Branding is an underrated aspect of investment. Most products outside of pharmaceuticals or technology — many consumer goods, for example — can be easily copied. However, some of the most successful promotions are those consumer products that customers love and remain loyal to anyway.
Fashion brand and retailer rotating group (R.V.L.V -1.18%) It can be the next example to shine. The company has grown significantly in recent years, and the stock’s fundamentals could set shareholders up for strong investment returns.
New Age Notice is fully applicable.
Magazines and cable television have served as platforms for fashion brands to reach consumers. You still see that, especially for designer brands. Revolve is an e-commerce fashion retailer that markets to millennial and Generation Z consumers with more than 1,000 brands, both third-party and owned.
Younger consumers grew up in a different era than older consumers, where most of their engagement is online. Revolve did that by working with its popular network of social media influencers and celebrities, incorporating Kendall Jenner and Emily Ratajkowski into its marketing strategy. Additionally, Revolve has an ambassador program that allows social media influencers to share products on their pages, track purchases, and earn commissions.
Instead of throwing money at magazine ads and ads, Revol is encouraging those in its target market (with tens of millions of followers) to advertise, sometimes at no upfront cost to the company — sharing profits with influencers who generate sales for the company. . It almost ensures that Revolve is getting value from ad spend because by definition commissions don’t exist without sales.
The number shows that the business is strong
The pace of sales has been somewhat volatile over the past several years as young consumers are vulnerable to the economy. They are typically not financially stable, and many have student debt. You can see below that stimulus helped boost earnings growth in 2021, but slowing inflation and a strained economy slowed growth in 2022. However, the long-term picture is a growing business; Over the past three years, revenue growth has averaged more than 24 percent annually.
RVLV revenue (quarterly YoY growth) data by YCharts
As long as Revolve’s marketing strategy continues to work, one can see continued long-term growth, and there’s no evidence right now that it won’t. The short term should be a concern for investors, but fear not — the company appears poised to weather the recession and tighten customer wallets.
You can see below that free cash flow has decreased but remains positive as fulfillment costs increase (like other retailers). After all, Revolve has a healthy cash balance of $237 million against zero debt. Even if Revolve starts burning through cash, it looks like it has a lot to go through.
RVLV free cash flow data by YCharts
Investors will want to look for free cash flow and sales growth to stabilize, followed by stable and declining inflation. Bear markets and downturns can be more about survival than short-term growth, and fortunately, Revolve seems prepared for the trouble that may come its way.
Meanwhile, the stock falls
Mr. Market sees all this bad news – especially in a bear market when investors are scared – and sells the stock. Revolve’s shares are down 72% from their highs, despite strong earnings, a healthy balance sheet and an effective marketing strategy.
However, these things happen. The stock trades at a price-to-sales ratio of just 1.7, the lowest since the COVID-19 crisis in March 2020. No one knows how long inflation will rise or whether markets will panic Wall Street.
But what is known is that Revol is generating cash surpluses, growing revenue by double digits and has a healthy balance sheet to ride out the storm. That looks like a big bounce back candidate when the bright days eventually come.
Justin Pope has no position in the mentioned stocks. He has positions in the Motley Fool and recommends Revolve Group Inc. The Motley Fool has a disclosure policy.
