Revolve Group (NYSE: RVLV)
Revolve Group Inc (NYSE: RVLV), known as Revolve in this writeup, is an online fashion retailer that sells its own and third party branded clothing through the Revolve and FWRD websites. Per p. 7 of the most recent 10-K, the business describes itself as “…the next-generation fashion retailer for Millennial and Generation Z consumers. As a trusted premium lifestyle brand and a go-to online source for discovery and inspiration, we deliver an engaging customer experience from a vast, yet curated, offering totaling over 70,000 apparel, footwear, accessories and beauty styles. Our dynamic platform connects a deeply engaged community of millions of consumers, thousands of global fashion influencers, and more than 1,000 emerging, established and owned brands. Through nearly 20 years of continued investment in technology, data analytics, and innovative marketing and merchandising strategies, we have built a powerful platform and brand that we believe is connecting with the next generation of consumers and is redefining fashion retail for the 21st century.” In fiscal year 2021, Revolve generated record revenues of $890 million and approximately $60 million in listed free cash flow. The business is headquartered in the mean streets of Cerritos, California.
History
Finding out about Revolve’s history was tougher than usual as it doesn’t have a section dedicated to it on its website or a Wikipedia page. The interview linked here with Co-Ceo Michael Mente and Lewis Howes was an excellent introduction to the business. It’s 57 minutes long but I highly recommend watching it in its entirety. I refer to it frequently in this writeup and learned a ton about Mr. Mente, Revolve and its slick marketing techniques. At the 4:00 mark Mr. Mente said that in the early 2000’s one of his friends showed him the results from online searches and how much it would cost to be listed on internet search sites. What he saw was a lot of people searching for women’s fashion, but hardly any of the major brands had an online presence at this time. They were still anchored to traditional retail stores and print advertising so there seemed to be an opportunity. Mr. Mente said the first move was buying and selling designer denim wholesale as they were very popular at the time. The business grew and grew until the Great Recession where it almost got wiped out. Michael Mente says at the 15:30 mark of the video linked above, “Within a two week period, sales dropped by 40% and we had no financial backers. It was just us. And the whole kind of industry, just kind of like, massive slow down. All of the, you know, department stores, everyone just discounted the stores 50% off. It was a really crazy time. So even though at the point we were doing $40-$50 million we were still fighting for our lives.” Although he doesn’t say how, the business managed to survive. Mr. Mente says later in the interview that the Great Recession still keeps him on his toes and affects his business decisions to this day. Revolve started working with influencers in 2009 which has been key to its overall brand and success. It was a pioneer in this space which I will discuss it later in the writeup under the What Does Revolve Do section. Per this Inc. article from 2018, Revolve also shifted its strategy to focus on millennial women post Great Recession. During this same time the business launched its owned brands which I will also discuss in the What Does Revolve Do section. Mr. Mente goes on to state in the video that he and his business partner, Mike Karanikolas, took meetings with investors from time to time, but none of them felt like the right fit. During 2012 they found the right investor to work with in TSG Consumer Partners, a consumer brand focused private equity firm in San Francisco. TSG was the only outside investor in the business before it went public. Mr. Mente said that the money raised from TSG was reinvested in the business over the next several years. Revolve IPO’d in June of 2019. TSG has since sold their interest and is no longer involved in the business.
CEOs
Michael Mente and Mike Karanikolas are the Co-CEOs of Revolve. They both met while working at a startup called NextStrat in the early 2000’s. Per their LinkedIn pages, NextStrat was their only professional work experience before starting Revolve. Per the Revolve Investor Relations site, Mr. Mente has a B.S. in Business Administration from the University of Southern California while Mr. Karanikolas has a degree in Computer Engineering from Virginia Tech. From what I can tell, Mr. Mente seems to be more of the face of Revolve and handles a lot of the outward responsibilities. Per the Inc. article above, Mr. Karanikolas works more on the data side of things.
CEO Compensation
The compensation for both CEOs is interesting to say the least. Both Mr. Mente and Mr. Karanikolas only take a base salary of $450,000. The Compensation Committee also grants short-term incentive and time-vested stock options to other Name Executive Officers, but neither CEO partakes in these awards. They each received a discretionary performance bonus in 2020 to take their pay a little bit north of $450,000, but not by much. There is no information provided as to what the discretionary bonus was based on or why it was granted. They also each received compensation totaling <$25,000 from 2019-2021 for “excess healthcare premium costs” paid by Revolve on behalf of their CEO’s. The summary compensation table shown below is taken from p. 37 of the 2022 Proxy Statement.
