the Consolidated Financial Statements SETTING THE SCENE 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. 8 3 / P Lovisa Holdings Limited reports within a retail financial period. The current financial year represents a 52 week period ended on the 2 July 2017 (2016: 53 week period ended 3 July 2016). This treatment is consistent with section 323D of Corporations Act 2001. The consolidated financial statements of the Group for the financial year ended 2 July 2017 were authorised for issue by the Board of Directors on 23 August 2017. 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 2016. 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 2 July 2017 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. Basis of consolidation Business combinations 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. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only Notes to the Consolidated Financial Statements 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. P / 3 9 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 Group 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. 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 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only Notes to the Consolidated Financial Statements 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. 0 4 / P 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). For management purposes, the Group is organised into geographic segments to review sales by territory. All territories offer similar products and services and are managed by sales teams in each territory reporting to the Global GM of Sales, however overall company performance is managed on a global level by the MD and the Group’s management team. Store performance is typically assessed at an individual store level. Lovisa results are aggregated to form one reportable operating segment, being the retail sale of fashion jewellery and accessories. This is a difference in the basis of segmentation from the 3 July 2016 annual report. The individual stores meet the aggregation criteria to form a reportable segment. The company’s stores exhibit similar long-term financial performance and economic characteristics throughout the world, which include: a. Consistent products are offered throughout the company’s stores worldwide; b. All stock sold throughout the world utilises common design processes and products are sourced from the same supplier base; c. Customer base is similar throughout the world; d. All stores are serviced from two delivery centres; e. No major regulatory environment differences exist between operating territories. As the Group reports utilising one reportable operating segment, no reconciliation of the total of the reportable segments measure of profit or loss to the consolidated profit has been provided as no reconciling items exist. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyNotes to the Consolidated Financial Statements (b) Geographic information The segments have been disclosed on a regional basis consisting of Australia and New Zealand, Asia (consisting of Singapore and Malaysia), Africa (South Africa) and Europe (United Kingdom and Spain) and the Group’s franchise stores in the Middle East and Asia. 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 / New Zealand b) Asia c) Africa d) Europe Total 2017 2016 Non-current assets (i) Non-current assets (i) 8,499 1,763 3,186 2,210 15,658 8,008 2,046 2,344 725 13,123 (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 region. In presenting the following information, segment revenue has been based on the geographic location of customers. ($000s) Sale of Goods Australia / New Zealand Asia Africa Europe Total Sale of Goods Franchise Revenue Middle East Asia Total Franchise Revenue Total Revenue 2017 2016 122,577 28,320 21,895 4,830 177,622 891 233 1,124 178,746 P / 4 1 108,401 25,500 18,182 530 152,613 848 - 848 153,461 a) Revenue recognition and measurement 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. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyNotes to the Consolidated Financial Statements 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 A4 EARNINGS PER SHARE (EPS) Calculation methodology 2017 23,861 41,047 3,677 112 440 45,276 2016 24,516 36,362 3,380 122 116 39,980 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) 2 4 / P 2017 27.66 27.25 2016 15.76 15.74 Profit attributable to ordinary shareholders ($000s) 29,046 16,553 Weighted average number of ordinary shares for basic EPS (shares) 105,000,000 105,000,000 Weighted average number of ordinary shares and potential ordinary shares for diluted EPS (shares) 106,581,406 105,193,666 Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share 105,000,000 105,000,000 2017 2016 Adjustments for calculation of diluted earnings per share: Options Performance Rights 1,565,406 188,333 16,000 5,333 Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share 106,581,406 105,193,666 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 Group’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. