There is at least one apparel player on the ASX wowing investment analysts right now, and that’s Universal Store (ASX:UNI).
In a revised note to investors last week (cleverly titled ‘UNI-que opportunity’), Macquarie Bank analysts have placed Universal Store as its top pick in the Small-Cap Consumer space. They believe the company – which also manages Thrills and Perfect Stranger subsidiaries – has shown an ability to stay on-trend with its customer base of 15 to 25 year-olds over the last year.
Matched with a gross profit lift of 19 per cent since FY22, Macquarie analysts think Universal Store is set to outperform the market.
This is all despite investors raising alarm bells on five key challenges facing the fashion retail group, including elevated business costs, a tough youth apparel market, difficulty investing in UNI stock due to liquidity, cycling stronger prior periods, and the underperformance of the Thrills subsidiary – particularly in the wholesale space.
But Macquarie analysts aren’t phased by any of these pushbacks. Regarding business costs, Universal Store reported its CODB as a percentage of sales lifted 130 basis points to 33.1 per cent, citing cost inflation, and investments in team capabilities and bonuses thanks to stronger trading.
Universal Store Group CEO Alice Barbery is eligible to get a short-term incentive (STI) of $475,000 in FY25, according to the group's remuneration report. The Universal Store board has also increased the FY26 Target STI of the group CEO to $500,000 per annum, with the FY26 target for the group chief financial officer lifted to $227,500 per annum, and the FY26 target of the Divisional CEO – which is George Do, who looks after Universal Store and Perfect Stranger – to $322,000 per annum.
Macquarie analysts note that while a higher CODB as a percentage of sales, despite gross profit growth, typically suggests operating de-leverage, they believe the key drivers for the growth in CODB/Sales are also partially attributed to three concurrent long-term incentives overlapping in FY25, alongside a growing headcount at Universal Store.
On top of this, the analysts project that private label growth across Universal Store will be a gross margin tailwind.
“UNI has successfully grown its private label product, driving GM upside,” Macquarie analysts reported. “Penetration of Universal Store private label has increased to 55 per cent in FY25 (+9ppts vs FY24), with the Neovision private label brand alone growing by +7ppts within Universal Store's sales mix over FY25.
“UNI's Perfect Stranger (PS) brand is also growing strongly, with LFL sales +26 per cent over FY25, and online sales growth of +94 per cent y/y.”
As for Perfect Stranger – which sells women's clothing, with its dresses usually priced between $110 and $150 – analysts claim the brand’s model contributes to group private label penetration growth, and is gross margin mix accretive. This essentially means that selling more of this product improves the company’s overall profitability.
“It is harder to metricise the EBITDA margin contribution from Perfect Stranger, given it operates within the Universal Store operating structure (shared CODB),” the analysts noted. “Interest and recognition of UNI's private label brands is growing, increasing the gross margin expansion opportunity available to the company.”
The note to investors also highlighted Google Search data, which shows that interest in UNI's private label 'Neovision' brand has continued to build strongly over the past year.
“Similarly, the private label 'Perfect Stranger' brand has been broadly receiving greater interest online than competing brands such as Charcoal Clothing and Pepper Mayo.”
Macquarie analysts also claim that Universal Store has managed to stay on-trend in its appeal to younger consumers, which is considered a tough market to sell fashion to, particularly in the current economic climate.
The analysts highlighted Country Road Group’s recent FY25 results, with its adjusted earnings before interest and tax (EBIT) hitting negative $18.1 million, with a significant decline in revenue. Foot traffic data also shows that physical retail stores are not seeing growths similar to population growth or youth apparel spend growth.
But Universal Store has consistently grown earnings over previous years, owing to staying on-trend over competitors and its hybrid online/physical model.
“Whilst larger apparel brands have been challenged recently, UNI has consistently grown earnings by staying 'on-trend',” Macquarie analysts noted. “We think this is contingent on the current successful management & buying team remaining with UNI (as such, downside risk exists in the event of key management or buyer departures).
“Whilst there was selling by insiders in May-25… management are still appropriately aligned with UNI stock, given the Group CEO & Divisional CEO alone own ~5% of UNI currently.”
With concerns that liquidity makes investing in Universal Store difficult, Macquarie analysts reiterated that management are well-aligned as owners of UNI stock. On top of this, Universal Store’s inclusion in the ASX300 this month could be a tailwind to stock demand.
The analysts further note that Universal Store’s Group CEO Alice Barbery has overseen earnings-per-share growth of 9.5 per cent CAGR since her appointment in 2020, with the company’s on-trend strategy helping it grow in a subdued market.
As for the final two points – cycling a strong prior period and wholesale challenges at Thrills – Macquarie analysts point out that a weakening in comp sales over FY26 is already expected by them and the market, and that the Thrills brand should benefit from new leadership attention. With George Do looking after Universal Store and Perfect Stranger, Barbery is believed to hold more focus on Thrills.
For Thrills, analysts claim wholesale weakness will be increasingly offset by Thrills’ booming direct-to-consumer channel.
Over FY25, sales in its wholesale channel fell by 13.8 per cent, driven by a “small number of key accounts” according to Universal Store.
“Importantly, this weakness is already expected by the market – with both VA Consensus and our estimates already forecasting wholesale sales to remain below FY24 levels until FY29E,” Macquarie analysts reported.
On top of this, Universal Store’s Worship brand’s wholesale channel is offsetting weakness in its Thrills brand, with Worship’s wholesale channel sales up 10.5 per cent in FY25.
Ragtrader also uncovered that the overall fashion wholesale market has been in decline for some years in a feature story last year, with other wholesale players – including Oboz Footwear and the wholesale arm of Rip Curl – reporting subdued sales in this channel for FY25 recently.
“Whilst challenged as a whole, wholesale only represents <5 per cent of group sales for UNI, once adjusted for eliminations from inter-company sales,” Macquarie analysts reported.
“Additionally, the retail DTC offering within Thrills will progressively replace earnings weakness in the wholesale offering. Over FY25, DTC sales rose +12.9 per cent, with LFL growth of +4 per cent. UNI has guided to 2-4 new stores for DTC in FY26E.”