Will the Lovisa share price glitter in FY23?

The jewellery retailer’s shares are dropping in 2022 but are things about to turn around?

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Key points

  • The Lovisa share price has fallen almost 30% in 2022
  • I think the business is an attractive long-term opportunity
  • It’s growing sales and benefiting from operating leverage

The Lovisa Holdings Ltd (ASX: LOV) share price has dropped 27% in 2022. So could FY23 be a better year for the fast-fashion jewellery retailer?

It’s worth noting that despite the decline, Lovisa shares are still up by more than 300% over the past five years.

It seems ASX growth shares are on the nose in recent times with concerns about supply chains, inflation, and the prospect of rising interest rates.

However, with the Lovisa share price dropping but the company still displaying growth – is it an opportunity?

Growth and scalability

In the FY22 first half, Lovisa grew its revenue by 48.3%. Its earnings before interest and tax (EBIT) rose 59% and net profit after tax (NPAT) grew by 70.3%.

I think the result demonstrated that as Lovisa grows its revenue, it can benefit thanks to the operating leverage within the business. It has been focused on its cost of doing business (CODB) and efficiency while building the structure to support the company’s next stage of growth.

The sales growth momentum is continuing. Trading in the first eight weeks of the FY22 second half saw comparable sales growth of 12.1% year on year, with total sales growth of 61.7% on the same period in FY21. Lovisa said that the sales momentum had continued to the end of April 2022.

Its business model allows the business to generate gross profit margins of more than 75%.

Expansion plans

Lovisa said that it’s planning to keep expanding in its current markets. As at April 2022, it had added 59 new stores in FY22 to date.

The number of international stores is now 74% of its store network. It has added 38 new stores in the United States in the year to date. The US is a large opportunity for the ASX share and could be an important factor for the Lovisa share price.

The business is also focused on building its digital platforms globally as well as finding new markets to pilot the Lovisa brand.

I think that the business is in a good financial position to achieve this growth. Not only is it already generating good profit, but it has a strong balance sheet with no debt.

I believe that Asia and the US are particularly promising markets for the company to achieve long-term growth.

Valuation

The drop in the Lovisa share price makes it much more attractive to me, considering the sales and profit growth that it’s also achieving.

Using estimates from Macquarie, the Lovisa share price is now valued at 28 times FY22’s estimated earnings and 23 times FY23’s estimated earnings. If Lovisa can globally roll out an effective digital offering and keep growing its store network, I think it could be on track for an exciting future as it benefits from operating leverage.

As a bonus, it’s also giving investors a pleasing dividend. Macquarie thinks that the Lovisa grossed-up dividend yield could be almost 5% in FY23.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Lovisa Holdings Ltd and Macquarie Group Limited. 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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