Lovisa Holdings Limited
Annual Report 2019

Plain-text annual report

L O V I S A H O L D I N G S L I M I T E D ANNUAL REPORT 2019 P / 1 ACN 602 304 503 Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only2 / P Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyCONTENTS Overview Chairman’s Report Directors’ Report Financial Statements Consolidated statement of financial position Consolidated statement of profit or loss and other comprehensive income Consolidated statement of changes in equity Consolidated statement of cash flows Notes to 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 04 10 12 34 35 36 37 38 40 46 52 62 76 77 81 84 P / 3 Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only OUR BRAND MOVING GLOBALLY 4 / P • 390 STORES IN 15 COUNTRIES • EXPANSION OF US + FRANCE STORE FOOTPRINT • ONLINE STORES OPEN FOR AUSTRALIA/NZ AND UK/EUROPE • 150 NEW PRODUCTS ARRIVING WEEKLY Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyHIGHLIGHTS EBIT up 2.8% $52.5M $37.0M NPAT UP 3.0% REVENUE UP 15.3% $250.3M LIKE FOR LIKE SALES -0.5% FINAL DIVIDEND 15.0 CPS FULLY FRANKED P / 5 TOTAL STORES 390 NET INCREASE OF 64 STORES Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyOverview 6 6 / / P P Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyOverview GLOBAL REACH P / 7 KEY Owned Stores Franchise STORE NUMBERS Owned FY19 FY18 Franchise FY19 FY18 Aus/NZ Australia 154 151 Asia Middle East Total Franchise 8 28 36 6 18 24 TOTAL STORES 390 326 Asia New Zealand Singapore Malaysia 22 18 25 20 22 21 Africa South Africa 61 56 Europe/Americas UK 38 24 Spain France 9 8 19 5 2 1 354 302 USA Total Owned Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only Overview 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 390 stores in 15 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 China. 8 / P Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only Overview P / 9 Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyChairman’s Report CHAIRMAN’S REPORT 0 1 / P Five continents, fifteen countries, over four hundred stores, and we will not stop here. Lovisa’s global presence continues to expand at a rapid pace. The opportunities we are seeing across the globe right now are more exciting than at any point in Lovisa’s history. To capture this growth and win the market we have to operate with speed and efficiency. This is the way to go. Our customers connect with our products, and our team is constantly striving to meet all their needs. We now have Lovisa boutiques from London to Los Angeles and to Singapore. What is more exciting is, we also have stores in Brea, Lille and Leeds, cities that one might not immediately recognise. This demonstrates the global reach and scale that Lovisa is now operating within. To be present where the customers are, we will continue to look for new opportunities to open new stores in new countries, including smaller cities. We recognise the vast opportunities for further growth and expansion, and strive to continually improve to meet all the needs of our customers, reaching them both digitally and physically, no matter where they may be! Our biggest opportunity to further improve is always what we are not doing for our customer now - what is missing, and what changes should we make to enhance our customer experience so that we can continuously move the needle even higher. Lovisa wants to be, and has to be, a place where we can reinvent, test and trial new offerings, not just in the important areas of product innovation and fashion trends, but equally in the areas of cost, process, training and automation. One of these trials in the past year was piercing. The opportunity for piercing had humble beginnings. Holly Fraser is a young, astute and experienced leader transferred to the United States of America (USA) to open a new market. Holly paid extremely close attention to what the customers were looking for. It was clear to her that our customers not only wanted great products, they also wanted someone to help them with their piercings. It was Holly’s insight and customer obsession that led to the successful testing of incorporating piercing in our American market. Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyChairman’s Report These 2 examples show we have many dynamic, ambitious, successful team members – we need more of them! Both Erin and Kirra continue to show the drive and commitment to themselves, Lovisa, and our customers. It is the ‘Erins’ and ‘Kirras’ who are the lifeblood and success of our global rollout. They, and many others deserve our thanks and appreciation every day for the energy and ambition they bring to their roles. A big thank you to our customers and shareholders for your continuous support. To all of Lovisa around the world, thank you for your energy, for holding yourself to high standards, taking necessary risks and reinventing every day. Our global roll-out will march on with our team continuously delivering exceptional customer experience, opening new stores in new cities, and developing exciting new products. Stay tuned, we have more customers to serve! Brett Blundy Non-Executive Chairman P / 1 1 It is not surprising that not only customers in America are looking for help with their piercings, it is customers worldwide! The Lovisa team took their learnings from the USA and have now rolled out piercing services in stores across the globe. As is Lovisa’s way, the team has rallied behind this new category and has done a tremendous job getting the offer and experience right for our customers. This has required retrofitting each store, sourcing world- class piercing products, and training the team to provide the service our customers come to expect and deserve. The collective results of these actions have proven to resonate strongly with our customers and will continue to benefit Lovisa for years to come. Lovisa’s customer focus is alive and well. While offering piercings might seem like a logical extension now, it wasn’t obvious until we opened a store on the other side of the world with focus on our customer’s needs. This is a reminder that we should continually challenge the status quo. What we know and accept today must be questioned and must be improved upon. At Lovisa we are working to do this every day. Lovisa continues to be strongly led by Shane Fallscheer, who has a continuing focus on developing the leadership and management capabilities across the business whilst ensuring the Lovisa culture is successfully and appropriately maintained around the world. As we need to do more in this area, the people side of Lovisa remains an intensive focus for the leadership team and the board. Growth has opened up enormous opportunities and need for ambitious and driven individuals to succeed. It is always important to develop and encourage our future leaders. In Lovisa’s case, it is imperative that we continue to develop compelling initiatives and innovation around attracting and developing our current and future global leaders. A focus has to, and will continue to be on who is the next country leader, where is the next CEO coming from, who will open up the next territory. The career opportunities at Lovisa are only limited by the individual’s commitment to their career and our collective support. Two recent examples are: Kirra Gorton Kirra is from the Sunshine Coast QLD, and has been with Lovisa for over 6 years where she progressed her way up from stores to Regional Manager QLD. Last year, Kirra moved to New Zealand to take on the Country Manager role. Kirra is remarkably only 23 years of age. Erin McCrory Erin started with Lovisa as a team member in one of our first Lovisa stores, Macquarie NSW. She has been with Lovisa for 9 years. Erin very quickly worked her way up to Store Manager of Pitt St and then Regional Manager NSW. Erin was then promoted to State Manager of NSW. In 2018, Erin accepted the promotion to lead and manage the United Kingdom. Erin is 28 years of age. Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only THE DIRECTORS’ REPORT 2 1 / P Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyP / 1 3 Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyDirectors’ Report THE DIRECTORS 4 1 / P Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyDirectors’ Report Details of the qualifications and experience of each Director in accordance with the requirements of the Corporation Act have been included below. Brett Blundy Shane Fallscheer Tracey Blundy Sei Jin Alt James King John Armstrong Brett Blundy Non-Executive Director & Chairman Appointed 1 November 2018 Chairman of the Board Along with being co-founder and substantial shareholder, Brett is also the Chairman and Founder of BB Retail Capital (“BBRC”), a private investment group with diverse global interests across retail, capital management, retail property, beef, and other innovative ventures. Brett is one of Australia’s most successful retailers, with BBRC’s retail presence extending to over 800 stores across more than 15 countries. Brett is currently a non-executive director of Accent Group Limited (ASX: AX1) and Aventus Retail Property Fund (ASX: AVN). Shane Fallscheer Managing Director Appointed 6 November 2014 Shane Fallscheer is the Managing Director and founder of Lovisa. He has 32 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. 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 a nominated representative of BB Retail Capital on the Board of Lovisa. Tracey 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 and BB Retail Property Pty Limited. Sei Jin Alt Independent Non-Executive Director Appointed 19 February 2019 Sei Jin brings to the Board broad merchandising, managerial, financial, and operational experience in multiple fashion categories as well as business leadership expertise gained over 20 years in the industry across a number of major US retailers including Francesca’s, JC Penny, Nordstrom and Macy’s. James King Independent Non-Executive Director Appointed 17 May 2016 Chairman of the Remuneration & Nomination Committee Member of the Audit, Business Risk & Compliance Committee James King has over 31 years’ experience as a Director and a Senior 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 Chairman of Dutt Industries Pty Ltd and is a member of Global Coaching Partnership. Previously he was a Director of ASX listed JB Hi-Fi Ltd, Trust Company Ltd, Navitas Ltd, Pacific Brands Ltd and Tattersalls Ltd. He also served as a member of the Council of Xavier College and Chairman of Juvenile Diabetes Research Foundation (Victoria). Jim holds a Bachelor of Commerce from University of New South Wales and is a Fellow of the Australian Institute of Company Directors. P / 1 5 John Armstrong Independent Non-Executive Director Appointed 25 September 2018 Chairman of the Audit, Business Risk & Compliance Committee Member of the Remuneration & Nomination Committee John has more than 30 years’ experience in various financial and commercial management roles and brings significant financial experience to the Board. His most recent executive role was at SEEK Limited, an ASX 50 listed leading recruitment and education provider, where he was the Chief Financial Officer for over 12 years. John’s focus was on SEEK’s Asian operations and investments, including directorships of SEEK’s business in China, Zhaopin Ltd (a US listed company), and SEEK Asia, which operates across South East Asia. Prior to SEEK, he held financial management roles at Carlton & United Breweries and commenced his career at Ernst & Young. John is a Non-Executive Director of Blackmores Limited and was previously a Non-Executive Director of Melbourne IT and iProperty Group Ltd. Nico Van Der Merwe Alternate Director to Brett Blundy Appointed 19 February 2019 Nico has been Chief Financial Officer of BB Retail Capital for the past 12 years and brings significant retail, investment, and financial management experience to the Board. Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyDirectors’ 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 30 June 2019. Director M Kay T Blundy S Fallscheer J King B Blundy J Armstrong S J Alt N Van Der Merwe Board Audit and Risk Remuneration & Nomination Number attended Number held Number attended Number held Number attended Number held 3 5 6 6 4 4 2 - 3 6 6 6 6 4 2 2 1 3 4 4 2 3 2 1 1 4 4 4 4 3 2 2 2 3 4 4 4 3 2 - 2 4 4 4 4 3 2 2 Michael Kay was a Director of Lovisa Holdings Limited during the year until his resignation on 30 October 2018. Brett Blundy was appointed as a Director and Chairman on 1 November 2018, having previously acted in the capacity of alternate Director prior to that time. John Armstrong was appointed as an independent non-executive Director on 25 September 2018. Sei Jin Alt was appointed as an independent non-executive Director on 19 February 2019. Nico Van Der Merwe was appointed as an alternate Director for Brett Blundy on 19 February 2019. Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only Directors’ Report 1.1 Company Secretary Chris Lauder was appointed Company Secretary on 15 September 2017. He is also the company’s Chief Financial Officer. Mr Lauder is a Chartered Accountant. 1.2 Directors Interests in Shares The relevant interest of each Director in the Company at the date of the report is as follows: Ordinary Shares in the Company 43,207,500 1,153,005 4,140,000 Director B Blundy (1) T Blundy (2) S Fallscheer (3) J King (4) J Armstrong S J Alt N Van Der Merwe (1) Shares held by BB Retail Capital Pty Ltd (2) Shares held by Coloskye Pty Ltd (3) Shares held by Centerville Pty Ltd (4) Shares held by King Family Super Fund 4. REVIEW OF OPERATIONS The following summary of operating results and operating metrics reflects the Group’s performance for the year ended 30 June 2019: 4.1 Financial Performance For the year ended 30 June 2019 the Group reported a net profit after tax of $37.0 million following same store sales being down 0.5% and the addition of net 64 stores across the globe. This was also assisted by an increase in gross margin on the back of tight inventory management and the stronger USD hedge rate during the period. This result reflects an increase of 3.0% on the Group’s 2018 net profit. 34,000 Consolidated $’000 FY2019 FY2018 Change - - - Sales Gross profit Gross Margin 250,282 217,010 15.3% 201,409 173,637 16.0% 80.5% 80.0% 0.5% Operating expenses 139,087 115,437 20.5% EBITDA EBIT 62,322 58,200 52,484 51,074 Net profit after tax (NPAT) 37,043 35,954 7.1% 2.8% 3.0% Basic Earnings per share 35.09c 34.24c 0.85c P / 1 7 2. PRINCIPAL ACTIVITIES The principal activity of the Group during the financial year was the retail sale of fashion jewellery and accessories. 4.1.1 Sales The business has 390 retail stores in operation at 30 June 2019 including 36 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: 2019 2018 $000's $000's 14,779 7,980 19,002 13,652 Final ordinary dividend for the year ended 30 June 2018 of 14.0 cents (2017: 7.6 cents) per fully paid share fully franked paid on 25 October 2018 Interim ordinary dividend for the year ended 30 June 2019 of 18.0 cents (2018: 13.0 cents) per fully paid share fully franked paid on 26 April 2019 STRONG REVENUE GROWTH (A$M) m 3 . 4 3 1 $ m 5 . 3 5 1 $ m 7 . 8 7 1 $ m 0 . 7 1 2 $ m 3 . 0 5 2 $ FY15 FY16 FY17 FY18 FY19 NUMBER OF STORES IN OFFSHORE MARKETS CONTINUED TO GROW Total dividends paid 33,781 21,632 In addition to the above dividends, since the end of the financial year the Directors have declared the payment of a final dividend of $15,835,000 (15.0 cents per fully paid share) expected to be paid on 24 October 2019. The dividend will be fully franked. 9 3 2 0 5 2 8 8 2 6 2 3 FY15 FY16 FY17 FY18 AUSTRALIA OFFSHORE FY17 0 9 3 FY19 Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only Directors’ Report 4.1.1 Sales (continued) 4.1.3 Cost Of Doing Business The Group’s reported revenue was $250.3m, being a 15.3% increase on the prior year with comparable sales being down 0.5% across the Group. The offshore expansion continued during the year with the addition of a net 64 stores across the Group, comprising of 70 new stores including new stores in France and the USA, offset by 6 stores closed. 4.1.2 Gross Profit Margin GROSS MARGIN % % 7 FY13 7 % 4 FY14 7 % 9 FY15 7 % 0 FY16 8 % FY17 0 8 FY15 FY16 FY17 FY18 FY19 INCREASE IN COST OF DOING BUSINESS % 4 5 % 4 5 % 3 5 % 3 5 % 6 5 FY15 FY16 FY17 FY18 FY19 The Group’s Cost of Doing Business (CODB) increased during the year due to investing ahead of the curve to support the Company’s net opening of 64 new stores and the ongoing store rollout plan. The company has continued its investment in new territory infrastructure and senior management roles to support the store rollout. 4.1.4 Earnings The Group’s Gross Profit increased by 16.0% to $201.4m. Gross Margin increased during the year to 80.5% on the back of tight inventory management and the stronger USD hedge rate during the period. Earnings before interest and tax (EBIT) was $52.5m being a 2.8% increase on EBIT from the prior year. Financing costs were positive during the year following strong cash flow and debt facilities remaining undrawn for much of the year. 8 1 / P This Margin increase benefited from currency tailwinds associated with the Australian Dollar. We estimate 34bps of the 46bps improvement in gross margin was a result of the impact of the stronger AUD/USD hedge rate on stock purchases. Net profit after tax increased 3.0% to $37.0m with EPS lifting to 35.1 cents. 4.1.5 Cash Flow The Group’s net cash flow from operating activities increased $8.3m during the year to $68.9m. Capital expenditure of $24.1m relates predominately to new store openings and refurbishments of current stores upon lease renewal. The Group’s policy of distributing surplus cash by way of increased dividends resulted in a net cash outflow for the year, with net cash of $11.2m on hand at year end. Lovisa Holdings Limited Annual Report - 30 June 2019For 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 cash Net derivative asset/(liability) Net deferred tax balances Net assets/equity Net working capital Directors’ Report Actual FY2019 $’000 7,413 22,769 Actual FY2018 $’000 4,881 14,945 (37,576) (27,579) (7,394) 38,418 4,418 35,442 11,192 645 6,372 53,651 (7,753) 22,411 3,563 18,221 21,057 1,429 4,535 45,242 Change FY18/FY19 % 51.9% 52.4% 36.2% (4.6%) 71.4% 24.0% 94.5% (46.8%) (54.9%) 40.5% 18.6% The Group’s net working capital remained stable during the year. Inventory levels increased from $14.9m to $22.8m during the year due to an increase of 52 company owned stores and 12 franchise stores, as well as additional stock holdings to support new store openings in the first half of FY20 and the e-commerce business. 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 maintains its debt facilities at $25m along with a $7m contingent liability facility predominately for issuance of Bank Guarantees and Letters of Credit to international landlords. The Group possesses net cash reserves of $11.2m at year end. P / 1 9 Lovisa Holdings Limited Annual Report - 30 June 2019For 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 $250.3 million in FY2019. The Group continues to focus on its key drivers to deliver growth in sales and profit growth. Growth pillar International expansion Business Strategy Section 5.2 Streamline global supply chain 5.3 Strategy Risks Achievements • Continue to leverage current • Competition (6.2) international territories • Leverage the Company’s capital in large international markets • Roll out USA, France and UK territory and investigate other Northern Hemisphere markets • Consider franchise partners for selected territories • Expand into new international markets, targeting one new trial territory per annum • Retail environment and general economic conditions (6.3) • Failure to successfully implement growth strategies (6.4) • Availability of appropriately sized sites in good locations • Net 61 stores opened outside of Australia during the year including 14 stores in the United Kingdom and 4 new stores in Spain. In new territories 6 stores were opened in France and 18 new stores in the USA. 12 franchise stores were opened during the year. • Streamline and optimise supply • Exchange rates (6.5) base in Asia • Optimise air and sea freight whilst maintaining speed to market operating model • Consider alternative Northern Hemisphere distribution model • Product sourcing or supply chain disruptions • Over 51% of product was moved through the China and HK warehouses (FY18: 45%) • Completed move of Asian distribution hub from HK to China Enhance existing store performance 5.4 • Optimise and improve existing • Competition (6.2) • FY19 LFL sales down store network • Retail environment 0.5% • Continue to target high traffic shopping precincts • Judicious pricing and general economic conditions (6.3) • Global roll-out of in store piercing service underway 0 2 / P 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 • Prevailing fashions and consumer preferences may change (6.6) • Prevailing fashions and consumer preferences may change (6.6) • We continue to close stores in sub-optimal locations • Opening of online store for Australia/NZ and United Kingdom/Europe • Increased social media • Privacy breaches engagement • Prevailing fashions and consumer preferences may change (6.6) • Continued strong performance 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 the product team is primarily based in Melbourne, 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 - 30 June 2019For personal use onlyDirectors’ 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 target 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 a portfolio of company owned stores in Australia, New Zealand, Singapore, Malaysia, South Africa, the United Kingdom, Spain, France and the United States of America and supporting franchised stores in Kuwait, the United Arab Emirates, Oman, Bahrain, Saudi Arabia and Vietnam. Lovisa will continue to explore other markets through pilot programs and will advise shareholders upon successful completion of those pilot programs in order to capitalise on the opportunities presented and obtain scale in these markets. 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. The history of Lovisa stores is as follows: Australia New Zealand Singapore South Africa Malaysia United Kingdom Spain France USA Middle East* Vietnam* Total FY2015 146 FY2016 144 FY2017 145 FY2018 151 FY2019 154 14 15 36 15 - - - - 13 - 239 18 19 36 14 3 - - - 16 - 250 18 21 50 19 11 1 - - 19 4 288 20 22 56 21 24 5 2 1 18 6 326 22 18 61 25 38 9 8 19 28 8 390 P / 2 1 * Franchise Stores 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 Australia and New Zealand) or its third party operated warehouse in China (for stock to be sold in all other countries). 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. In August 2018, the Group successfully transitioned the HK third party warehouse to a new third party warehouse in Qingdao, China to ensure we are better placed to efficiently support the global expansion of the business. 5.4 Enhance Existing Store Performance Lovisa is constantly reviewing the efficiency of its existing store network to ensure that stores are run as profitably as possible, with stores closed if they are not performing to expectations and new sites continuing to be identified. Whilst some of the markets Lovisa operates in are mature and have less opportunities for new store openings, our leasing team continue to assess new sites as they arise. The global roll-out of piercing services into stores is well underway with a focus on enhancing customer loyalty. 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, focused imagery, and the store “look and feel”. Stores are located in high foot traffic areas, in high performing centres. The company’s online store is now operational for Australia/NZ and the UK/EU market. Lovisa Holdings Limited Annual Report - 30 June 2019For 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. 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 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. 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. 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 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 - 30 June 2019For personal use onlyDirectors’ 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 $15,835,000 (15.0 cents per fully paid share) expected to be paid on 24 October 2019. The dividend will be fully franked. No other matters or circumstance has arisen since 30 June 2019 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 - 30 June 2019For personal use onlyDirectors’ Report 9. REMUNERATION REPORT - AUDITED 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 Brett Blundy James King Tracey Blundy John Armstrong Sei Jin Alt Chairman (Resigned 31 October 2018) Director Director Director (Appointed 25 September 2018) Director (Appointed 19 February 2019) Nico Van Der Merwe Alternate Director (Appointed 19 February 2019) Executive KMP Shane Fallscheer Chris Lauder Managing Director Chief Financial Officer A. Principles Used to Determine the Nature and Amount of Remuneration (a) Non-Executive Directors KMP Remuneration Non-executive Directors’ fees are determined within an aggregate Non-executive 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 30 June 2019 was $391,333. Brett Blundy, 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 between $60,000 to $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 1. Base salary and benefits including superannuation 2. Short term incentive scheme comprising cash 3. Long term incentive scheme comprising options The mix of fixed and at risk components for each Senior Executive as a percentage of total target remuneration for the 2019 financial year is as follows: Senior Executive Shane Fallscheer Chris Lauder Fixed remuneration At risk remuneration 16% 67% 84% 33% Chairman (Appointed Chairman 1 November 2018) The current executive salary and reward framework consists of the following components; 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. 