Fast fashion ASX share that could be a millionaire maker

Fast fashion has become a growth area with young women and girls. Good companies will overcome the difficulties created by social distancing.

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Lovisa Holdings Ltd (ASX: LOV) is a great little company in the fast fashion market. It sells products principally to young women and girls.

Once again, in my life, the aphorisms of value investor Peter Lynch have proven valuable. He invited people to invest in what they know. I became aware of Lovisa since my young daughter started to take a very strong interest in it.  

In the 5 years since listing, the Lovisa share price has had an annual compound growth rate (CAGR) of 39%. I think this is one of the few real growth stocks on the ASX. If you had invested $10,000 in Lovisa on January 1, 2015, it would have been worth almost $51,504 a mere 5 years later. That's a total return of 515%.

FY20 performance

Before the coronavirus broke out, Lovisa had reported very strong figures. Unaudited results saw net profits for the period up by 8% from the year before. This was even though margins had eroded a little due to the high Australian Dollar. The company said the rising AUD was offset by growing sales volumes. 

In addition, the company opened another 11 stores. It now has a presence across Australia, New Zealand, Singapore, Malaysia, South Africa, with franchises in Saudi Arabia, the UAE, Kuwait and Oman.

Yet at the time of writing, the company's share price has dropped by 72% since the start of the year. A share that I once thought was priced outside of what I was willing to pay is now well within my target price zone. 

A fast fashion ASX growth share

The CAGRs that matter are those that define company performance. For example, company Lovisa has compounded its sales growth by a very impressive 12.7%. This tells us it is a company whose fast fashion products have clearly captured the imagination of its target audience. 

With a CAGR of 62% for free cashflow it clearly has products with high margins. Even for a company that is known for low-cost fashion items.

The next two indicators run together in this case. With a high cashflow, you would expect a high earnings per share (EPS), yet its CAGR is only 3.2%. This is because the company is now in store roll-out mode. Its free cash is ploughed into new stores, giving it an impressive 51% growth rate in shareholder equity.

Lovisa currently has a price to earnings ratio (P/E) of 11.5. This is a fair way under the average since it floated of 17. 

Foolish takeaway

Social distancing measures have created significant issues for the company. It is also impacted by the low Australian Dollar as its imported products are going to cost more.

However, the company has no long term debt. So it is able to ride out the current crisis.

Lovisa is a fantastic company that is well managed and has struck a chord in the fast fashion market. Security of supply is going to be an issue in the foreseeable future, just as with many other companies.

When things begin to normalise, Lovisa will be able to resume its store roll-out strategy and continue its growth streak. 

Motley Fool contributor Daryl Mather has no position in any of the stocks 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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