Taking a look at this week’s significant IPO: Revolve Group (RVLV)

Online retailer Revolve Group is the latest in a string of fashion and fashion-adjacent companies launching an initial public offering (IPO).

Fashion purveyors, particularly ones that have come to the market recently, like Farfetch(NYSE: FTCH) and Stitch Fix (NASDAQ: SFIX), tend to be as volatile and erratic as the many clothing trends that come and go. Might Revolve Group be the exception to this apparent rule…

You say you want a revolution…

Revolve Group is a retailer that focuses on the millennial and Generation Z demographics. It sells clothes and accessories from over 500 brands, 21 of which are its own labels. As its home is online, it emphasizes customer acquisition and retention through digital means.

Revolve Group likes to use “influencers,” i.e., noted social media figures, to help push its wares. This seems economical — it says it has relationships with around 3,500 of these people, yet they consume only about 25% of total marketing expenses. Revolve also raises brand awareness through activities like sponsorships — for example, the #REVOLVEfestival held during the annual Coachella Valley Music and Arts Festival.

Revolve Group has provided a somewhat limited set of financials in its prospectus. Going by these (seen in the charts below), revenue is still rising, although the rate of growth is declining. Costs are being held in check, if anything, and the company is profitable, yet erratically so (which is not unusual in this industry).

Metrics 2018 2017 2016
Net sales $498,739 $399,597 $312,082
Operating expenses $223,508 $173,168 $139,834
Net income $30,685 $5,347 $2,403
Net margin 6.2% 1.3% 0.8%
Metrics Q1 2019 Q1 2018
Net sales $137,343 $113,305
Operating expenses $63,853 $48,928
Net income $4,962 $5,379
Net margin 3.6% 4.7%

Data Source: Revolve Group IPO prospectus.

A fickle industry

Revolve Group cites data from researcher Euromonitor indicating that the global apparel, footwear, accessories, and beauty market — all of which are segments it covers — will rise at a compound annual growth rate of over 5% from 2018 to 2021. The outlook for online retail in the same years is much brighter: It’s forecast at a CAGR of 12.5%. There is clear opportunity here for a sharp online operator like Revolve Group.

I admire the company for being consistently profitable, at least to the degree that’s being presented. Also, it really seems to have its finger on the pulse of digital marketing and sales.

The thing is, it’s hardly the only fashion retailer living in the digital world — in fact, there’s broad realization across the industry that sales need to be driven by web “stickiness,” and that influencers matter. It’s basically a rule now that any ambitious fashion or lifestyle brand has to carve out a notable presence on social media sites.

And even for experts and veterans in the fashion industry, it’s awfully hard to determine when, if, and for how long a brand or a product line can be hot. This is why the fundamentals of this business tend to be very up and down.

Look at the volatility of recent(ish) fashion sector IPO stocks headed by clever people, like styling service Stitch Fix, luxury portal Farfetch, and conglomerate Capri Holdings(NYSE: CPRI) — known as Michael Kors prior to its purchase of Versace and Jimmy Choo…

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