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 %. 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. Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only Directors’ Report Short Term Incentive plan EPS over the Performance Period % Exercisable 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. The Company’s remuneration policy for KMP is currently focused on long term incentives only, and as a result no short term incentives are included within remuneration for KMP. Long Term Incentive plan The Company operates a long term incentive plan. The plan is designed to align the interests of the executives with the interest of the shareholders by providing an opportunity for the executives 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 Performance Rights. Performance Conditions The Board considers profit based performance measures such as EPS and EBIT to be the most appropriate performance conditions as they align the interests of shareholders with management. 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 this Grant were: 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 • No options were forfeited during the year. 100% awarded • The actual compound annual growth rate in EPS over the performance period ended 30 June 2019 was 29.5%. As a result of this the Board have determined that 1,893,646 Performance Options have now vested and are exercisable, including 1,687,764 granted to the Managing Director • The expiry of the Performance Options is 12 months following the end of the performance period. FY2018 LTI – Performance Options In July 2017, October 2017 and November 2017 a grant of Performance Options was made to the Managing Director, Executives and Management as part of the FY2018 LTI. The key terms associated with the 2017 Grant are: • • The performance period commences 3 July 2017 and ends 28 June 2020. The exercise price of the Performance Options is $3.79 for the July 2017 granted options, $4.00 for the October 2017 granted options and $5.94 for the November 2017 granted options, which represents the 30 day VWAP to the date of grant. • A total of 2,959,660 Performance Options were granted in the July 2017 grant, 377,171 in the October 2017 grant and 337,553 in the November 2017 grant. 1,308,901 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 delivering the Company’s EPS target over the performance period, and are consistent with the EPS hurdle for the FY2017 Performance Options noted above . • The Performance Options granted to the Managing Director were approved at the 2017 AGM. P / 2 5 • • The performance period commenced 4 July 2016 and ended on 30 June 2019. • 377,171 options were forfeited during the year. FY2019 LTI – Performance Options 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. In October 2018 a grant of Performance Options was made to the Managing Director, Executives and Management as part of the FY2019 LTI. The key terms associated with the 2019 Grant are: • 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 Performance Options granted to the Managing Director were approved at the 2016 AGM. The grant of Performance Options are subject to performance conditions based on delivering the Company’s EPS target growth over the performance period, as set out below. The performance period commences 2 July 2018 and ends 27 June 2021. The exercise price of the Performance Options is $10.95, which represents the 30 day VWAP to the date of grant. • A total of 2,758,608 Performance Options were granted, with 2,564,103 of these options subject to shareholder approval. • The grant of Performance Options are subject to performance conditions based on delivering the Company’s EBIT target over the performance period, as set out below. Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only • • • For Performance Options granted to the Managing Director, the Performance Options will be tested at the end of the performance period, and if they are determined to have vested they will then be subject to a further 2 year holding restriction period ending 2 July 2023, after which time they may be exercised up to their expiry date being 12 months following the end of the restriction period. For executives other than the Managing Director, the expiry of the Performance Options is 12 months following the end of the performance period. The Performance Options granted to the Managing Director were approved at the 2018 AGM. • No options were forfeited during the year. The Board has determined the EBIT Target growth hurdles applicable to both the FY2018 and FY2019 grants are as follows: Performance Options granted to the Managing Director: EBIT* over the Performance Period % Exercisable Less than threshold 24% compound growth 25% compound growth 26% compound growth Nil 10% awarded 20% awarded 100% awarded Performance Options granted to other Executives: EBIT* over the Performance Period % Exercisable Less than threshold 17.5% compound growth 20% compound growth 22.5% compound growth Nil 40% awarded 60% awarded 80% awarded 25% compound growth 100% awarded * EBIT is defined as Earnings before Interest and Tax before Share Based Payments expense for the purposes of testing the performance conditions above. Certain executives (other than KMP) are also subject to personal performance hurdles in addition to the EBIT hurdle noted above. 9.3 Equity Remuneration Analysis Analysis of Options and Performance Rights over Equity Instruments Granted as Compensation Details of the vesting profile of options and 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 6 2 / P S Fallscheer FY17 LTIP 1,687,764 400,000 4 July 2016 133,360 100 FY18 LTIP 1,308,901 500,000 3 July 2017 FY19 LTIP 2,564,103 8,000,000 2 July 2018 C Lauder FY18 LTIP 337,553 160,000 3 July 2017 FY19 LTIP 76,923 210,000 2 July 2018 166,667 133,333 64,000 17,500 - - - - - - - - - 30 June 2019 28 June 2020 27 June 2021 28 June 2020 27 June 2021 9.4 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 1 July 2018 Granted Exercised Forfeited Held at 30 June 2019 Vested during the year % Vested and exercisable at 30 June 2019 Directors S Fallscheer - IPO LTIP - FY17 LTIP - FY18 LTIP - FY19 LTIP Executives C Lauder - FY18 LTIP - FY19 LTIP 550,000 1,687,764 1,308,901 - - - - 2,564,103 337,553 - - 76,923 550,000 - - - - - - - - - - - - 1,687,764 1,308,901 2,564,103 337,553 76,923 - 100 - 1,687,764 - - - - - - - - Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only Directors’ Report 9.5 Details of Remuneration Details of the remuneration of the Directors and Key Management Personnel (KMPs) is set out below. Short Term Employment Benefits Post- Employment Benefits Long Term Benefits Share Based Payments Other Benefits Year Salary & Fees ($) Non- monetary benefits ($) Performance based payment ($) Super Contributions ($) Annual & Long Service Leave ($) Options/ Rights ($) Termination Benefits ($) Total ($) NON-EXEC DIRECTORS B Blundy (1) M Kay (2) T Blundy J King 2019 2018 2019 100,000 - 45,662 2018 136,986 2019 2018 2019 2018 54,795 69,794 73,059 73,059 J Armstrong (3) 2019 56,012 S J Alt (4) P Cave (5) N Van Der Merwe (6) TOTAL NON-EXEC DIRECTORS 2018 2019 2018 2019 2018 2019 2018 - 20,000 - - 23,197 - - 2019 349,528 2018 303,036 - - - - - - - - - - - - - - - - - - EXEC DIRECTORS S Fallscheer 2019 1,282,749 27,841 2018 636,063 27,841 OTHER KMP C Lauder 2019 376,831 2018 264,578 S Doyle (7) 2019 - G Fallet (8) 2018 430,289 2019 2018 - 73,136 - - - - - - TOTAL EXEC 2019 1,659,580 27,841 - - 4,338 13,014 25,205 10,206 6,941 6,941 5,321 - - - - 3,470 - - 41,805 33,631 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 25,000 190,923 433,360 - - - - - - - - - - - - - - - - - - - 100,000 - 50,000 150,000 80,000 80,000 80,000 80,000 61,333 - 20,000 - - 26,667 - - P / 2 7 391,333 336,667 1,959,873 30,000 85,397 299,987 - 1,079,288 - - - - - - - - - - - - - - - - - - - - - 24,731 38,328 81,500 20,000 21,174 28,428 32,000 - - - - - - - 521,390 366,180 - 245,760 20,048 34,355 (100,000) 261,559 892,011 - - - - - - - - 3,341 5,064 (40,000) 189,980 231,521 49,731 229,251 514,860 - 2,481,263 2018 1,404,066 27,841 265,760 74,563 153,244 191,987 451,539 2,569,000 (1) Appointed as Chairman on 1 November 2018 (2) Resigned as a Chairman and a Director on 30 October 2018 (3) Appointed on 25 September 2019 (4) Appointed on 19 February 2019 (5) Resigned as a Director on 31 October 2017 (6) Appointed as an Alternate Director of Lovisa Holdings on 19 February 2019 (7) Resigned on 20 April 2018 (8) Resigned on 15 September 2017 Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only Directors’ Report 9.6 Consequences of Performance on Shareholder Wealth In considering the consolidated entity’s performance and the benefits for shareholder wealth, the Remuneration and Nomination Committee has regard to a range of indicators in respect of senior executive remuneration and linked these to the previously described short and long term incentives. The following table presents these indicators showing the impact of the Group’s performance on shareholder wealth, during the financial years: Earnings before interest and tax ($000) FY 2019 FY 2018 FY2017 52,484 51,074 40,704 Net profit after tax ($000) 37,043 35,954 29,046 Dividends paid ($000) 33,781 21,632 12,600 Share Price $11.36 $11.70 $3.69 Earnings per share (cents) 35.09 34.24 27.66 KMP Shareholdings The following table details the ordinary shareholdings and the movements in the shareholdings of KMP (including their personally related entities) for FY2019. No. of shares Held at 1 July 2018 Shares Purchased Shares Sold Held at 30 June 2019 Non-executive Directors B Blundy 43,207,500 T Blundy 1,153,005 J King 34,000 - - - J Armstrong S J Alt N Van Der Merwe (alternate) Executive Directors - - - - - - - - - - - - 43,207,500 1,153,005 34,000 - - - S Fallscheer 4,490,000 550,000 (900,000) 4,140,000 Executive C Lauder - 3,000 - 3,000 8 2 / P Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyDirectors’ 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 Brett Blundy Non-Executive Chairman Shane Fallscheer Managing Director Melbourne, 21 August 2019 10. INSURANCE OF OFFICERS AND INDEMNITIES During the financial year, Lovisa Holdings Limited paid a premium of $303,000 (2018: $160,000) 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 81 and forms part of this Directors’ Report. 11.2 Audit and Non-Audit Services Provided by the External Auditor During the financial year ended 30 June 2019, the following fees were paid or were due and payable for services provided by the external auditor, KPMG, of the Consolidated Entity: Consolidated Entity 2019 $000 2018 $000 Audit and assurance services Audit and review of financial statements Other services Tax compliance services Other accounting services 270 240 60 132 462 103 113 456 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 - 30 June 2019For personal use only 0 3 / P 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 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 - 30 June 2019For 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 65 66 67 69 69 71 76 77 81 84 88 Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only FINANCIAL STATEMENTS 2 3 / P Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyP / 3 3 Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyFinancial Statements CONSOLIDATED STATEMENT OF FINANCIAL POSITION As at 30 June 2019 Consolidated ($000s) Assets Cash and cash equivalents Trade and other receivables Inventories Derivatives Total current assets Deferred tax assets Property, plant and equipment Intangible assets and goodwill Total non-current assets Total assets Liabilities Bank overdraft Trade and other payables Employee benefits - current Provisions - current Current tax liabilities Total current liabilities Employee benefits - non current 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 C4 A6 B3 B4 C5 B6 B8 B7 A6 B8 B7 30 June 2019 19,180 7,413 22,769 645 50,007 6,372 38,418 4,418 49,208 99,215 7,988 23,659 2,992 2,212 1,261 1 July 2018 21,057 4,881 14,945 1,429 42,312 4,535 22,411 3,563 30,509 72,821 - 11,747 2,416 1,117 6,534 38,112 21,814 1,062 6,390 7,452 45,564 53,651 780 4,985 5,765 27,579 45,242 C1 209,791 208,526 (208,906) (208,906) 6,302 46,464 53,651 2,270 43,352 45,242 The Notes on pages 38 to 72 are an integral part of these consolidated financial statements. Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyFinancial Statements CONSOLIDATED STATEMENT OF PROFIT OR LOSS & OTHER COMPREHENSIVE INCOME For the financial year ended 30 June 2019 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 A3 A3 A6 A4 A4 2019 2018 250,282 (48,873) 201,409 (66,352) (42,579) (8,796) (9,838) (241) (21,119) 52,484 436 (302) 134 52,618 (15,575) 37,043 (697) 2,329 1,632 1,632 217,010 (43,373) 173,637 (55,514) (34,713) (7,213) (7,126) (463) (17,534) 51,074 192 (111) 81 51,155 (15,201) 35,954 1,981 410 2,391 2,391 P / 3 5 38,675 38,345 37,043 37,043 38,675 38,675 35.09 34.21 35,954 35,954 38,345 38,345 34.24 33.33 The Notes on pages 38 to 72 are an integral part of these consolidated financial statements. Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyFinancial Statements CONSOLIDATED STATEMENT OF CHANGES IN EQUITY As at 30 June 2019 Attributable to Equity Holders of the Company Consolidated ($000s) Note Share Capital Common Control Reserve Balance at 3 July 2017 208,526 (208,906) Share Based Payments Reserve Cash Flow Hedge Reserve Foreign Currency Translation Reserve Total Equity 556 (731) (286) 28,189 - - - - 340 - 340 896 896 - - - - - 1,981 - - 35,954 1,981 - 410 410 1,981 410 38,345 - - - 1,250 1250 - - (697) - - - 340 (21,632) (21,292) 124 124 45,242 45,242 - - - (150) 37,043 (697) - 2,329 2,329 Retained Earnings 29,030 35,954 - - 35,954 - (21,632) (21,632) 43,352 43,352 (150) 37,043 - - D4 A5 - - - - - - - - - - - - - - 208,526 (208,906) 208,526 (208,906) - - - - - - - - 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 Balance at 1 July 2018 Balance at 2 July 2018 Impact of change in accounting policy Total comprehensive income for the year Profit Cash flow hedges Foreign operations - foreign currency translation differences Total comprehensive income for the year Capital contributions Employee share schemes Dividends Total transactions with owners of the Company Balance at 30 June 2019 6 3 / P 208,526 (208,906) 80,245 896 553 2,453 83,767 C1 D4 A5 1,265 - - 1,265 - - - - - - (33,781) - 2,400 - (33,781) 2,400 - - - - - - - - 1,265 2,400 (33,781) (30,116) 209,791 (208,906) 46,464 3,296 553 2,453 53,651 The Notes on pages 38 to 72 are an integral part of these consolidated financial statements. Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyFinancial Statements CONSOLIDATED STATEMENT OF CASH FLOWS For the financial year ended 30 June 2019 Consolidated ($000s) Note 2019 2018 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 key money intangibles Net cash used in investing activities Cash flows from financing activities Share options exercised 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 278,004 243,407 (211,277) (182,802) 66,727 60,605 436 (302) (20,633) 46,228 192 (111) (13,895) 46,791 (23,359) (14,183) 55 (831) (24,135) 1,265 (33,781) (32,516) (10,423) 21,057 558 11,192 67 (1,162) (15,278) - (21,632) (21,632) 9,881 11,039 137 21,057 P / 3 7 C5 B4 A5 C5 C5 The Notes on pages 38 to 72 are an integral part of these consolidated financial statements. Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyNotes 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 Level 1, 818-820 Glenferrie Road, Hawthorn, Victoria 3122. 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 30 June 2019 (2018: 52 week period ended 1 July 2018). This treatment is consistent with section 323D of Corporations Act 2001. The consolidated financial statements of the Group for the financial year ended 30 June 2019 were authorised for issue by the Board of Directors on 21 August 2019. 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. Intangible assets and goodwill 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 2018. This is the first set of the Group’s annual financial statements in which AASB 15 Revenue from Contracts with Customers and AASB 9 Financial Instruments have been applied. 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 30 June 2019 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 B2 - inventories: recognition and measurement of stock provisioning; • Note B5 – impairment test: key assumptions underlying recoverable amounts, including the recoverability of goodwill and key money; 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 - 30 June 2019For personal use only Notes to the Consolidated Financial Statements When the settlement of a monetary item receivable from or payable to a foreign operation is neither planned nor likely to occur in the foreseeable future, foreign exchange gains and losses arising from such a monetary item that are considered to form part of a net investment in a foreign operation are recognised in other comprehensive income, and are presented in the translation reserve in equity. About the Notes to the financial statements The notes include information which is required to understand the financial statements and is material and relevant to the operations, financial position and performance of the Group. Information is considered material and relevant if, for example: • The amount with respect to the information is significant because of its size or nature; • The information is important for understanding the results of the Group; • It helps to explain the impact of significant changes in the Group’s business; or • It relates to an aspect of the Group’s operations that is important to its future performance. Subsequent events There are no matters or circumstances that have arisen since the end of the financial year which significantly affected or may significantly affect the operations of the Group, the result of those operations, or the state of affairs of the Group in future financial years. 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. Lovisa Holdings Limited Annual Report - 30 June 2019For 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 regional management, 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. 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; and 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 - 30 June 2019For personal use onlyNotes 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), Americas (United States of America) and Europe (United Kingdom, Spain and France 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 e) Americas Total 2019 2018 Non-current assets (i) Non-current assets (i) 15,305 1,642 3,497 10,748 7,226 38,418 10,473 1,723 3,689 6,017 509 22,411 (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 Americas Total Sale of Goods Franchise Revenue Middle East Asia Total Franchise Revenue Total Revenue P / 4 1 2019 2018 137,684 132,013 34,393 33,417 36,672 6,346 34,558 30,499 17,884 509 248,512 215,463 1,385 385 1,770 1,153 394 1,547 250,282 217,010 a) Revenue recognition and measurement Revenue is recognised when the customer obtains control of the goods, 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 customer obtains control of the goods. A right of return provision has been recognised in line with the Group’s returns policy in line with the requirements of IFRS 15 along with a right to recover returned goods asset. The impact of this change in accounting policy has been quantified in note D9. Franchise income Franchise income, which is generally earned based upon a percentage of sales is recognised on an accrual basis. There is no material impact from the introduction of IFRS 15 on franchise income. Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyNotes to the Consolidated Financial Statements A3 EXPENSES Expenses by nature Consolidated ($000s) Property expenses Lease expenses Outgoings Total property expenses 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 Other expenses Administrative expenses Other expenses Total other expenses A4 EARNINGS PER SHARE (EPS) Calculation methodology 2019 2018 32,113 10,466 42,579 60,361 5,123 282 586 66,352 14,429 6,690 21,119 26,856 7,857 34,713 50,824 4,178 172 340 55,514 13,259 4,275 17,534 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) 2019 35.09 34.21 2018 34.24 33.33 Profit attributable to ordinary shareholders ($000s) 37,043 35,954 Weighted average number of ordinary shares for basic EPS (shares) 105,566,000 105,016,000 Weighted average number of ordinary shares and potential ordinary shares for diluted EPS (shares) 108,272,778 107,863,473 2019 2018 Weighted average number of ordinary shares used as the denominator in calculating basic earnings per share 105,566,000 105,016,000 Adjustments for calculation of diluted earnings per share: Options 2,706,778 2,847,473 Weighted average number of ordinary shares and potential ordinary shares used as the denominator in calculating diluted earnings per share 108,272,778 107,863,473 2 4 / P Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only Notes to the Consolidated Financial Statements A4 EARNINGS PER SHARE (EPS) (CONTINUED) Information concerning the classification of securities i) Options Options 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 have not been included in the determination of basic earnings per share. Details relating to the options are set out in note D4. 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) 14.0 cents per qualifying ordinary share (2018: 7.6 cents) 18.0 cents per qualifying ordinary share (2018: 13.0 cents) 2019 2018 14,779 19,002 7,980 13,652 33,781 21,632 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) 15.0 cents per qualifying ordinary share (2018: 14.0 cents) Consolidated ($000s) Dividend franking account 2019 2018 15,835 15,835 14,702 14,702 2019 2018 P / 4 3 Franking credits available for subsequent reporting periods based on a tax rate of 30.0% (2018: 30%) 4,620 8,623 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: 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. Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only Notes to the Consolidated Financial Statements A6 INCOME TAXES (CONTINUED) (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 (b) Reconciliation of effective tax rate Consolidated ($000s) Profit before tax from continuing operations Tax at the Australian tax rate of 30% (2018: 30%) Effect of tax rates in foreign jurisdictions 4 4 / P Non-deductible expenses Tax exempt income Utilisation of carried-forward tax losses Recognition of tax effect of previously unrecognised tax losses Current year losses for which no deferred tax asset is recognised Other movements 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 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 2019 2018 17,264 16,372 103 171 17,367 16,543 (1,791) (1,342) (1) - (1,792) (1,342) 15,575 15,201 2019 52,618 15,785 2018 51,155 15,347 (515) (532) 379 (34) - (313) 761 (590) 102 499 (28) (450) (483) 645 32 171 15,575 15,201 (2,052) 1,837 (215) 149 1,260 1,409 15,360 16,610 6,534 3,819 (20,633) (13,895) 1,261 6,534 1,261 6,534 - - 1,261 6,534 Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only Notes to the Consolidated Financial Statements A6 INCOME TAXES (CONTINUED) (b) Reconciliation of effective tax rate (continued) 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 (c) Deferred tax assets and liabilities reconciliation 2019 2018 29.6% 27.8% 29.7% 30.4% Consolidated ($000s) Property, plant and equipment Employee benefits Provisions Other items Transaction costs Carry forward tax losses Deferred tax expense Net deferred tax assets Statement of financial position Statement of profit or loss 2019 1,681 1,485 902 505 - 1,799 - 2018 653 1,162 1,151 595 235 739 - 2019 (1,024) (322) 259 90 235 (1,030) (1,792) 2018 (294) (194) (66) (303) 235 (720) (1,342) P / 4 5 6,372 4,535 Presented in the Statement of financial position as follows: Deferred tax assets 6,372 4,535 Unused tax losses for which no deferred tax asset has been recognised total $1,063,000 (2018: $652,000). (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 2019 2,774 3,617 6,391 19 - 19 2018 3,187 1,531 4,718 183 - 183 Net deferred tax assets 6,372 4,535 Lovisa Holdings Limited Annual Report - 30 June 2019For 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) Note Trade receivables Deposits Prepayments Other receivables Impairment of receivables 2019 3,147 1,120 3,052 94 7,413 2018 959 967 2,891 64 4,881 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. 