Recently, Revolve Group (NYSE:RVLV) management delivered some fairly positive business results for its investors.
Last year the top line rose by 6% to $1.13 billion while gross margin for the year came in at 52.5%, and net income soared by 73% to a total of $48.8 million. Free cash flow, however, did contract by about 54%.
The fashion and apparel eCommerce retailer has been weak of late, so is now the time to buy the dip?
Sluggish Top Line Doing U-Turn?
Revenue growth had been sluggish after highs reached at the turn of the decade. Over the past three quarters, management reported year-over-year quarterly revenue growth of between 3 and 14%.
Fortunately for shareholders, growth has been progressively accelerating. However, this is still far below the roughly 60% rate the company was able to achieve through much of 2021 and 2022.
Aside from its financials, Revolve has also been able to make strides in its marketing with celebrity partnerships. Most recently, the brand partnered with popular musical artist Cardi B to create a fashion and beauty brand in an exclusive joint venture.
Celebrity involvement in the brand will likely help keep younger buyers engaged, especially given the large online presence of some of Revolve’s partners and endorsers.
Revolve Group’s China Problem
The state of American trade with China remains uncertain. While the Trump administration has issued a 90-day pause on tariffs above 10% with most other countries, Chinese goods are still under a 125% tariff. The result could be extremely negative for companies that manufacture goods in the world’s largest factory market.
This may very well present major problems for Revolve Group. Rather than owning its own manufacturing facilities for its owned brands, the company contracts with several third-party suppliers.
The leadership team noted heavy reliance on suppliers in China in its financial statements. Although there’s no saying exactly what percentage of Revolve’s merchandise originates in China, it’s fairly clear that the current tariff regime presents a significant risk to the company by imposing higher merchandise costs on it.
If Revolve chooses to move its manufacturing base toward suppliers in other countries, it could take time and create disruptions in its supply chain.
This problem extends beyond Revolve’s owned brands, as China is the country of origin for many apparel companies selling in the US today. As such, Revolve could also face much higher costs associated with the brands it sells but doesn’t actively own.
Valuation Looking Much Better After 30% Crash
Despite still being up a little over 3% for the last year, Revolve has fallen by almost 30% in the last 90 days, giving up almost all of its trailing 12-month gains. As such, it’s worth asking whether the stock could have become undervalued amid the recent market selloff.
Right now, RVLV trades at 31.9x earnings, 1.4x sales and 73.9x operating cash flow. Given the deep uncertainties of the market today, these multiples don’t exactly make Revolve Group look like a bargain for investors.
The average analyst price target of $31.13 per share would see shares rise by 43.5% from their last price of $21.69. This estimate, however, has changed very little since the beginning of the year and so doesn’t appear to have been updated to factor in the very real risks higher tariffs on China could pose to the company.
Is Now the Time to Buy, Sell or Hold Revolve Group?
Revolve Group seems fairly valued or, if anything, moderately overvalued after its recent selloff, with much of course still depending on how the trade tensions gripping the US market ultimately shake out.
Investors may not be getting any huge deals on Revolve Group right now, but they probably aren’t paying an outrageous price for it either.
In many ways, Revolve looks to be a fairly good business. Though revenue growth has been somewhat slow for a while, its sales are again picking up and the company is actively profitable. Even more importantly, Revolve has managed to engage closely with younger consumers online, giving it significant advantages over more traditional apparel brands.
The elephant in the room, though, is Revolve’s reliance on Chinese manufacturing. With so many worries pertaining to global trade and massive tariffs still being applied to Chinese goods, apparel firms like Revolve face significant disruptions risks that will see their margins squeezed.
This is especially true given the fact that the tariffs on other countries have only been paused for 90 days, giving businesses and investors no guarantees that they will remain lower indefinitely.
Consumers need to be wary of buying premium designer clothing of the sort Revolve sells at the moment. Consumer confidence was already tapering off before the recent tariff upset, and worries about the state of the economy and the potential for higher prices could cause consumers to hold onto their cash. This reluctance to spend is set to hit Revolve’s top line while tariffs pummel its margins, leading to the possibility of a rough time ahead for the business.
Right now, Revolve is probably a decent stock to hold but trade uncertainties and a price that still looks somewhat elevated will likely keep it from being a good stock to buy for now.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.
