Please ensure Javascript is enabled for purposes of website accessibility

Why Smart Investors Should Pay Attention to This Small Growth Stock

By John Ballard – Oct 8, 2021 at 10:15AM

Key Points

  • Clothing is a top spending priority in the near term, which sets Revolve Group up for a bright future.
  • This leading online apparel brand has a data-driven inventory strategy that drives strong earnings performance during the pandemic.
  • It's got a secret weapon to open the floodgates to a $100 billion-plus online apparel market.

Motley Fool Issues Rare “All In” Buy Alert

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This outperforming mid-cap stock has got the makings of a long-term multibagger.

Revolve Group's (RVLV 1.66%) share price has more than doubled so far in 2021, and it could repeat that performance over the next few years. With young people opening their wallets to splurge on new clothes coming out of the pandemic, investors could be underestimating near-term demand trends heading into 2022.

Piper Sandler's semiannual Generation Z survey recently showed that clothing is the top spending priority for the first time since 2014. The survey is based on the responses of 10,000 U.S. teens and gives investors a good barometer on where the next generation is spending more of their time and money, which can point to investment opportunities.

Here's why Revolve is perfectly suited to not only enjoy strong near-term growth, but why it's also built to deliver industry-leading growth for many years.

Two people wearing dressy clothes and laughing.

Image source: Getty Images.

A profitable operating model

Revolve is a top e-commerce store that sells the latest fashions, primarily to millennials and Gen Z customers. Thanks to this compelling market position, the company's earnings results have completely obliterated analysts' expectations over the last year. For example, Revolve's adjusted earnings per share (EPS) came in at $0.42 compared to the $0.21 Wall Street anticipated in the most recent quarter. 

Coming off the second consecutive quarter of accelerating sales growth, management has shifted to "aggressive hiring mode" -- a good sign that Revolve sees more demand on the horizon. CEO Michael Karanikolas mentioned during the Q2 earnings call that the new hires are intended to "support consumer demand and exciting growth opportunities."

What is Revolve's secret? Eighteen years' worth of data. Revolve is not a flash-in-the-pan retailer catering to fickle teenagers. It uses a data-driven approach to source on-trend merchandise, and it can quickly pivot to whatever customers are shopping for.  

During the pandemic, Revolve leaned away from dresses and other party attire that it has long been known for and stocked more sweats and athleisure. This shift is paying off in a big way. 

Even with sales flatlining during the middle of 2020, Revolve still managed to realize full-price sell-through on 77% of its sales, outperforming the rest of the retail industry. This solid execution translated to a relatively stable gross margin and a 113% increase in free cash flow.

It's not easy for most retailers to just flip a switch and change their merchandise assortment, but Revolve's read-and-react technological approach really shone during the pandemic. This performance during a challenging period for retailers sets the stage for more growth.

One exciting growth opportunity

Revolve recently hired celebrity and social influencer Kendall Jenner to be the creative director of its Forward brand, which should further bolster its brand appeal. The Forward segment generated only 16% of the company's total sales in 2020, but it's starting to take off after the launch of a new loyalty program that is fully integrated with the Revolve brand. Forward's sales on a two-year basis through Q2 were up 120%. 

"The amount of Forward customers coming directly from our existing Revolve customer base accelerated almost overnight after we launched the Forward loyalty program, contributing strongly to our Forward segment growth in the second quarter," Karanikolas said during the last earnings call. With Jenner on board, growth at Forward could be a major catalyst to watch.

Revolve is a small grower very capable of delivering multibagger returns over the next decade. It generated trailing-12-month sales of just $699 million, which leaves a lot of room for more growth in the $100 billion-plus online apparel market. 

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Revolve Group Inc Stock Quote
Revolve Group Inc
RVLV
$25.05 (1.66%) $0.41
Piper Sandler Companies Stock Quote
Piper Sandler Companies
PIPR
$140.64 (-0.72%) $-1.02

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
351%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.