The ASX stock Step One Clothing Ltd (ASX: STP) has all the factors needed to continue beating the market, in my eyes. I think the ASX dividend share could be an excellent investment opportunity.
Step One describes itself as a "leading direct-to-consumer online retailer for innerwear." It offers an "exclusive range of high-quality, organically grown and certified, sustainable, and ethically manufactured innerwear that suits a broad range of body types."
The Step One Clothing stock price has increased more than 40% in the year to date, as shown in the chart below. That compares to a rise of 5% for the S&P/ASX 200 Index (ASX: XJO) in 2024.
However, the business has dropped around 25% since 12 April 2024, making it significantly cheaper and giving investors an opportunity to invest at a much better valuation. Let's explore.
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Strong revenue growth
One of the main things that can drive a business significantly higher is the speed of revenue growth.
If its revenue can rise by more than 10% per year over the long term, it gives the earnings and share price a good chance of growing at a compound annual growth rate (CAGR) of at least 10% per year, too.
Step One Clothing reported in the FY24 first-half result that its total revenue increased by 25.5% to $45.1 million. It also added 182,000 new customers in the HY24 period.
One compelling thing about the business is that it's delivering rapid growth in overseas markets.
Australia only saw 8.9% revenue growth to $26.2 million, but the United Kingdom experienced 38% revenue growth to $14.6 million, while United States revenue jumped 256% to $4.1 million.
There's no guarantee it will continue ramping up sales in the UK and US in the short term, but the ASX dividend stock's progress is very promising. It can expand into other countries like Canada in the future.
Improving profit margins
For a business to become successful, I believe it needs to grow more than just revenue. It should also grow profit.
It's particularly beneficial for shareholders if profit margins can rise. Investors usually value businesses based on the profit generated, so if margins rise, then profit can soar faster than revenue.
The HY24 result saw the gross profit margin improve by 0.5 percentage points to 81.2%, and the earnings before interest, tax, depreciation and amortisation (EBITDA) margin improved by 1.7 percentage points to 22.5%.
While total HY24 revenue rose 25.5%, the net profit after tax (NPAT) increased by 34.7%, thanks to the NPAT margin improving by approximately 5.1 percentage points to 27%.
In my eyes, the company has a very promising future if margins keep increasing.
Excellent dividends
The company has been very generous to shareholders in terms of dividend payouts. In recent results, the ASX stock has provided shareholders with payments, which equate to a dividend payout ratio of 100%.
Step One Clothing said of the HY24 result:
The company's funding level following this dividend distribution is deemed sufficient to support future expansion and ensure ongoing financial stability. The company is targeting a full year payout ratio of 100% of NPAT.
The dividend is fully franked to the maximum extent possible, demonstrating the board's commitment to aligning the interests of its investors with the company's financial success.
According to the forecasts on Commsec, at the current Step One share price, it could pay a grossed-up dividend yield of 6.4% in FY25 and 6.9% in FY26.
