Revolve Group (RVLV -0.97%) is an e-commerce platform that caters to millennial and generation Z consumers. The company curates luxury apparel, footwear, and accessory items, which it sells through a digital platform. It also owns several private brands. Revolve gained notoriety by marketing primarily through a network of 3,500 influencers who have large Instagram followings. Investors were also enthused by the company's use of data science to inform private label designs and inventory management based on user trends.
Revolve's initial public offering opened at $18 per share in June 2019 and closed at $34 on its first day of trading. By the end of the week, shares climbed to $42. Since then, holders have endured a relatively steady decline. Revolve shares dropped to $31 leading up to the company's first public quarterly earnings report.
There was no negativity about the company that would explain the decline. But growth stocks can be volatile following an IPO as some shareholders cash in on their equity, and others try to establish positions in the newly available stock.
Revolve fell more than 25% after the first public earnings report in August 2019, after the company reported unexpected net losses despite exceeding analysts' revenue estimates. Adjusting for share repurchase expenses related to corporate conversion, its net profits actually rose 22% year-over-year, so concerns about the company's profitability over the medium term might be overstated.
Investors were also rattled when Revolve posted Q3 earnings. Quarterly sales grew 22% year-over-year, net profits rose 34%, and adjusted EBITDA grew 40%. The company enjoyed 33% active customer growth and 26% higher order volume. These metrics are all positive at first glance, and the headline financial results certainly provide cause for optimism.
Key details are causing skepticism
Digging slightly deeper, there were some less enthusiastic details for investors. Management's revenue guidance for the full year indicated that 22% growth was the high end of the forecast range, opening the door to skepticism about the company's ability to sustain its impressive rate of expansion. Its adjusted EBITDA margin was also forecast to decline 15 to 75 basis points for the full year, indicating that any gains from scale are expected to be overcome by increased expenses to stimulate growth. These can be major red flags for growth investors. The company also indicated that the sales mix of its private brands was falling, which can hurt profit margins and inventory management.
To analyze Revolve, investors must balance trends in the company's financial results, management's outlook, the viability of its business model, apparel retail market forces, and its valuation relative to comparable companies.
Revolve's valuation is very predictable in context
Revolve's forward price-to-earnings of 21.0 is higher than the specialty retail industry average. But it compares very favorably to e-commerce darlings such as Etsy (ETSY 1.03%) at 54.1 and Stitch Fix (SFIX -0.42%) at 111.2. Revolve's EV/EBITDA ratio follows a similar pattern to its forward P/E. The stock is expensive based on its free-cash-flow multiple of 62, though this could be temporarily high due to inventory building. Adjusting for growth outlook, Revolve's 1.37 PEG ratio is on the high end of reasonable. Such analysis cannot be made about unprofitable highfliers like Chewy and Wayfair, which are other e-commerce companies that serve different markets and could experience similar demand dynamics. Investors can own other higher-end apparel retailers, even those with growing e-commerce channels like Nordstrom, with less lofty valuation multiples. However, most of those companies have much more muted growth outlooks and somewhat different business models.
Acting as a marketplace helps insulate the company from brand-specific risk, though Revolve itself must compete to maintain its recognition among target customers as a valuable curating platform. Revolve's influencer marketing strategy has been effective, but recent trends indicate that social media users are growing less susceptible to influencer's endorsements. That could be problematic for sustained growth.
Some valid concerns have certainly been raised since Revolve Group's IPO, but there has not been a 62% degradation in fundamentals. This downward slide was no doubt caused in part due to unsustainably bullish valuations earlier in the year, but today this stock looks much more appropriately priced. Investors who believe in Revolve's marketing strategy, brand curation, and the use of technology to disrupt the e-commerce landscape in apparel should be interested in this price range. But there are far less expensive opportunities to buy to gain exposure to the apparel and e-commerce industries.