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Are shares of Lovisa Holdings Ltd (ASX:LOV) a buy?

The share price of fast-fashion jewellery chain Lovisa Holdings Ltd (ASX: LOV) has fallen 23% from its record high of $12.53 on June 15. The share price decline has occurred on fears of overvaluation and a trading update that revealed comparable store sales growth for the first 7 weeks of FY19 was still positive, yet below the company’s long-term target range of 3-5%.

Lovisa has been one of the best performers on the Australian share market over the last 12 months with its shares gaining 61% compared to the broader market’s gain of 1%. The company’s performance is even more impressive when factoring in the subdued trading environment in the retail sector as seen in other Australian retailers such as Harvey Norman Holdings Limited (ASX: HVN) and Myer Holdings Ltd (ASX: MYR).

With shares of Lovisa officially in bear market territory, it may be time for investors to buy shares in one of the few Australian retailers with strong growth prospects.

Global expansion 

Lovisa delivered an excellent operational result in FY18 with revenue increasing by 21.4% to $217 million on the back of same-store sales growth of 6.8% and 38 new stores being added to its network. Gross margin rose by 120 basis points to 80% due to effective inventory management and a strong performance over the Christmas period in the first half. The company’s cost of doing business was flat at 53%, and as a result, net profit after tax grew by 23.8% to $36 million.

Lovisa has indicated that subject to the availability of suitable sites, it expects to accelerate the rollout of new stores in FY19 at a higher rate than FY18. The vast majority of new store openings are forecast for overseas markets with the company expecting to open at least 7 stores in time for Christmas trading in France, Spain and the United States.

Foolish takeaway

Lovisa reported earnings per share of 34.2 cents in FY18. The current consensus earnings per share estimate for FY19 is 38.94 cents, which represents growth of 13.9%. At current prices, Lovisa is trading for around 25 times FY19 earnings which is reasonable given the company’s growth prospects.

August’s trading update of comparable same-store growth coming in at below expectations has presented investors with a more reasonable risk/reward proposition at a price point in the mid $9 range if the company can meet future expectations.

The key for Lovisa over the next couple of years lies in the success of its international expansion given the mature nature of its Australian operations which generated 61% of company sales in FY18. The company has been successful in expanding internationally thus far, and further success in rolling out new stores in overseas markets should drive future earnings growth and reward long-term shareholders in outperforming the broader market.

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Motley Fool contributor Tim Katavic has no financial interest in any company mentioned. 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 Scott Phillips.

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