Insights

Why Revolve Group Stock Tanked on Thursday

What happened

Shares of Revolve Group (NYSE: RVLV) are falling today, down by 14.5% as of 11:34 a.m. ET following the company’s second-quarter earnings release.

Revolve reported an increase in revenue and higher gross margin, but business conditions worsened in July, causing a sharp deceleration in revenue growth. 

So what

Investors have been on pins and needles, punishing any company that shows signs of weakness. Revolve’s revenue soared 27% versus the year-ago period, but management said that growth slowed to 10% at the start of the third quarter, which didn’t sit well with market participants.

As for positives, gross margin improved slightly to 55.9% of revenue, compared to 55.6% in the year-ago quarter. It was also encouraging to see active accounts increase 39% year over year, with average order values up 19%.  

However, the company took a big hit on higher fuel prices that negatively impacted shipping costs to customers. As a result, Revolve posted a 48% decline in net profit.

Now what

The next several quarters will be challenging, to say the least. Not only is Revolve dealing with higher transportation costs and lower consumer sentiment, but it will also be facing tough comparisons to the elevated growth it experienced in the second half of 2021. 

Nonetheless, management noted that the company is still growing faster than its competitors, so it’s taking market share, which is important. Plus, the revenue growth year to date suggests Revolve is still a destination of choice for millennials shopping for apparel.

Another positive is the company has a clean balance sheet, with $237 million of cash and no debt. Revolve should navigate this economy just fine.

John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Revolve Group Inc. The Motley Fool has a disclosure policy.

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