Revolve (RVLV) has established itself as a status symbol, and has used its strong brand to maximize its marketing spend.

It operates as an online fashion retailer providing apparel, footwear, accessories, and beauty styles under established and emerging brands, as well as owned brands. It also offers various luxury brands.

We are neutral on Revolve. (See Analysts’ Top Stocks on TipRanks)

Strengths

Let's start off with some strong points about Revolve's operations. The company had a solid gross profit margin of 55.6% in the second quarter of 2021. This is up from 50.5% from 2020, and just shy of its 2019 margin of 55.8%.

However, sales and profits topped 2019 numbers by a wide margin. Sales grew 41% from pre-pandemic levels. Net income soared from $12.7 million to $31.5 million.

The company's operating income margin came in at 13.8%. When considering that most retailers have income margins in the single digits, how has the company been able to achieve strong margins?

Revolve is a pioneer of applying an influencer marketing strategy. Currently, its influencer network is more than 7,500 strong. What's interesting is that instead of targeting its target market, Revolve has instead positioned itself as an indispensable brand for its influencers.

As the Revolve brand became an important status symbol, more influencers wanted to be seen as a part of it.

This creates a virtuous cycle that leads to a better brand reputation, and even more influencers wanting to join the network. This gives the company strong operating leverage because influencers get paid a commission.

Essentially, the influencers do all the work of generating advertising impressions to their audiences for free, and Revolve only pays for the revenue-generating results. As a result, marketing expenses were only 15.3% of revenue.

Risks

As great as Revolve is, it's not without risks. To begin with, the company is trading at a P/E ratio of 52.2. Although there are plenty of worse companies with higher multiples, the high multiple still makes Revolve vulnerable to big drawdowns on any piece of disappointing news.

Recently, Nike (NKE) told investors that it is experiencing inventory issues due to supply chain disruptions. As Nike's issues suggest, no company is completely safe.

It's also important to note that these issues for Nike occurred during the period after Revolve last reported. Therefore this is something investors should definitely keep in mind before this quarter's earnings are announced.

Wall Street's Take

Turning to Wall Street, Revolve has a Strong Buy consensus rating, based on nine Buys and two Holds assigned in the past three months. The average Revolve price target of $75.50 implies 7.6% upside potential.

Final Thoughts

Revolve has managed to create a brand that is viewed as a status symbol, not only to its customers, but also to its brand influencers. As a result, the company doesn't have to spend money chasing big influencers. Instead, they choose to work with Revolve and get paid when producing results.

Nonetheless, investors need to keep in mind that supply chain issues are still a threat, and its high multiple leaves it vulnerable to a large drawdown.

Disclosure: At the time of publication, Stock Bros Research did not have a position in any of the securities mentioned in this article.

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The post Revolve: An Indispensable Influencer Partner appeared first on TipRanks Financial Blog.

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By: StockBros Research
Title: Revolve: An Indispensable Influencer Partner
Sourced From: blog.tipranks.com/revolve-an-indispensable-influencer-partner/
Published Date: Fri, 08 Oct 2021 12:40:30 +0000

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