Revolve Group, Inc. — Q2 2021 Form 10-Q Summary
Business context and reporting period
Revolve is an online fashion retailer serving Millennial and Generation Z consumers through its REVOLVE and FORWARD segments. The unaudited report covers the three and six months ended June 30, 2021, with comparisons to the same periods in 2020.
Key financial metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net sales | $228.6 million | $142.8 million | $407.5 million | $288.9 million |
| Gross profit | $127.2 million | $72.1 million | $223.9 million | $143.0 million |
| Gross margin | 55.6% | 50.5% | 54.9% | 49.5% |
| Income from operations | $32.9 million | $18.8 million | $54.1 million | $22.7 million |
| Operating margin | 14.4% | 13.2% | 13.3% | 7.8% |
| Net income | $31.5 million | $14.2 million | $53.8 million | $18.4 million |
| Net margin | 13.8% | 10.0% | 13.2% | 6.4% |
| Diluted EPS | $0.42 | $0.20 | $0.72 | $0.26 |
| Adjusted EBITDA | $35.4 million | $20.9 million | $58.7 million | $26.5 million |
| Operating cash flow | $33.3 million | $53.8 million | $66.6 million | $61.9 million |
| Free cash flow | $32.8 million | $53.0 million | $65.3 million | $60.5 million |
At June 30, 2021, cash and cash equivalents were $219.6 million, inventory was $118.8 million, total current assets were $389.6 million, and working capital was $234.4 million. No borrowings were outstanding under the $75.0 million revolving credit facility. The facility was extended to March 23, 2026, is secured by substantially all assets, and prohibits cash dividends under its covenants. The company reported compliance with all covenants.
Material changes versus the prior comparable periods
- Q2 net sales increased 60.1%; six-month sales increased 41.1%. Growth was driven by higher order volumes and average order value.
- Q2 total orders increased 52.1% and average order value increased 25.0% to $255. For the six-month period, orders increased 30.7% and average order value increased 10.4%.
- REVOLVE sales increased 48.7% in Q2 and 35.6% year to date. FORWARD sales increased 151.1% in Q2 and 77.7% year to date.
- Gross margin expanded by 5.1 percentage points in Q2 and 5.4 percentage points year to date, primarily due to more full-price sales and shallower markdowns.
- Marketing expense increased 138.2% in Q2 and 67.0% year to date as the company increased performance marketing and resumed in-person brand events. Marketing reached 15.3% of Q2 sales versus 10.3% in the prior year.
- Q2 selling and distribution expense increased 68.7%, with higher shipping, payment-processing and customer-service costs and a higher return rate. Fulfillment expense declined as a percentage of sales because of automation and scale efficiencies.
- Inventory increased approximately 24.7% from December 31, 2020, reflecting purchases to support recovering demand. The returns reserve increased from $25.6 million to $44.0 million.
- Six-month operating cash flow increased modestly, but Q2 free cash flow declined to $32.8 million from $53.0 million, primarily because of working-capital investments.
- The effective tax rate fell to 3.5% in Q2 from 23.6% and was negative 0.3% for the six-month period, primarily due to excess tax benefits from stock-option exercises.
Guidance, outlook, commentary and risks
The filing does not provide specific quantitative revenue, earnings or margin guidance. Management states that demand improved in the first half of 2021 as restrictions eased, stimulus payments were distributed and vaccinations increased, but the sustainability of the recovery remains uncertain because of COVID-19 variants and possible reinstated restrictions.
- Management expects marketing as a percentage of sales to exceed historical levels during 2021, which may pressure short-term operating income.
- Owned-brand sales had been reduced by 2020 cost controls. Management expects sequential improvement in owned-brand mix during the remainder of 2021 and into 2022, but near-term owned-brand contribution remains below historical levels and may pressure gross margin.
- Inventory investments could support sales growth but create risks of shortages, excess inventory, markdowns and write-offs if demand changes.
- Management expects higher short-term fulfillment and selling-distribution pressure from returns, shipping costs and carrier capacity constraints.
- Key risks include COVID-19 resurgence, consumer discretionary spending, fashion and demand forecasting, competition, customer acquisition costs, supply-chain disruption, reliance on China-based suppliers, tariffs, social-media and influencer effectiveness, privacy and cybersecurity regulation, and dependence on a centralized Los Angeles fulfillment center.
- The company believes existing cash and operating cash flow will meet anticipated needs for at least 12 months, but acknowledges that a COVID-19 resurgence or other adverse developments could cause liquidity to be depleted sooner.
- A California wage-and-hour class action settlement approved in January 2021 was paid during the first quarter. Management does not believe current litigation or tax matters are likely to have a material adverse effect.
- Disclosure controls and procedures were deemed effective as of June 30, 2021, with no material changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether post-reopening demand, order growth and the $255 average order value remain durable without stimulus effects.
- Whether elevated marketing spending produces acceptable customer acquisition and retention returns.
- Whether inventory growth is matched by sales growth without increased markdowns, write-offs or return-related costs.
- Whether gross-margin gains persist as owned-brand mix, product mix and full-price selling patterns change.
- Whether COVID-19 variants, supply-chain constraints, shipping costs or China-related trade restrictions disrupt operations.
- Cash conversion, particularly the effect of inventory, prepaid expenses and returns reserves on future free cash flow.
- The effect of the low effective tax rate and stock-option-related tax benefits on future earnings comparability.
- The company’s transition from emerging growth company status at December 31, 2021 and the related accounting and internal-control requirements.