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This Trend-Setter's Stock Is Set to Crush the Reopening

Revolve Group (NYSE: RVLV) is a fashion retailer with a business plan that centers around social media influencers and live marketing events in an effort to target Millennial and Gen Z customers. Revolve found its way through a tough 2020 in which all of its events were canceled, and emerged in decent shape.

The stock is up 207% over the past year, dwarfing the S&P 500's 25% gains. Now, as the world continues to emerge from the pandemic-induced lockdowns, Revolve is back to doing what it does best, and the results speak for themselves.

Image source: Getty Images

Impressive two-year results

Revolve's year-over-year results are impressive, but considering those results are compared to pandemic-affected quarters, it's more useful to compare its business and financial metrics to 2019. On a two-year basis, the most recently reported quarter showed revenue growth of 58%, net income growth of 74%, and gross margin growth of 148 basis points. This shows that even through a year when its primary marketing strategy was put on ice, the company was able to keep growing its business.

Customer metrics on a year-over-year basis are also trending up. Active customers, total orders placed, and average order volume were up 12%, 60%, and 19% respectively. In the Q3 earnings call, management was also quick to point out that active customers grew by 124,000 over Q2, which represents the largest sequential growth in the company's history.

Not only is Revolve growing substantially over 2019, the more recent acceleration in active customers shows the impact of the company's return to live-event marketing.

Live events and Kendall Jenner

Considering that Revolve built its business around live events and influencer marketing, the pandemic presented a significant challenge to its proven marketing strategy. Revolve specifically targets Millennial and Generation Z female shoppers. Management believes this digital and mobile native generation is best reached via social media and with the use of influencers. Fortunately, during Q3, Revolve was able to return to the live events that are core to its business.

For the first time ever, Revolve participated in New York Fashion Week. Among many other celebrity attendees was Kendall Jenner, who was recently named as the creative director of Revolve's FORWARD segment. FORWARD is Revolve's higher-end segment that provides a higher average order value and is an important part of the company's growth. Jenner's appointment plays right into Revolve's marketing strategy, and a feature video she did for Vogue, which portrayed a day in Jenner's life in her new role, has already been viewed 5 million times. That's a wide net of potential customers who may find their way to Revolve due to Jenner's association with the business. Time will tell if Jenner's appointment will make an impact to the bottom line, but her addition aligns with the company's vision for attracting new customers by leveraging Jenner's celebrity status and social media follower base.

The future is bright

The growth Revolve has seen in recent quarters is paired with well-managed operating expenses and a pristine balance sheet. While overall operating expenses represented a higher percentage of revenues in Q3, some of that was expected by management, as they planned to spend more on the live events mentioned above. What should be encouraging to investors is that general and administrative expenses decreased as a percentage of revenue from 12% to 10%. Additionally, even with an increased spend on inventory, the company managed to generate $1 million in free cash flow and the balance sheet remains debt free.

Throughout the pandemic, Revolve signaled that if the business could weather the storm, it would be poised for strong growth once consumers returned to purchasing clothes and going out. The past two quarters have proved that thesis was correct. Whether this growth will continue remains to be seen, but Revolve trades at an attractive price-to-sales (P/S) ratio of eight, which is on-par with online retailers such as FarFetch (NYSE: FTCH) and Poshmark (NASDAQ: POSH) that have P/S ratios of seven, and five, respectively.

Considering that Revolve was able to keep its business afloat during the pandemic, it stands to reason that the company should benefit from tailwinds as more live events take place. For investors who believe that these live marketing events can be the catalyst for accelerated growth -- and that these events won't be too severely impacted by the newly discovered omicron variant -- now is a great time to grab shares of Revolve as it hopes to capitalize on the economy's reopening.

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Jeff Santoro owns shares of Poshmark, Inc. The Motley Fool owns shares of and recommends Farfetch Limited, Poshmark, Inc., and Revolve Group Inc. The Motley Fool has a disclosure policy.


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