3 investment ideas amid the rise of online shopping

The acquisition of Heydude

Crocs shares have been in a downtrend since mid-November, which intensified following news of the acquisition of rival Heydude. The deal will be valued at $2.5bn: $2.05bn will be transferred in cash and the rest in Crocs shares. The deal is expected to close in Q1 2022. Heydude will operate as a division of Crocs, with the founder of the company retained as strategic advisor and creative director.

Investors have reacted negatively to the news: it has to do with borrowing to close the deal, and hence the increased debt burden. Against this backdrop, the value of Crocs fell by 11%.

Crocs managers believe that buying Heydude will benefit the company. The arguments include:

• expansion of the product portfolio
• an increase in the number of customers and sustainable sales growth (especially in the northeast US)
• an increase in cash flow and overall operating margins, which will contribute to a rapid reduction in debt.

Of particular note is Heydude. The company has great potential. More than 40% of Heydude's operations are conducted online, with expected annual revenues of $570m, while Crocs CEO Andrew Rees estimates that revenues could reach $700m-$750m in 2022.

In addition, investment firm Piper Sandler lists Heydude as one of the fastest-growing brands. That's the view analysts reached after conducting the Taking Stock With Teens survey. Heydude was ranked 8th in the autumn 2021 survey, up from 17th in 2020.

Crocs is acquiring Heydude at EV/EBITDA of 15x and EV/S of 4.4x, which is a reasonable level given the growth rate of the acquired company. The realisation of the deal will expand the size of Crocs' addressable market to $125bn.

In other words, the negative investor reaction to the Heydude acquisition could be a good opportunity to acquire Crocs shares.

Financial results and company valuation

Crocs continues to report excellent financial results with a Q3 2021 revenue of $625.9 million, an increase of 73% and 100%, respectively, over the same period in the previous two years.

E-commerce sales accounted for 37% of total revenue, growing 69% in Q3 2021. At the same time, Crocs continues to show business efficiency - operating and net profit margins in Q3 2021 increased to 32.4 and 24.5%, compared to 20.0 and 17.1% in the same period a year ago.

Crocs also retains its financial position - at the end of Q3 2021 it had $436.6m of liquidity and $686m of total debt. The Heydude acquisition will increase Crocs' debt to $2.75bn, with Net Debt/EBITDA reaching 2.97x, which is considered acceptable.

FCF remains positive, with free cash flow in Q3 2021 of $136m, after all fixed costs, and Operating Cash Flow of $150.5m.

The attractiveness of Crocs as an asset also lies in the company's undervaluation: the main multiples showed a rather low result:

• EV/S - 3.85x
• PE - 10.97x
• Forward PE - 13.23x
• P/FCF - 18.16x

In January 2022, investment firms Loop Capital and Piper Sandler raised their price targets on Crocs shares to $190 and $246, respectively.

How to take advantage of the idea?

1. Buy the stock at $119.5.
2. Allocate no more than 2% of your portfolio for purchase. To compile a balanced portfolio, you can use the recommendations of our analysts.
3. Sell when the price reaches $190.

Continued strong interest in luxury goods

2021 proved to be a good year for retailers that distribute premium and luxury goods. The easing of quarantine restrictions, the partial re-establishment of air links between countries, as well as increased shopper interest in online marketplaces have all contributed to the increase in demand.

The consultancy firm Bain & Co recently conducted a study which found that the luxury goods market has shown a rapid recovery in 2020-2021 and the positive momentum will continue in the medium term. Bain & Co estimates that by 2025 the value of the luxury goods market will pass the $360m-$380m mark and CARG will be in the 6-8% range. The company stresses that demand for luxury goods will come from the Chinese and US markets, with generations Y and Z making up the bulk of the consumers.

Capri is one of the beneficiaries in its segment, due to which it is showing growth in key operating indicators. In November, the company reported Q2 fiscal 2022 results that exceeded analysts' expectations. Against this backdrop, the company's management has increased its revenue and profit forecasts for the entire of 2022. Previously forecast at $5.15 billion in revenue, it now stands at $5.3 billion. Adjusted earnings per share stood at $4.5, a number that previously hovered in the $3.8-3.9 range. The realisation of the set outlook will boost Capri Holdings' capitalisation.

Additional growth drivers

Capri Holdings is trying to attract additional growth drivers. One of the latter is to support inorganic growth through M&A transactions. During a call with CFO analysts in 2021, Capri Holdings CEO Tom Edwards said the company was on the lookout for a potential M&A target. This information was confirmed by Capri CEO John D. Idol. However, he noted that only companies worth more than $1bn are being considered.

Capri Holdings (originally Michael Kors Holdings) has previously done two such deals: in 2017, it bought Jimmy Choo Ltd for $1.2bn and in 2019, Capri Holdings acquired Versace for $2.1bn. The integration of both companies into the holding company was successful. Capri was able to optimise costs and restructure sales streams, including the closure of loss-making shops in North America and Europe. In contrast, the number of stores in China and other Asian countries has been increased. These actions had a positive effect on the company's financial results and overall capitalisation.

It is worth noting that Capri Holdings was able to achieve a low leverage ratio of Net Debt/EBITDA of 0.88x after the M&A transaction. It can be said that Capri Holdings has built an excellent strategy by maintaining its growth rate through M&A deals.

