Welcome to Fear and Greed, summer investing series brought to you by Vanta, specialists in compliance lead Growth. I'm Sean Aylmer. Anyone who's visited a shopping center in recent years or will have come across Levisa. La Visa sells cheap jewelry. It's a relatively simple business, but is it one for your portfolio? As always, this is general information only and you should seek independent advice before making investment decisions. Gorrav Sody is the deputy head of Research at Intelligent Investor. Gorerab Welcome back to Fear and Greed.

Welcome to Fear and Greed, summer investing series brought to you by Vanta, specialists in compliance lead Growth. I'm Sean Aylmer. Anyone who's visited a shopping center in recent years or will have come across Levisa. La Visa sells cheap jewelry. It's a relatively simple business, but is it one for your portfolio? As always, this is general information only and you should seek independent advice before making investment decisions. Gorrav Sody is the deputy head of Research at Intelligent Investor. Gorerab Welcome back to Fear and Greed.

Thanks Shawan. It's a pleasure to be here.

Thanks Shawan. It's a pleasure to be here.

So is it a simple business Levisa?

So is it a simple business Levisa?

Yeah, it is a simple business, Seawan. Retailing is typically pretty easy to understand as a concept. You're you're really making or buying something and then selling it at a margin. And because it's so simple, it is incredibly competitive, which is why when I first came across Levisa, I actually thought it was a fraud. We were doing an exercise in the office looking at all these retailers, and the numbers coming out of Levisa were so astonishing. There are particular markers we have in the office for frauds, and one of them is over profitability and a few technical accounting things that we look at, and this was setting off red flags. I thought, this can't be right. There's something wrong here. This is a fraud. Now I had to pin down as a business. I was going to explode. But then as I did a bit more work on it and we started try understand this business, we realize it is not a fraud. It is probably the best quality retailer I've ever seen. Wow, the most profitable retailer I've ever seen. Why. It's the operating model that they have. So let's just break down the profitability of Levisa. It will absolutely astound you. They earn eighty percent gross margins, incredible for retail. Their net margins are about twenty percent, which is kind of what Apple earns. I've never seen a retailer that earns a margin similar to an ecosystem holder like Apple. It's astonishing. So how do they do it well? Levisa controls the entire value chain from design, production, wholesale, and retail. So when it comes to design, they have a team of designers who scour the world for trends. They then quickly produce those trends in factories that they control, so they have production facilities in China and all over the world. They then distribute and they have DC distribution centers again all over the world, and they control all their retail outlets. So they are taking they are not giving up any margin to anyone else, and they have internalized that entire process from design, production, wholesale, distribution, and retail. That's because they capture margin all along the way. That's one of the secrets to their high profitability. The other thing that this business does because they capture that whole process, that's high margin and when you think about the nature of the good, it's a very high turnover good. Now that's a really combination in retail. Typically, if you're a retailer, you might think of a grocery business right like a like a Woolies or Calls. They own very small margins, but they turn over a lot of products. So that's how they generate their profitability. Very small margins sort of sort of three four percent profit margins, but turnover a lot and a lot. On the other side, you have something like like a Tiffany's, like a high end jeweler, they might earn sort of a fifty sixty percent margin, but they don't turn over their stock all that often. Now, Leavisa combines super high margin eighty percent gross margin along with super high inventory turnover, and that is a secret source. That is That's why I thought it was a fraud, because we don't often see that. I can't think of many businesses that are able to combine those two things together, and they are growing exponentially. I expect them to open their one thousandth store sometime in early twenty twenty five. Four years ago, they had about two hundred stores.

Yeah, it is a simple business, Seawan. Retailing is typically pretty easy to understand as a concept. You're you're really making or buying something and then selling it at a margin. And because it's so simple, it is incredibly competitive, which is why when I first came across Levisa, I actually thought it was a fraud. We were doing an exercise in the office looking at all these retailers, and the numbers coming out of Levisa were so astonishing. There are particular markers we have in the office for frauds, and one of them is over profitability and a few technical accounting things that we look at, and this was setting off red flags. I thought, this can't be right. There's something wrong here. This is a fraud. Now I had to pin down as a business. I was going to explode. But then as I did a bit more work on it and we started try understand this business, we realize it is not a fraud. It is probably the best quality retailer I've ever seen. Wow, the most profitable retailer I've ever seen. Why. It's the operating model that they have. So let's just break down the profitability of Levisa. It will absolutely astound you. They earn eighty percent gross margins, incredible for retail. Their net margins are about twenty percent, which is kind of what Apple earns. I've never seen a retailer that earns a margin similar to an ecosystem holder like Apple. It's astonishing. So how do they do it well? Levisa controls the entire value chain from design, production, wholesale, and retail. So when it comes to design, they have a team of designers who scour the world for trends. They then quickly produce those trends in factories that they control, so they have production facilities in China and all over the world. They then distribute and they have DC distribution centers again all over the world, and they control all their retail outlets. So they are taking they are not giving up any margin to anyone else, and they have internalized that entire process from design, production, wholesale, distribution, and retail. That's because they capture margin all along the way. That's one of the secrets to their high profitability. The other thing that this business does because they capture that whole process, that's high margin and when you think about the nature of the good, it's a very high turnover good. Now that's a really combination in retail. Typically, if you're a retailer, you might think of a grocery business right like a like a Woolies or Calls. They own very small margins, but they turn over a lot of products. So that's how they generate their profitability. Very small margins sort of sort of three four percent profit margins, but turnover a lot and a lot. On the other side, you have something like like a Tiffany's, like a high end jeweler, they might earn sort of a fifty sixty percent margin, but they don't turn over their stock all that often. Now, Leavisa combines super high margin eighty percent gross margin along with super high inventory turnover, and that is a secret source. That is That's why I thought it was a fraud, because we don't often see that. I can't think of many businesses that are able to combine those two things together, and they are growing exponentially. I expect them to open their one thousandth store sometime in early twenty twenty five. Four years ago, they had about two hundred stores.