The lack of pay for the Co-CEOs took me off guard so I delved a bit further in to the Proxy Statements. The same compensation arrangement for the CEOs held true in the 2020 and 2021 Proxy Statements so I kept wondering what was going on. I found an answer after looking at the Beneficial Owners of Revolve’s stock. The business has two classes of stock; Class A and Class B. Per p. 50 of the 2022 Proxy Statement, MMMK Development, Inc. owns over 99% of the Class B shares. MMMK Development, Inc. is an entity controlled by the CEOs as they are the only investors in it. Per p. 48 of the 2021 Annual Report, the Class A stock has one vote per share while the Class B stock has ten votes per share. Through this holding they collectively own ~45% of the outstanding shares and control approximately ~89% of the voting power. This seems to be where their financial interest is held as I was unable to find anything else in publicly available documents to contradict this.
What Does Revolve Do?
As stated above, Revolve is an e-Commerce clothing retailer that operates its namesake website along with the FWRD website. Revolve operates solely online and does not have physical retail locations. You can find links to its websites here and here. Based on what I saw on Revolve website, the price for a typical clothing item is more than $100 and closer to $150. FWRD has an even higher average price point of several hundred dollars (think closer to $400-$500) and you can routinely find items that cost $1,000+. Feel free to scroll through its catalog if you don’t believe me. Revolve primarily caters to millennial women through both of its sites and refers to its customers as “she” and “her” in its public filings and presentations. FWRD does offer a men’s selection. It has a similar average price point to the women’s selection and one would have no problem finding items that cost $1,000+. Per pp. 63-64 of the most recent 10-K, “The REVOLVE segment contributes to a majority of our net sales, representing 83.6% and 86.3% of our net sales for the years ended December 31, 2021 and 2020, respectively. During the years ended December 31, 2021 and 2020, REVOLVE generated $745.1 million and $500.9 million in net sales, respectively, representing an increase of 48.8%... The FWRD segment contributes to a smaller, although expanding, portion of our overall net sales, representing 16.4% and 13.7% of our net sales for the years ended December 31, 2021 and 2020, respectively. During the years ended December 31, 2021 and 2020, FWRD generated $146.3 million and $79.8 million in net sales, respectively, representing an increase of 83.4%.” This all seems simple enough. On the surface, Revolve slings clothes on the internet. That’s not all Revolve does though. There are four other features of the business that separate it from the competition.
The first differentiating feature of Revolve is its influencer marketing. Taken from p. 7 of the most recent 10-K, “We are recognized as a pioneer and a leader in social media and influencer marketing. We have built a large community of influencers and brand partners, including thousands of micro-influencers, as well as some of the most influential social media celebrities in the world. Through our recognized leadership position, deep relationships and history of mutually beneficial partnerships, we believe we have become a partner of choice for influencers worldwide, leading to a competitive advantage. These marketing efforts deliver authentic, aspirational experiences and lifestyle content that drive long term loyalty and engagement. We complement our emotional brand marketing with sophisticated, data-driven performance marketing, the combination of which drives successful customer acquisition and retention that are key drivers of our customer lifetime value.” Taken from p. 9 of the most recent 10-K, “We have a history of being a leader in innovative digital and community-driven marketing and we believe we have positioned ourselves as a preferred partner for influencers and traditional marketing providers. We continuously provide our customers with aspirational and engaging content and amplify our message in a highly efficient manner through our network of over 4,500 influencers, elevated and aspirational social events and content that connects with her current lifestyle. In 2021, we drove 51% of traffic for REVOLVE from free and low-cost sources, as measured by the number of visitors who landed on the REVOLVE website or mobile application directly, via email marketing links, or though paid branded search terms and organic search results.” Mr. Mente discussed influencer marketing and what the business gets from it in depth in the interview with Lewis Howes that is linked in the History section of this writeup. At the 21:50 mark he talks about working with influencers way back in 2009. Things were different then as there were a smaller number of them and they were kind of scattered on the internet writing independent blogs, doing vlogs, etc. There wasn’t a central platform for influencers to build their brand. That is where Instagram comes in. That was the key platform that led to explosive growth of all types of influencers. It is also what makes up a large portion of the traffic from “free and low-cost sources” mentioned above. I know what you might be thinking about influencers as you read this. They don’t have the best reputation these days and I’ll give you that. Whatever you think about them, they’re effective. Revolve and every other brand wouldn’t be using them if they didn’t work. I discuss this topic further in the Advantages of this