This brick-and-mortar retailer is aggressively expanding when the sector is under pressure

Photo: Lovisa Prospectus

Retail has been in the doghouse as the sector faces the onslaught from online competitors and the weak wages growth environment.

But not all brick-and-mortar retailers are on the defensive even as some of the best names in the industry such as JB Hi-Fi Limited (ASX: JBH) and Myer Holdings Ltd (ASX: MYR) are sliding backwards from structural changes to the industry.

Sure, there have been a handful of consumer-facing stocks that are bucking the trend such as Woolworths Group Ltd (ASX: WOW) and Premier Investments Limited (ASX: PMV), but if you want to buy growth, it’s hard to look past Lovisa Holdings Ltd (ASX: LOV).

The stock is surging 3.7% in afternoon trade to touch a record high of $11.06 compared to a 0.3% gain by the All Ordinaries (Index:^AORD) (ASX:XAO) index and Citigroup thinks there is more left in the tank as the broker initiated coverage on the costume jewellery retailer with a “buy” recommendation.

“Lovisa is in the early stage of its international expansion and we see material earnings upside over the medium term from the current pilots,” said the broker.

“Our investigation into France, Spain and USA indicates these markets could represent a $280 million revenue and ~$64 million EBIT [earnings before interest and tax] opportunity (~1.6x Lovisa’s FY17 EBIT). Should Lovisa successfully rollout 418 stores across the three pilot markets, we see the company worth $16.12 per share.”

But Citigroup prefers to play it “conservative” and is only factoring in a 209-store rollout across the three markets. This equates to a price target of $12.30 a share on top of the broker’s 23 cents a share dividend forecast for FY18.

Lovisa is more advanced in its entry into the United Kingdom, which is a bigger near-term driver of group profit, although it is still early days yet with management opening 25 stores out of the 100 targeted stores.

Citigroup is already calling Lovisa’s international expansion a success by describing the retailer as being “on the path to world domination” with China, Mexico and Canada representing other markets that the company could expand into.

How many ASX-retailers have you heard being described in the same way? None I can think of.

But the stock is not without risks. Mall foot traffic is falling, and given that cheap jewellery is often an impulse buy, this could adversely affect Lovisa’s sales.

Fleeting and fickle consumer taste in costume jewellery pose another risk, while investors are likely to remember the sudden departure of the company’s chief executive last month.

Nonetheless, Lovisa probably has the best organic growth opportunities in the sector although Noni B Limited’s (ASX: NBL) acquisition of a number of Specialty Fashion Group Ltd.’s (ASX: SFH) brands shows there is more than one way to grow in this challenging environment.

Looking for other stocks with strong growth potential outside of retail? The experts at the Motley Fool have picked three of their favourite emerging disruptors to back this year.

Follow the free link below to find out what these stocks are and why they should be on your watchlist.

The Disruptors: 3 Revolutionary Aussie Companies to Back for 2018

We’re living in one of the most exciting times in investing history. Innovation and a booming culture of entrepreneurship are constantly creating new companies with the potential to make forward-thinking investors very rich. Now more than ever, one small, smart investment could make a huge difference to your wealth.

That’s why at The Motley Fool we’ve been scrutinizing the ASX to uncover the kinds of companies that we believe could turn into the next Cochlear or REA Group.

We’ve found three exciting companies that we believe re poised to perform in the new year. Click here to uncover these ideas!

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Premier Investments Limited. 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 Scott Phillips.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.