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Why Revolve Group Stock Crashed on Thursday

By John Ballard – Aug 5, 2021 at 1:28PM

Key Points

  • Revolve significantly beat earnings expectations in the second quarter.
  • However, sales showed a sharp deceleration after the end of Q2.
  • Analysts expect earnings growth to accelerate over the next two years.

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The company delivered excellent growth last quarter, but post-quarter sales trends likely influenced the stock's sell-off.

What happened

Revolve Group (RVLV 6.93%) reported second-quarter earnings results that significantly exceeded analysts' expectations. What seemed to spook investors was that the company's sales growth showed a sharp deceleration from the end of Q2 into July. While management expressed optimism about the recovery underway in the economy, it said that COVID-19 is still negatively impacting the business in certain markets around the world. 

The apparel stock had been steadily rising this year, as investors viewed the stock as a good reopening play. Even with the share price down 18.9% as of 11:20 a.m. EDT on Thursday, the stock is still up 81% year to date.

RVLV Chart

RVLV data by YCharts

So what

Taking the quarter at face value, the company is clearly performing very well. Net sales increased by 60% year over year to $228 million, while net profit more than doubled over the year-ago quarter. This was a meaningful acceleration over the first quarter's 22% increase in sales. 

But with the share price soaring to a high valuation recently, some investors may have headed into the quarter with itchy trigger fingers. In this case, investors probably didn't like that sales growth decelerated to 40% year over year in July. 

Two analysts downgraded the stock, which seemed to add fuel to the flames. However, Raymond James still gives the shares an outperform rating, with a $78 price target. That's 37% above the current quote.

Three friends wearing dresses and splashing water on the beach.

Image source: Getty Images.

Now what

"Overall, we are encouraged by the pace of reopening and economic recovery across the United States and in many of our key international markets," the company stated in a press release. 

Analysts expect Revolve to post a modest 6.9% increase in adjusted earnings per share for 2021, before accelerating to 25% in 2022 and 27% in 2023.

With the stock already up sharply this year and currently trading at a high forward price-to-earnings ratio of 67, the shares are going to be volatile. 

Still, the acceleration in growth last quarter shows that Revolve is a top destination for millennials looking for social attire, and because this company is still relatively small, the stock could still deliver very good returns over the long term.

John Ballard has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Revolve Group Inc. The Motley Fool has a disclosure policy.

Stocks Mentioned

Revolve Group Stock Quote
Revolve Group
RVLV
$28.69 (6.93%) $1.86

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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