writeup. Mr. Mente delved further in to Revolve’s relationship with influencers and why they’ve been so effective. It’s all about authenticity. At the 23:15 mark he states, “I think the one thing for us that’s been really key is that is has to just really be authentic and organic. If it was a situation where you could spend money and receive the return, the big guy would always win. Corporate guys would just be throwing money everywhere and it wouldn’t work. But I think like, ya know, for it to work, I think it has to be genuine and authentic. The influencer really, in my opinion, really has be a fan of the brand for it to really work versus attempting to sell something that they don’t necessarily care about. So, I think that was super important.” The size of the influencer’s following isn’t a determining factor for Revolve as to whether it will work with them or not. Revolve will work with smaller influencers because they are typically more engaged with their followers and have a relationship with them. Larger influencers, like Kim Kardashian (the biggest influencer on Earth), whom the business just partnered with to curate a shopping list on Revolve, are literally brands unto themselves. Working with larger influencers ends up being a brand collaboration.
Cool, great. Why does Revolve work with influencers though? What’s the point? The answer is to sell its brand and a lifestyle. Going back to the Lewis Howes interview, at the 28:11 mark, Mr. Mente starts talking about this directly. He states, “For us it’s so cool, in that like, this concept of living your best life. It’s also this combination of “What do we think is awesome?” because it’s probably going to be relevant to them and it’s gonna be relevant to our consumer.” At the 28:48 mark he talks about people having a genuinely good time. Seeing the photos they post is fun because the people in the pictures are actually enjoying themselves. How often have you liked a picture of a friend or family member on social media for this same reason? You can imagine how a marketing strategy like this could be effective. There is very much a psychological aspect to it. There is something in us that likes seeing others have fun. He really drives the point home at the 29:30 mark where he states, “What we sell is a premium, aspirational product that is still accessible. Something that you aspire towards and you crave, but also something that is still inclusive that a large portion of the market can really afford. And this type of product is meant for being social in the sense that we sell all apparel categories. But really, it’s that feeling you get, as a dude, whether it’s hanging out with your friends or party or you’re going to a business event, you put on your nice shirt or jacket and you feel good. Or even you go to the gym, you got your nice gym clothes and you’re like “I’m ready to work.” And I that’s kind of the feeling of fun and kind of, um, socializing that we try to capture with our broad market. That is what our brand is about.” Even the way it compensates its influencers circles back the brand and the lifestyle it’s trying to sell. Influencers are sometimes paid in cash, but are more often paid with free clothes and trips provided by the business. In return the influencers tag the brand to their followers which builds the brand value for Revolve out more and more. It’s an incredibly effective strategy.
Its use of data and technology is the another differentiating feature of the business. From p. 7 of the most recent 10-K, the leveraging of data allows Revolve to offer a shopping model that “… is more targeted than department stores or mass-market online retailers and provides a greater selection and access than specialty retailers, allows us to more effectively serve consumers.” For those of you who may not know, most fashion houses design their catalog a year or so out. Applying this to real life, most fashion houses are designing for Summer or Fall 2023 as you read this writeup. Revolve uses a different model which it calls “read and react”. This model is described on p. 8 of the most recent 10-K stating that it, “…combines qualitative and quantitative decision-making to identify trends, curate assortments, facilitate our merchandise planning and re-order processes, and manage pricing. Our technology enables us to automate the rapid identification of new trends and emerging brands, allowing us to offer a vast and diversified product assortment that does not rely on any given trend or style and has minimal overlap with other retailers. Furthermore, by introducing new products daily in limited quantities, we create a sense of urgency for our customers.” On p. 63 of the same 10-K it states, “We generally make shallow initial inventory buys, and then use our proprietary technology tools to identify and re-order best sellers, taking into account customer feedback across a variety of key metrics, which allows us to manage inventory and fashion risk.” This doesn’t eliminate inventory and fashion risk, but it does help manage them significantly. The use of data and technology allows Revolve to dip its toe in to the water instead of cannonballing into it. It is more efficient and leaner than what a typical fashion house would do which is guess at what fashion trends are going to be in 12-16 months. I’m going back to the well with the Lewis Howes interview, but Mr. Mente made an excellent overall point about what Revolve does with the data it has. At the 37:50 mark he states, “All we’re doing is really just listening to the consumer and trying to understand and give them what they want.”
