Revolve Group, Inc. — Form 10-Q Summary
Business context and reporting period
Revolve is an online fashion retailer serving Millennial and Generation Z consumers through the REVOLVE and FWRD platforms. The filing covers the quarter and nine months ended September 30, 2021, compared with the corresponding 2020 periods. Results reflected recovery from the COVID-19-related disruption experienced in 2020, supported by easing restrictions, stimulus payments, vaccinations and renewed in-person marketing activity.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $244.1 million | $151.0 million | $651.6 million | $439.9 million |
| Gross profit | $134.5 million | $83.5 million | $358.4 million | $226.5 million |
| Gross margin | 55.1% | 55.3% | 55.0% | 51.5% |
| Income from operations | $19.2 million | $21.8 million | $73.4 million | $44.5 million |
| Net income | $16.7 million | $19.4 million | $70.5 million | $37.8 million |
| Diluted EPS | $0.22 | $0.27 | $0.95 | $0.52 |
| Adjusted EBITDA | $21.7 million | $24.0 million | $80.4 million | $50.5 million |
| Free cash flow | $1.3 million | $13.9 million | $66.6 million | $74.4 million |
- Q3 net sales increased 61.6%; nine-month sales increased 48.1%. Growth was driven by orders placed, which rose 60.4% in Q3 and 40.4% year to date, and higher average order value, up 19.0% in Q3 and 13.4% year to date.
- Q3 operating margin declined to 7.9% from 14.5%, and net margin declined to 6.8% from 12.9%, primarily because marketing, selling and distribution expenses grew faster than sales.
- For the nine months, operating margin improved to 11.3% from 10.1% and net margin improved to 10.8% from 8.6%, benefiting from gross-margin expansion and operating leverage outside marketing and distribution.
- Q3 marketing expense increased 148.4% to $47.0 million, or 19.2% of sales, including higher performance marketing and brand-event spending. Nine-month marketing expense increased 94.7% to $108.1 million.
- As of September 30, 2021, cash and cash equivalents were $221.6 million versus $146.0 million at December 31, 2020. Working capital was $253.7 million versus $171.2 million.
- Operating cash flow was $68.4 million for the nine months, down from $76.2 million, primarily because of working-capital investment. Inventory rose to $141.8 million from $95.3 million at year-end, and the returns reserve rose to $50.8 million from $25.6 million.
- The company had no borrowings outstanding under its $75.0 million revolving credit facility. The facility was extended to March 23, 2026, is secured by substantially all assets, and contains customary restrictive covenants. The company was in compliance with its covenants.
Material changes versus the prior comparable period
- REVOLVE segment sales rose 56.4% in Q3 and 42.7% for the nine months; FWRD sales rose 94.8% and 83.7%, respectively.
- FWRD increased to 16.3% of total sales in both Q3 and the nine-month period, compared with 13.5% and 13.2%, respectively, in the prior-year periods.
- Gross margin improved materially for the nine months, reflecting a higher percentage of full-price sales and shallower markdowns, but was essentially flat in Q3 because of higher inventory write-offs, receiving and import costs and a higher third-party-brand mix.
- Selling and distribution expense increased 83.8% in Q3 and 54.7% year to date, driven by higher shipping, merchant processing, customer service and return-related costs.
- Active customers increased to 1.678 million from 1.504 million; total orders for the nine months increased to 4.881 million from 3.476 million; average order value increased to $276 in Q3 and $263 year to date from $232 in both prior-year comparisons.
- Q3 net income decreased despite substantial sales growth because of significantly higher marketing and distribution investment. Nine-month net income increased 86.3%, aided in part by a lower effective tax rate of 3.5% versus 14.3%.
Guidance, outlook, commentary and risks
The filing does not provide clear quantitative revenue or earnings guidance. Management expects continued investment in marketing, headcount, inventory, owned brands, fulfillment and international expansion. Marketing as a percentage of sales may exceed historical levels during 2021 and certain future periods. Management expects the mix of owned-brand sales to improve sequentially through the remainder of 2021 and into 2022.
- COVID-19 trends remained uncertain because of variants, changing restrictions and potential changes in consumer discretionary spending. Management stated that recent favorable demand trends may not continue.
- Supply-chain disruption, labor shortages, freight costs, import costs and higher materials costs could pressure gross margin, inventory availability and fulfillment performance.
- Higher return rates and carrier costs are expected to pressure fulfillment and selling and distribution expenses.
- Inventory commitments create risk of shortages if demand exceeds supply or excess inventory and markdowns if demand weakens. Inventory increased substantially during the recovery period.
- Customer acquisition costs are rising, competition for influencers and social-media channels is increasing, and Apple’s application-tracking requirements may make acquisition and retention more difficult.
- The company relies heavily on third-party suppliers and manufacturers, particularly in China, and on a concentrated Los Angeles-area fulfillment and technology infrastructure.
- Material risks also include privacy and cybersecurity compliance, international operations, tariffs and trade restrictions, consumer discretionary spending, competition, labor costs, fashion-cycle risk and the effectiveness of internal controls as the company transitions out of emerging-growth-company status.
- A California wage-and-hour class action settlement of approximately $1.0 million, accrued in 2019, was approved and paid during the first quarter of 2021. Management reported no other current litigation or tax matters expected to have a material impact.
Important facts for investors to verify
- Whether the sharp sales growth and higher average order value remain durable after the COVID-19 recovery comparison fades.
- Whether expanded marketing and in-person event spending generates adequate customer acquisition, retention and lifetime-value returns.
- Trends in return rates, inventory aging, inventory write-offs, markdowns and the $50.8 million returns reserve.
- Whether shipping, freight, labor, import and supply-chain costs continue to pressure gross margin and operating leverage.
- Cash conversion and working-capital requirements as inventory and sales scale, including the decline in nine-month operating cash flow and free cash flow.
- Progress in rebuilding the owned-brand portfolio and its effect on merchandise mix and margins.
- COVID-19 developments, international demand, China-related sourcing and regulatory exposure, privacy requirements and potential tariffs.
- The effect of the dual-class capital structure, under which Class B shares carry ten votes per share, on governance and Class A shareholder rights.