Wow, what the store of the competitors? Why are they doing it? No one else is doing it?

Wow, what the store of the competitors? Why are they doing it? No one else is doing it?

Yeah, they have lots of competitors shore, and lots of people have tried to copy what they're doing. I think one of the secrets here is also because they own their retail stores and the design and the retailer is integrated. They collect lots of data from all over the world about what is selling and what is not, So at any point in time, they're able to tell you this item is selling, these trends are working, and those trends are not, And all that sales data feeds back into the design team and that informs new designs. So actually the more they grow, the larger their network, the better their quality of their data, and the better the information that informs the design team. And if you're a new competitor, you may start out even if you start out with four or five stores, you just don't have that breadth of data to be able to hit the trends that Levisa can find so much quicker. And because they have built out over time these tribution centers and these production facilities, they actually release about one hundred new items every week, and no other retailer of this in this space can come anywhere close to that. So in the advantages they have have come from time and scale, and they're quite difficult to compete.

Yeah, they have lots of competitors shore, and lots of people have tried to copy what they're doing. I think one of the secrets here is also because they own their retail stores and the design and the retailer is integrated. They collect lots of data from all over the world about what is selling and what is not, So at any point in time, they're able to tell you this item is selling, these trends are working, and those trends are not, And all that sales data feeds back into the design team and that informs new designs. So actually the more they grow, the larger their network, the better their quality of their data, and the better the information that informs the design team. And if you're a new competitor, you may start out even if you start out with four or five stores, you just don't have that breadth of data to be able to hit the trends that Levisa can find so much quicker. And because they have built out over time these tribution centers and these production facilities, they actually release about one hundred new items every week, and no other retailer of this in this space can come anywhere close to that. So in the advantages they have have come from time and scale, and they're quite difficult to compete.

With risks to Levisa as an investor.

With risks to Levisa as an investor.

Yeah, So the big risk, and I think this is true for any retail stock, is that cheap costume jewelry is reliant on hitting the right trends, and there's a risk that trends change and maybe consumers no longer pursue cheap costume jewelry. They might seek out higher cost, better quality jewelry. So we may be in the middle of a long trend that suddenly comes to an end. So this requires constant monitoring. Because retail is trend driven, it is prone to fads and we have to monitor this to make sure we are not on the receiving end of a fad. For your time this morning, Thank you.

Yeah, So the big risk, and I think this is true for any retail stock, is that cheap costume jewelry is reliant on hitting the right trends, and there's a risk that trends change and maybe consumers no longer pursue cheap costume jewelry. They might seek out higher cost, better quality jewelry. So we may be in the middle of a long trend that suddenly comes to an end. So this requires constant monitoring. Because retail is trend driven, it is prone to fads and we have to monitor this to make sure we are not on the receiving end of a fad. For your time this morning, Thank you.

Sean does Gore have Sony, Deputy head of Research at Intelligent Investor. Remember to get your own independent advice before making decisions. This is Fear and Greed Summer Investing series brought to you by Vanta van To automates compliance for frameworks like ISO twenty seven one, SoC two, CPS two three four and Essential eight, saving time and money while building trust. Join over eight thousand companies like Atlasian, Dovetail and fire Ant managing real time risk. Get one thousand dollars off at vanter dot com. Slash Fear and Greed. I'm Sean Elma, Enjoy your day.

Sean does Gore have Sony, Deputy head of Research at Intelligent Investor. Remember to get your own independent advice before making decisions. This is Fear and Greed Summer Investing series brought to you by Vanta van To automates compliance for frameworks like ISO twenty seven one, SoC two, CPS two three four and Essential eight, saving time and money while building trust. Join over eight thousand companies like Atlasian, Dovetail and fire Ant managing real time risk. Get one thousand dollars off at vanter dot com. Slash Fear and Greed. I'm Sean Elma, Enjoy your day.