Revolve Group (NYSE: RVLV)
is set to open up more than 18% after its Q2 2020 revenue and earnings both came in above expectations.
Revolve is an online fashion retailer that curates luxury apparel, footwear, and accessories. The company markets through a network of thousands of Instagram influencers.
Sales actually declined 12% yoy to $142.8 million but came in well above consensus estimates of $119.3 million. Earnings came in at 20 cents per share, beating expectations of 3 cents per share, and a substantial improvement on the 57 cents a share loss reported in Q2 2019.
Headwinds for the Online Retailer
While many pure e-commerce companies have prospered since the onset of the pandemic, Revolve’s marketing strategy involves in-person events. Its biggest brand marketing event of the year, dubbed #RevolveFestival, was canceled.
On top of that, dresses had historically been Revolve’s top-selling category – and had its highest gross margins. But with everyone stuck at home, dress sales have dipped considerably. While beauty and loungewear have performed very well for Revolve, they haven’t been able to make up for the weakness in dresses.
Revolve shows that being a pure online retailer isn’t enough on its own to prosper during the pandemic – a company also needs to sell something that people need right now.
But Numbers Are Getting Better Every Month
On its Q1 2020 earnings call, Revolve talked about its net sales improvement from late March through early May:
- The second half of March was down 50% yoy.
- April net sales dipped 40% yoy.
- Net sales in the first ten days of May were down 25% yoy.
In its Q2 2020 press release, Revolve noted that yoy net sales comparisons improved each month during the second quarter, culminating in a yoy net sales increase in June 2020. And during the six weeks since the end of Q2 (July 1 to August 10), net sales have increased by a low single-digit percentage yoy.
The net sales trends are encouraging, but gross margin in Q2 2020 was down 530 basis points yoy to 50.5%. Again, this is due to the shift from higher-margin items (dresses) to lower margin items (beauty and loungewear).
The good news is people won’t be stuck at home forever. And when people do start going out again en masse, pent-up demand should lead to a surge in dress sales for Revolve.
Growth is Priced In
The after-hours move takes RVLV to around 45x projected 2021 earnings, which seems too expensive at first glance. After all, this company is barely growing sales after huge yoy decreases during the first two months of the pandemic.
But Revolve’s net sales are expected to grow by around 20-25% in both 2021 and 2022. Shares are trading at a little over 2x projected 2021 sales.
It’s tough to say just how much Revolve will grow sales into the mid-2020s, but the strength of online retail, and Instagram in particular, provides a lot of reason for optimism.
There has been an unmistakable shift from traditional methods of advertising, like television ads, to modern trust-building forms of advertising, such as Instagram influencer promotions.
Revolve is well-positioned to capitalize on this trend, and that gives it the potential for several years of high growth.
Where Can You Get In?
Revolve is set to open at 2020 highs today, breaking above the previous high of $21.19, set in January.
Over the previous two months, shares had based between around $15 and $18, before breaking out Monday on above-average volume. In yesterday’s session, shares increased almost 5% on triple their average volume, possibly due to the expectation of an earnings beat.
That earnings beat came to fruition and now shares will tack on almost 20% more. The RSI is already in overbought territory – it will move even further into overbought territory after today’s open.
On the other hand, the 50-day moving average just crossed over the 200-day moving average a few weeks ago – the sign of an emerging up trend. And looking at the chart RVLV doesn’t look too extended.
This isn’t a stock that has gone straight-up since the onset of the pandemic.
If you do get in on the open, I’d put a stop-order within 10% of your purchase price. Revolve has a lot of long-term upside, but also considerable downside if its revenue growth over the next 2+ years fails to meet expectations.
The Final Word
A tough three-month period doesn’t change the long-term outlook for Revolve – but it does offer you a chance to buy shares at a good price. While the P/E ratio can seem a bit high for a company that is experiencing near-term struggles, it’s actually reasonable for a company that can easily run off a few years (or more) of 20% revenue growth.
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