Ever since the vaccines were approved back in November of last year, tons of stocks considered "reopening" plays have soared in value. One of these companies is Revolve Group (RVLV -0.16%), an online fashion retailer that focuses on selling dresses and other apparel for social events. The stock is up a whopping 320% in the last 12 months and 114% year to date, significantly outpacing the broad market indexes. With shares near all-time highs, should investors be cashing out?
What is Revolve Group?
Revolve Group is an online retailer focused on serving millennial and gen Z women. It calls itself a "premium lifestyle brand," which means it sells expensive apparel, dresses, footwear, and beauty products with a focus on items meant for social occasions. The strategy it has used to consistently grow sales (outside of 2020) is to partner with thousands of global fashion influencers to market its products.
In the past, Revolve Group has spent millions of dollars at major events like Coachella, the annual music festival in California. It also has close to five million followers on Instagram, which it also leverages as part of its marketing operation. Revolve mostly employs a direct-to-consumer (DTC) strategy, selling the majority of its products on its two websites, Revolve.com and fwrd.com.
As you might expect, a company that sells clothing for social occasions struggled in 2020. Revenue was down 3% last year to $581 million. However, net income actually grew 59% to $57 million for the full year with all the cost savings management implemented. Revolve was able to pivot to virtual marketing events (which helped reduce expenses) and started selling more casual outfits during the COVID-19 lockdowns.
In the first quarter, revenue grew 22% to $179 million in conjunction with broad vaccination efforts across the United States (Revolve's biggest market). What's more, gross margin expanded to 54.0% year over year from 48.6%, and free cash flow hit a record $32 million for the period. Management didn't provide guidance for the full year, but if this 22% growth continues, 2021 sales will hit $709 million.
Valuation is creeping up
With the stock up over 300% in the past 12 months, Revolve's valuation has gotten much more expensive. It currently has a market cap of $4.8 billion, giving it a price-to-sales ratio (P/S) of 7.8 based on its trailing-12-month revenue, and a trailing price-to-free-cash-flow (P/FCF) multiple of 49. Both of these metrics are high considering Revolve Group's margin structure and the industry it operates in. However, revenue and free cash flow have been depressed for most of the last year, so those numbers could come down quickly in 2021 and beyond if the company can keep up its first-quarter momentum.
Time to sell?
Shareholders of Revolve Group have a tough dilemma with the stock up so much, and to be honest, I don't think anyone can give a good answer on whether this is a buy or sell at these prices. Typically, if the only reason you have to sell a stock is that the valuation is higher than you'd like, the best thing to do is to just hold onto your shares. This could be especially true in this case since Revolve Group looks primed for strong growth over the next few quarters with the return of social events.
Selling after a 300% gain might feel like the right thing to do, but if the business continues to expand, the best move is to sit patiently and hold.