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3 Reasons Revolve Group Stock Plunged 22% Last Week

Rick Munarriz, The Motley Fool

It was one of June's hottest IPOs, but Revolve Group (NYSE: RVLV) has a lot of ground to make up if it wants to recover this month's losses. The online hub for fashionistas slipped 22% last week after posting disappointing financial results, and it has now shed nearly a quarter of its value in August.

Revolve Group nearly doubled in June after going public at $18 earlier that month. A flat July followed, and now the shares are shifting in reverse. Let's go over why investors have cooled on the once-red-hot debutante.

Cover of a Revolve Group holiday catalog.

Image source: Revolve Group.

1. Miss once and the market won't miss you

A cardinal rule with any IPO is that it can't stumble out of the gate. When the time comes to step up with its first financial report as a public company it can't come up short. Revolve Group landed ahead of where analysts were parked with its top-line results, but it failed to deliver on the bottom line.

The next-gen fashion retailer for millennials and Generation Z members saw its net sales climb 23% to hit $161.9 million. After seeing net sales soar 28% in 2017 before slowing to a 25% clip last year and 21% through the first three months of the year, it's actually encouraging to see acceleration. Analysts were settling for $159.9 million in net sales for the second quarter, matching the first quarter's 21% ascent. 

Things didn't quite work out the same way at the other end of the income statement. One thing that sets Revolve Group apart from the faster growing IPOs of 2019 is that it's profitable, a welcome byproduct of its clever business model. However, the $0.18 a share it posted was less than the $0.19 a share that Wall Street pros were expecting. 

Revolve Group didn't put out guidance for the current quarter in its early June prospectus, so technically Wall Street is the one that missed. However, since investors are marching to the expectations of analysts and one of the stock's selling points is its profitability, it's easy to see why the stock stumbled after falling short on the bottom line. 

2. Guidance could've been better

This is a seasonal business, but not in the way that you probably think a retailer would peak. Revolve Group's strongest quarter in terms of net sales -- at least in 2017 and 2018 -- has been the second quarter. Revolve Group hosts the #REVOLVEfestival in April, and that event is potent enough to lift sales even above what it rakes in during the holiday shopping season two quarters later. We now know that the peak quarter was mixed, and we'll have to wait a year to see Revolve Group at its best again. 

Revolve Group's guidance for all of 2019 calls for $598 million to $608 million in net sales, growth of 20% to 22%. It's already at the high end of that range through the first half of the year so the assumption here is that growth will decelerate off of the second quarter's 23% pace. The rub here is that analysts are already modeling top-line results north of $606 million, so they're already at the high end of that range. 

3. The model could be susceptible

One thing that sets Revolve Group apart is that, instead of traditional online advertising, it keeps a growing army of fashion-forward influences on its payroll. Social media celebrities with tons of followers are paid to promote Revolve apparel items, and in a few cases even inspire and brand them. This is a smart cost-effective approach that finds it waist-deep in its fourth consecutive year of profitability. However, this isn't exactly a secret recipe. Other online and offline retailers are likely to embrace this model.

Revolve Group also relies on big spenders. The average order size has ballooned up to $281 this year. If the economy starts to sputter, influencers might not be enough to inspire young consumers into parting with their money.

Revolve Group knows how to draw a crowd. It closed out the second quarter with 1.359 million active accounts, a 36% year-over-year increase. Unfortunately, the number of orders placed and net sales aren't growing as quickly. Investors will want to keep an eye on that trend to make sure that the platform continues to be engaging. 

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Rick Munarriz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com