Piper Sandler has assumed coverage on Revolve Group (NYSE: NYSE:RVLV), an online fashion retailer, assigning an Overweight rating and setting a price target of $30.00. The firm recognized a positive shift in the company's performance, noting a rebound in sales and an improvement in margins.
Revolve Group has experienced a turnaround after a challenging 2023, with sales picking up in the second quarter of 2024 and further acceleration observed in July. This improvement comes despite a more difficult comparison in the third quarter of 2024 and is not driven by promotions. The stabilization in demand from aspirational consumers and clearer fashion trends have contributed to this upswing.
A significant aspect of Revolve's recent performance has been the reduction in return rates, which had been impacting the company's profit and loss statement since the first quarter of 2021. For the first time in three years, return rates declined year-over-year in the second quarter of 2024. This decline is attributed to a shorter return window and the implementation of artificial intelligence initiatives to detect fraud.
Management has indicated that the guidance for 2024 does not account for any improvements in return rates. However, any positive change in this area is expected to benefit profitability. Specifically, each one percent change in the return rate could potentially improve the Selling & Distribution and Fulfilment line item by 30 to 50 basis points annually.
Despite a significant recovery from its lows in July and a positive second-quarter earnings report, Revolve's stock is not widely favored by analysts, with only one-third of sell-side ratings being buys. Additionally, the short interest as a percentage of the float remains high, consistently exceeding 25%.
Revolve's valuation is deemed attractive by Piper Sandler at 19 times the estimated 2025 enterprise value to EBITDA ratio, particularly given the opportunity for margin inflection. Historically, Revolve's adjusted EBITDA margins were in the low double-digits, but they are currently in the mid-single digits. If margins reach the high single-digits, the firm estimates Revolve's earnings power could be approximately $1.30 to $1.40.
To be sure, Revolve reported robust growth in the second quarter of 2024, with a 3% year-over-year increase in net sales to $282 million, and a significant rise in net income, more than doubling to $15 million. Adjusted EBITDA also saw a 97% increase to $20 million. The company has made strategic acquisitions, including an 80% stake in luxury brand Alexandre Vauthier and partnerships with Matches Fashion and Nike (NYSE:NKE).
InvestingPro Insights
As Piper Sandler resumes coverage on Revolve Group with a positive outlook, recent data from InvestingPro further contextualizes the company's financial health and market performance. Revolve Group, with a market capitalization of $1.64 billion, is trading at a high earnings multiple with a P/E ratio of 51.05. This indicates a premium valuation compared to the industry average, reflecting investor optimism about the company's growth prospects.
InvestingPro Tips highlight that Revolve holds more cash than debt on its balance sheet, suggesting a strong financial position that could weather economic uncertainties. Additionally, the company has been profitable over the last twelve months, reinforcing the positive sentiment shared by Piper Sandler. However, it's worth noting that four analysts have revised their earnings downwards for the upcoming period, which could signal caution for potential investors.
Revolve's stock price movements have been quite volatile, yet the company has demonstrated a strong return over the last year, with a 51.14% price total return. This performance is consistent with the positive trend identified by Piper Sandler. For investors seeking more detailed analysis, there are additional InvestingPro Tips available at InvestingPro, providing deeper insights into Revolve's financial metrics and market position.
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