Revolve Group, Inc. 2019 Form 10-K Summary
Business context and reporting period
Revolve is a digitally native fashion retailer serving Millennial and Generation Z consumers through the REVOLVE and FORWARD segments. Its offerings include apparel, footwear, accessories, beauty products, third-party brands and 24 owned brands. The filing covers the fiscal year ended December 31, 2019. The fourth quarter ended December 31, 2019 is included in the annual results; the filing is not a standalone quarterly report.
- 2019 net sales were generated primarily in the United States, with international sales representing 16.3% of total net sales.
- REVOLVE represented 87.7% of consolidated net sales; FORWARD represented 12.3%.
- Owned brands contributed 36.1% of REVOLVE segment net sales, compared with 30.9% in 2018.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change or comment |
|---|---|---|---|
| Net sales | $601.0 million | $498.7 million | Increased 20.5% |
| Gross profit | $322.0 million | $265.3 million | Increased 21.4% |
| Gross margin | 53.6% | 53.2% | Increased 40 basis points |
| Income from operations | $48.1 million | $41.8 million | Increased 15.1% |
| Net income | $35.7 million | $30.6 million | Increased 16.4% |
| Net income attributable to common stockholders | $(5.1) million | $30.7 million | 2019 reduced by $40.8 million Class B share repurchase accounting effect |
| Diluted earnings per share | $(0.09) | $0.44 | Not comparable because of the IPO-related repurchase |
| Adjusted EBITDA | $55.6 million | $46.5 million | Non-GAAP; increased 19.6% |
| Net cash from operating activities | $46.1 million | $26.7 million | Increased $19.4 million |
| Free cash flow | $33.6 million | $23.6 million | Non-GAAP; increased $10.0 million |
| Cash and cash equivalents | $65.4 million | $16.4 million | Increased $49.0 million |
| Working capital | $97.8 million | $56.9 million | Increased $40.9 million |
Active customers increased 26.6% to 1.488 million, while total orders increased 27.1% to 4.715 million. Average order value declined to $275 from $279. Approximately 79% of net sales were at full price. Mobile devices generated 53.7% of net sales and 56.2% of orders.
Fourth-quarter 2019 net sales were $147.6 million, gross margin was 52.9%, net income was $8.4 million, Adjusted EBITDA was $13.7 million and free cash flow was $13.2 million. Management attributed sequential pressure to seasonality, reduced new inventory receipts in REVOLVE and increased discounting.
Liquidity, debt and capital resources
- The company had no borrowings outstanding under its $75.0 million revolving credit facility as of December 31, 2019. The facility matures March 23, 2021 and is secured by substantially all company assets.
- The company was in compliance with its credit facility covenants and believes cash, operating cash flow and available borrowing capacity will meet anticipated needs for at least the next 12 months.
- Capital expenditures were $12.5 million in 2019, compared with $3.0 million in 2018, primarily reflecting fulfillment-center consolidation and automation.
- The June 2019 IPO generated approximately $53.3 million of net proceeds after underwriting discounts and offering expenses. Approximately $40.8 million was used to repurchase Class B common stock.
- Future minimum operating lease payments totaled $15.0 million as of December 31, 2019.
- The company has never paid cash dividends and does not anticipate paying dividends in the foreseeable future.
Material changes versus the prior comparable period
- Revenue growth was driven by customer and order growth, partially offset by lower average order value.
- REVOLVE revenue increased 21.6% to $527.3 million; FORWARD revenue increased 13.1% to $73.7 million.
- Gross margin expanded modestly, aided by merchandise mix and greater REVOLVE contribution, while management warned that owned-brand contribution could moderate and pressure margins.
- Fulfillment expense increased 46.1% and rose to 3.2% of sales because of expanded and temporarily duplicative fulfillment capacity and automation costs.
- Selling and distribution expense increased 24.2%, primarily from higher shipping, payment-processing and customer-service costs.
- Marketing expense increased 19.8%, including higher performance marketing and REVOLVE event spending.
- Inventory increased to $104.3 million from $102.2 million despite revenue growth. Management stated that inventory had grown faster than sales in recent periods and that inventory management could continue to affect discounting, full-price sales, margins and near-term growth.
- The company adopted ASC 606 in 2019 using the modified retrospective method. The adoption reduced reported 2019 net sales by $2.4 million and net income by $2.3 million relative to the prior method, and changed the presentation of expected returns and gift-card and store-credit breakage.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide formal numerical revenue, earnings or margin guidance. Management’s stated priorities include customer acquisition and retention, expansion of owned brands, international growth, broader product categories, technology investment and fulfillment efficiency.
- COVID-19 was identified as a material emerging risk because a substantial majority of owned-brand products and a substantial portion of third-party products are manufactured in China. The filing states that the magnitude of the impact was unclear but could materially affect sales, supply, growth prospects and financial condition.
- Management expected COVID-19-related supply delays to affect the first and second quarters of 2020 and potentially alter historical seasonality.
- Other principal risks include fashion and demand forecasting, excess inventory and markdowns, competition, dependence on influencers and social platforms, customer acquisition costs, cybersecurity and privacy compliance, international operations, tariffs, labor costs, fulfillment capacity and technology interruptions.
- A California wage-and-hour class action was subject to a January 2020 settlement memorandum of understanding, pending court approval. Approximately $1.0 million was accrued in 2019 general and administrative expense.
- 2019 non-routine items primarily related to legal settlements. Adjusted EBITDA excludes these items, equity compensation, depreciation and amortization, taxes and other specified items; it should not be viewed as a substitute for GAAP earnings or cash flow.
- The company operates with a dual-class share structure. Class B shares carry ten votes per share, and holders existing before the IPO collectively controlled approximately 98% of voting power as of December 31, 2019.
- Management concluded that disclosure controls and procedures were effective as of December 31, 2019. The filing does not include management’s internal-control assessment or an auditor attestation because the company was within the applicable transition period for newly public companies.
Most important facts for investors to verify
- Whether revenue growth can continue after the 2019 increase in customers and orders, particularly given lower average order value and fourth-quarter inventory constraints.
- Inventory levels, aging, markdown rates, full-price sales and future write-down risk.
- Whether owned-brand growth continues to support gross margin without increasing sourcing, inventory or reputational risk.
- The financial effect of COVID-19, China-related supply-chain disruption, tariffs and international demand.
- Cash conversion after elevated fulfillment and capital expenditures, including the relationship between GAAP operating cash flow and non-GAAP free cash flow.
- Terms, covenant compliance and borrowing capacity under the secured revolving credit facility.
- Final court approval and total cost of the wage-and-hour settlement, along with any additional legal or regulatory contingencies.
- The effect of the dual-class structure, potential share sales and approximately 4.9 million outstanding options on voting control and future dilution.