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Which of these 2 dirt-cheap shares should I buy: boohoo or Revolve Group?

Two women friends sightseeing in summer while on vacation.
Two women friends sightseeing in summer while on vacation.

The stock market’s recent turmoil has produced a great opportunity for me, due to the array of cheap shares now available.

One industry suffering from global economic difficulty is the fashion retail market. However, with an expected compounded annual growth rate (CAGR) of 10% through to 2026, this could be a very rewarding long-term investment.

boohoo (LSE: BOO) and Revolve Group (NYSE: RVLV) are two key players in the online fashion market. I’ll be discussing below which of these is the better cheap share for me to gain exposure to this market.

Beaten-down boohoo

Set up in 2006, boohoo has grown rapidly in the fast-fashion space, with revenue climbing from £67m to £1.98bn since 2013. Active customers rose by 43% to 20m over the past two years. Fast fashion is where trendy clothing inspired by celebrity culture is sold very cheaply in rapid time to meet consumer demand.

However, boohoo shares have fallen by 85% in the past year and, with a price-to-sales ratio of 0.26, look dirt-cheap.

But fast fashion is coming under increasing scrutiny.

Firstly, there are question marks over whether it is only profitable by paying workers criminally low wages. This is something that has plagued boohoo’s reputation, when in 2020 it was discovered that it sourced garments from a factory paying workers just £3.50 an hour. boohoo’s steep pre-tax profit decline of £124.7m to £7.8m may be evidence of this, along with increased competition and macroeconomic headwinds.

Secondly, due to the emissions and waste created by fast fashion, it may not be sustainable in an increasingly environmentally conscious world. These reputational headaches could become more serious for boohoo over time.

The case for Revolve

Set up in 2003, Revolve is also growing strongly. Revenue has climbed from $400m to $891m since 2017, and is expected to hit $1bn in 2022. In 2021, it also generated $100m of net income.

However, unlike boohoo, Revolve specialises in selling high-end clothing and accessories, demonstrated by an average order volume of $275 per customer in 2019.

It lists other brands on its site, but the data analytics it collects on its primarily Gen-Z customers’ purchasing decisions allows it to emulate successful brands based on that analysis.

Revolve has also been aided by its impressive social media strategy with its network of celebrities and influencers, such as Kendall Jenner.

However, its shares have plunged by 73% since they peaked in November 2021, due to increasing costs and inflationary pressures. In the last quarter, revenue grew year over year by 26.9%, but earnings declined by 48.4%. This shows that Revolve isn’t immune to the current economic crisis. Still, its shares look dirt cheap with a forward price-to-earnings ratio of 22 and a price-to-sales ratio of just 1.67.

Now what

Looking at just revenue, boohoo’s is more than double Revolve’s. Yet its market cap of £467m is far lower than Revolve’s $1.77bn. However, boohoo faces multiple issues targeting the core of its business model.

On the contrary, Revolve has many things going for it, such as the widespread endorsement from social media influencers and its ability to learn about its consumers trends.

Furthermore, the higher gross margins Revolve benefits from helps it better withstand the cost pressures faced in the global economy today, which is why I’ll be buying more Revolve shares.

The post Which of these 2 dirt-cheap shares should I buy: boohoo or Revolve Group? appeared first on The Motley Fool UK.

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Muhammad Cheema has positions in Revolve Group. The Motley Fool UK has recommended Revolve Group Inc and boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2022