This ASX stock has gained 89% since I bought it – but it could still be a bargain

This stock has glittering potential in my opinion.

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One of my best ASX stock investments within the last year has been Lovisa Holdings Ltd (ASX: LOV). The Lovisa share price has gone up almost 90% since I bought it in the last quarter of the year. I think it's a very exciting ASX growth share with a lot of potential to keep expanding.

Investors generally consider an ASX stock by its present profit and its prospects for future profit. I am optimistic about the jewellery company's potential for significant growth in the future.

I think there are few non-technology S&P/ASX 200 Index (ASX: XJO) shares that have the potential to grow revenue as much as Lovisa in the next several years.

Two things make me believe the company could deliver strong capital growth in the next five years.

Global store rollout plans to boost ASX stock's sales

Over the last three years, five years or longer, Lovisa's sales growth has largely tracked its store rollout and a bit of same-store sales growth in normal economic conditions.

For example, in the FY24 half-year result, Lovisa's store count rose 19.4% to 854, and total sales went up by 18.2% to $373 million (despite the current challenging economic conditions harming same-store sales growth).

At the end of the FY24 first-half result, the ASX stock had 175 stores in Australia, a country of less than 30 million people.

I think there is excellent scope for the business to expand significantly in numerous markets. For example, in the USA, it has 207 stores (up from 155 stores in HY23), 47 stores in the UK, one store in China, one store in Vietnam, four stores in Mexico, and so on. These countries have much bigger populations than Australia, particularly the US and China.

In my opinion, the Lovisa store network could easily double in the next five years, and if its growth trend continues, Lovisa's sales could double in that time too.

Scale benefits

When a business grows, profit margins often increase. This can enable the bottom line to grow faster than revenue. The profit can help push the Lovisa share price higher and fund larger dividends.

While Lovisa's costs have accelerated during this inflationary period, I think inflation can slow down relatively soon, and the ASX stock's growing scale will enable bigger profit margins.

Expansion into a new country comes with initial costs, but it doesn't need to enter Mexico or Canada again; those one-off start-up costs won't be repeated. It just needs to open more stores in those markets.

Becoming bigger will give Lovisa more buying power and give it other economies of scale.

The broker UBS has estimated that Lovisa can generate $709 million in revenue in FY24 and $81 million in net profit after tax (NPAT). By FY28, in four years, its revenue is expected to increase by 76% to $1.25 billion, and the net profit is projected to grow by 112% to $172 million.

According to those UBS estimates, the Lovisa share price is valued at 21x FY28's estimated earnings.

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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