Volatility in the stock market doesn't mean you have to sit at the edge of your seat biting yours nails anxiously. That's certainly not what Warren Buffet is doing: The Oracle of Omaha is using this opportunity to identify great deals on top stocks for the long haul. Any investor can do that same thing.

Revolve Group (RVLV 2.77%) is a fairly new company with enormous potential, and its stock is down 58% year to date. Let's see why you should consider adding shares to your portfolio.

Fashion and tech forward

Revolve Group sells high fashion on its eponymous web site as well as its luxury sister site FWRD. It features 70,000 apparel, footwear, accessory, and beauty products that are consistently updated to meet demand. However, this is not your typical fashion company brought into the digital age. It was created as a digital-first company from the outset and uses its 20 years' worth of data to inform all of its operations, such as curating styles and marketing. It's completely online, save for occasional pop-up shops. As part of the digital focus, Revolve is differentiated by its reliance on social media as a marketing tactic. It has built out a large network of influencers, including celebrities, who tout its wares with blog posts, images, videos, and reviews. 

Forging strong connections with customers is a significant part of the growth model, as return Revolve customers tend to be more consistent buyers. In 2021, the 49% of active customers who had made a purchase the year before accounted for 77% of total net sales for the year. Also encouraging is that "the significant majority of [Revolve's] newly acquired customers in recent quarters have [made purchases] at full price," as management noted on the recent second quarter earnings call. This is promising news for investors, as customers acquired through full-price sales have a much higher lifetime value than those brought in through markdowns. This is a company with a laser-focused market, and through not compromising with markdowns, it's maintaining its luxury branding for the long term.

Fashionable financials

This higher-end focus has been a formula for success. Last year's earnings report was particularly impressive: Total net sales increased 54% year over year to $891.4 million, and total net income jumped 76% to $99.8 million. Active customers hit 1,840 by 2021's end, a 25% year-over-year increase. In 2021, customers made 6,636 orders, a 47.5% increase from the year before. Those orders had an average value of $271 each, 14.8% than the average order value in 2020.

As you might imagine, that's changing in 2022. While total net sales only grew 27% over the same quarter last year, the company did bring in a record $290.1 million. Net income, though, slumped to $16.3 million, a 48% year-over-year decline. On the positive side, gross margin expanded by 29 basis points to reach 55.9%. Growth drivers are still robust: Active customers jumped 39% to hit 2,165; average order value increased 19% and crossed the $300 mark, and 27% more orders were placed in the second quarter compared to that in year prior.

Feeling the macroeconomic pressure

Co-CEO Mike Karanikolas explained that Revolve is seeing pressure in increased shipping and delivery costs as well as higher rates of return than pre-pandemic. But he sees it as all part of the growth story. Management made a decision to offer free delivery to more areas, and the hassle-free policy generated higher sales but also more returns. For example, Canadian orders have quadrupled since Revolve launched free returns there, but return rates have doubled. "[It's] a trade-off we'll make all day
long considering the exceptional growth of our localization efforts in the markets," he said.

Management said that sales increased a measly 10% year over year in July, and it's only going to get worse through the rest of the year. That's due to a combination of factors, particularly inflation and comparisons to a strong 2021. Inventory levels are elevated in this environment, and the company is working to bring that back into balance. But Revolve remains debt free, ending the quarter with more than $200 million in cash.

Focusing on the future

Revolve is an efficient, well-managed company with a niche market and a growing, loyal clientele. It's succeeding in an industry where many competitors are floundering, posting double-digit sales growth when prior winners are posting declining sales. 

The uncertainty surrounding the near-term performance can be unnerving, and it's not surprising that the stock has taken a hit because of that. At Revolve's current price, shares are trading at a trailing 12-month price-to-earnings ratio of 21, an attractive valuation for a company with such serious growth prospects. This looks like an opportunity to buy on the dip.