The big economic reopening is just around the corner. More than half of American adults have gotten at least one vaccine shot, and states have already begun to relax guidance on social distancing. New York Mayor Bill De Blasio promised the city would fully reopen with no restrictions by July 1, and President Biden has told Americans they don’t need to wear masks in most outdoor situations if they’re vaccinated.
There will soon be rise in pre-pandemic activities as we near the end of the crisis, and one stock that looks poised to capitalize on this rebound is Revolve Group (NYSE:RVLV).
What is Revolve Group?
Revolve Group is an online apparel retailer targeting millennials and Gen Z women. It uses online influencers to market its product and to connect with customers, and it sees its relationships with influencers as a competitive advantage. It operates two platforms: Revolve, a constantly refreshed and curated assortment of premium apparel; and Forward, which carries emerging luxury apparel brands.
Revolve was founded in 2003 and held its IPO in 2019. Before the pandemic, revenue was growing steadily in the low 20% range each quarter, a strong growth rate for an apparel retailer.
The company is solidly profitable, having generated a profit for at least the past three years, and it grew its operating profit 27% to $61.1 million last year, even as revenue fell 3% to $580.6 million. Management effectively controlled inventory and limited markdowns, leading to a strong bottom-line performance as the company also dealt with significant headwinds from the pandemic, which has crushed apparel sales across many categories, even for online retailers.
Why it’s a great time to buy
The factors that hampered Revolve during the pandemic make it a great opportunity in the recovery. The company’s biggest category is dresses, and a substantial portion of its sales is focused on “occasion-wear” — clothing purchased for social events like weddings, parties, concerts, and vacations. These types of gatherings have essentially been nonexistent over the past year due to social-distancing protocols, but that’s about to change.
There are already signs the apparel industry is raring for a comeback. According to the Census Bureau, sales in the clothing category more than doubled year over year in March, a clear sign apparel retailers benefited from stimulus checks as consumers are ready to shop for clothes again. After all, in addition to the need for new duds for social occasions, many Americans have gained or lost weight during the pandemic, and others are eager to refresh their wardrobe to mark a new stage of life after the crisis.
There is plenty of anecdotal evidence to support this. Retailers like Madewell and Anthropologie are reporting a spike in demand for dresses. Fashion trends are leaning toward bright colors and funky patterns, reflective of a sense of optimism and celebration about life after the pandemic. Even condom sales are soaring — market research firm IRI said sales increased 23% in the four weeks ended April 18 year over year, reflective of increased social activity, or at least the anticipation of it.
That’s all great news for Revolve, which should thrive in an atmosphere of carefree spending on occasion wear as many of its peers seem to be reporting. The company itself has said it expected to benefit from the reopening. Co-CEO Mike Karanikolas explained on the fourth-quarter earnings call:
We believe the world is on an exciting path to reopening, and our customer can’t wait to get back out again and enjoy the active social lifestyle that she loves and has come to associate with Revolve. As a brand built and centered around this social lifestyle, Revolve is ideally positioned to benefit as the world reopens.
Revolve will report first-quarter earnings after hours on May 6. In its fourth-quarter report, management said sales were up low single digits through the first seven weeks of the quarter. But performance should get a boost in March as it laps the beginning of the pandemic a year ago and rides the March spike in apparel sales from the latest stimulus and fresh consumer demand.
The most important thing to watch in the report will be guidance and management commentary regarding the reopening. Analysts aren’t expecting a big recovery this year, only calling for about 19% full-year revenue growth for this growth stock, which presents an opportunity. If the company can capitalize on pent-up demand as management alludes to in its recent comments, the stock could steadily outperform going forward.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.