Business Context and Reporting Period
Revolve Group, Inc. is an online fashion retailer serving Millennial and Generation Z consumers through the REVOLVE and FWRD platforms. The unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021.
Financial Performance and Liquidity
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Net sales | $283.5 million | $178.9 million | +58.5% |
| Gross profit | $154.4 million | $96.7 million | +59.8% |
| Gross margin | 54.5% | 54.0% | +50 bps |
| Income from operations | $28.5 million | $21.2 million | +34.1% |
| Operating margin | 10.0% | 11.8% | -180 bps |
| Net income | $22.6 million | $22.3 million | +1.4% |
| Net margin | 7.9% | 12.4% | -450 bps |
| Diluted EPS | $0.30 | $0.30 | Flat |
| Adjusted EBITDA | $31.5 million | $23.3 million | +35.1% |
| Operating cash flow | $53.8 million | $33.2 million | +62.0% |
| Free cash flow | $52.7 million | $32.5 million | +62.3% |
Revenue growth was driven by a 68.2% increase in orders and a 12.5% increase in average order value. Active customers increased to 2.041 million from 1.477 million, total orders placed increased to 2.156 million from 1.282 million, and average order value increased to $288 from $256.
REVOLVE revenue increased 56.2% to $237.7 million, while FWRD revenue increased 71.1% to $45.8 million. U.S. revenue rose to $237.9 million, and international revenue rose 28.1% to $45.6 million.
Operating expenses increased 66.9% for fulfillment, 86.5% for selling and distribution, 72.5% for marketing, and 35.0% for general and administrative expenses. Selling and distribution costs were pressured by higher shipping rates, fuel surcharges and increased returns. Marketing investment increased by $19.0 million to support customer acquisition, retention and brand events.
Cash and cash equivalents were $270.6 million at March 31, 2022, compared with $218.5 million at December 31, 2021. Working capital was $302.7 million. Inventory was $179.2 million, and the returns reserve was $69.6 million. The company stated that cash, operating cash flow and available borrowing capacity should meet anticipated needs for at least the next 12 months, although COVID-19-related uncertainty could adversely affect this assessment.
The company had no borrowings under its $75.0 million revolving credit facility. The facility expires March 23, 2026, is secured by substantially all assets, contains customary restrictive covenants, prohibits cash dividends and permits a potential increase of up to $25.0 million. The company was in compliance with its financial covenants.
Material Changes Versus the Prior Comparable Period
- Net sales and gross profit grew approximately 59%, supported by higher order volume, average order value, full-price sales and owned-brand mix.
- Gross margin improved modestly to 54.5%, but operating margin declined because selling and distribution and marketing expenses grew faster than revenue.
- Net income was broadly unchanged despite higher operating income, primarily because the effective tax rate increased to 22.1% from a 6.1% benefit in the prior-year period. The change primarily reflected lower excess tax benefits from stock-option exercises.
- Operating cash flow increased by $20.6 million, primarily due to favorable working-capital changes, including higher accounts payable and returns reserves.
- Inventory increased from $171.3 million at December 31, 2021 to $179.2 million as the company increased purchases to support demand.
- Non-GAAP Adjusted EBITDA included a $0.5 million non-routine item related to a self-insured retention payable under an insurance policy.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific quarterly or full-year revenue, earnings or margin guidance. Management expects to continue investing in owned brands, international expansion, fulfillment capacity, technology, personnel and marketing. A 96,000-square-foot Pennsylvania fulfillment facility leased in March 2022 was expected to become operational by the end of the second quarter of 2022.
Management reported improved demand and easing restrictions, including the return of the #REVOLVEfestival in April 2022 after a two-year hiatus. However, the filing states that seasonality for 2022 remains uncertain and that recent favorable trends may not continue.
- COVID-19 resurgence, changing consumer behavior, supply-chain disruption and higher cost of goods remain significant uncertainties.
- Strict lockdowns in China, labor shortages, higher freight costs, fuel surcharges, inflation and the Russia-Ukraine war may pressure inventory availability, margins and demand.
- Management expects fulfillment, selling and distribution costs to face short-term pressure from higher wages, returns and shipping costs.
- Marketing spending may remain above historical levels in selected periods, and the return on increased customer-acquisition investment is uncertain.
- Inventory commitments create risks of shortages, excess inventory, markdowns and write-offs if demand changes.
- The company received a March 15, 2022 cease-and-desist letter alleging copyright infringement and related claims. The matter had not proceeded to litigation as of the filing date; the company accrued an amount equal to its insurance self-insured retention.
- No material litigation, material off-balance-sheet arrangements or accounting-policy changes were reported. Disclosure controls and procedures were deemed effective.
Most Important Facts for Investors to Verify
- Whether revenue growth and customer gains continue after the reopening-related rebound and the return of in-person marketing events.
- Whether higher returns, shipping costs, fuel surcharges, wages and marketing expenses further reduce operating and net margins.
- Whether inventory growth converts into sales without materially higher markdowns, write-offs or return-related costs.
- The sustainability and comparability of non-GAAP Adjusted EBITDA and free cash flow, including working-capital effects and excluded items.
- The effect of COVID-19, China supply-chain restrictions, inflation, currency movements and the Russia-Ukraine war on demand and product availability.
- The resolution and potential cost of the copyright-related claim and any other legal or regulatory matters.
- Execution and cost of the Pennsylvania fulfillment-center expansion and related staffing requirements.
- The implications of the dual-class structure, under which the co-chief executive officers and their affiliates controlled approximately 89% of voting power as of March 31, 2022.