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Max Manturov

Max Manturov

Head of investment research regulated by CySec 19.01.2022

3 investment ideas amid the rise of online shopping

The apparel and footwear sector of well-known brands remains attractive to investors. Amid the lockdown, demand for online services has increased, which has served as a significant trigger for the retailer's financial performance. 

 In this selection, our analysts have highlighted three companies for investment that have the potential to deliver strong returns at an optimal level of risk in the near term.


Crocs

Ticker CROX.US
Entry price $119.5
Target price $190
Growth potential 59%
Time horizon 3–6 months
Risk High
Portfolio weight 2%

The Company

Crocs is an American company that designs and develops shoes and accessories for every day. All shoes are made from a special material that was invented by the company's technologists - Croslite. Crocs products are available in 90 countries around the world. The issuer uses three main distribution channels: wholesale, retail and online shops.

In September 2021, an investment report on Crocs was already presented by our analysts, at which time it was noted that the company was looking like a promising investment. Crocs uses aggressive marketing to boost sales, but its main advantage remains its unique products, which have been great competition to other casual shoe manufacturers. The return on the investment idea was 16% in September, but the target has not yet been reached. Crocs remains an attractive asset to invest in. A few triggers remain to be added to make the investment idea more attractive.

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.


Buy Crocs Shares >>



Capri Holdings

Ticker CPRI.US
Entry price $56.8
Target price $80
Growth potential 40.8%
Time horizon 6 months
Risk High
Portfolio weight 2%

The Company

Capri Holdings is a multinational fashion holding company. It develops and promotes clothing, footwear, accessories and perfumes for the world-renowned brands Michael Kors, Jimmy Choo and Versace. The company's experts develop designs for new models and distribute finished products. Capri branded products can be purchased anywhere in the world.

At the beginning of 2021, our analysts already presented an investment in Capri Holdings. The return on the idea was as high as 36%, slightly below the stated target of 48.7%. As a result, the idea closed after six months with a yield of 14%. Capri Holdings remains an attractive investment on the back of low valuations and due to several factors, which we will discuss further below.

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.


Buy Capri Holdings Shares >>



Revolve Group

Ticker RVLV.US
Entry price $44.2
Target price $65
Growth potential 47%
Time horizon 6 months
Risk High
Portfolio weight 2%

The Company

Revolve Group is an online retailer and clothing manufacturer offering around 50,000 models of clothing, footwear, accessories and beauty products from 1000 manufacturers. The main market is concentrated in North America, but products can be purchased through the Revolve platform in many countries around the world.

Our analysts have previously presented two investment ideas on Revolve, the most recent of which was released in September 2021. Both ideas proved successful: the first yielded a return of 42% and the second yielded 23%. Since September, the company's shares have shown a downtrend. Their value has fallen by 47% with no negative news on Revolve. Possible triggers for the drop include:

  • An increase in the number of COVID-19 cases both in the US and globally
  • A sale of shares in a large number of companies, including in the technology sector, caused by expectations of QE rollback and a new wave of COVID-19

The current situation could be an excellent opportunity to start building positions in the company's shares. Below we have presented the reasons why Revolve is promising, as well as a look at the current financial results and price targets set by investment companies.

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.


Buy Revolve Group Shares >>


How to Buy Shares

If you don't have an investment account yet, open it now: this can be done online, in just 10 minutes. All you need to do is fill out a short form and verify your account.

Once your account has been opened, you can buy shares in any of the following ways, whichever is more convenient to you:

1. Freedom24 Web Platform: In the Web Terminal section, type the company ticker in the search box and select the company in question from the results. Open a secure session in the trading window on the right, select the number of shares you want to buy, and click Buy.

2. Freedom24 iPhone App and Android: Go to the Price screen and tab the search icon in the top right corner. In the search dialog that shows up, type the company ticker and select the company in question in the search results. You will then see the stock in the market watch; tap it and go to the Order tab in the dialog that shows up. Specify the number of shares you want to buy and click Buy.


*Additional information is available upon request. Investment in securities and other financial instruments always involves risks of capital loss. The Client should make himself aware at his own accord, including to familiarize himself with Risk Disclosure Notice. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Commissions, fees or other charges can diminish financial returns. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, objectives, or needs and do not constitute an investment advice service. The recipient of this report must make their own independent decisions regarding any securities or financial instruments mentioned herein. Information has been obtained from sources believed to be reliable by Freedom Finance Europe Ltd. or its affiliates and/or subsidiaries (collectively Freedom Finance Europe). Freedom Finance Europe Ltd. do not warrant its completeness or accuracy except with respect to any disclosures relative to the Freedom Finance Europe Ltd. and/or its affiliates and the analyst’s involvement with the issuer that is the subject of the research. All pricing is indicative as of the close of market for the securities discussed, unless otherwise stated.

  • Recommendation evaluation methodology in accordance with Terms and Conditions of Market Research Use
    Freedom Finance analysts perform a three-stage analysis. They select a promising industry based on the latest news, statistics and industry-specific metrics. They assess the supply and demand situation and its future development dynamics. Industry’s investment attractiveness is mostly affected by the forecasted market growth rates; total addressable market, player concentration level and likeliness of a monopoly formation, as well as the level of regulation by various entities or associations.

    The assessment is followed by the comparative analysis based on the selected sample. The sample comprises companies with a market capitalization of over USD 1 billion, but there is space for exceptions (when the suitable level of liquidity for company’s securities is available on the stock exchange). The selected companies (peers) are being compared against each other based on multipliers (EV/S, EV/EBITDA, PE, P/FCF, P/B), revenue growth rates, marginality and profitability (operating income margin, net income margin, ROE, ROA), and business performance.

    Having completed the comparative analysis, the analysts carry out a more in-depth research of the news about the selected company. They review company’s development policy, information about its current and potential mergers and acquisitions (M&A activity), and assess the efficiency of company's inorganic growth and other news about it over the past year. The main objective at this stage is to identify the growth drivers and evaluate their stability, as well as the extent of impact they have on the business.

    Based on all the data collected, the analysts determine the weighted forecasted figures of company’s growth rates and proposed business marginality, which are used to calculate the company’s multiplier-based estimated value. The said value enables setting the stock price target and stock value growth potential.

    The expected timing of the idea implementation is set depending on the current market situation, volatility level and available forecasting horizon for industry and company development. The forecasting period is normally set between 3 and 12 months.