6 4 / P B2 INVENTORIES Recognition and measurement Inventories are stated at the lower of cost and net realisable value. Net realisable value is the estimated selling price in the ordinary course of business, less the estimated costs of completion and selling expenses. Cost includes the product purchase cost, import freight and duties together with other costs incurred in bringing inventory to its present location and condition using the weighted average cost method. All stock on hand relates to finished goods. Costs of goods sold comprises purchase price from the supplier, cost of shipping product from supplier to warehouse, shrinkage and obsolescence. Warehouse and outbound freight costs are reported as distribution expenses. Inventories recognised as expenses during 2019 and included in cost of sales amount to $44,609,000 (2018: $38,512,000). During 2019 inventories of $3,503,000 (2018: $4,571,000) were written down to net realisable value and included in cost of sales. The impact of introduction of the right to recover returned goods recognised under AASB15 is disclosed in note D9. 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 Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyNotes to the Consolidated Financial Statements B3 PROPERTY, PLANT AND EQUIPMENT (CONTINUED) Reconciliation of carrying amount Consolidated ($000s) Depreciation policy Cost Balance at 3 July 2017 Additions Disposals Effect of movements in exchange rates Balance at 1 July 2018 Balance at 2 July 2018 Additions Disposals Effect of movements in exchange rates Balance at 30 June 2019 Consolidated ($000s) Accumulated depreciation and impairment losses Balance at 3 July 2017 Depreciation Disposals Effect of movements in exchange rates Note Leasehold improvements Hardware and software Fixtures and fittings Total Lease term 3 years 3 years 32,532 10,533 (2,892) 497 40,670 40,670 22,308 (2,610) 884 61,252 1,555 2,130 (96) 25 194 1,520 (1) 3 34,281 14,183 (2,989) 525 3,614 1,716 46,000 3,614 2,597 (174) 56 6,093 1,716 610 - 2 2,328 46,000 25,515 (2,784) 942 69,673 Note Leasehold improvements Hardware and software Fixtures and fittings P / 4 7 Total (17,881) (6,065) 2,403 (288) (704) (789) 55 (10) (38) (271) 1 (1) (18,623) (7,126) 2,459 (299) Balance at 1 July 2018 (21,831) (1,448) (309) (23,589) Balance at 2 July 2018 Depreciation Disposals Effect of movements in exchange rates (21,831) (7,668) 2,376 (366) (1,448) (1,645) 111 (29) (309) (445) - (1) (23,588) (9,758) 2,487 (396) Balance at 30 June 2019 (27,489) (3,011) (755) (31,255) Carrying amounts At 2 July 2017 At 1 July 2018 At 30 June 2019 14,651 18,839 33,763 851 2,166 3,082 156 1,407 1,573 15,658 22,411 38,418 Lovisa Holdings Limited Annual Report - 30 June 2019For 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. Goodwill is not amortised. Key Money Key money represents expenditure associated with acquiring existing operating lease agreements for company-operated stores in countries where there is an active market for key money (e.g. regularly published transaction prices), also referred to as ‘rights of use’. Key money is not amortised but annually tested for impairment. Key money in countries where there is not an active market for key money is amortised over the contractual lease period. (a) Reconciliation of carrying amount Consolidated ($000s) Balance at 3 July 2017 Additions Amortisation Effect of movements in exchange rates Balance at 1 July 2018 Balance at 2 July 2018 Additions Amortisation Effect of movements in exchange rates Balance at 30 June 2019 8 4 / P Note Key Money - 1,162 (11) 30 1,181 Goodwill 2,276 - - 106 2,382 1,181 2,382 831 (80) 42 - - 62 1,974 2,444 B5 IMPAIRMENT OF PROPERTY, PLANT AND EQUIPMENT AND INTANGIBLE ASSETS AND GOODWILL Recognition and measurement Impairment The carrying amounts of the Group’s property, plant and equipment, and intangible assets and goodwill, are reviewed at each reporting date to determine whether there is any indication of impairment. If any such indication exists then the asset’s recoverable amount is estimated in line with the calculation methodology listed below. An impairment loss is recognised if the carrying amount of an asset or its cash-generating unit exceeds its recoverable amount. A cash-generating unit is the smallest identifiable asset group that generates cash flows that largely are independent from other assets and groups. Impairment losses are recognised in profit or loss. Impairment losses recognised in respect of cash-generating units are allocated first to reduce the carrying amount of any goodwill allocated to the units and then to reduce the carrying amount of the other assets in the unit (group of units) on a pro rata basis. Calculation of recoverable amount The recoverable amount of an asset or cash-generating unit is the greater of its value in use and its fair value less costs to sell. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. Impairment test Impairment testing for CGUs containing goodwill and indefinite-lived key money For the purpose of impairment testing, goodwill and key money are 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 EBITDA growth rate (average of next five years) 2019 15.0% 3.0% 2018 15.0% 3.0% Lovisa Holdings Limited Annual Report - 30 June 2019For 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 and indefinite-lived key money (continued) The discount rate was a pre-tax measure based on the rate of 10-year government bonds issued by the government in the relevant market and in the same currency as the cash flows, adjusted for a risk premium to reflect both the increased risk of investing in equities generally and the systemic risk of the specific CGU. Five years of cash flows were included in the discounted cash flow model with a long-term growth rate into perpetuity determined as the lower of the nominal GDP rates for the countries in which the CGU operates and the long-term compound annual EBITDA growth rate estimated by management. EBITDA for the purposes of impairment testing was based on expectations of future outcomes taking into account past experience, adjusted for the anticipated revenue growth with FY20 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 Accrued expenses 2019 9,138 14,521 23,659 P / 4 9 2018 5,203 6,544 11,747 Trade payables are unsecured and are usually paid within 30 days of recognition. Information about the Group’s exposure to currency and liquidity risk is included in Note C4. B7 PROVISIONS Recognition and measurement A provision is recognised if, as a result of a past event, the Group has a present legal or constructive obligation that can be estimated reliably, and it is probable that an outflow of economic benefits will be required to settle the obligation. Provisions are determined by discounting the expected future cash flows at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the liability. The unwinding of the discount is recognised as a finance cost. A provision for dividends is not recognised as a liability unless the dividends are declared, determined or publicly recommended on or before the reporting date. Consolidated ($000s) Site restoration Straight line rent and lease incentive Return provision Onerous lease Balance at 2 July 2018 Provisions made during the year Provisions used during the year Effect of movement in exchange rates Balance at 30 June 2019 Current Non-current 2,532 722 (165) 49 3,138 772 2,366 3,138 3,560 3,046 (1,441) 45 5,210 1,192 4,018 5,210 - 358 (114) 2 246 246 - 246 10 - (2) - 8 2 6 8 Total 6,102 4,126 (1,722) 96 8,602 2,212 6,390 8,602 Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only Notes 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 ten 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. 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 B8 EMPLOYEE BENEFITS Recognition and measurement Long-term service benefits The Group’s net obligation in respect of long-term service benefits is the amount of future benefit that employees have earned in return for their service in the current and prior periods. The obligation is calculated using expected future increases in wage and salary rates including related on-costs and expected settlement dates, and is discounted using high quality Australian corporate bond rates at the balance sheet date which have maturity dates approximating to the terms of the Group’s obligations. Short-term benefits Liabilities for employee benefits for wages, salaries and annual leave that are expected to be settled within 12 months of the reporting date represent present obligations resulting from employees’ services provided to reporting date, are calculated at undiscounted amounts based on remuneration wage and salary rates that the Group expects to pay as at reporting date including related on-costs, such as workers compensation insurance and payroll tax. Lovisa Holdings Limited Annual Report - 30 June 2019For 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 2019 2018 2,992 2,992 2,416 2,416 2019 2018 1,062 1,062 780 780 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 - 30 June 2019For personal use onlyNotes 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 Share Capital On issue at beginning of year Exercise of performance rights Share issue to Employee Share Trust On issue at end of year Treasury Shares 2 5 / P On issue at beginning of year Shares issued to trust Shares allocated on option exercise No. of Ordinary Shares Value of Ordinary Shares 2019 ‘000’s 2018 ‘000’s 2019 ‘000’s 2018 ‘000’s 105,016 105,000 208,526 208,526 - 550 16 - - 6,045 - - 105,566 105,016 214,571 208,526 - (550) 550 - - - - - - (6,045) 1,265 (4,780) - - - - Share Capital After Treasury Shares 105,566 105,016 209,791 208,526 All ordinary shares rank equally with regard to the Company’s residual assets. (i) Ordinary shares The Company does not have authorised capital or par value in respect of its issued shares. All issued shares are fully paid. The holders of these shares are entitled to receive dividends as declared from time to time, and are entitled to one vote per share at general meetings of the Company. All rights attached to the Company’s shares held by the Group are suspended until those shares are reissued. (ii) Treasury shares Treasury shares are shares in Lovisa Holdings Limited that are held by the Lovisa Holdings Limited Share Trust for the purposes of issuing shares under the Long Term Incentive Plans. When shares recognised as equity are repurchased, the amount of the consideration paid, which includes directly attributable costs, is recognised as a deduction from equity. Repurchased shares are classified as treasury shares and are presented in the treasury share reserve. When treasury shares are sold or reissued subsequently, the amount received is recognised as an increase in equity and the resulting surplus or deficit on the transaction is presented within share capital. (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 accounted for 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. C1 CAPITAL AND RESERVES (CONTINUED) Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyNotes to the Consolidated Financial Statements (b) Nature and purpose of reserves (continued) (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. (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 Note 2019 2018 7,988 - Information about the Group’s exposure to interest rate, foreign currency and liquidity risk is included in Note C4. (a) Terms and debt repayment schedule Terms and conditions of outstanding loans are as follows: Consolidated ($000s) Currency Cash advance facility Multi-option facility Contingent liability facility Total interest-bearing liabilities AUD AUD AUD Nominal interest rate 2.37% 6.48% 2.30% 30 June 2019 1 July 2018 Year of maturity Face value Carrying amount Face value Carrying amount 2020 2019 2019 - - 7,988 7,988 - - 7,988 7,988 - - - - - - - - The bank loans are secured by security interests granted by Lovisa Holdings Limited and a number of its subsidiaries over all of their assets in favour of the Commonwealth Bank of Australia (CBA). P / 5 3 Lovisa Holdings Limited Annual Report - 30 June 2019For 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 established 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. 