Price is its third differentiating feature. I looked at listed competitors on TIKR and three stood out. They were ASOS, BooHoo and FarFetch. There is a fourth competitor, SHEIN, that I will also reference. I chose ASOS and BooHoo because they achieved high returns on capital unlike the other competitors that are listed on TIKR. ASOS even counts Nick Sleep as a shareholder. FarFetch’s returns on capital have been negative. I can’t defend that, but the business is building out its brand and has made some acquisitions which have been a drag on ROIC. It is also the only publicly traded online luxury retailer on TIKR’s list of competitors, so all of this taken together made me think that it deserved to be included. I chose SHEIN even though it’s private because their product offering is similar Revolve. All four competitors do roughly the same thing as Revolve at the end of the day: They operate as online retailers selling their own and third-party clothing brands to customers around the world. For the purposes of this section, I will use dresses as the item that I compared across each site. The first two competitors that I will discuss are BooHoo and SHEIN. Their price points are much lower than Revolve. After looking through their websites, BooHoo and SHEIN typically offer dresses for under $50. I say this because BooHoo’s price range only has six tiers. Five of those tiers are from £0-£50 (it is based in the U.K, but ships to the U.S.). I know this is listed in pounds, but the comparison is still roughly right after converting to U.S. Dollars. SHEIN claims to have over 53,000 dresses in stock but only 1,477 of them are over $50. Most ASOS dresses are priced below $100. They currently offer 9,257 dresses; 3,477 of them are priced between $5-$50 while 4,370 of them are priced between $50-$100 meaning that ~85% of their entire dress stock costs under $100. The price for a dress on Revolve is at least double that of ASOS and typically above $200. FarFetch is at the extreme far end as it only sells luxury brands. You would be lucky to find a dress on there for under $1,000. There are some fluctuations in the product selection, but this is based on an overview of each website. I used dresses as the benchmark item because all the competitors offer a huge selection and I only have so much bandwidth as a one person show. I can tell you that every other product category that I looked at follows this same pricing pattern: BooHoo and SHEIN offer discounted items, ASOS offers more “affordable” items, Revolve offers premium items while FarFetch offers luxury items. In closing, Mr. Mente recently reaffirmed the business’ commitment to its premium pricing and brand strategy when asked about the possibility of lowering prices during the Q1 2022 investor call. He stated, “I think it’s important for us being a premium brand, the real whitespace lies in our core price point and we think there is a lot of opportunity to continue to migrate that core price point up over time. Don’t anticipate seeing any more higher proportions or ratios of low priced product in the future.”
