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How an End to COVID-19 Will Help This E-Commerce Stock

By Bradley Freeman - Apr 29, 2021 at 8:37AM

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This company will get a boost from economic normalization.

When contemplating what an end to COVID-19 would mean for different companies, we don't often think about an e-commerce stock getting a demand boost. The pandemic surely pushed consumers toward online shopping as many brick-and-mortar retailers temporarily closed their doors. So how does an e-commerce company gain from this competition returning?

Here, we dive into just how Revolve Group (RVLV -2.53%) -- an online fashion company -- should benefit as the economy reopens, while many of its peers suffer the opposite.

A woman standing in a street and wearing a red dress

Image source: Getty Images.

How a "normal" world helps Revolve

Revolve Group leans heavily on live events to market its product and to build its brand awareness. Since 2015, the company has been leveraging the global allure of spectacles like the Coachella Music Festival. It hosts an annual event at Coachella called "RevolveFestival" where it dresses hundreds of musicians and influencers in its the latest styles. As a result, the company collects sponsorship dollars and rapidly grows its social media reach -- a win-win.

With the pandemic disrupting live events, Revolve lost a major marketing channel but one that is slowly returning as the threat of COVID-19 fades. Besides Coachella, which alone attracts 750,000 potential customers, Revolve normally hosts over 100 live events a year all over the world.

The company uses these events to introduce Revolve and all of its brands to the public so it can then convert that awareness into new sales. But beyond marketing, a "return to normal" has other benefits -- as concerts, first dates, happy hours, and weddings return, demand for fashion should rise. This is essential given the company's focus on luxury, premium offerings.

Illustrating the boost in this renewed demand is Revolve's international segment. While the company fights to return to overall sales growth following last year's 3% decline, international sales were up 24% year over year in the fourth quarter. The company noted "international strength was broad based with Australia, Canada, Greater China, and the Middle East each delivering strong double-digit growth in net sales." Co-CEO Mike Karanikolas went on to explain during the latest earnings call: "[W]hat's great to see is that we're seeing continued strength in the categories that we really accelerated during COVID, but then we are seeing, particularly in Q1 -- the Q1 trends to date, some strong recovery in those [pre-pandemic] historical categories."

Positioned well to be aggressive

But it's one thing for the world Revolve performs strongest in to return, and it's another thing for the company to be ready take advantage of that return.

Despite the continued disruption to its demand, the company still managed to boost its underlying gross margin over the last two quarters. Management pulled this off by realizing a higher percentage of net sales at full price with fewer markdowns. Furthermore, in the heat of the pandemic, Revolve delivered its fastest quarterly inventory turnover in six years. This keeps the company flexible -- and quite profitable.

In 2020 as a whole, net income spiked 59% to $56.8 million, and its free cash flow more than doubled to $71.4 million. The company's cash position similarly increased 123% at year-end to $146 million.

This liquidity offers Revolve the opportunity to be aggressive in its efforts to capture demand as the worldwide recovery gains steam. It can sink its teeth into future events and promotions, likely a tailwind for revenue growth long term.

Revolve is a buy 

Revolve Group is one of the few e-commerce companies that will become even stronger as the pandemic ends, and the business is ready to kick into a higher gear thanks to effective management during the crisis. For these reasons, I own Revolve Group and think you should as well.

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Stocks Mentioned

Revolve Group, Inc. Stock Quote
Revolve Group, Inc.
RVLV
$28.09 (-2.53%) $0.73

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