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only Notes to the Consolidated Financial Statements 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) 2.00 cents per qualifying ordinary share (2016: 4.07 cents) 10.00 cents per qualifying ordinary share (2016: 6.67 cents) 2017 2,100 10,500 2016 4,273 7,004 12,600 11,277 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) 7.60 cents per qualifying ordinary share (2016: 2.00 cents) Consolidated ($000s) Dividend franking account 2017 7,980 7,980 2016 2,100 2,100 2017 2016 Franking credits available for subsequent reporting periods based on a tax rate of 30.0% (2016: 30%) 5,363 2,308 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. P / 4 3 (a) Amounts recognised in profit or loss Consolidated ($000s) Current tax expense Current period Changes in estimates related to prior years Deferred tax (benefit)/expense Origination and reversal of temporary differences Changes in temporary differences related to prior years Total income tax expense 2017 2016 12,933 (79) 12,854 (1,148) (310) (1,458) 11,396 6,218 - 6,218 777 - 777 6,995 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only Notes to the Consolidated Financial Statements 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% (2016: 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 Changes in estimate related to prior years Total non temporary differences Temporary differences Amounts recognised in OCI Net movement in deferred tax balances Total temporary differences Income taxes payable for the current financial year Income taxes payable at the beginning of the year 4 4 / P Less: Tax paid during the year Income taxes payable as at year end Represented in the Statement of financial position by: Current tax liabilities Current tax assets 2017 40,442 12,133 (674) 318 (52) (201) 262 (390) 2016 23,548 7,064 (384) 225 (8) (24) 122 - 11,396 6,995 (51) 1,458 1,407 12,803 1,487 (10,471) 3,819 45 (777) (732) 6,263 3,628 (8,404) 1,487 3,819 1,487 - - 3,819 1,487 Effective tax rates (ETR) Bases of calculation of each ETR Global operations – Total consolidated tax expense ETR: IFRS calculated total consolidated company income tax expense divided by total consolidated accounting profit on continuing operations. Australian operations – Australian company income tax expense ETR: IFRS calculated company income tax expense for all Australian companies and Australian operations of overseas companies included in these consolidated financial statements, divided by accounting profit derived by all Australian companies included in these consolidated financial statements. Percentage ETR Global operations – Total consolidated tax expense Australian operations – Australian company income tax expense 2017 2016 28.2% 29.9% 29.7% 29.3% Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only Notes to the Consolidated Financial Statements A6 INCOME TAXES (CONTINUED) (c) Deferred tax assets and liabilities reconciliation Statement of financial position Statement of profit or loss Consolidated ($000s) Property, plant and equipment Employee benefits Provisions Other items Transaction costs Carry forward tax losses Deferred tax expense Net deferred tax assets 2017 357 967 1,084 397 469 - 2016 (397) 719 754 43 704 - 3,275 1,823 2017 (760) (248) (332) (353) 235 - (1,458) Presented in the Statement of financial position as follows: Deferred tax assets 3,275 1,823 Unused tax losses for which no deferred tax asset has been recognised total $913,000 (2016: $907,000). (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 2017 2,454 1,169 3,623 178 171 348 2016 563 (160) 92 (27) 309 - 777 2016 1,604 863 2,467 302 342 644 P / 4 5 Net deferred tax assets 3,275 1,823 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only Notes to the Consolidated Financial Statements 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 2017 1,001 1,954 620 40 3,615 2016 375 1,214 610 94 2,293 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 6 4 / P 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 2017 and included in cost of sales amount to $32,508,000 (2016: $34,564,000). During 2017 inventories of $5,180,000 (2016: $4,801,000) 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. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyNotes to the Consolidated Financial Statements 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 29 June 2015 23,400 2,482 436 53 26,371 Additions Disposals Effect of movements in exchange rates 8,379 (3,320) (306) 620 (94) (21) 283 - - - - - 9,282 (3,414) (327) Balance at 3 July 2016 28,153 2,987 719 53 31,912 Balance at 4 July 2016 Additions Disposals 28,153 7,962 2,987 684 719 151 53 3 31,912 8,800 (3,495) (2,124) (679) (53) (6,351) Effect of movements in exchange rates (89) 8 Balance at 2 July 2017 32,532 1,555 - 191 - 3 (81) 34,281 Consolidated ($000s) Accumulated depreciation and impairment losses Balance at 29 June 2015 Depreciation Disposals Effect of movements in exchange rates Note Leasehold improvements Hardware and software Fixtures and fittings Office equipment P / 4 7 Total (14,017) (1,657) (269) (27) (15,971) (5,356) (535) (127) (16) (6,034) 3,148 (20) 83 5 - - - - 3,231 (15) Balance at 3 July 2016 (16,245) (2,104) (396) (43) (18,789) Balance at 4 July 2016 (16,245) (2,104) Depreciation Disposals Effect of movements in exchange rates (4,861) 3,089 137 (522) 1,920 2 Balance at 2 July 2017 (17,881) (704) Carrying amounts At 28 June 2015 At 3 July 2016 At 2 July 2017 9,382 11,908 14,651 825 883 851 (396) (146) 504 1 (37) 167 323 154 (43) (10) 52 - (1) 25 10 2 (18,789) (5,539) 5,566 140 (18,623) 10,400 13,123 15,658 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only Notes to the Consolidated Financial Statements 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 29 June 2015 Finalisation of purchase price adjustment from previous business combination Effect of movements in exchange rates Balance at 3 July 2016 Balance at 4 July 2016 Effect of movements in exchange rates Balance at 2 July 2017 Note Goodwill 1,610 984 (522) 2,073 2,073 203 2,276 B5 IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS AND GOODWILL Recognition and measurement Impairment 8 4 / P 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) 2017 15.0% 3.0% 2016 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. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only Notes to the Consolidated Financial Statements B5 IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS AND GOODWILL (CONTINUED) Impairment test (continued) Impairment testing for CGUs containing goodwill (continued) 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 FY18 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. 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 payables 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 2017 4,568 5,433 10,001 P / 4 9 2016 4,292 4,058 8,350 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) Balance at 4 July 2016 Provisions made during the year Provisions used during the year Provisions released during the year Effect of movement in exchange rates Balance at 2 July 2017 Current Non-current Site restoration Straight line rent and lease incentive Onerous lease Other provisions 1,721 865 (669) - 39 1,956 552 1,404 1,956 791 448 (115) - 2 1,126 79 1,047 1,126 411 240 - - - - 411 411 - 411 - - (240) - - - - - Total 3,163 1,313 (784) (240) 41 3,493 1,042 2,451 3,493 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyNotes to the Consolidated Financial Statements 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. (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). c) Onerous leases Description 0 5 / P 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. B8 EMPLOYEE BENEFITS Recognition and measurement Long-term service benefits Key Estimates Expenditure to settle the restoration obligation at the end of the lease term is based on the Group’s best estimate. Key Estimates No major estimation required in the calculation of these provisions. 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 Group’s best estimate 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. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only Notes to the Consolidated Financial Statements 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 2017 2016 2,075 2,075 1,594 1,594 2017 2016 608 608 401 401 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. P / 5 1 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyNotes to the Consolidated Financial Statements 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 No. of Ordinary Shares Value of Ordinary Shares 2017 '000's 2016 '000's 2017 2016 '$000's '$000's On issue at beginning/end of year 105,000 105,000 208,526 208,526 All ordinary shares rank equally with regard to the Company’s residual assets. (i) Ordinary shares 2 5 / P 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. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyNotes to the Consolidated Financial Statements 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 2017 1,705 2016 3,566 P / 5 3 - 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) Cash advance facility Multi-option facility Contingent liability facility Currency Nominal interest rate AUD AUD AUD 3.62% 6.73% 2.30% Corporate card facility AUD 17.99% 2 July 2017 3 July 2016 Year of maturity Face value Carrying amount Face value Carrying amount 2020 2018 2018 2017 - - 12,000 12,000 1,705 1,705 3,566 3,566 - 54 - 54 - - - - Total interest-bearing liabilities 1,759 1,759 15,566 15,566 The bank loans are secured by security interests granted by Lovisa Holdings Limited and its subsidiaries over all of their assets in favour of the Commonwealth Bank of Australia (CBA). Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only Notes to the Consolidated Financial Statements C4 FINANCIAL INSTRUMENTS – FAIR VALUES AND RISK MANAGEMENT (a) Fair values Recognition and measurement 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. 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. 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 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 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 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 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). • 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 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. The Group recognises transfers between levels of the fair value hierarchy at the end of the financial year during which the change has occurred. 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 fair value if the carrying amount is a reasonable approximation of fair value. 2 July 2017 Carrying Amount Fair Value Hedging instruments Loans and receivables Other financial liabilities Total Level 1 Level 2 Level 3 Total 4 5 / P Consolidated ($000s) Note 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 805 805 - - 3,615 12,744 16,359 - - - - - 805 805 3,615 12,744 16,359 - - - - 1,705 1,705 - - 10,001 10,001 11,706 11,706 - - - - - - - - - - - - - - - - 805 805 - - - - - - - - - - - - - - - - 805 805 - - - - - - - Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyNotes to the Consolidated Financial Statements C4 FINANCIAL INSTRUMENTS – FAIR VALUES AND RISK MANAGEMENT (CONTINUED) (a) Fair values (continued) Recognition and measurement (continued) 3 July 2016 Carrying Amount Fair Value Hedging instruments Loans and receivables Other financial liabilities Total Level 1 Level 2 Level 3 Total Consolidated ($000s) Note 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 909 909 - - 2,293 8,295 10,588 - - - - - 909 909 2,293 8,295 10,588 - - - - 3,566 3,566 12,000 12,000 8,350 8,350 23,916 23,916 - - - - - - - - - - - - - - - - 909 909 - - - - - - - - - - - - - - - - 909 909 - - - - - - - P / 5 5 (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 Significant unobservable inputs Inter-relationship between key unobservable inputs and fair value measurement Not applicable. Not applicable. 