The fourth differentiating feature of Revolve is its owned brands of which there are 31 as of the publishing date of this writeup. Owned brands are the same thing as a private label, but that’s what Revolve refers to them as. Per p. 7 of the most recent 10-K, “We have built a portfolio of 30 owned brands, each crafted with unique attributes and supported by independent marketing investments. We believe our consumers perceive these as highly desirable, independent brands, rather than private labels or house brands. In 2021, our owned brands represented five out of our top 10 brands in the REVOLVE segment and contributed 20.1% of the REVOLVE segment’s net sales.” Its owned brand strategy started just after the Great Recession as response to its competitors. By this point in time, they were moving online, selling a lot of the brands you could find on Revolve and offering free shipping, so the business had to do something to differentiate itself. Revolve’s owned brands aren’t like most private label offerings in the fashion world. The typical strategy is that a retailer will see what’s selling, make a private label version of it, sell it for less, but collect a higher margin. What Revolve does is use its “read and react” strategy to see what the data says, make an owned brand, market it through its influencer network, build the brand’s value and charge a premium for the product. Revolve does not seek to undercut the third-party brands that it sells. Owned brands have a collective following of 4 million followers on Instagram which is an average of 133,000+ followers per brand. Its 31st brand was announced recently in Q1 of this year. It is called WellBeing + BeingWell and is focused on activewear. Quoting Mr. Mente on the Q1 2022 Earnings Webcast, “Activewear offers particularly exciting growth potential since our customer lives an active lifestyle and increasingly looks to REVOLVE for inspiration. We recently launched our first activewear owned brand that has performed strongly in the early going. The WellBeing + BeingWell brand features styles sourced from sustainable materials thoughtfully designed with our planet in mind, and advances our strategy to diversify our owned brands assortment into new categories.” He also went on to state, “Continuing on the inclusivity theme, we recently announced plans to create a size inclusive collaboration for our owned brands with content creator and curve model, Remi Bader, set to launch with REVOLVE in the fall of 2022.” Doesn’t look like the owned brands are slowing down anytime soon.
Valuation
Revenues at Revolve have increased at a solid clip since the business went public. Its first 10-K lists complete financial data from 2018 so I will use that year as the base which the business has grown from. From 2018-2021, revenues grew from ~$499 million to ~$890 million which is a CAGR of 15.6%. This is solid growth and what I want to see as a potential investor in the business. On to free cash flow.
My calculations for free cash flow (FCF), what I call real free cash flow (RFCF), are shown in the screencap below.
Over the last four years, RFCF has increased from $22 million to $55 million which is a CAGR of 25.74%. That is an excellent growth rate and also what I want to see as a potential investor. You’ll notice that RFCF was down in 2021, but that was due to an increase in inventory due to expected sales in 2022. Given its current market capitalization of ~$2 billion, this means the business trades at a 36x multiple of RFCF. I’d like to see something closer to 20-25x RFCF, so this is a higher end valuation. So, Revolve has achieved solid growth in revenue and excellent growth in cash flow. What about the returns on capital?
My return on invested capital (ROIC) calculations are shown in the screencap below.
Revolve’s ROIC is exceptional. A bonus is that the business has no debt besides its capital lease obligations. Tax benefits have helped to keep Revolve’s tax expense down which in turn affects ROIC. Per the Q1 2022 Investor Presentation, the business expects as normalized tax rate of 25% going forward. To be conservative, I applied that rate to calculate both NOPAT and Net Income between 2018-2021 to see how ROIC was affected. This example assumes that the business paid the full 25% since 2018. The results are shown in the screencap below.
Including the full 25% effective tax rate materially lowers Revolve’s ROIC, but it’s still elite. What about its returns on incremental invested capital (ROIIC)? The first ROIIC screencap below does not take the 25% effective tax rate in to account while the second one does.
By my calculations, the team at Revolve has been compounding the value of the business by anywhere from 25-31% since 2018. Let’s use 25% as the actual compounding rate as it is more conservative. Since the stock went public in June of 2019, the price has CAGR’d at -5.2% indicating a sizeable gap between how the business is performing versus how it’s perceived by the market.
Risks
Revolve, like any business, faces risks as it moves forward in its journey. The most obvious one is the fashion industry itself. Fashion is fickle and constantly evolving so the business must constantly stay on its toes and keep up with new trends. For example, I’ve noticed that low top Nike Dunks are back in style in New York City. The same is true for ripped jeans, t-shirts featuring classic hip-hop/rap albums and jackets featuring oversized race or sport team logos. I’ve asked around as to why this is the case and the response has boiled down to “because they’re in” without any evidence as to why. People weren’t wearing these shoes and clothes three years ago and I doubt they’ll still be wearing them in another three years. You can imagine how that could be tough to deal with so Revolve has to constantly be on the lookout for the next best thing. My response to this is that Revolve has been in business for almost twenty years and has constantly evolved with the times. It had to deal with the constant changes of what’s hot or not in the fashion industry and seemed to have figure it out each time. Its financial results wouldn’t be so good if this wasn’t the case.
