Torrid Holdings Inc. (NYSE:CURV) Stock Rockets 27% As Investors Are Less Pessimistic Than Expected

Torrid Holdings Inc. (NYSE:CURV) shareholders are no doubt pleased to see that the share price has bounced 27% in the last month, although it is still struggling to make up recently lost ground. Taking a wider view, although not as strong as the last month, the full year gain of 13% is also fairly reasonable.

In spite of the firm bounce in price, you could still be forgiven for feeling indifferent about Torrid Holdings' P/S ratio of 0.4x, since the median price-to-sales (or "P/S") ratio for the Specialty Retail industry in the United States is about the same. Although, it's not wise to simply ignore the P/S without explanation as investors may be disregarding a distinct opportunity or a costly mistake.

Check out our latest analysis for Torrid Holdings

How Has Torrid Holdings Performed Recently?

Torrid Holdings could be doing better as its revenue has been going backwards lately while most other companies have been seeing positive revenue growth. It might be that many expect the dour revenue performance to strengthen positively, which has kept the P/S from falling. However, if this isn't the case, investors might get caught out paying too much for the stock.

If you'd like to see what analysts are forecasting going forward, you should check out our free report on Torrid Holdings.

Is There Some Revenue Growth Forecasted For Torrid Holdings?

In order to justify its P/S ratio, Torrid Holdings would need to produce growth that's similar to the industry.

Retrospectively, the last year delivered a frustrating 10% decrease to the company's top line. That put a dampener on the good run it was having over the longer-term as its three-year revenue growth is still a noteworthy 17% in total. Accordingly, while they would have preferred to keep the run going, shareholders would be roughly satisfied with the medium-term rates of revenue growth.

Shifting to the future, estimates from the six analysts covering the company suggest revenue growth is heading into negative territory, declining 0.6% over the next year. Meanwhile, the broader industry is forecast to expand by 3.7%, which paints a poor picture.

With this in consideration, we think it doesn't make sense that Torrid Holdings' P/S is closely matching its industry peers. Apparently many investors in the company reject the analyst cohort's pessimism and aren't willing to let go of their stock right now. There's a good chance these shareholders are setting themselves up for future disappointment if the P/S falls to levels more in line with the negative growth outlook.

What Does Torrid Holdings' P/S Mean For Investors?

Torrid Holdings appears to be back in favour with a solid price jump bringing its P/S back in line with other companies in the industry We'd say the price-to-sales ratio's power isn't primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations.

While Torrid Holdings' P/S isn't anything out of the ordinary for companies in the industry, we didn't expect it given forecasts of revenue decline. With this in mind, we don't feel the current P/S is justified as declining revenues are unlikely to support a more positive sentiment for long. If we consider the revenue outlook, the P/S seems to indicate that potential investors may be paying a premium for the stock.

You should always think about risks. Case in point, we've spotted 4 warning signs for Torrid Holdings you should be aware of, and 2 of them can't be ignored.

Of course, profitable companies with a history of great earnings growth are generally safer bets. So you may wish to see this free collection of other companies that have reasonable P/E ratios and have grown earnings strongly.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.