As a Foolish investor, I must say that I love to hunt for a bargain. Penny shares have always piqued my interest given their small size and typically higher level of price volatility.
Penny stocks refer to companies with a market capitalisation below £100m and a share price of less than £1.
Worth a pretty penny
One that caught my eye this week was Revolution Beauty Group (LSE: REVB). It is a global, multi-category, mass beauty and personal care business. I like that the company is diversifying with its wholesale retailing relationships, as well as operating with a clear digital sales strategy.
Revolution Beauty shares have soared 10% in the last week alone. Shares in the AIM-listed beauty retailer are trading at 29.5p with a £93m market capitalisation. In its most recent interim results, the company reported adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of £6.4m from £90.4m.
Recent update
The company recently held its Capital Markets Event on 8 February with a brief update to investors. One thing that stood out was its diversified global earnings across the USA (27% of sales), UK (34%) and Rest of the World (39%).
Revolution Beauty’s “fast to market” content model is also a tick in my books. The company has focused on delivering engaging content quickly to maintain and capture additional market share.
While there’s a lot to like about Revolution Beauty, there are always risks to investing. I think penny shares, in particular, warrant heightened due diligence given their small size and often significant price swings.
One key risk I can see is that Revolution Beauty is very consumer facing. While the company’s recent Capital Markets presentation shows a US$460bn (and growing) global beauty market, I am wary of direct-to-consumer companies. People do like to spend on cosmetics, which comprise 78% of group sales, but that can be tested when times get tough.
Businesses tend to be more resilient and more reliable from a customer perspective. Given the current economic climate, including heightened cost-of-living pressures, I could see consumers reducing their beauty spend in favour of the bare necessities.
E-commerce vs brick-and-mortar
The other thing that jumps out to me is the high percentage of earnings from physical retail stores. Revolution Beauty reports 80% of its earnings are from physical retail with 20% via digital.
With the rise of e-commerce and the likes of Amazon, brick-and-mortar retail has been under pressure in recent years. One big positive, however, is that real estate isn’t a major part of the business with property, plant and equipment making up £7.9m or 6.0% of total assets in FY23.
The strong gains in the last week or so indicate that other investors are buying up Revolution Beauty shares. I like the look of the business but am wary of the consumer-facing element if we see further recessionary conditions.
All in all, I’m willing to bide my time and consider buying when I see the company’s next results release to allay my concerns.
