Fast Fashion has an innovative player that’s being overlooked
The biggest and sometimes most controversial headlines in the fashion industry these days are around the growth of fast fashion.
Every brand seems to replicate the fast fashion giants such as Zara, H&M, and Artizia who are known to quickly churn out thousands of styles each season at reasonable prices. The fast fashion industry has been booming and will not slow down any time soon.
So, when new kid on the block Revolve (RVLV) took an innovative approach to e-commerce online shopping and marketing, their Uniform ROA took off. This, coupled with booming demand, high growth, and a low P/E makes it a great FA Alpha 50 name
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The key to the massive growth of the fast fashion industry is demand. The consumers whom brands such as Zara, H&M, and Artizia are targeting love new products and the constant need to consume.
Fast fashion has also gained considerable growth due to online offerings. Some brands like Zara strategically release sales earlier on their respective app and website to entice consumers to utilize their e-commerce options first.
By cutting out retail stores all together, fast fashion names can save considerable overhead costs that would be eaten up by their brick and mortar stores.
Eliminating these fixed costs can go directly to making more items at a cheaper cost to ride the fast fashion wave. However, not all fast fashion brands are created equal. Finding the top players requires finding a competitive advantage.
Revolve (RVLV) is a unique fast fashion brand in that it is completely online and has a robust marketing system to promote its brands.
Founded in 2003 in the e-commerce infancy, Revolve quickly became the new kid on the block with its innovative ideas. It wanted to shift from fashion magazines to a fashion blog, and it had the perfect platform to deliver.
Fast forward to 2022, Revolve is one of the most well known e-commerce apparel brands for its unique marketing approach.
It utilizes most, if not all, of their marketing budget to send apparel to influencers as well as plan elaborate vacations for them to showcase new clothes.
This approach has taken the social media consumer by storm—tailored specifically to young and urban customers who can’t get enough.
But has this approach translated to real returns?
When looking at Revolve’s as-reported ROA, it looks modest. Since its IPO in 2019, it has not broken 20%. 2021’s ROA was a mere 16.7%.
This may cause some to question whether Revolve’s approach has really paid off based on these mediocre returns.
In reality though, Uniform ROA has been taking off as Revolve has been scaling its business and innovating against the slower moving fashion players in the industry.
Uniform ROA in 2020 was 62% and 2021—their best year yet—was 70%.
The market is not pricing in their considerable growth and massive potential due to industry demand with just a modest P/E of 18x. Great returns, strong growth, and attractive valuations mark Revolve as a great FA Alpha 50 name.
Throughout financial market history, many of the world’s most successful investors have been candid in their belief that Generally Accepted Accounting Principles (“GAAP”) distort economic reality.
Warren Buffett, for example, once said investors should “concentrate on the world of companies, not arcane accounting mathematics.”
Investors who neglect the very real issues with as-reported accounting can find themselves caught up investing with the crowd, blindly following hot “themes” without a thorough grasp of how to understand the businesses in question.
The only true way to focus on the “world of companies,” as Buffett suggests investors do, is to present a clear picture of how a business operates, something that can only be done by adjusting financial statements to reflect the arbitrary nature of certain accounting rules that leave much to discretion.
The world’s best investors understand the need to make these adjustments, which allows them to focus not on picking out the most popular companies, but rather on looking for great names in sleepy areas that the market isn’t paying much attention to. From there, the goal is to then identify quality companies with significant growth potential at reasonable prices.
That’s exactly what we’ve set out to do with the FA Alpha, our monthly list of 50 companies that rank at the top for quality, high growth, and low valuations.
This list has outperformed the market by 300 basis points per year for over 20 years now, effectively doubling the performance of the market by focusing on the real fundamentals and valuations of companies with our proprietary Uniform Accounting framework.
See for yourself below.
To see the other 49 names on the list, click here.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research