Pent Up Demand Could Propel Revolve (NYSE: RVLV) in 2021

Revolve NYSE: RVLV, an online fashion retailer for millennial women, is on the verge of setting 52-week highs after an up-and-down month of November. The company soared on the Pfizer NYSE: PFE vaccine news back on November 9, before selling off on disappointing earnings. Revolve ended the month on a high note, however, surging by more than 21% over the last five sessions of November.

Now, shares are taking a breather, but look primed for further upside.

It’s easy to assume that everything e-commerce turned to gold in 2020, but Revolve just recorded its second consecutive quarter of declining sales. But the struggles are no indictment on Revolve.

Revolve is Mismatched for the Pandemic

Dresses have historically been Revolve’s top-selling category. But with people stuck at home, dress sales have taken a dive. Beauty and loungewear continue to perform well for Revolve, but haven’t been enough to offset the dress weakness.

And it’s not just what Revolve sells, but how Revolve markets its brands. This is not an online retailer that exclusively interacts with its customers through digital means. Instead, Revolve’s marketing strategy revolves – pun intended – around in-person events. Its biggest brand marketing event of the year, for example, was canceled.

Earnings are a Bright Spot

Revenue dipped 12% yoy in Q2 and 2% yoy in Q3. But earnings were a different story:

• In Q2, earnings were 20 cents per share, blowing away expectations of 3 cents a share and the 57 cents a share loss reported in the year-ago period.
• In Q3, earnings were 27 cents per share, roughly double the estimates of 14 cents a share and the 13 cents a share reported in Q3 2019.

So why were earnings such a positive surprise?

Part of it is that Revolve spends a lot of money marketing at those in-person events. The cancellations have enabled Revolve to considerably cut costs.

But there’s more to it than that:

Revolve has an automated inventory management system that prevents the company from amassing excess inventory in poorly performing categories.

On the Q2 earnings call, management explained, “Through leveraging our read and react strategy, technology and team of data analysts, the buying and planning team was able to drive our merchandise reorders to a record high in July, when expressed as a percentage of total net sales. Product reorders are very important because reorders improve inventory dynamics and reduce inventory risk, since we only reorder those products that are selling well.”

Marketing spend will return to pre-pandemic heights sooner rather than later – as it should – but the inventory management system will continue to pay dividends for years to come.

2021 Could Be a Banner Year

Revolve shares increased by nearly 13% on November 9, the day vaccine news came out. Frankly, I think that RVLV should have been up even more on the news.

In 2021, there will be pent up demand in several areas, but parties and festivals could be among the leaders. Young people are ready to jump out of their skin after spending 8+ months mostly stuck inside. By next summer? They’re going to be partying like its 1999.

Revolve is going to be right there waiting, selling dresses and building its brand awareness at parties and festivals.

Furthermore, a lackluster 2020 will lead to easy comps in 2021. The numbers are going to look great in a vacuum, but even better when they’re compared to the previous year.

2021 Estimates Seem Light

Analysts are expecting Q2 2021 revenue to grow 20.4% yoy and Q3 2021 revenue to grow 19.3% yoy.

I understand the caution on Q2 2021, as the vaccine probably won’t be fully rolled out by then. But still, I think that the estimates are too conservative.

Looking at Q3, I think the estimates are way too conservative. There’s a great chance that we’re back to “almost-normal” by next summer, and people will have spent well over a year living with restrictions.

The Verdict

Revolve has weathered the storm in 2020 and looks ready to prosper in 2021 and beyond. The market reaction on November 9 and the 2021 estimates make me think that most investors haven’t yet grasped the opportunity in front of Revolve in 2021. I’d look to get in before that changes.