Another promising growth driver is the presence in the NFT token market and the creation of virtual luxury items for Metaverse, which is now gaining popularity. With its help, companies in the fashion industry will be able to sell virtual goods as well as conduct marketing and build loyalty with Generation Y and Generation Z buyers. The market is very promising, with investment bank Morgan Stanley estimating the NFT luxury goods market could reach a valuation of $50 billion by 2030.

Capri Holdings has not been spared and one of its brands Jimmy Choo has launched the Mystery Box collection. Inside each "box" there are animated cards with the brand's shoes. It is worth noting that the collection has NFTs with both frequent and rare shoes. The size of the collection was 8888 boxes and the entire collection sold out in a short span of time.

Capri Holdings is keeping up with the times and tries to participate in all the existing trends. In so doing they want to be closer to the young and profitable generation.

Financial condition and valuation of the company

Capri Holdings continues to post excellent financial results. In the second quarter of fiscal 2022, for example, revenues reached $1.3 billion, an increase of 17.1%. Looking at the segments, the best was Versace - the brand sales increased by 46%, but the share of total revenue is still low (21.7%).

During the same period, the company also increased its business margin. Operating profit margin rose to 15% (previous figure 14%) and net profit margin to 15.4% (previous figure 11%).

In addition, Capri Holdings is gradually reducing its debt burden. The company's debt has now fallen to $1.14 billion and its cash position is $234 million. The FCF level is also stable at $167 million in Q4 2021. In other words, the company has no liquidity problems.

The company is cheap relative to the industry average by key multiples:

• EV/S — 2,4x;
• EV/EBITDA — 21,3x;
• PE — 21,9x;
• Forward PE — 9,9x.

Investment banks increased their price targets on the company's stock in December 2021: JPMorgan Chase - $80, Goldman Sachs - $86.

How to take advantage of the idea?

1. Buy the stock at $56.8.
2. Allocate no more than 2% of your portfolio for purchase. To compile a balanced portfolio, you can use the recommendations of our analysts.
3. Sell when the price reaches $80.

Revolve's investment appeal factors

One of the most important reasons to invest in Revolve is the company's business model, which is distinctive:

1. The sale of products only through its own online marketplace, which helps save on premises rental, property maintenance and third-party platform commissions. Trading online allows Revolve to avoid the problems associated with lockdowns.
2. Dynamic inventory management helps to estimate demand for products and increases inventory turnover rates. This leads to a significant increase in business margins and revenue growth.

These distinctive features of the business model have helped Revolve overcome the challenges of the 2020 lockdown, as well as demonstrating significant growth in key operational metrics following an improving epidemiological environment.

Another important growth trigger for the company is that its brands (Revolve and Forward) are targeting millennials and Generation Z. Prior to the pandemic, Revolve was actively attracting attention with extensive marketing campaigns at music festivals and youth social events. Engagement was also established with popular young celebrities and bloggers on social media. For example, in September 2021, Revolve welcomed blogger Kendall Jenner to its team. She took the position of creative director of the Forward division (FWRD), which specialises in premium products. Kendall Jenner has connections with major brands, and her main advertising force is her social media audience of 213 million followers. With Kendall's help, the company plans to engage with customers and significantly expand its customer base.

Financial results and company valuation

The presence of the features described above is clearly evident in the company's financial results. In Q3 2021, all key operating metrics showed growth:

1. The number of registered users on the platform rose to 1.6 million. By comparison, the figure was 1.5 million in Q3 2020 and 1.4 million in Q3 2019.
2. The number of orders reached 1.83 million, the figure was at 1.14 million in Q3 2020 and 1.19 million in Q3 2019.
3. The average order increased to $276, the average was $232 in Q3 2020 and $275 in Q3 2019.

Revolve has successfully continued to improve its financial performance. The company's Q3 2021 revenue rose 62% year-on-year and 58% year-on-year to $244.1m in 2019, with the Revolve brand accounting for the bulk of the revenue at 83.7%. However, FRWD is gradually expanding its share of the company's total revenue. This is supported by a higher growth rate: in Q3 2021 it was 95% over the same period in 2020 and 112% over Q3 2019.

For Q3 2021, Adj EBITDA margin and net profit decreased relative to the 2020 results to 8.9% (previously 15.9%) and 6.8% (previously 12.8%). This is more due to the planned increase in marketing costs, which rose from 12.5% to 19.2% of total revenue. Revolve's management planned to increase spending on this item in advance - it will allow the company to continue to aggressively build up its client base. It is worth noting that average Adj EBITDA and net profit margins since the beginning of the year are 12.3% and 10.7%, respectively.

Revolve still has no debt load, the company is working on building up cash, which amounted to $221.6m in Q3 2021 (Q3 2019 cash was at $51.1m). Revolve also maintains stable operating cash flow and FCF, which for 9M 2021 was $68.4m. 2021 were $68.4m and $66.6m, respectively.

On key multiples, Revolve trades cheaply compared to its peers, given the company's growth rate and level of business margins:

• EV/S - 3.9x
• EV/EBITDA - 30.5x
• PE - 35.5x
• Forward PE - 32.1x

At the end of 2021, several investment houses raised their targets for Revolve shares:

• BMO Capital Markets - $47
• Morgan Stanley - $57
• Raymond James - $83
• B. Riley - $84
• Wedbush - $84
• Credit Suisse Group - $85.8
• Robert W. Baird - $90
• Guggenheim - $100     

How to take advantage of the idea?

1. Buy the stock at $44.2.
2. Allocate no more than 2% of your portfolio for purchase. To compile a balanced portfolio, you can use the recommendations of our analysts.
3. Sell when the price reaches $65.