This Beaten Fashion Stock 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. Still, some of the best-performing stocks belong to those mainstream brands that customers love and stick with anyway.
Fashion brand and retailer revolution group (RVLV 1.38%) could be the next shining example. The company has grown significantly in recent years and the fundamentals of the stock could prepare shareholders for strong returns on investment in the future.
Fully effective new-age advertising
Magazines and cable TV 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 caters to millennial and Gen Z consumers, selling merchandise from over 1,000 brands, both third-party and owned.
Young consumers have grown up in a different time than older consumers, with much of their engagement occurring online. Revolve incorporated this 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 ads and magazine ads, Revolve gets people in its target market (with tens of millions of subscribers) to advertise, sometimes at no upfront cost to the company. – by sharing the profits with the influencers who generate sales for the company. This virtually guarantees that Revolve gets value from its ad spend because, by definition, commissions don’t exist without sales.
The numbers show the company is strong
Sales momentum has been somewhat volatile over the past few years, as younger consumers are naturally vulnerable to the economy. They are generally not as well established financially and many have student debt. You can see below that the stimulus helped revenue growth in 2021, but soaring inflation and a weaker economy in 2022 slowed growth. However, the long-term picture is of a growing business; revenue growth has averaged more than 24% per year over the past three years.
Long-term growth could be seen to continue as long as Revolve’s marketing strategy continues to work, and there is no evidence at this time that it won’t. The short term should be on investors’ minds, but fear not: the company appears financially poised to endure a recession and tighten client portfolios.
You can see below that free cash flow fell due to higher fulfillment costs (like many other retailers), but remained positive. More importantly, Revolve has a healthy cash balance of $237 million against zero debt. Even though Revolve is starting to burn some cash, it seems to have plenty to get by.
Investors will look for free cash flow and sales growth to stabilize and then rebound as inflation stabilizes and recedes. Bear markets and recessions can become more about survival than short-term growth, and fortunately Revolve seems prepared for the difficulties that may arise.
Meanwhile, the stock plunges
Mr. Market sees all this bad news – especially in a bear market where investors are scared – and sells the stock. Shares of Revolve have fallen 72% from their peak, despite record-high earnings, a healthy balance sheet and an effective marketing strategy.
Nevertheless, these things happen. The stock is trading at a price-to-sell ratio of just 1.7, its lowest since the COVID-19 crash in March 2020. The short term is full of uncertainties; no one knows how long inflation will skyrocket or how long bear markets will terrorize Wall Street.
But what is known is that Revolve is generating cash profits, growing revenue at a double-digit rate, and has a healthy balance sheet to weather the storm. Seems like a great potential candidate to bounce back when better days finally 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.