Why Lovisa Holdings Ltd shares crashed today

Lovisa Holdings Ltd (ASX:LOV) took a tumble even as it reported a full year net profit that was 7.3% ahead of its forecast. Here's why…

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A better than forecast profit result from jewellery retailer Lovisa Holdings Ltd (ASX:LOV) wasn't enough to keep profit takers at bay today.

The stock tumbled 6.5% to $3.31 during lunch time trade despite management releasing big growth numbers with gross profit jumping 28.6% and revenue rising by 27.1% to $134.3 million for the year ended June 30, 2015.

The gross profit was 0.1% ahead of the company's prospectus forecast but its adjusted net profit of $17.6 million is 7.3% above prospectus guidance.

But it's not the bottom line that's the problem. It was its revenue line which came in 0.3% below prospectus.

That might sound like a small miss but it could be an early sign of trouble for the outperforming retailer because the miss in sales comes despite the company opening 14 more stores (mainly in South Africa) than its original plan of 225 stores when it floated in December last year.

Retailers that are rolling out new stores should receive a sizable boost to both revenue and earnings, and the bigger footprint probably explains the higher-than-anticipated net profit.

But what happened to revenue? Discounting due to competition or a poorer than expected performance from existing stores may have been to blame and the weakening Australian dollar isn't helping.

Lovisa's cost to make the jewellery is denominated in US dollars and the company's Australian stores account for 61% of its global network.

Fortunately, hedging contracts and its overseas stores provide some protection from a weakening Aussie.

But investors are happy to take some money off the table given that the stock is trading well ahead of its initial public offer price of $2 a share.

I think taking some profit is a good idea as Lovisa is not particularly cheap as it trades on a 2015-16 consensus price-earnings of 16x. I would need to have more confidence about its top-line growth before buying the stock.

On the other hand, there are also bright spots in Lovisa's results with the company attributing its profit growth to strong like-for-like (LFL) sales growth of 8.2% for the year, along with new store openings and the full year impact of stores that opened in 2013-14.

LFL sales measure revenue growth from shops that have been operating for more than a year.

The company declared a fully franked final dividend of 4.07 cents a share, which is in-line with its guidance.

Lovisa was established in 2010 and has stores in Australia, New Zealand, Malaysia, Singapore, South Africa and the United Arab Emirates.

The company closed 20 local stores in the year to June which were a legacy from a prior acquisition, but opened 49 new stores overseas.

This strategy has paid off for the company with stores in overseas markets generally enjoying a lower cost of doing business than in Australia.

Lovisa didn't provide guidance for the current year but is bullish about its future as it looks to further expand operations with the opening of more overseas stores in 2015-16 and it will spend $3.9 million to refurbish 40 existing stores.

The offshore expansion program will also look at opportunities in new regions that Lovisa doesn't currently have operations in.

Motley Fool contributor Brendon Lau has no position in any stocks mentioned. Follow me on Twitter - https://twitter.com/brenlau The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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