30 June 2019 Carrying Amount Fair Value 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 Trade and other payables B1 C5 C5 B6 Hedging instruments Loans and receivables Other financial assets/ liabilities Total Level 1 Level 2 Level 3 Total 645 645 - - - - - - - - - 7,413 19,180 26,593 - - - - - - - - - - 645 645 7,413 19,180 26,593 - 7,988 7,988 23,659 23,659 31,647 31,647 - - - - - - - - - 645 645 - - - - - - - - - - - - - - - - 645 645 - - - - - - - 4 5 / P Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyNotes to the Consolidated Financial Statements C4 FINANCIAL INSTRUMENTS – FAIR VALUES AND RISK MANAGEMENT (CONTINUED) (a) Fair values (continued) Recognition and measurement (continued) 1 July 2018 Carrying Amount Fair Value 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 Trade and other payables B1 C5 B6 Hedging instruments Loans and receivables Other financial assets/ liabilities Total Level 1 Level 2 Level 3 Total 1,429 1,429 - - 4,881 21,057 25,938 - - - - - - - - - - 1,429 1,429 4,881 21,057 25,938 - - 11,747 11,747 11,747 11,747 - - - - - - - 1,429 1,429 - - - - - - - - - - - - 1,429 1,429 - - - - - 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 Type Valuation technique Forward exchange contracts Market comparison technique: Fair value of forward exchange contracts is determined using forward exchange rates at the balance sheet date. These over-the-counter derivatives utilise valuation techniques maximising the use of observable market data where it is available. Significant unobservable inputs Inter-relationship between key unobservable inputs and fair value measurement Not applicable. Not applicable. Financial instruments not measured at fair value Type Valuation technique Significant unobservable inputs Secured bank loans Discounted cash flows. Not applicable. (ii) Transfers between Level 1 and 2 There were no transfers between Level 1 and Level 2 during the year. (iii) Level 3 fair values Transfer out of Level 3 There were no transfers out of Level 3 during the year. Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyNotes 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 30 June 2019, no trade receivables were past due but not impaired (2018: 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; and • $7 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 - 30 June 2019For personal use onlyNotes to the Consolidated Financial Statements C4 FINANCIAL INSTRUMENTS – FAIR VALUES AND RISK MANAGEMENT (CONTINUED) (b) Financial risk management (continued) (iii) Liquidity risk (continued) 30 June 2019 Contractual cash flows Carrying amount Total 2 mths or less 2-12 mths 1-2 years 2-5 years More than 5 years 9,138 9,138 7,988 7,988 9,138 7,988 17,126 17,126 17,126 - - - - Outflow - Inflow Total 32,360 7,696 24,664 (33,005) (7,882) (25,123) (645) (645) (186) (459) Consolidated ($000s) Non-derivative financial liabilities Trade payables Bank overdrafts Derivative financial liabilities Forward exchange contracts used for hedging: Consolidated ($000s) Non-derivative financial liabilities Trade payables Derivative financial liabilities Forward exchange contracts used for hedging: 5,203 5,203 5,203 5,203 5,203 5,203 - - - Outflow - Inflow Total - - 29,047 5,777 23,270 (30,476) (6,105) (24,371) (1,429) (1,429) (328) (1,101) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 1 July 2018 Contractual cash flows Carrying amount Total 2 mths or less 2-12 mths 1-2 years 2-5 years More than 5 years P / 5 7 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. 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 - 30 June 2019For personal use onlyNotes 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 60% 40% 30% 80% 50% 40% 100% 75% 50% The summary quantitative data about the Group’s exposure to currency risk as reported to the management of the Group is as follows: In thousands of Cash and cash equivalents Trade receivables Trade payables 30 June 2019 1 July 2018 SGD 935 USD GBP ZAR SGD 1,072 947 14,801 1,411 67 1,969 - 282 - USD 90 523 GBP 563 ZAR 7,746 - 249 - (3,214) (2,014) - (230) (3,124) (962) (199) Net statement of financial position exposure 1,002 (173) (1,067) 15,083 1,181 (2,511) (399) 7,796 Sensitivity analysis 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. 8 5 / P Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyNotes 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 30 June 2019 SGD (5 percent movement) USD (5 percent movement) GBP (5 percent movement) ZAR (5 percent movement) 1 July 2018 SGD (5 percent movement) USD (5 percent movement) GBP (5 percent movement) ZAR (5 percent movement) Interest rate risk Profit or loss Strengthening Weakening (42) 8 51 (718) (56) 120 19 (371) 53 (9) (56) 794 62 (132) (21) 410 The Group is subject to exposure to interest rate risk as changes in interest rates will impact borrowings which bear interest at floating rates. Any increase in interest rates will impact Lovisa’s costs of servicing these borrowings which may adversely impact its financial position. This impact is not assessed to be material. Increases in interest rates may also affect consumer sentiment and the level of customer demand, potentially leading to a decrease in consumer spending. Exposure to interest rate risk The interest rate profile of the Group’s interest-bearing financial instruments as reported to the management of the Group is as follows: P / 5 9 Consolidated ($000s) Variable-rate instruments Financial liabilities Nominal amount 2019 7,988 7,988 2018 - - Cash flow sensitivity analysis for variable rate instruments At 30 June 2019, if interest rates had changed by +/- 100 basis points from the year end rates with all other variables held constant, there would have been $41,000 impact on pre tax profit for the year (1 July 2018 - no impact), as a result of higher/lower interest expense from variable rate borrowings. There is no 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 - 30 June 2019For 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) Derivatives Forward exchange contracts 2019 645 645 2018 1,429 1,429 The following table indicates the periods in which the cash flows associated with cash flow hedges are expected to occur and the carrying amounts of the related hedging instruments. Consolidated ($000s) Forward exchange contracts: Assets Liabilities 2019 2018 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 645 - 645 645 - 645 645 - 645 - - - 1,429 1,429 1,429 - - - 1,429 1,429 1,429 - - - A loss of $89,000 was included in other expenses on foreign currency derivatives not qualifying as hedges (2018: gain of $109,000). 0 6 / P 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 2019 2018 19,180 (7,988) 11,192 21,057 - 21,057 Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyNotes to the Consolidated Financial Statements C5 CASH FLOWS (CONTINUED) Reconciliation of cash flows from operating activities Consolidated ($000s) Note 2019 2018 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 trade and other payables Change in current tax liabilities Change in provisions and employee benefits Net cash from operating activities 37,042 35,954 9,838 241 586 89 628 48,424 (7,824) (2,532) (1,837) 11,912 (5,273) 3,358 46,228 7,126 463 340 (109) (222) 43,552 (1,266) (1,818) (1,260) 1,746 2,715 3,122 46,791 P / 6 1 Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyNotes 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 Employee Share Plan 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 2 6 / P Lovisa America, LLC Lovisa France SARL Lovisa Hong Kong Ltd D2 OPERATING LEASES Recognition and measurement Principal place of business Australia Australia Australia Singapore Singapore South Africa South Africa New Zealand Malaysia United Kingdom Singapore Spain United States of America France Hong Kong 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 ten 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 10 years. 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 2019 33,280 90,123 24,259 147,662 2018 23,988 54,585 10,954 89,527 Lovisa Holdings Limited Annual Report - 30 June 2019For 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 $5,432,000 at 30 June 2019 (2018: $3,648,000). (b) Capital commitments and contingent liabilities The Group is committed to incur capital expenditure of $1,006,000 (2018: $510,000). There are no contingent liabilities that exist at 30 June 2019 (1 July 2018: 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. All options are to be settled by physical delivery of shares. At 30 June 2019 the Group has the following share-based payment arrangements: (i) Share option programmes (equity-settled) Long Term Incentives - Annual Programmes (FY 2017 - FY 2018) Share Option Programme Grant date/employee entitled Options granted Number of instruments (000’s) Contractual life of options Vesting conditions P / 6 3 FY 2017 LTI (1) May 2016 3,460 3 years FY 2017 LTI (2) August 2016 412 3 years FY 2018 LTI (1) July 2017 2,960 3 years FY 2018 LTI (2) October 2017 FY 2018 LTI (3) November 2017 3 years 3 years 377 338 7,547 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. The Board 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 Following completion of the FY2019 financial year, the Board determined that these hurdles had been met for the FY2017 options and therefore all remaining 1,893,646 of these options have vested and are exercisable. The actual compound annual growth rate in EPS over the performance period ended 30 June 2019 was 29.5%. All FY 2018 (2) share options were forfeited during the year. Lovisa Holdings Limited Annual Report - 30 June 2019For 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) Long Term Incentives - Annual Programmes (FY 2019) Share Option Programme Options granted Grant date/employee entitled Number of instruments (000’s) Contractual life of options Vesting conditions FY 2019 LTI October 2019 2,564 3 years FY 2019 LTI October 2019 195 3 years Refer Performance Options granted to Managing Director table below Refer Performance Options granted to other Executives table below 2,759 2,564,103 of the FY2019 LTI (1) options were approved at the Company’s AGM on 30 October 2018. The Board has determined the EBIT Target growth hurdles applicable to both the FY2019 grants are as follows. Performance Options granted to Managing Director Company’s EBIT* over the Performance Period % of Performance Options that become exercisable Less than threshold Equal to threshold Between threshold and stretch Stretch Performance Options granted to other Executives Nil 24% compound growth - 10% awarded 25% compound growth - 20% awarded 26% compound growth - 100% awarded Company’s EBIT* over the Performance Period % of Performance Options that become exercisable Less than threshold Equal to threshold Between threshold and stretch Stretch Nil 17.5% compound growth - 40% awarded 20% compound growth - 60% awarded 22.5% compound growth - 80% awarded 25% compound growth - 100% awarded 4 6 / P * EBIT is defined as Earnings before Interest and Tax before Share Based Payments expense for the purposes of testing the performance conditions above. (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. Share option programme FY2017 LTI (1) FY2017 LTI (2) FY2018 LTI (1) FY2018 LTI (3) FY2019 LTI (MD) FY2019 LTI (EXEC) Fair value at grant date $0.24 $0.34 $0.38 $0.47 $3.12 $2.73 30 day VWAP share price at grant date $2.10 $2.63 $3.79 $5.94 $10.95 $10.95 Exercise price $2.10 $2.63 $3.79 $5.94 $10.95 $10.95 Expected volatility (weighted-average) 24.70% 25.88% 23.70% 20.50% 40.90% 40.90% Expected life (weighted-average) Expected dividends 3 years 3 years 3 years 2.5 years 3 years 3 years 5.11% 4.08% 5.60% 5.60% 3.50% 3.50% Risk-free interest rate (based on government bonds) 1.86% 1.44% 1.87% 1.89% 2.15% 2.15% Expected volatility has been based on an evaluation of the historical volatility of the Company’s share price. Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only Notes 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 were as follows. Number of options Weighted average exercise price Number of performance rights Outstanding at 2 July 2018 Granted during the year Forfeited during the year Exercised during the year Outstanding at 30 June 2019 Exercisable at 30 June 2019 Outstanding at 3 July 2017 Granted during the year Forfeited during the year Exercised during the year Outstanding at 1 July 2018 Exercisable at 1 July 2018 000’s 5,046 2,759 (377) (550) 6,878 1,894 4,216 3,674 (2,844) - 5,046 550 $ $3.17 $10.95 $4.00 $2.30 $6.32 $2.16 $2.15 $4.01 $2.74 - $3.17 $2.30 (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 000’s - - - - - - 16 - - (16) - - P / 6 5 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 Termination benefits Other long term benefits 2019 2,037 92 515 - 229 2018 2,001 108 192 452 153 2,873 2,906 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 30 June 2019 except for those disclosed in note D5 (c) (1 July 2018: nil). Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only Notes to the Consolidated Financial Statements D5 RELATED PARTIES (CONTINUED) (c) Other related party transactions Consolidated ($000s) 30 June 2019 1 July 2018 30 June 2019 1 July 2018 Transaction values for the year ended Balance outstanding as at a) Expenses Expense recharges b) Sales Recharges 101 - 44 - - - (11) - Included in expenses in the period is $100,000 relating to Directors fees for Brett Blundy in his capacity as Director and Chairman of the Company. Transactions between the Lovisa Group and BB Retail Capital and its related parties have been disclosed above due to BB Retail Capital continuing to be in a position of holding significant influence in relation to the Group, with representation on the Board of Directors. Lovisa has, and will continue to benefit from the relationships that its management team and BB Retail Capital have developed over many years of retail operating experience. Non property management related expense recharges are also priced on an arms length basis. The Group will continue to utilise BBRC Retail Capital’s retail operating experience on an arms length basis. All outstanding balances with other related parties are priced on an arm’s length basis and are to be settled in cash within two months post the end of the reporting year. None of the balances are secured. No expense has been recognised in the current year or prior year for bad or doubtful debts in respect of amounts owed by related parties. D6 AUDITOR’S REMUNERATION Consolidated ($) a) KPMG Audit and review services 6 6 / P 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 2019 2018 208,000 181,000 62,000 270,000 59,000 240,000 In relation to other assurance, taxation and due diligence services 166,710 182,757 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 24,965 191,675 461,675 25,125 25,125 39,247 39,247 64,372 33,729 216,486 456,486 21,601 21,601 43,846 43,846 65,447 526,047 521,933 Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyNotes 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 30 June 2019 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 Loss on disposal of property, plant and equipment Other income/(expenses) Dividend income 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 Impact of change in accounting policy Dividends recognised during the year Retained earnings at end of year 2019 154,849 (46,836) 108,013 (42,170) (19,081) (1,556) (3,765) (6) 1,763 3,454 21 (297) 46,376 (12,024) 34,352 - 34,352 41,056 (72) (33,781) 41,555 P / 6 7 2018 129,265 (24,847) 104,418 (40,041) (18,100) (1,776) (3,020) 12 (1,367) 25,242 72 (105) 65,335 (12,138) 53,197 - 53,197 9,491 - (21,632) 41,056 Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyNotes 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 Current tax receivables Derivatives Total current assets Deferred tax assets Property, plant and equipment Investments Total non-current assets Total assets Liabilities Bank overdraft Trade and other payables Employee benefits - current 8 6 / P Current tax liabilities Provisions - current Total current liabilities Employee benefits - non-current 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 30 June 2019 1 July 2018 979 39,577 12,123 356 645 53,680 3,265 14,174 210,000 227,439 281,119 7,988 11,506 2,109 - 696 22,299 1,062 1,638 2,700 24,999 256,120 209,791 925 3,296 553 41,555 256,120 8,303 33,340 6,615 - 1,429 49,687 3,165 9,447 210,000 222,612 272,299 - 8,879 1,861 5,654 677 17,071 780 1,794 2,574 19,645 252,653 208,526 925 896 1,250 41,056 252,653 Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyNotes 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 2019 33,220 - 33,220 30,356 219,203 - - 209,791 1,861 7,551 219,203 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 30 June 2019. (c) Parent entity guarantees in respect of the debts of its subsidiaries 2018 25,041 - 25,041 12,057 223,188 5,654 5,654 208,526 896 8,113 217,535 P / 6 9 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 30 June 2019: • AASB 9 : Financial Instruments • AASB 15: Revenue from Contracts with Customers A AASB 15 Revenue from Contracts with Customers AASB 15 establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaced AASB 118 Revenue, AASB 111 Construction Contracts and related interpretations. The Group has adopted AASB 15 using the cumulative effect method (without practical expedients), with the effect of initially applying this standard recognised at the date of initial application (i.e. 2 July 2018). Accordingly, the information presented for 2018 has not been restated. Details on the changes to accounting policy for revenue have been included in note A2. Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only D9 NEW STANDARDS AND INTERPRETATIONS ADOPTED BY THE GROUP (CONTINUED) Notes to the Consolidated Financial Statements D9 NEW STANDARDS AND INTERPRETATIONS ADOPTED BY THE GROUP (CONTINUED) A AASB 15 Revenue from Contracts with Customers (continued) The following table summarises the impact, net of tax, of transition to AASB 15 on retained earnings at 2 July 2018. ($000s) Retained earnings Sales with a right of return Related tax Impact at 2 July 2018 Impact of adopting AASB 15 at 2 July 2018 204 (53) 151 The following tables summarise the impacts of adopting AASB 15 on the Group’s statement of financial position as at 30 June 2019 and its statement of profit or loss for the year then ended for each of the line items affected. There was no material impact on the Group’s statement of cash flows for the year ended 30 June 2019. Impact on the condensed consolidated statement As reported Adjustments Amounts without adoption of AASB 15 ($000s) Inventory Deferred tax assets Total assets Current tax liabilities 0 7 / P Provisions Total liabilities Retained earnings Total equity 22,769 6,372 99,215 (1,261) (8,602) (45,564) 46,464 53,651 Impact on the consolidated statement of profit or loss ($000s) Revenue Cost of sales Gross profit Profit before tax Income tax expense Profit for the period As reported Adjustments 250,282 (48,873) 201,409 52,618 (15,575) 37,043 (49) (47) (96) (6) 250 244 148 148 (1) (1) (2) (2) - (2) 22,720 6,325 99,119 (1,267) (8,352) (45,320) 46,612 53,799 Amounts without adoption of AASB 15 250,281 (48,874) 201,407 52,616 (15,575) 37,041 B AASB 9 Financial Instruments On 2 July 2018 the Group adopted AASB 9, replacing the previous accounting standard, AASB 139 Financial Instruments. The group has taken advantage of the exemption from restating comparative information for prior periods with respect to classification and measurement (including impairment) requirements. The hedge accounting requirements of AASB 9 have been applied. AASB 9 requires the Group to ensure that hedge accounting relationships are aligned with the Group’s risk management objectives and strategy and to apply a more qualitative and forward-looking approach to assessing hedge effectiveness. AASB 9 also introduces new requirements on rebalancing hedge relationships and prohibiting voluntary discontinuation of hedge accounting. Under the new model, it is possible that more risk management strategies, particularly those involving hedging a risk component (other than foreign currency risk) of a non-financial item, will be likely to qualify for hedge accounting. The Group does not currently undertake hedges of such risk components. The Group uses forward foreign exchange contracts to hedge the variability in cash flows arising from changes in foreign exchange rates relating to inventory purchases. The types of hedge accounting relationships that the Group currently of AASB 9 and are aligned with the entity’s risk management strategy and objective. The impact on reserves and retained earnings at 2 July 2018 as a result of the application of the AASB 9 hedge accounting requirements is not material. Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only D9 NEW STANDARDS AND INTERPRETATIONS ADOPTED BY THE GROUP (CONTINUED) B AASB 9 Financial Instruments (continued) Differences in the carrying amounts of financial assets and financial liabilities resulting from the adoption of AASB 9 are recognised in retained earnings at 2 July 2018, and are not material for the Group. These relate solely to the recognition of expected credit losses (ECLs) as a result of the revised requirements for impairment of the new standard. The key changes to the Group’s accounting policies and the impacts resulting from the adoption of AASB 9 are described below. i) Classification & measurement of financial assets and financial liabilities AASB 9 contains a new classification and measurement approach for financial assets that reflects the business model in which assets are managed and their cash flow characteristics. AASB 9 contains three principal classification categories for financial assets: measured at amortised cost, FVOCI and FVTPL. The standard eliminates the existing IAS 39 categories of held to maturity, loans and receivables and available for sale. Under AASB 9, derivatives embedded in contracts where the host is a financial asset in the scope of the standard are never bifurcated. Instead, the hybrid financial instrument as a whole is assessed for classification. The Group has assessed that the new classification requirements does not have a material impact on its accounting for trade receivables. AASB 9 largely retains the existing requirements in IAS 39 for the classification of financial liabilities. However, under IAS 39 all fair value changes of liabilities designated as at FVTPL are recognised in profit or loss, whereas under AASB 9 these fair value changes are generally presented as follows: • the amount of change in the fair value that is attributable to changes in the credit risk of the liability is presented in OCI; and the remaining amount of change in the fair value is presented in profit or loss. • The Group has not designated any financial liabilities at FVTPL and it has no current intention to do so therefore there is no material impact regarding the classification of financial liabilities at 2 July 2018. ii) Impairment AASB 9 replaces the ‘incurred loss’ model in IAS 39 with a forward-looking ‘expected credit loss’ (ECL) model. This will require considerable judgement about how changes in economic factors affect ECLs, which will be determined on a probability-weighted basis. The new impairment model will apply to financial assets measured at amortised cost or FVOCI, except for investments in equity instruments, and to contract assets. Under AASB 9, loss allowances will be measured on either of the following bases: • 12-month ECLs: these are ECLs that result from possible default events within the 12 months after the reporting date; and lifetime ECLs: these are ECLs that result from all possible default events over the expected life of a financial instrument. • Lifetime ECL measurement applies if the credit risk of a financial asset at the reporting date has increased significantly since initial recognition and 12-month ECL measurement applies if it has not. An entity may determine that a financial asset’s credit risk has not increased significantly if the asset has low credit risk at the reporting date. However, lifetime ECL measurement always applies for trade receivables without a significant financing component; the Group has chosen to apply this policy also for trade receivables with a significant financing component. The cash and cash equivalents are held with bank and financial institution counterparties, with a minimum ‘A’ rating. The Group considers that its cash and cash equivalents have low credit risk based on the external credit ratings of the counterparties. P / 7 1 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 2019; however, the Group has not applied the following new or amended standards in preparing these consolidated financial statements. (a) AASB 16 Leases The Group is required to adopt AASB 16 Leases from 1 July 2019. The Group has assessed the estimated impact that initial application of AASB 16 will have on its consolidated financial statements, as described below. The actual impacts of adopting the standard on 1 July 2019 may change because: • the Group has not finalised the testing and assessment of controls over its new IT systems implemented to manage the new accounting treatment; and the new accounting policies are subject to change until the Group presents its first financial statements that include the date of initial application. • AASB 16 introduces a single, on-balance sheet lease accounting model for lessees. A lessee recognises a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. There are recognition exemptions for short-term leases and leases of low-value items. Lessor accounting remains similar to the current standard – i.e. lessors continue to classify leases as finance or operating leases. AASB 16 replaces existing leases guidance, including AASB 117 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases – Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only D10 NEW