Marketing the Revolve brand and lifestyle is also a risk because it relies so heavily on it. Besides influencer marketing, Revolve hosts a lot events. The business hosted a Super Bowl party in L.A. back in early February where it somehow managed to get performances from Justin Bieber and Drake. The party was a huge hit and all-over social media. The same cannot be said about the 2022 Revolve Festival at Coachella. The link in the previous sentence takes you to the results of a Google search for “Revolve Festival Coachella 2022”. There are several pages of links to articles from news outlets and influencers highlighting their negative experiences at this event. Most of the complaints boil down to the hot weather, a lack of transport to take guests to and from the event from an initial pick-up zone and long wait times to get into the festival once they did arrive. These are first and maybe even post-first world problems, but Revolve’s brand took a serious hit. Something tells me that everything must be perfect when you’re dealing with influencers and famous people who may or may not think that they’re above such issues. Additionally, the elements of the lifestyle it sells could change. If you go to Revolve’s Instagram account which is linked here, you can start to see quickly what that lifestyle is. It includes smoking hot girls wearing sexy clothes and traveling to outdoor destinations around the world while partying and having a good time along the way. Admittedly, this sounds great. Sign me up. I’d love to tag along. As time goes on though, I think there’s a possibility that “living your best life” could start to morph into something different. Perhaps it could be more focused on staying in, working out, partying less, living or eating healthier, traveling to different destinations, etc. Hopefully you understand what I’m trying to get at. “Living your best life” is a concept we all understand, but it isn’t static. What “living your best life” is today could be different from what it is tomorrow. This is a risk that I cannot underwrite.
Another risk is that third party brands are increasingly going direct-to-consumer. The business has countered this by introducing its owned brands which, as stated above, are doing very well and make up a nice chunk of sales, but Revolve still relies on those third party brands for a majority of its revenue. Taken from p. 9 of the most recent 10-K, “Net sales of owned brands represented 20.1, 26.7% and 36.1% of REVOLVE segment net sales for 2021, 2020 and 2019, respectively.” This translates to raw dollar amounts of sales from owned brands having been $150 million, $134 million and $190 million respectively. Its owned brand sales are trending down which is a concern. I don’t feel like this warrants a red flag given how successful and adaptive the business has been in the past, but it is something that I’ll have to keep my eye on. This is also a risk that I cannot underwrite given the unknowns surrounding how the competition will execute their direct-to-consumer strategy.
Competition, a fourth risk, is related to the direct-to-consumer strategy of third-party brands. I discussed four of its competitors above, but Revolve has thousands of them if we’re being honest. The constant introduction of new brands and differing strategies in the fashion industry will no doubt force the business to keep evolving which I think is a good thing. Ultimately, the evolution must be profitable for it to work out, so this risk boils down to overall strategy and capital allocation at the end of the day. I think Revolve deserves some credit here given that it survived the Great Recession without outside capital, that it (the Great Recession) still affects business decisions to this day and that it did so well during COVID. There might be something in that water over there in Cerritos that has allowed the business to roll with the punches and achieve sustained success for so long.
The final risk I will mention is exposure to China. Per p. 21 of the most recent 10-K, “We do not own or operate any manufacturing facilities. We use multiple third-party suppliers and manufacturers based primarily in China and, to a lesser extent, the United States and other countries, including India, to source and manufacture all of our products under our owned brands.” Revolve also uses TikTok, WeChat and AliPay to sell items and receive payments from customers both in and out of China. This exposure is on top of the sometimes-sudden pivots in Chinese governmental or economic policy and their current geopolitical tensions with the Taiwan and the United States. This is another risk that I cannot underwrite.
Advantages
Revolve’s focus on female millennial’s is a huge advantage for the business. Women in this age bracket (and every other age bracket) love to shop for clothes. It’s just how it is quite frankly. I don’t see this dynamic changing anytime soon. The cherry on top is that most millennial women aren’t at their peak earning power yet so there’s still a long growth runway for them to keep shopping for the foreseeable future.
Revolve’s brand is also an advantage for the business. I mentioned marketing and the negative press surrounding the 2022 Revolve Festival as a risk, but other than that the business nails its brand. I mean they nail it. From its website design and layout to their main Instagram (linked above) or any of its other owned brand accounts to its YouTube channel to utilizing the home as a dressing room and offering free returns to the events it hosts, Revolve knows exactly what it’s doing and who it’s appealing to. Revolve just get it.
