Here’s My Top Growth Stock to Buy Right Now

Every investor wants a stock that can grow faster than the broad market, but this…

Every investor wants a stock that can grow faster than the broad market, but this outperformance isn’t always easy to find. Let’s explore how Revolve Group (NYSE:RVLV) can use its innovative business model to disrupt the fashion industry to boost its revenue and earnings. 

A fashion retail disruptor 

Founded in 2003, Revolve Group boasts a unique take on fashion retail. The company curates and sells designer apparel, footwear, and accessories with the help of a proprietary algorithm to manage inventory and tap into fashion trends. But its marketing strategy — which relies on a network of about 4,500 Instagram influencers — is what sets it apart from competitors in the industry. 

Well dressed woman throwing cash

Image source: Getty Images.

Instead of traditional advertising such display ads, billboards, etc., Revolve pampers its social media influencers with free clothes and exclusive experiences to help them create engaging social media content. As just one example, the company’s 2019 #REVOLVEfestival (affiliated with the Coachella music festival) dressed over 750 influencers and helped the company attract 130,000 new Instagram followers. 

This unique strategy has fueled the growth of the company’s brand visibility and its top line. Revenue grew at a compound annual rate of more tha 24% from 2016 to 2019, before the disruptions of the coronavirus pandemic.

Revolve also boasted a strong gross margin of 51.5% through the first three quarters of 2020, significantly higher than competing apparel companies like Urban Outfitters and Stitch Fix. That suggests the company has efficient inventory management, and Revolve is also able to sell items at full price instead of relying on markdowns to boost sales. The company can leverage its digital-only distribution strategy to reduce operating costs as well.

Over the long-term, these advantages could lead to healthy bottom-line growth as the company scales up its business model.

Bouncing back from the crisis

However, the coronavirus pandemic took a major toll on Revolve’s marketing strategy as the company depends on travel and tourism to generate engagement. But the company is quickly recovering from the crisis by pivoting to digital-only programming. Influencers now create stay-at-home content around cooking, hair routines, and dances in lieu of their previous glitzy outings. According to Revolve Chief Brand Officer Raissa Gerona, engagement with this new marketing strategy could become a new growth metric for the company (perhaps even after the pandemic is over).  

Third-quarter net sales fell 2% year over year to $151 million, but that was an improvement from the second quarter when sales were down 12%. Revolve is also using the pandemic as an opportunity to streamline its operations by automating its fulfillment system and temporarily reducing executive salaries to save on operating costs. These efforts (along with reduced markdowns and fewer returns on items) helped the company boost third-quarter net income from $9.6 million in the prior-year period to $19.4 million, despite the challenging economic environment.

Management didn’t provide formal guidance in the latest earnings report, but they did expect continued uncertainty in the fourth quarter due to global headwinds, including rising coronavirus cases and high unemployment in the U.S. But the U.S. is undergoing a massive vaccination effort as it inoculates up to one million Americans per day, and work on a third stimulus package (which may include cash distributions) could support consumer spending near term. 

Revolve Group currently trades at a forward price-to-earnings (P/E) ratio of 56, which represents a significant premium to the S&P 500 multiple of 25 as the market prices in aggressive expectations for the company. 

But Revolve has set itself apart in an ultra-competitive industry, making it a growth stock with massive potential thanks to its disruptive, social media-driven marketing strategy. Though the stock has more than doubled in the past year, investors who want the best the fashion and apparel industry can offer should pick up shares before Revolve resumes its growth trajectory in the wake of the pandemic.