Revolve Group, Inc. — Form 10-Q Summary
Reporting period: Three months ended March 31, 2021; unaudited interim results. Revolve is an online fashion retailer serving Millennial and Generation Z consumers through the REVOLVE and FORWARD segments.
Financial Performance and Position
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net sales | $178.9 million | $146.1 million | 22.5% increase |
| Gross profit | $96.7 million | $71.0 million | 36.2% increase |
| Gross margin | 54.0% | 48.6% | 540 basis-point increase |
| Income from operations | $21.2 million | $3.9 million | Increase |
| Net income | $22.3 million | $4.2 million | Increase |
| Diluted EPS | $0.30 | $0.06 | Increase |
| Adjusted EBITDA | $23.3 million | $5.6 million | Increase |
| Net cash from operations | $33.2 million | $8.1 million | Increase |
| Free cash flow | $32.5 million | $7.5 million | Increase |
- Operating margin improved to 11.8% from 2.6%; net margin improved to 12.4% from 2.8%.
- Operating expenses increased 12.4% to $75.5 million, but declined to 42.2% of sales from 45.9%. Marketing expense increased 19.5%, primarily from higher performance marketing investment.
- Cash and cash equivalents were $182.9 million at March 31, 2021, up from $146.0 million at December 31, 2020. Working capital increased to $199.4 million from $171.2 million.
- Inventory was $100.5 million, compared with $95.3 million at year-end 2020. The returns reserve increased to $37.5 million from $25.6 million.
- No borrowings were outstanding under the credit facility. The amended facility provides up to $75.0 million of revolver capacity and expires March 23, 2026; obligations are secured by substantially all company assets.
- Cash used in property and equipment purchases was $0.7 million. Financing cash flow of $4.3 million primarily reflected stock-option exercises.
Material Changes Versus Q1 2020
- Sales recovery reflected easing stay-at-home restrictions, government stimulus, vaccination rollout and stronger demand for social-occasion merchandise as compared with the pandemic-affected period beginning in March 2020.
- REVOLVE sales increased 22.2% to $152.2 million; FORWARD sales increased 23.8% to $26.7 million.
- International sales increased 38.4% to $35.6 million and represented 19.9% of total sales, versus 17.6% in the prior-year quarter.
- Total orders placed increased 9.4% to 1.282 million, while average order value was essentially flat at $256 versus $259. Active customers declined to 1.477 million from 1.528 million on a trailing twelve-month basis.
- Gross margin benefited from fewer markdown sales, shallower markdowns, lower inventory valuation adjustments and lower import expenses. The product mix shifted toward fashion apparel and away from dresses, although dress demand began rebounding late in the quarter.
- Fulfillment expense declined 2.8% despite higher volume, reflecting automation and fulfillment-center efficiencies. Selling and distribution expense increased 14.7%, including higher shipping and merchant-processing costs.
- Operating cash flow benefited from higher net income and favorable working-capital changes, including increases in accounts payable and the returns reserve.
Outlook, Commentary, Risks and Unusual Items
- Management did not provide specific revenue, earnings or margin guidance in the filing. The filing states that recent favorable demand trends may not continue and that quarterly results remain difficult to forecast.
- Management expects marketing and general and administrative expenses to increase in 2021 as hiring, marketing activity and investments resume. Marketing as a percentage of sales may temporarily exceed historical levels.
- Management expects owned-brand contribution to remain lower in the near term, which may pressure gross margin, although owned brands generally carry higher margins than third-party brands.
- COVID-19 remains the principal uncertainty, including potential resurgences or variants, renewed restrictions, changes in discretionary spending, supply-chain disruption, fulfillment-center interruptions and changes in consumer behavior.
- Inventory investments are increasing to support demand, creating risks of insufficient inventory if demand exceeds expectations or excess inventory and markdowns if demand weakens.
- The company believes existing cash and operating cash flow are sufficient for anticipated needs for at least the next 12 months, but acknowledges that liquidity assumptions could prove incorrect.
- A California employee wage-and-hour class action settlement approved in January 2021 was paid during the quarter. Approximately $1.0 million had been accrued in 2019; management does not believe current legal or tax matters will have a material adverse impact.
- The effective tax rate was a benefit of 6.1%, compared with a benefit of 4.4% in Q1 2020, primarily due to excess tax benefits from stock-option exercises.
- The company remains an emerging growth company and uses the JOBS Act extended transition period for certain accounting standards. Disclosure controls were deemed effective, with no material changes to internal control over financial reporting.
Investor Verification Items
- Verify whether sales growth, order growth and international momentum persist after government stimulus and reopening-related demand benefits diminish.
- Monitor active customers, repeat purchasing, average order value, return rates and the relationship between customer acquisition spending and contribution margins.
- Assess sustainability of the 54.0% gross margin given lower owned-brand contribution, product mix changes, inventory availability, markdowns, freight costs and potential tariffs.
- Review inventory levels, the $37.5 million returns reserve and subsequent markdown or return activity for signs of excess inventory or elevated returns.
- Confirm continued operating cash generation and liquidity while inventory, headcount, marketing and fulfillment investments increase.
- Evaluate exposure to COVID-19 developments, supply-chain concentration in China, international regulatory requirements, tariffs, cybersecurity, privacy and social-media marketing risks.
- Consider the $75.0 million secured revolving facility, its restrictive covenants and the prohibition on cash dividends, despite no borrowings outstanding at quarter-end.
- Consider the dual-class structure: Class B shares carry ten votes per share, and the co-chief executive officers and their affiliated entity collectively controlled approximately 91% of voting power as of March 31, 2021.