This beaten-down fashion action could be the next big thing

Branding is an underrated aspect of investing. Most products outside of pharmaceuticals or technology — many consumer goods, for example — can be easily copied. However, some of the most successful stocks belong to these consumer brands that customers love and remain loyal to anyway.

Fashion brand and retailer Revolve Group (RVLV 0.08%) may be the next example to shine. The company has grown significantly in recent years, and the stock’s fundamentals could propel shareholders to solid returns on future investments.

New age advertising in full effect

Magazines and cable television have long served as platforms for fashion brands to reach customers. You still see this today, especially for designer brands. Revolve is an e-commerce fashion retailer that markets to Millennial and Generation Z consumers, selling merchandise from more than 1,000 brands, both third-party and owned.

Younger consumers grew up in a different era than older consumers, with much of their engagement online. Revolve has incorporated it into its marketing strategy by working with a network of famous social media influencers and celebrities, including Kendall Jenner and Emily Ratajkowski. Additionally, Revolve has a brand ambassador program that allows social media influencers to share products on their pages, with links to track purchases and earn commissions.

Instead of throwing money at magazine ads and advertising, Revolve is encouraging those within its target market (tens of millions of followers) to advertise, sometimes at no upfront cost to the company — sharing the profits with influencers who generate sales for the company. It virtually ensures that Revolve is getting value from ad spend because, by definition, commissions don’t exist without sales.

The numbers show that business is strong

Sales momentum has been somewhat volatile over the past few years as younger consumers are understandably vulnerable to the economy. They are usually not that financially established and many of them have student debt. You can see below that the stimulus helped boost earnings in 2021, but rising inflation and a shakier economy in 2022 have slowed growth. However, the long-term picture is that of a growing business; revenue growth has averaged more than 24% per year over the past three years.

RVLV Revenue Data (Quarterly Yearly Growth) according to YCharts

Long-term growth can be seen to continue as long as Revolve’s marketing strategy continues to work, and there is no evidence at the moment that it won’t. The short term should be the concern for investors, but fear not—the company appears financially poised to weather a recession and tighten customer wallets.

You can see below that free cash flow has decreased due to increased fulfillment costs (like many other retailers) but has remained positive. More importantly, Revolve has a healthy cash balance of $237 million against zero debt. Even if Revolve starts burning money, it seems to have a lot going for it.

Free cash flow chart of RVLV

RVLV free cash flow data from YCharts

Investors will want to look for free cash flow and sales growth to stabilize, then recover as inflation stabilizes and recedes. Markets and recessions can be more about survival than short-term growth, and fortunately, Revolve seems prepared for the difficulties that may come their way.

Meanwhile, the stock falls

Mr. Market sees all this bad news — especially in a bear market when investors are scared — and sells the stock. Shares of Revolve are down 72% from their peak, despite revenue at an all-time high, a healthy balance sheet and an effective marketing strategy.

However, these things happen. The stock is trading at a price-to-sales ratio of just 1.7, the lowest since the COVID-19 hit in March 2020. The near term is fraught with uncertainty; no one knows how long inflation will rise or face markets will terrorize Wall Street.

But what is known is that Revolve is generating cash, growing its revenue at a double-digit rate, and has a healthy balance sheet to ride out the storm. It looks like a great potential candidate for a comeback when the brighter days come.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Revolve Group Inc. The Motley Fool has a disclosure policy.

Source link

Related posts

Leave a Comment

2 × 2 =