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. 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. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyNotes to the Consolidated Financial Statements 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 6 5 / P 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 2 July 2017, no trade receivables were past due but not impaired (2016: 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 secured by security interests granted by Lovisa Holdings Ltd and its subsidiaries over all of their assets in favour of the Commonwealth Bank of Australia (CBA): • $15 million revolving cash advance facility • $10 million multi option facility • $5 million contingent liability facility for global letters of credit and bank guarantees. 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. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyNotes to the Consolidated Financial Statements C4 FINANCIAL INSTRUMENTS – FAIR VALUES AND RISK MANAGEMENT (CONTINUED) (b) Financial risk management (continued) (iii) Liquidity risk (continued) 2 July 2017 Contractual cash flows Carrying amount Total 2 mths or less 2-12 mths 1-2 years 2-5 years More than 5 years 4,568 1,705 - 4,568 1,705 - 4,568 - - - 1,705 - 6,273 6,273 4,568 1,705 - - 35,586 7,140 28,446 (34,781) (7,015) (27,766) 805 805 125 680 - - - - - - - - - - - - - - - - - - - - - Carrying amount Total 2 mths or less 2-12 mths 1-2 years 2-5 years P / 5 7 More than 5 years 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 Total 3 July 2016 Consolidated ($000s) Non-derivative financial liabilities Trade payables Bank overdrafts 4,292 3,566 4,292 3,566 4,292 - - - 3,566 - - - 12,000 Secured bank loans 12,000 12,000 Derivative financial liabilities Forward exchange contracts used for hedging: - Outflow - Inflow Total 19,858 19,858 4,292 3,566 12,000 - - 25,633 6,861 18,772 (24,724) (6,532) (18,192) 909 909 329 580 - - - - - - - - - - - - - - - - - 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 Note 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. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyNotes to the Consolidated Financial Statements 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 applies hedge accounting 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 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, British pounds 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 8 5 / P 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: 2 July 2017 3 July 2016 In thousands of SGD USD GBP ZAR SGD USD GBP ZAR Cash and cash equivalents 1,174 - 1,108 7,404 1,920 - 75 1,951 Trade receivables Trade payables - 406 - - - 108 - (28) (3,491) (117) (136) (127) (2,876) (385) 10 (12) Net statement of financial position exposure Sensitivity analysis 1,146 (3,085) 991 7,268 1,793 (2,768) (310) 1,949 A reasonably possible strengthening (weakening) of the USD, the SGD, the GBP 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. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyNotes to the Consolidated Financial Statements 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 Strengthening Weakening Profit or loss 2 July 2017 SGD (5 percent movement) USD (5 percent movement) GBP (5 percent movement) ZAR (5 percent movement) 3 July 2016 SGD (5 percent movement) USD (5 percent movement) GBP (5 percent movement) ZAR (5 percent movement) Interest rate risk (55) 147 (54) (346) (85) 132 15 (93) 60 (162) 59 383 94 (146) (16) 103 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. P / 5 9 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 2017 1,705 1,705 2016 15,566 15,566 Cash flow sensitivity analysis for variable rate instruments At 2 July 2017, 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 $114,000 lower/higher (3 July 2016 - $122,000 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). Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only Notes to the Consolidated Financial Statements 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 2017 (805) (805) 2016 (909) (909) 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. 2017 2016 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 - (805) (805) - (805) (805) - (805) (805) - - - - (909) (909) - (909) (909) - (909) (909) - - - Consolidated ($000s) Forward exchange contracts: Assets Liabilities A loss of $64,000 was included in other expenses on foreign currency derivatives not qualifying as hedges (2016: $3,000). 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 2017 2016 12,744 (1,705) 11,039 8,295 (3,566) 4,729 0 6 / P Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyNotes to the Consolidated Financial Statements C5 CASH FLOWS (CONTINUED) Reconciliation of cash flows from operating activities Consolidated ($000s) Note 2017 2016 Cash flows from operating activities Profit Adjustments for: Depreciation Loss on sale of property, plant and equipment 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 29,046 16,553 5,539 785 440 64 (376) 35,498 1,907 (1,322) (1,452) - 1,651 2,332 1,018 39,632 6,034 162 116 3 1,154 24,022 (146) (23) 734 30 580 (2,141) 282 23,338 P / 6 1 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyNotes to the Consolidated Financial Statements 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 