Listed below are links to Revolve’s main website, several of its brands, a video about the 2022 Revolve Festival and a short interview with Kim Kardashian. I provided these links so that you, the reader, can get a better understanding of why I think Revolve nails its brand, marketing and lifestyle that I was talking about in the previous section.
Instagram accounts for some of its owned brands:
L’Acadamie à I found this brand and the four others below it here.
Video about the 2022 Revolve Festival
Regardless of what you think of them, the use of influencers as a marketing tool is an advantage for the business. I mentioned this in the What Does Revolve Do section, but I think it’s worth reinforcing here. I could post links to various articles, scholarly papers and videos about the effectiveness of influencers to help drive sales and brand awareness, but I doubt any of you would look at them. I’ll ask you one question though. Why would both established and up-and-coming brands use influencers if they weren’t effective? There wouldn’t be the proliferation of them that we’ve all seen and they wouldn’t be used as marketing vehicles if they weren’t generating money or measurable awareness for the brands that they represent. Regarding the shopping behavior of its customers and the impact of influencers, taken from p. 8 of the most recent 10-K, “Next-generation consumers often aspire to express their individual style through fashion and beauty. More than older generations of consumers, they frequently seek an emotional connection with brands that are unique and on-trend and resonate with their values. They look to social media and digital content from influencers as their source of inspiration and discovery and to inform their purchasing decisions. Influencers have an outsized impact on the purchasing behaviors of next-generation consumers. Influencers maintain a social media presence on platforms such as Instagram, TikTok and YouTube, and have thousands or even millions of engaged followers. Influencers can have a more powerful impact than traditional advertising methods because they bring their followers into their daily lives and share their personal tastes and preferences in an authentic way.” Expression of individual style through fashion and beauty and the impact of influencers on their followers are two other dynamics that I don’t see changing anytime soon. One final point about its influencers, Revolve does its best to avoid one and done deals. It strives to have long lasting relationships with them.
The final advantage I will discuss is a macro tailwind and that is online and mobile shopping. On p. 8 of the most recent 10-K it states, “Mobile sales in particular have rapidly increased as consumers leverage their ability to discover, browse and purchase anytime from anywhere through their mobile devices. In 2021, customer orders placed through mobile devices represented 64.6% of our total orders.” I think the probability of online and mobile orders decreasing over time is very low and close to zero. It’s so ubiquitous now that we take it for granted. Revolve will no doubt continue to see more and more online and mobile orders as time goes on.
Conclusion
So, is Revolve a compounder? I think so. I would go as far as saying that I think the business is basically a royalty on the self-image, ego and desire for status of millennial women. What about the stock price? It is without question a great business with high returns on capital that trades at a little over 2x revenues. On the other hand, it does trade at 36x 2021 RFCF which isn’t a cheap multiple. With that being said, per the Q1 2022 Investor Presentation, sales were $283.5 million which is an increase of 58% year-over-year and listed FCF was $53 million. Spring is Revolve’s busiest season, so sales and free cash flow are higher versus the rest of the year. Given that sales and listed FCF are elevated, 2022 Q1 listed FCF was 88% of the total of 2021 listed FCF which indicates that the figure will be materially higher in 2022. This combined with the spread between the stock price and the value compounding rate of the business and the advantages described in the previous section makes me think that it is fairly priced. If I had the money, I would buy shares of the business and would keep buying if prices went down. Unfortunately, I don’t any funds available right now. In closing, Revolve is an asset light, high return on capital business that is a pioneer in the influencer marketing space that utilizes data and technology to build a more efficient operating strategy that is differentiated from its competitors while offering a targeted, yet premium product offering to its customers. Businesses like this don’t come around too often so I think it’s your interest to at least pay attention to it as time goes on. Thanks again as always for reading. If you liked this writeup then please feel free to share it and subscribe!
Please reach out to me at possiblevalueresearch@gmail.com, @PossibleValue on Twitter and @Heshy on MicroCapClub with any comments, concerns or questions. Lastly, don’t forget to tell someone that you love them.
*** Remember that this isn’t investing advice. Consult a trusted financial or investment advisor before making any kind of investment decision. ***
Disclosure: I do not own shares in Revolve Group.