STANDARDS AND INTERPRETATIONS NOT YET ADOPTED (CONTINUED) (a) AASB 16 Leases (continued) i. Leases in which the Group is lessee The Group will recognise new assets and liabilities for its operating leases of retail stores, offices and warehouse facilities (see Note D2). The nature of expenses related to those leases will now change because the Group will recognise a depreciation charge for right-of-use assets and interest expense on lease liabilities. Previously, the Group recognised operating lease expense on a straight-line basis over the term of the lease, and recognised assets and liabilities only to the extent that there was a timing difference between actual lease payments and the expense recognised. In addition, the Group will no longer recognise provisions for operating leases that it assesses to be onerous as described in Note B7. Instead, the Group will include the payments due under the lease in its lease liability. Based on the information currently available, the Group estimates that it will recognise additional lease liabilities of between $130,000,000 and $145,000,000 as at 1 July 2019. The Group’s loan covenants will be amended to factor in this accounting standard change. ii. Transition The Group plans to apply AASB 16 initially on 1 July 2019, using the modified retrospective approach. Therefore, the cumulative effect of adopting AASB 16 will be recognised as an adjustment to the opening balance of retained earnings at 1 July 2019, with no restatement of comparative information. The Group plans to apply the practical expedient to grandfather the definition of a lease on transition. This means that it will apply AASB 16 to all contracts entered into before 1 July 2019 and identified as leases in accordance with AASB 117 and IFRIC 4. The Group also plans to apply the practical expedient relating to the application a single discount rate to a portfolio of leases with reasonably similar characteristics. The Group will also exclude initial direct costs from the measurement of the ROU asset at the date of initial application. The Group has assessed options available to extend or terminate leases based on individual store performance and costs to be incurred as a result of extension or termination. The Group has also relied on previous assessments of whether leases are onerous in accordance with IAS 37 immediately before the date of initial application as an alternative to performing an impairment review. (b) Other standards The following amended standards and interpretations are not expected to have a significant impact on the Group’s consolidated financial statements. 2 7 / P • • • • IFRIC 23 Uncertainty over Tax Treatments; Prepayment Features with Negative Compensation (Amendments to IFRS 9); Long-term Interests in Associates and Joint Ventures (Amendments to IAS 28); Plan Amendment, Curtailment or Settlement (Amendments to IAS 19); • Annual Improvements to IFRS Standards 2015–2017 Cycle – various standards; • Amendments to References to Conceptual Framework in IFRS Standards; and • IFRS 17 Insurance Contracts. Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only P / 7 3 Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only4 7 / P Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlySIGNED REPORTS P / 7 5 Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyDIRECTORS’ DECLARATION 1. In the opinion of the Directors of Lovisa Holdings Limited (‘the Company’): (a) the consolidated financial statements and notes that are set out on pages 34 to 72 and the Remuneration report in the Directors’ report, are in accordance with the Corporations Act 2001, including: (i) giving a true and fair view of the Group’s financial position as at 30 June 2019 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 30 June 2019. 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. 6 7 / P Signed in accordance with a resolution of the Directors. ________________________________________________ Shane Fallscheer Director Melbourne 21 August 2019 Lovisa Holdings Limited Annual Report - 30 June 2019For 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 Group’s financial position as at 30 June 2019 and of its financial performance for the year ended on that date; and complying with Australian Accounting Standards and the Corporations Regulations 2001. The Financial Report comprises: • Consolidated statement of financial position as at 30 June 2019 • 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. 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 Auditor’s 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 Board’s 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. P / 7 7 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 - 30 June 2019For personal use only Signed Reports INDEPENDENT AUDIT REPORT TO THE MEMBERS OF LOVISA HOLDINGS LIMITED (CONTINUED) 8 7 / P Key Audit Matters Key Audit Matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Report of the current period. This matter was 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 this matter. Valuation of Inventories ($22.8m) Refer to Note B2 to the Financial Report The key audit matter How the matter was addressed in our audit A key audit matter for us was the Group’s valuation of inventories due to the: • • • relative size of inventories (being 23% of total assets within the Group’s consolidated statement of financial position). judgement we applied to assess the Group’s provisioning for obsolete inventory. The Group sells fashion jewellery and is 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 by the Group at product level, and therefore the value of inventories, requires consideration of the ageing and condition of products on hand, historic trends in write-offs, inventory turnover, seasonality of inventory and anticipated future sales. Such judgements may have a significant impact on the Group’s provisioning, and therefore the overall carrying value of inventories, necessitating our audit effort thereon. Group’s policy for the shrinkage provision is calculated based on the inventory counts performed and expected misappropriation of inventories as a percentage of sales. We focus on the shrinkage provisioning calculation which is largely manual and is therefore at greater risk of error. Our procedures included: • Evaluating the appropriateness of the Group’s inventory provisioning policies against the requirements of the accounting standards. • • • • Assessing the historical accuracy of the Group’s inventory provisioning against actual outcomes, to inform our evaluation of the current year provisioning and key judgements. Challenging the Group’s judgements within their obsolete inventory provisioning, particularly the extent to which aged and seasonal inventory can be sold, taking into account our knowledge of the industry and past Group performance. Analysing current and historic trends in inventory turnover and ageing to identify indicators of slow- moving or obsolete inventory and therefore those inventory items at higher risk of obsolescence. We compared this to the Group’s inventory ageing report. Checking the integrity of the Group’s inventory ageing report at 30 June 2019, as a key input used in the obsolete inventory provisioning, by comparing on a sample basis inventory age per the report to purchase invoices. • Attending a sample of inventory counts across the Group’s store and warehouse locations - - to observe the condition of a sample of products held. We did this to check the condition of products assumed in their recorded inventory value. to observe the Group’s shrinkage process. • Analysing the inventory shrinkage provision levels by region against sales, including against historical trends. • Assessing the integrity of the provisioning calculations. This included checking the accuracy of the formulas within the calculations. • Comparing a statistical sample of inventory product values recorded by the Group at year-end, to the Group’s post year-end recommended retail selling prices to identify products at risk of selling below cost. 2 Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only Signed 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 Limited’s 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 Auditor’s Report was the Director’s report. The Chairman and Managing Director’s Report and the ASX 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 Auditor’s Report we have nothing to report. Responsibilities of the Directors for the Financial Report The Directors are responsible for: • • • 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 Group and Company’s ability to continue as a going concern and whether the use of going concern basis of accounting is appropriate. 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 and Company or to cease operations, or have no realistic alternative but to do so. Auditor’s 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 Auditor’s 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 the 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_responsibilities/ar1.pdf. This description forms part of our Auditor’s Report. 3 P / 7 9 Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only Signed 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 30 June 2019, 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 30 June 2019. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards. 0 8 / P KPMG Rachel Milum Partner Melbourne 21 August 2019 4 Lovisa Holdings Limited Annual Report - 30 June 2019For 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 30 June 2019 there have been: i. ii. no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and no contraventions of any applicable code of professional conduct in relation to the audit. KPMG Rachel Milum Partner Melbourne 21 August 2019 P / 8 1 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 - 30 June 2019For personal use only ASX INFORMATION 2 8 / P Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyP / 8 3 Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyASX 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 Holdings 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/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 21 August 2019 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 3 SEPTEMBER 2019) SUBSTANTIAL SHAREHOLDERS The number of shares held by substantial shareholders and their associates are set out below: 4 8 / P Shareholder BB Retail Capital Pty Ltd FIL Limited 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 8,863,375 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 1,287 1,011 251 223 30 555,546 2,599,644 1,938,042 6,076,045 94,602,605 2,802 105,771,882 0.53 2.46 1.83 5.74 89.44 100.00 The number of shareholders holding less than a marketable parcel of ordinary shares is 92. Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyASX 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: Number of ordinary shares held Percentage of capital held Name BB Retail Capital Pty Ltd HSBC Custody Nominees (Australia) Limited J P Morgan Nominees Australia Pty Limited National Nominees Limited Centreville Pty Ltd Citicorp Nominees Pty Limited Grahger Retail Securities Pty Ltd BNP Paribas Nominees Pty Ltd Coloskye Pty Limited PBC Investments Pty Limited Mrs Vanessa Louise Speer BNP Paribas Noms Pty Ltd Truebell Capital Pty Ltd Marich Nominees Pty Ltd BNP Paribas Nominees Pty Ltd Hub24 Custodial Serv Ltd Drp UBS Nominees Pty Ltd HSBC Custody Nominees (Australia) Limited - A/C 2 Stornoway Nominees Pty Ltd Ellri Investment Trust Mr Richard Waite & Mrs Susan Waite 43,207,500 13,597,630 12,004,638 5,749,899 4,140,000 3,339,455 2,000,000 1,551,906 1,153,005 1,000,000 927,460 685,270 600,000 575,237 547,768 527,559 506,096 450,000 250,000 232,065 40.85 12.86 11.35 5.44 3.91 3.16 1.89 1.47 1.09 0.95 0.88 0.65 0.57 0.54 0.52 0.50 0.48 0.43 0.24 0.22 88.00 12.00 100.00 P / 8 5 Total Balance of register 93,045,488 12,726,394 Grand total 105,771,882 Options and performance rights issued under the Lovisa Holdings Ltd Long Term Incentive Plan to take up ordinary shares 6,671,360 6 Number on issue Number of holders Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only 6 8 / P Lovisa Holdings Limited Annual Report - 30 June 2019For personal use onlyP / 8 7 Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only8 8 / P CORPORATE DIRECTORY Company Secretary Chris Lauder, Chief Financial Officer and Company Secretary Principal Registered Office Lovisa Holdings Limited Level 1, 818-820 Glenferrie Road Hawthorn VIC 3122 +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 Lovisa Holdings Limited Annual Report - 30 June 2019For personal use only 

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