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 Lovisa Complementos España SL Principal place of business Australia Australia Singapore Singapore South Africa South Africa New Zealand Malaysia United Kingdom Singapore Spain Lovisa America, LLC isa Comple España SL United States of America Lovisa Hong Kong Ltd Hong Kong 2 6 / P D2 OPERATING LEASES Recognition and measurement 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 2017 17,930 36,062 5,552 59,544 2016 14,574 21,280 364 36,218 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only Notes to the Consolidated Financial Statements D3 COMMITMENTS AND CONTINGENCIES (a) Guarantees The Group has guarantees outstanding to landlords and other parties to the value of $1,810,000 at 2 July 2017 (2016: $670,000). (b) Capital commitments and contingent liabilities The Group is committed to incur capital expenditure of $557,000 (2016: nil). There are no contingent liabilities that exist at 2 July 2017 (3 July 2016: none). 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 2 July 2017 the Group has the following share-based payment arrangements: (i) Share option programmes (equity-settled) FY2017 LTI - Performance Options (1) Grant date/employee entitiled Options granted On 18 May 2016 Number of instruments (000’s) Vesting conditions 3,460 20% compound increase in EPS over 3 years, with a decrease in the number of options vesting down to a minimum of 10% compound EPS growth over the 3 year period in line with the table below. P / 6 3 Contractual life of options 3 years Total share options 3,460 1,687,764 of these options were approved at the Company’s AGM on 25 October 2016. 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 Performance 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 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only Notes to the Consolidated Financial Statements D4 SHARE-BASED PAYMENT ARRANGEMENTS (CONTINUED) (a) Descriptions of the share-based payment arrangements (continued) i) Share option programmes (equity-settled) (continued) FY2017 LTI - Performance Options (2) Grant date/employee entitiled Options granted On 15 August 2016 Number of instruments (000’s) Vesting conditions 412 20% compound increase in EPS over 3 years, with a decrease in the number of options vesting down to a minimum of 10% compound EPS growth over the 3 year period in line with the table below. Contractual life of options 3 years Total share options 412 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 Performance Options that become exercisable Less than threshold Equal to threshold Between threshold and stretch 4 6 / P Stretch Initial Public Offering - Performance Options Nil 10% compound growth - 20% awarded 12.5% compound growth - 40% awarded 15% compound growth - 60% awarded 17.5% compound growth - 80% awarded 20% compound growth - 100% awarded Grant date/employee entitled Options granted Number of instruments (000’s) Vesting conditions Contractual life of options On 23 December 2014 550 As per table below 2.5 years Total share options 550 The achievement of forecast EPS for FY15 (15.62c) resulted in the award of one third of the options. The remaining two thirds of Options were subject to a performance condition based on the Company’s EPS over FY16 and FY17 (EPS Hurdle). The Board determined that the threshold EPS target was 37.33c and the stretch EPS target was 41.23c over FY16 and FY17. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only Notes to the Consolidated Financial Statements D4 SHARE-BASED PAYMENT ARRANGEMENTS (CONTINUED) (a) Descriptions of the share-based payment arrangements (continued) i) Share option programmes (equity-settled) (continued) Initial Public Offering - Performance Options (continued) Company’s EPS over the Performance Period % of Performance 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 (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 in the prior year 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 FY2017 LTI (1) FY2017 LTI (2) P / 6 5 $0.386 $2.300 N/A $2.300 34% 2.5 years 4.67% 2.23% $0.237 $2.050 $2.100 $2.100 24.70% 3 years 5.11% 1.86% $0.340 $2.79 $2.63 $2.63 25.88% 3 years 4.08% 1.44% Expected volatility has been based on an evaluation of the historical volatility of the Company’s share price. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyNotes to the Consolidated Financial Statements D4 SHARE-BASED PAYMENT ARRANGEMENTS (CONTINUED) (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 2017 000’s 4,010 412 (206) - 4,216 550 2017 $ $2.13 $2.63 $2.63 - $2.15 $2.30 2017 000’s 16 - - - 16 16 Outstanding at 4 July Granted during the year Forfeited during the year Exercised during the year Outstanding at 2 July Exercisable at 2 July (d) Expenses recognised in profit or loss For details on the related employee benefit expenses, see Note A3. D5 RELATED PARTIES (a) Parent and ultimate controlling party 6 6 / P Lovisa Holdings Limited is the parent entity and ultimate controlling party in the Group comprising itself and its subsidiaries. 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 2017 2,170 118 385 144 2,817 2016 1,634 99 100 146 1,979 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 24 to 28. (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. There were no transactions or balances outstanding from these related parties during the period or at 2 July 2017 (3 July 2016: nil). Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only Notes to the Consolidated Financial Statements D5 RELATED PARTIES (CONTINUED) (c) Other related party transactions Consolidated ($000s) 2 July 2017 3 July 2016 2 July 2017 3 July 2016 Transaction values for the year ended Balance outstanding as at a) Expenses Expense recharges b) Sales Recharges 752 121 394 3 - 32 (28) 2 Transactions between the Lovisa Group and BB Retail Capital and its related parties have been disclosed above due to BB Retail Capital continuing to be in a position of holding significant influence in relation to the Group, with representation on the Board of Directors. Lovisa has, and will continue to benefit from the relationships that its management team and BB Retail Capital have developed over many years of retail operating experience. BB Retail Capital has provided certain property management services to Lovisa on an arm’s length basis including managing negotiations with landlords for new leases and lease renewals. This arrangement ceased as at 2 July 2017 with property management services now provided in-house. Non property management related expense recharges are also priced on an arms length basis. The Group will continue to utilise BBRC Retail Capital’s retail operating experience on an arms length basis. All outstanding balances with other related parties are priced on an arm’s length basis and are to be settled in cash within two months post the end of the reporting year. None of the balances are secured. No expense has been recognised in the current year or prior year for bad or doubtful debts in respect of amounts owed by related parties. D6 AUDITOR’S REMUNERATION Consolidated ($) 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 2017 2016 P / 6 7 186,787 199,240 43,213 230,000 20,760 220,000 In relation to other assurance, taxation and due diligence services 193,430 137,250 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 21,402 214,832 444,832 9,972 9,972 46,803 46,803 56,775 501,607 16,842 154,092 374,092 18,978 18,978 165 165 19,143 393,235 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyNotes to the Consolidated Financial Statements D7 DEED OF CROSS GUARANTEE Pursuant to ASIC Corporations (Wholly-owned Companies) Instrument 2016/785 issued by the Australian Securities and Investment Commission, 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 Instrument 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 2 July 2017 is set out as follows. 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 8 6 / P Loss on disposal of property, plant and equipment 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 2017 112,825 (26,298) 86,527 (35,081) (18,167) (1,183) (2,995) (666) (3,899) 4,757 (403) 28,890 (7,225) 21,665 41 21,705 426 (12,600) 9,491 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 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyNotes to the Consolidated Financial Statements D7 DEED OF CROSS GUARANTEE (CONTINUED) Statement of financial position Consolidated ($000s) Assets Cash and cash equivalents Trade and other receivables Inventories 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 2 July 2017 3 July 2016 1,770 27,311 6,224 35,305 2,806 7,421 210,000 220,227 255,532 1,705 26,870 1,660 2,774 805 886 34,700 608 - 1,457 2,065 36,765 218,767 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 27,901 209,221 P / 6 9 208,526 208,526 925 556 (731) 9,491 925 116 (772) 426 218,767 209,221 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyNotes to the Consolidated Financial Statements 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 profits Total equity (a) Parent entity accounting policies 2017 17,194 - 17,194 5,535 216,560 2,774 2,774 208,526 556 4,704 213,786 2016 13,208 - 13,208 - 210,826 2,074 2,074 208,526 116 110 208,752 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 2 July 2017. (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 2 July 2017: • AASB 1057 Application of Australian Accounting Standards 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. 0 7 / P Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only Notes to the Consolidated Financial Statements 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 2016; 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 IFRS 15 Revenue from Contracts with Customers IFRS 16 Leases 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. 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. 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. IFRS 16 is effective for annual periods beginning on or after 1 January 2019. Early adoption is permitted for entities that apply IFRS 15 at or before the date of initial application of IFRS 16. 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. P / 7 1 Adoption of IFRS 15 not expected to have a material impact on the Group’s profit. Recognition of a provision for refunds will result in a gross up of balances on the statement of financial position. The impact on reported sales and margins is not expected to be material in the ordinary course of events. 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 as the Groups operating leases are recognised on the balance sheet. 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. The impact upon implementation will depend on the leases in place on transition. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only 2 7 / P Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlySIGNED REPORTS P / 7 3 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyDIRECTORS’ 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 34 to 71 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 2 July 2017 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 Corporations (Wholly owned Companies) Instrument 2016/785 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 2 July 2017. 