There are many different types of investing styles, and two major categories are short-term buyers versus long-term buyers. Short-term investing has certainly led to some success, but the nail-biting and stress that comes with it, in addition to the inevitable losses over time, make it a less-than-ideal choice for most investors. On top of that, long-term investing is likely to provide better returns over the long run anyway.
What a long-term approach does require, though, is patience and foresight. With that in mind, I've identified a stock that's been crushed this year but has incredible long-term potential. Revolve Group (RVLV 1.57%) has the makings of a great stock, and now could be a great time to buy.
Using AI to disrupt fashion
Revolve was built 20 years ago with an artificial intelligence (AI) infrastructure that informs all of its business operations. It can make quick and accurate merchandising calculations based on product popularity to take advantage of up-and-coming trends while meeting shifting demand. The company releases about 1,500 items weekly, and since it has accurate information based on millions of data points, 85% of net sales were at full price in 2022. That has given it an edge in the industry as it has grown to become a top name in high fashion.
There are several other ways it has distinguished itself from standard fashion retailers. It operates exclusively online and doesn't have the added expenses of maintaining a physical presence, leading to stronger profitability. It has developed a social media and celebrity influencer strategy that rewards engagement and puts its products under the noses of Gen X and millennial consumers who frequently use social media. It creates collections with celebrity ambassadors and hosts live fashion events that bolster its brand and generate loyalty from fans.
This has led to high sales growth and scale over the past few years, which accelerated during the pandemic when e-commerce became even more prevalent.
Silver linings in a pressured retail environment
Although Revolve sells apparel and footwear at high prices, its clientele leans toward the fashion-obsessed rather than the affluent. It's feeling the pain of inflation as its core customers cut down on spending. Third-quarter sales decreased 4% year over year, and net income dropped 73% to just $3.2 million, getting dangerously close to negative. However, management has implemented rigorous expense management furthered by its AI capabilities. It has been reducing inventory as its sales are declining to rebalance its strategy in the pressured economy. That led to a 33% increase in free cash flow during the quarter to $11.5 million.
One thing to note is that Revolve continues to recruit and engage fans who love its brand. The sales decline is all about customers switching to cheaper clothing since they have less money to spend. Otherwise, they're still shopping at Revolve.
This is a critical trend to keep in mind when evaluating Revolve's potential to bounce back. Despite the slowdowns and declines in sales and profits, every report has demonstrated increasing numbers of active customers and total orders placed. In the third quarter, active customers rose 12% year over year, while total orders placed were up 9%. Since Revolve has started to discount more items, shoppers are responding and purchasing. This is helping move inventory and generate sales.
Image source: Revolve Group.
Is Revolve a growth stock?
With several quarters of declining sales and earnings, it would be a stretch to call Revolve a growth stock right now. But the trend should reverse soon, and big picture, Revolve's annual sales have increased at a compound annual rate of 17% over the past five years, more than doubling since 2018.
Revolve has the technology and model to get back to growth and be a winning stock. When viewed through a long-term lens, Revolve can reward patient investors.
