I'd use the Warren Buffett method and buy this ASX stock

This investment is sparkling.

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If I think about the Warren Buffett method, the ASX share Lovisa Holdings Ltd (ASX: LOV) looks like an exciting business to own.

Warren Buffett is one of the world's greatest investors, perhaps the best of all time. He recently credited Charlie Munger as being the architect of Berkshire Hathaway.

One of the main rules that helped the duo produce such strong returns is that they went for wonderful businesses purchased at fair prices.

Buffett really likes See's Candies, a high-quality chocolate and sweets business within Berkshire Hathaway. It made strong profits for its size, but Berkshire Hathaway wasn't able to re-invest for more growth to take it global. Instead, that profit was used to help grow other areas of Berkshire Hathaway.

With Lovisa, an affordable jewellery retailer, it's very different – the ASX share has great growth potential.

Why Lovisa shares are so compelling

Firstly, let me note that the Lovisa share price is up 35% in the past month and 72% in the past three months. It would have been cheaper to buy a few weeks ago, and I'm not expecting strong gains in the short term after its impressive rally.

But the business continues to display lots of exciting elements.

In the FY24 first-half result, it reported revenue growth of 18.2% to $373 million, a gross profit margin of 80.7% (up 40 basis points) and a dividend that was 31% higher at 50 cents per share.

The business is investing heavily in store growth, which is growing its scale. Entering new markets could lead to a sizeable store network in a few years.

There are a number of markets where it has 10 stores or less, including Canada, Mexico, Italy, the Netherlands, Spain, China, Vietnam, Hong Kong and Taiwan. In Australia, it has 175 stores, while in a huge market like the US, it has 207 stores.

I think Lovisa has lots of potential to double its store count over the next seven or eight years. In the FY24 first-half period, it added 53 net new stores.

Despite the recent tricky trading conditions, the ASX share managed to deliver comparable store sales growth of 0.3% year over year in the first seven weeks of the second half of FY24 – total sales were up 19.6% in the same period compared to FY23.

New sales come at such a high margin, that it makes a lot of sense to open stores across numerous markets. I believe ongoing growth will help its underlying margins. If the company stopped opening (and spending on) new stores, I think its increasing operating leverage would be more apparent over the subsequent year or two.

The right call, in my mind, is to open as many (highly) profitable stores as it can worldwide, which it's doing. Growing its digital sales could also be helpful if done at a good profit margin.

Foolish takeaway

The ASX share is certainly not cheap right now. But, the broker UBS thinks Lovisa could generate earnings per share (EPS) of $1.45 in FY28, which would put the current Lovisa share price at 21 times FY28's estimated earnings.

Ongoing store growth makes me excited by this business, particularly if same-store sales can remain positive for the foreseeable future.

Motley Fool contributor Tristan Harrison has positions in Lovisa. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Berkshire Hathaway and Lovisa. The Motley Fool Australia has recommended Berkshire Hathaway and Lovisa. 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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