Most e-commerce companies got a massive boost in 2020. Etsy, Shopify, and Wayfair saw their share prices jump 100% or more in the past year due to an increased demand for online shopping. One e-commerce business actually saw significant headwinds in 2020: Revolve Group (NYSE:RVLV). The fashion retailer saw sales and revenue decline, even though it was at a clear advantage versus its brick-and-mortar competitors.
This sounds like a setup for a short pitch, but fear not, the headwinds Revolve Group faced in 2020 should turn into a major tailwind in 2021 and beyond. Here’s why the company is primed to do so well this year, and why forward-looking investors should have it on their radar.
Revolve Group sells high-end fashion apparel focused on millennial and Gen Z women. All of its sales come from online sources, with a focus on dresses and other occasion-wear that people typically use to dress up for festivals, concerts, parties, and other social occasions. The company has two brands: Revolve and Forward. Revolve is the majority of the business and goes after a wider consumer base, while Forward sells luxury apparel with items regularly costing close to $1,000 apiece.
Revolve’s 2020 annual report was released on Feb. 24. Revenue was $580 million for the full year, down 3% from 2019, while total orders fell 5% to around 4.5 million. At face value, these numbers don’t look great. But when you consider the major headwind from the majority of social events getting canceled or postponed over the past year, the decline in revenue looks a lot better.
On the profitability front, Revolve Group actually grew net income by 59% in 2020 to $56.8 million. The growth came from cost savings on marketing and travel expenses as well as improved efficiencies with inventory. This is a testament to management’s ability to pivot during a crisis, likely positioning Revolve Group to come out of 2020 in a better financial position than it went in with, something many people probably wouldn’t have bet on in March of last year.
Why the future looks bright
Revolve Group is primed to get back to growth for a few simple reasons. One is the pent-up demand among young consumers around the globe to go to weddings, parties, and other occasions where they need to dress up. On the latest conference call, management said Australia, which is handling COVID-19 better than most countries and is already opening up its economy, accelerated sales growth to 30% in the fourth quarter. Israel, another country doing well with the pandemic, has seen recent growth of 50%. This bodes well for the U.S., Revolve Group’s largest market, when the economy eventually opens up later this year.
What’s more, the personal savings rate in the U.S. has soared since the shutdowns last March. Why is this important for Revolve Group? Because as more of the U.S. population gets vaccinated, the average consumer will have gathered a year of “dry powder” to spend on things like Revolve dresses. The timing couldn’t be more perfect.
Revolve Group trades at a trailing price-to-sales ratio of 5.7 and a trailing price-to-earnings ratio of 58. This is no doubt expensive, but when you consider all the evidence that growth should accelerate in a meaningful fashion this year, the future valuation multiples don’t look that crazy. Plus, with 53% gross margins, it’s not like the profits Revolve generated in 2020 were a fluke due to a huge pullback in spending. The company was profitable in 2019 and should continue to generate cash once it gets back to growing its business sometime this year.
Overall, while most e-commerce companies will likely see growth slow in 2021, Revolve Group is in a position to capitalize from the reopening of the economy. The stock does trade at a premium valuation, which should make investors cautious. But if you believe this company can grow sales at 20% to 30% and sustain its current profit margins, Revolve Group stock could be a lot bigger five years from now.
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.