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 FORWARD segments. The filing covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods. Results were materially affected by the COVID-19 pandemic, including reduced demand for occasion-focused apparel, canceled marketing events, supply-chain disruption and changes in consumer behavior.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net sales | $151.0 million | $154.2 million | $439.9 million | $453.4 million |
| Gross profit | $83.5 million | $82.7 million | $226.5 million | $243.9 million |
| Gross margin | 55.3% | 53.6% | 51.5% | 53.8% |
| Income from operations | $21.8 million | $12.8 million | $44.5 million | $37.5 million |
| Net income | $19.4 million | $9.6 million | $37.8 million | $27.3 million |
| Diluted EPS | $0.27 | $0.13 | $0.52 | $(0.25) |
| Adjusted EBITDA | $24.0 million | $14.4 million | $50.5 million | $42.0 million |
| Free cash flow | $13.9 million | $7.4 million | $74.4 million | $20.4 million |
As of September 30, 2020, cash and cash equivalents were $158.7 million, working capital was $142.9 million, inventory was $73.6 million and total stockholders’ equity was $174.9 million. The company had $15.0 million outstanding under its $75.0 million secured revolving credit facility, at a weighted-average interest rate of 1.5%. No borrowings were outstanding at December 31, 2019.
Operating cash flow for the first nine months was $76.2 million, compared with $31.8 million in the prior-year period. The increase primarily reflected higher net income and favorable working-capital changes, particularly reduced inventory purchases. Capital expenditures were $1.8 million, compared with $11.5 million in the prior-year period.
Material Changes Versus the Prior Comparable Period
- Q3 net sales declined 2.0%, while nine-month sales declined 3.0%. The principal drivers were lower average order value and fewer orders, partly offset by fewer merchandise returns.
- Q3 gross margin increased to 55.3% from 53.6%, reflecting lower markdown activity, improved inventory management, lower receiving and import costs, and lower inventory valuation adjustments. Nine-month gross margin decreased to 51.5% from 53.8% because of greater markdowns, merchandise-mix changes and a higher proportion of third-party brands.
- Operating expenses declined 11.7% in Q3 and 11.8% for the nine months, driven by reduced marketing, fulfillment, selling and distribution, and general and administrative costs.
- Marketing expense declined 18.3% in Q3 and 17.8% for the nine months, primarily because of canceled or reduced brand activations and lower performance-marketing investment.
- REVOLVE segment sales declined 3.6% in Q3 and 5.0% for the nine months. FORWARD segment sales increased 9.0% in Q3 and 12.7% for the nine months.
- International sales increased 17.8% in Q3 and 12.3% for the nine months, representing 20.2% and 18.8% of sales, respectively, compared with 16.8% and 16.3% in the prior-year periods.
- Active customers were 1.504 million, compared with 1.438 million a year earlier, but management reported a sequential decline from the second quarter. Orders declined 4.4% in Q3 and 4.1% for the nine months, while average order value fell to $232 from $275 in Q3 and to $232 from $270 for the nine months.
Guidance, Outlook, Commentary and Unusual Items
Management did not provide specific numerical revenue or earnings guidance in the filing. It expected COVID-19 to materially affect operations and results through at least the remainder of 2020. Management also expected inventory to increase in the fourth quarter from the third-quarter level but remain below year-end 2019 levels.
In response to the pandemic, the company reduced payroll and non-payroll costs, furloughed and laid off employees, deferred capital expenditures, canceled or delayed inventory orders and extended vendor payment terms. As demand improved, employees were brought back, compensation was restored to pre-COVID levels by the end of the third quarter, discretionary bonuses were accrued subject to full-year performance, and inventory purchases and operating expenses were increased.
Management stated that available cash and operating cash flow were expected to cover anticipated needs for at least the next 12 months, including repayment of borrowings when the credit facility expires. However, management cautioned that this assessment could prove incorrect because of pandemic uncertainty. The credit facility expires March 23, 2021, is secured by substantially all assets, restricts certain activities and prohibits cash dividends. The company was in compliance with its covenants at September 30, 2020.
Material risks include renewed restrictions or changes in consumer spending, supply-chain and China sourcing exposure, inventory shortages or excess inventory and markdowns, customer acquisition and retention, lower average order values, reliance on influencers and social media, data privacy and cybersecurity, fulfillment-center concentration in Los Angeles County, competition, international and currency risks, tariffs, litigation and regulatory compliance.
The company accrued approximately $1.0 million for a California wage-and-hour class-action settlement. The court preliminarily approved the settlement on September 8, 2020; final approval remained pending. Management did not believe other current litigation or tax matters would have a material adverse effect. The filing reported no material off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Whether demand, active customers, orders and average order value recover after the pandemic and whether international strength offsets U.S. weakness.
- Whether higher gross margin in Q3 is sustainable as inventory purchases increase and owned-brand contribution remains lower.
- Inventory levels, markdowns, return rates and the potential for shortages or excess inventory in subsequent quarters.
- Liquidity after repayment or refinancing of the $15.0 million credit-facility balance and the facility’s March 2021 expiration.
- The effect of restoring compensation, increasing marketing and rebuilding operating capacity on future margins and cash flow.
- Final approval and total cost of the wage-and-hour class-action settlement.
- Continuing COVID-19 restrictions, supply-chain disruption, China exposure, tariffs, fulfillment-center risks and data-security or privacy events.
- The impact of the dual-class structure: Class B shares carry ten votes per share, and insiders and affiliates held approximately 95% of voting power as of September 30, 2020.