Broker initiation: Buy this ASX share for a 40%+ return

Bell Potter believes that this retailer is only at the start of its journey.

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Now could be the time to pounce on Universal Store Holdings Ltd (ASX: UNI) shares.

That's the view of analysts at Bell Potter, which have just initiated coverage on the ASX share.

What is the broker saying about this ASX share?

Bell Potter believes that the youth fashion-focused retailer is only at the start of its journey and sees scope for it to nearly double its store network. It commented:

As a leading youth focused apparel, footwear and accessories retailer in Australia, UNI has more than doubled the store print of its flagship 'Universal Store' brand to 77 stores and is expanding private label brands by growing the stand-alone format of 'Perfect Stranger' and 'Thrills'. […] We identity a total store opportunity of ~190 for Australia and see growth ahead given the ability to execute on a further ~90 stores from the current store network of 95.

Another positive is that the broker believes that the ASX share can expand its margins in the coming years. Combined with its store expansion opportunity, this bodes well for its earnings. It adds:

In our analysis of the sales growth and gross margin expansion for a larger group of consumer names globally, we note ~70% at higher FY25e sales than FY19 and ~55% expanding gross margins more than 200 bps from FY19 to FY25e (Consensus based). We think UNI is placed attractively applying this thesis and see further upside to grow margins beyond FY25e with the roll out of the Perfect Stranger and Thrills formats. We estimate that the long-term new store opportunity could add $30-35m in EBITDA and presents significant upside to UNI's earnings base, thereby to the current share price.

Major upside

According to the note, the broker has initiated coverage on Universal Store with a buy rating and a $4.60 price target. Based on its current share price of $3.36, this implies a potential upside of 37% for investors.

But the returns won't stop there. The broker is forecasting a fully franked dividend of 20.8 per share in FY 2024. This represents a 6.2% dividend yield, which brings the total potential return from this ASX share to 43%.

Motley Fool contributor James Mickleboro has positions in Universal Store. 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 no position in any of the stocks mentioned. 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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