4. The Directors draw attention to the Basis of Accounting for the consolidated financial statements set out on page 38, which includes a statement of compliance with International Financial Reporting Standards. 4 7 / P Signed in accordance with a resolution of the Directors. ________________________________________________ Shane Fallscheer Director Melbourne 23 August 2017 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only INDEPENDENT AUDIT REPORT TO THE MEMBERS OF LOVISA HOLDINGS LIMITED Independent Auditor’s Report To the shareholders of Lovisa Holdings Limited Report on the audit of the Financial Report Opinion We have audited the Financial Report of Lovisa Holdings Limited (the Company). In our opinion, the accompanying Financial Report of the Company is in accordance with the Corporations Act 2001, including: giving a true and fair view of the Groups financial position as at 2 July 2017 and of its financial performance for the year ended on that date; and complying with Australian Accounting Standards the Corporations Regulations 2001. and The Financial Report comprises: Consolidated statement of financial position as at 2 July 2017 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 then ended Notes including a summary of significant accounting policies Directors Declaration. The Group consists of the Company and the entities it controlled at the year-end or from time to time during the financial year. P / 7 5 Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our responsibilities under those standards are further described in the Auditors responsibilities for the audit of the Financial Report section of our report. We are independent of the Group in accordance with the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Boards APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the Financial Report in Australia. We have fulfilled our other ethical responsibilities in accordance with the Code. 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 Professional Standards Legislation. 1 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlySigned Reports INDEPENDENT AUDIT REPORT TO THE MEMBERS OF LOVISA HOLDINGS LIMITED (CONTINUED) Key Audit Matters Key Audit Matters are those matters that, in our professional judgment, were of most significance in our audit of the Financial Report of the current period. These matters were addressed in the context of our audit of the Financial Report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Valuation of inventories ($13.1m) Refer to Note B2 to the financial report. The key audit matter How the matter was addressed in our audit 6 7 / P A key audit matter for us was the Groups valuation of inventories, given the relative size of the balance (being 26% of total assets within the Groups consolidated statement of financial position) and the judgement we apply to assess the Groups estimates specific to the value of obsolete inventory. jewellery and is The Group sells fashion therefore subject to changing consumer demands and fashion trends. This increases the risk that, as trends change, products may either need to be sold at a discount below their recorded cost, or ultimately disposed of for zero value. Estimating the level of provisioning for obsolete inventory requires consideration of the ageing and condition of products on hand, historic trends inventory turnover and anticipated future sales. Such judgements may have a significant impact on the calculation of the inventory provision, and therefore the overall carrying value of inventories, necessitating our audit effort thereon. in write-offs and Our procedures included: the historical accuracy of the Assessing Groups inventory provision against actual outcomes, to inform our evaluation of the current year provision and assumptions; Challenging the Groups assumptions within their provision, particularly the extent to which aged and seasonal inventory can be sold, taking into account our knowledge of the industry and past Group performance; in Analysing current and historic identify inventory holdings and ageing to indicators of slow-moving or obsolete inventory. We compared this to the Groups listing of obsolete inventory; trends Checking the integrity of the inventory ageing report at 2 July 2017, as a key input used in the provision calculation, by comparing on a sample basis inventory age per the report to purchase invoices; Attending a sample of inventory counts across the store and warehouse locations to observe the existence and condition of products held; and Comparing a statistical sample of inventory carrying values to post year-end sales prices, and against amounts recorded in the provision. 2 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlySigned Reports INDEPENDENT AUDIT REPORT TO THE MEMBERS OF LOVISA HOLDINGS LIMITED (CONTINUED) Other Information Other Information is financial and non-financial information in Lovisa Holdings Limiteds annual reporting which is provided in addition to the Financial Report and the Auditor's Report. The Directors are responsible for the Other Information. The Other Information we obtained prior to the date of this Auditors Report was the Directors report. The Chairman and Chief Executives Report, and the ASX Additional Information are expected to be made available to us after the date of the Auditor's Report. Our opinion on the Financial Report does not cover the Other Information and, accordingly, we do not and will not express an audit opinion or any form of assurance conclusion thereon, with the exception of the Remuneration