The 2019 IPO class brought investors dozens of high-flying growth stocks without signs of near-term profitability. Uber Technologies initially comes to mind, but egregious valuations are the norm for many in the group. Among all of the froth, Revolve Group (NYSE:RVLV), an online clothing company, offers investors a blend of flexible operations and profitability.
Management has taken a responsible approach to e-commerce growth, thus ensuring positive cash flow. That became more crucial when the pandemic forced countless businesses to close temporarily with some fixed costs remaining. To me, Revolve Group is among the strongest members of the 2019 IPO group and a sizable position in my portfolio. Here are the two main reasons why.
Strong management decisions
The company's data-driven, analytical approach to inventory and operations is a winning philosophy. Unlike fashion brands trying to guess at what a customer may want, Revolve's "re-ordering platform" gives it real-time access to information on how each individual style is performing for the company. Revolve can quickly alert designers when their products are doing well so they can create more. Conversely, it can halt production of struggling products.
Furthermore, the company's move to bring more manufacturing in-house from overseas should eliminate shipping delays and geopolitical threats. This is instrumental in avoiding inventory gluts and boosting profit margins.
Revolve strives to invest in marketing projects with the highest return on investment. Those desired options are typically music festivals. The main company event, Revolve Festival, was postponed this year due to the pandemic, and other live events followed suit. But given the progress being made on a COVID-19 vaccine, I'm comfortable assuming that one day, live music will resume. And thanks to consistently strong cash flow, Revolve Group will surely be there to connect with customers. With Revolve's stock 50% off its all-time high, I believe much of the company's trouble has been baked into the share price.
Revolve Group has managed to maintain positive free cash flow despite the pandemic disruptions. And its cash position rose to $100 million due to efficient operations and a revolving credit facility that the company drew down as a safety net but has not used.
In the most recent earnings call, co-CEOs Mike Karanikolas and Michael Mente talked about how their company overcame the financial crisis. How? Revolve's digitally native business model and rational approach to inventory enabled it to scale down fixed costs more easily than traditional brick-and-mortar retailers. Karanikolas and Mente both think these same strengths are a recipe for success in today's health crisis. Each added $1 million in personal stock purchases this quarter.
Revolve's operations are more resilient than some analysts feared. In the weeks before the coronavirus pandemic took hold, Revolve Group was enjoying 20% year-over-year revenue growth. While sales were drastically hit at the start of the pandemic, revenue is already rebounding and web traffic remained steady throughout. Furthermore, their value brand, Forward, grew sales by close to 50% in the face of global turmoil.
Revolve's price to earnings ratio of 34 (excluding costs related to the IPO) is more expensive than the market. For comparison, fashion competitor Stitch Fix fetches a P/E around 100. With Revolve's 2021 sales growth expected to slightly outpace Stitch Fix's -- with a higher recent gross margin and net profit margin -- I would argue that Revolve is more deserving of a rich multiple.
Revolve Group offers investors with a compelling blend of profitability of operational flexibility. The company is structured to assure inventories match demand regardless of economic conditions. Positive free cash flow ensures longevity while retail sales recover from the pandemic. I am happy to include Revolve Group in my portfolio, and you should consider shopping for it as well.