Lovisa Holdings Ltd (ASX: LOV) shares look like a great opportunity to me due to a number of factors, which makes it a strong long-term option in my opinion.
It describes itself as one of Australia's leading specialist fast fashion jewellery retailers.
The company has a presence in more than 30 countries including Australia, New Zealand, the US, and the UK.
There are several reasons why I really like the business, and I'll outline a few of them.
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Strong growth potential in existing markets
The company's stores are very profitable and the company earns high margins on its affordable jewellery. In FY23 its gross profit margin was 80% on revenue of $596.5 million and it made $105.7 million of earnings before interest and tax (EBIT), despite all the investment in expanding its store network.
It finished the 2023 financial year with 801 stores after adding 210 stores during the period.
In Australia, it had 168 stores for a population of around 26.3 million people.
In the USA it only has 190 stores for 330 million people and there are many other places that have a much smaller store network than Australia such as the UK with 44 stores, Taiwan with one store, Spain with one store, the Netherlands with seven stores, Italy with seven stores, Poland with 18 stores, Canada with seven stores, Mexico with four stores and so on.
I think Lovisa could easily triple its store network in the existing markets where it operates, which could be useful support for Lovisa shares in the future.
Big new markets?
It's only just entered new compelling markets, such as Canada and Mexico, but there are two markets that could deliver enormous growth for the business – India and mainland China. According to the World Bank, those two countries have a combined population of 2.8 billion.
However, the potential of generating earnings from one of these two regions is apparently not just some far-off possibility, but something the company has been actively working on.
According to Morgans, it was said by Lovisa's CEO on a call with Morgans on result day (and not talked about on the public call) that the company has established an enterprise in China and it intends to enter mainland China "in this financial year".
A lot of Western brands have done well with Chinese customers, such as LVMH, and while Lovisa doesn't have the same presence as LVMH I think there's very good potential for the company to open hundreds of stores in the country.
Very reasonable valuation
The Lovisa share price and forward price/earnings (P/E) ratio seem very reasonable to me, for how much profit the business may be able to generate over the rest of this decade.
The company has done a lot of work preparing operations in the new countries that it's now operating and I think the next two years could see a significant amount of new stores added.
According to Commsec, the Lovisa share price is valued at just 22 times FY25's estimated earnings, with plenty of earnings growth potential in the subsequent years.
