I believe this ASX 200 stock can DOUBLE its profit in 5 years

This stock has enormous profit growth potential in my eyes, here's why.

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I think S&P/ASX 200 Index (ASX: XJO) stock Lovisa Holdings Ltd (ASX: LOV) has an exciting decade ahead of it. I'll outline why in this article.

Lovisa sells affordable jewellery primarily aimed at younger shoppers. I invested in the ASX 200 stock near the end of last year when the market was still highly concerned about inflation and interest rates.

A key reason for my optimism is the potential for profit growth in the next few years.

Huge store growth potential

Lovisa isn't just a retailer in Australia and New Zealand anymore. It has a presence on every continent except Antarctica.

In addition to the ANZ market, the company has at least one store in Singapore, Malaysia, Hong Kong, Taiwan, China, Vietnam, South Africa, Namibia, and Botswana.

Its presence in Europe extends from the United Kingdom to Spain, France, Germany, Belgium, the Netherlands, Austria, Luxembourg, Switzerland, Poland, Italy, Hungary, and Romania. Other markets include UAE, USA, Canada, Mexico, the Middle East, and a South American franchise.

Between the first half of 2023 and the FY24 first-half, Lovisa grew its store count by 139, or almost 20%, to 854. Of that total, 202 stores were in Australia and New Zealand.

Considering that Australia and New Zealand have a low combined population, there are several more highly populated countries where the ASX 200 stock can significantly grow its store count. These include China, Vietnam, the UK, France, Germany, Italy, and Mexico.

If Lovisa can increase its store count at a compound annual growth rate (CAGR) of 15% for five years, it has an excellent chance of doubling its store numbers.

And comparing the HY24 result to the HY19 result five years ago, Lovisa has grown its profit by 110% with a 133% increase in the store count.

Increasing profitability to flow through?

Lovisa has recently entered several countries. Setting up in a new country or region requires an upfront investment before the earnings start rolling in. After that, new stores are cheap to open and profitable because of the low-cost products.

New stores in fresh markets will boost the business's economies of scale — and it's a scalable business.

Broker UBS has forecast the ASX 200 stock could grow revenue by 73% between FY24 and FY28. The earnings per share (EPS) is predicted to grow by 107%.

UBS also predicts profit growth doubling in four years.

Pleasingly, the Lovisa dividend could keep growing, too, alongside the ASX 200 stock's revenue growth.

Lovisa share price snapshot

Using UBS' forecast, the Lovisa share price is valued at 47x FY24's estimated earnings. It's certainly not cheap after a rise of more than 70% in the last six months (see below), but it could still do well in the long-term if it delivers on the profit potential.

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 Lovisa. The Motley Fool Australia has recommended 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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