Has the tide turned for clothing store Revolve (RVLV)? The answer is yes, at least according to one analyst. Barclays’ Trevor Young shifted his rating from “equal weight” to “underweight.” Young cited two major factors as reasons for the shift. The first was a decline in overall revenue growth. The second is a set of troublesome comparisons. This appeared sufficient to send Revolve downward in Monday morning’s trading session.
The last 12 months for Revolve shares started off with a bang, but that bang quickly fizzled and started a slow drop. Last year at this time, Revolve shares challenged $60 per share. Just ahead of Thanksgiving, shares hit their peak with a closing figure of around $80. Mid-January saw shares lose nearly half their value, dropping to $41. A set of rallies and fizzled rallies followed, and now, the company stands around $27 per share.
It’s not looking good for the clothing chain, and with analysts starting to buck trends, that’s particularly bad news. This “premium lifestyle brand” might be hurting in the near term, especially given the larger macroeconomic trends at issue. Therefore, right now, I’m bearish on Revolve.
Investor Sentiment for Revolve Stock Proving Somewhat Polarized
Depending on which investor sentiment metrics you consult, you will either find rampant bullishness or shocking bearishness. Revolve currently has a TipRanks Smart Score of 9 out of 10, which suggests a strong likelihood that Revolve will outperform the broader market. However, the mood among Revolve insiders is extremely pessimistic. That’s particularly true looking at the last 12 months, although the last three months are on a positive track.
Three uninformative buys took place during that time, featuring directors Ruxandra Oana, Melanie Cox, and Marc Stolzman. The trio made purchases of unrevealed size, all about the same time, back around May 2022.
However, in 2022, the numbers overall are still heavily sell-weighted. Just in 2022, four buy transactions were recorded, while 10 sell transactions were spotted. For the last 12 months overall, that ratio swells to five buy transactions and 41 sell transactions.
Turnaround or Trouble Ahead for Revolve Stock?
What’s interesting about the recent change from Trevor Young is that it’s bucking a trend. Young pointed out that Revolve’s revenue growth was in decline, and margin pressures were weighing in. With dresses and similar products being “higher return rate categories,” that means there might be trouble ahead for Revolve stock.
Looking at other analyst forecasts—even one from Needham’s Anna Andreeva just eight days ago—suggests that there’s a lot of faith in Revolve’s overall future.
Andreeva reiterated a Buy rating and was far from alone. Even Wedbush’s Tom Nikic‘s recent downgrade was a downgrade to Hold as opposed to a downgrade to Sell like Young’s was.
Yet Young is pitching its course downward, and that brings us to the second major problem: macroeconomics. Revolve is a “premium lifestyle brand” which focuses mainly on women in the Millennial to Gen Z generation age ranges.
Basically, think the 40-and-under set. What does it sell those ladies? Mainly, apparel items that are commonly meant for social occasions. That means fancy dresses, shoes, and similar items.
Already two red flags should be waving like beacons in the night. Knowing what we know about the macroeconomic situation right now, we know that fancy parties might be going out the window pretty soon as recessions take hold worldwide.
Forget the White House prevarications; when you’re spending nearly $4 a gallon to fill your tank and $30 to fill your plate at even a moderately-priced restaurant, it’s a bad retail environment.
With fancy parties likely to be in decline soon, so too will demand for the fancy dresses required to get the most out of said parties. Plus, there’s likely to be a decline in demand therein anyway, as ladies turn back to their closets and focus on what they already have rather than picking up anything new.
Sure, that trend will be bucked in isolation. An occasional new dress is a vital morale boost even in the worst economy, but it’s certainly going to mean slumping sales for Revolve on at least some level.
Even if the amount of fancy parties remains unchanged or minimally so, the number of young ladies expanding their dress selections is likely to turn down at least somewhat. That’s a net loss in sales potential.
Retail takes it on the chin in almost every recession as consumers tighten their collective belts and focus on necessities. We’re already starting to see some of that behavior crop up already. Granted, Revolve is in a fairly decent place to attack that problem.
It focuses mainly on a direct-to-consumer sales channel that helps reduce overhead. It’s done quite well with that strategy, too; reports note that the company has nearly 5.5 million followers on its Instagram page.
The problem, however, is that a decline in revenue is still a decline in profit, even when expenses are fairly low. Offsetting a reduction in sales figures requires a matching reduction in expenses. Revolve’s direct-to-consumer approach suggests there may not be much room left to cut.
The latest earnings numbers out of the company suggest that this pattern is already in play, as Revolve missed its earnings projections by $0.09 per share. It also missed revenue figures by $2.82 million, coming in at an objectively-decent $290.05 million.
Is RVLV Stock a Buy?
Turning to Wall Street, Revolve has a Moderate Buy consensus rating. That’s based on 12 Buys and five Holds (the newest Sell added late last night should be considered as well) assigned over the past three months. The average Revolve price target of $31.41 implies 13% upside potential.
Analyst price targets range from a low of $22 per share to a high of $42 per share.
Conclusion: A Bad Day to be an Upscale Brand
Perhaps the picture is not so dire for Revolve. An upscale brand, after all, can still count on some support from the upscale shopper, which is less likely to feel negative impacts from recessionary conditions. Still, losing that middle-class shopper means less revenue going forward. Revolve will likely see another bad quarter before the potential Christmas shopping season bump, which doesn’t make for a good time to be involved with Revolve.
That’s why I’m bearish overall; the conditions just aren’t there for the company to do well right now. It will likely survive, thanks to the upscale shopper and the occasional need for new clothes.
However, a good amount of its shoppers will likely trade down during a rough economic climate. That means a reduction in revenue for Revolve, which investors will likely want to steer clear of for the foreseeable future.
