Are Lovisa shares the jewel in the crown of ASX growth stocks?

Lovisa (ASX: LOV) shares are arguably the epitome of ASX growth stocks, rising by 43% over the past year alone — and 272% over the past five — to $33.37.

Like all expanding mid-cap companies, the jeweler has seen significant volatility over the years, but recent half-year results have once again impressed analysts. And the combination of comparatively strong finances and a scalable business model means that further growth may be imminent.

Lovisa share price: half-year results

In H1 2024 earnings, Lovisa saw revenue rise by 18.2% year-over-year to $373 million, with an ‘improving trend through Q2.’ While comparable store sales dipped by 4.4%, gross margin rose by 40bps to 80.7%.

Accordingly, EBIT increased by 16.3% to $81.6 million, leaving net profit after tax up by 12% to some $53.5 million. Meanwhile, operating cash flow rose by 29.1% on the prior period to $150 million — leaving the ASX growth business with $15.5 million in net cash, and $120 million of cash facilities in place.

Operationally, Lovisa opened in both the Chinese and Vietnamese markets during the period, while opening 74 new stores and bringing its total estate to 854.

And in arguably a strong sign of financial firepower, Lovisa declared a 30% franked $0.50 interim dividend, up from $0.38 in the same half a year ago. Growth companies usually put all their excess cash into expansion; Lovisa is apparently generating enough excess income to both grow and regularly distribute to shareholders.

CEO Victor Herrero enthuses that ‘the company has continued to deliver solid sales and profit growth and invested in the structures to support our steady global expansion. This positions us strongly to move forward with growth in both existing and new markets.’

Where next for Lovisa shares?

Lovisa is not immune to inflationary pressures. The company noted that pressure on wages in particular had increased the cost of doing business — though the impact was offset by a reduction in CEO long-term incentive expense from $15 million to $6 million. There’s also the depreciation of store fit-outs to consider, alongside interest expense increasing due to the increase in lease liabilities as the store network grows within the higher rate environment.

For context, cash interest payments rose by some 77%, driven also by an increase in the level of gross debt on the balance sheet. Growth is not cheap; capital expenditure was $14.3 million in the half, with most of the cash spent on new store fit outs. On the other hand, this was down from $31.9 million in the same period a year ago as the pace of new store openings slowed down.

It’s worth noting that while the dividend increased, the company does not have a specific dividend payout ratio, instead determining the payout each period based on ‘profitability, cash flows, and future growth capex requirements.’

Morgans remains impressed by the company, with an ‘add’ rating and a $35 price target on the stock. It’s also forecasting a fully franked dividend of just over $0.83 per share in FY24 and $0.85 per share in FY25.

The broker notes that ‘LOV has operations in over 40 markets and substantial white space to expand in almost all of them. The 1H24 result surpassed expectations, mainly due to strong gross margins, which were supported by favourable changes to the price architecture. We have increased our EBIT estimate for the current year by 4%, but, for us, it's not about the near-term. The investor should focus on what this business could develop into in the years ahead.’

Boutique investment manager Elvest agrees with the sentiment, noting the recent financial results were ‘better than expected.’ They enthuse that ‘looking beyond FY24, we remain excited about the company's aggressive global store roll program, which could ultimately double or triple the existing footprint of 860 stores across over 40 markets.’

While there may be inflationary headwinds, Lovisa’s growth story may continue to impress.

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