Report and our related assurance opinion. In connection with our audit of the Financial Report, our responsibility is to read the Other Information. In doing so, we consider whether the Other Information is materially inconsistent with the Financial Report or our knowledge obtained in the audit, or otherwise appears to be materially misstated. We are required to report if we conclude that there is a material misstatement of this Other Information, and based on the work we have performed on the Other Information that we obtained prior to the date of this Auditors Report we have nothing to report. Responsibilities of the Directors for the Financial Report The Directors are responsible for: P / 7 7 preparing the Financial Report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 implementing necessary internal control to enable the preparation of a Financial Report that gives a true and fair view and is free from material misstatement, whether due to fraud or error assessing the Groups ability to continue as a going concern. This includes disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless they either intend to liquidate the Group or to cease operations, or have no realistic alternative but to do so. Auditors responsibilities for the audit of the Financial Report Our objective is: to obtain reasonable assurance about whether the Financial Report as a whole is free from material misstatement, whether due to fraud or error; and to issue an Auditors Report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error. They are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of this Financial Report. A further description of our responsibilities for the audit of the Financial Report is located at the Auditing and Assurance Standards Board website at: http://www.auasb.gov.au/auditors_files/ar2.pdf. This description forms part of our Auditors Report. 3 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlySigned Reports INDEPENDENT AUDIT REPORT TO THE MEMBERS OF LOVISA HOLDINGS LIMITED (CONTINUED) Report on the Remuneration Report Opinion Directors responsibilities In our opinion, the Remuneration Report of Lovisa Holdings Limited for the year ended 2 July 2017, complies with Section 300A of the Corporations Act 2001. The Directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with Section 300A of the Corporations Act 2001. Our responsibilities We have audited the Remuneration Report included in section 9 of the Directors report for the year ended 2 July 2017. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. 8 7 / P KPMG Maurice Bisetto Partner Melbourne 23 August 2017 4 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only Signed Reports 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 of Lovisa Holdings Limited for the financial year ended 2 July 2017 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. P / 7 9 KPMG Maurice Bisetto Partner Melbourne 23 August 2017 1 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 Professional Standards Legislation. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use only 0 8 / P Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyASX INFORMATION P / 8 1 Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyASX Information 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://www.lovisa.com.au/shareholder-info/), 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 23 August 2017 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 31 AUGUST 2017) SUBSTANTIAL SHAREHOLDERS The number of shares held by substantial shareholders and their associates are set out below: 2 8 / P Shareholder BB Retail Capital Pty Ltd Grahger Capital Securities Pty Ltd 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. Redeemable preference shares Number 43,207,500 12,301,000 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 290 636 269 277 41 129,600 1,980,178 2,113,006 7,331,280 93,461,936 1,513 105,016,000 0.12 1.89 2.01 6.98 89.00 100.00 The number of shareholders holding less than a marketable parcel of ordinary shares is 68. Lovisa Holdings Limited Annual Report - 2 July 2017For personal use onlyASX Information 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 Centreville Pty Ltd National Nominees Limited Grahger Retail Securities Pty Ltd JP Morgan Nominees Australia Limited Grahger Capital Securities Pty Ltd Grahger Retail Securities Pty Ltd Sandhurst Trustees Ltd Grahger Capital Securities Pty Ltd BNP Paribas Noms Pty Ltd Mrs Vanessa Louise Speer Coloskye Pty Limited HSBC Custody Nominees (Australia) Limited - A/C 2 PBC Investments Pty Ltd Mr Robert Thomas & Mrs Kyrenia Thomas UBS Nominees Pty Ltd BNP Paribas Nominees Pty Ltd RBC Investor Services Australia Nominees Pty Ltd Number of ordinary shares held Percentage of capital held 43,207,500 41.14 7,622,648 4,840,337 4,490,000 4,312,096 3,400,000 3,101,518 2,425,750 2,100,000 1,630,821 1,600,000 1,291,890 1,227,460 1,153,005 1,074,546 1,000,000 970,000 807,898 806,471 690,691 7.26 4.61 4.28 4.11 3.24 2.95 2.31 2.00 1.55 1.52 1.23 1.17 1.10 1.02 0.95 0.92 0.77 0.77 0.66 P / 8 3 Total Balance of register 87,752,631 17,263,369 Grand total 105,016,000 83.56 16.44 100.00 Options and performance rights issued under the Lovisa Holdings Ltd Long Term Incentive Plan to take up ordinary shares Number on issue Number of holders 4,215,798 4 Lovisa Holdings Limited Annual Report - 2 July 2017For 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 Tower 2, Collins Square 727 Collins Street Melbourne Victoria 3000 Website www.lovisa.com For personal use only

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