Revolve Group, Inc. — Form 10-Q Summary
Reporting period: Quarterly and six-month periods ended June 30, 2020, compared with the corresponding 2019 periods. The interim financial statements are unaudited. REVOLVE is an online fashion retailer serving Millennial and Generation Z consumers through its REVOLVE and FORWARD segments.
Financial Results and Key Metrics
| Metric | Q2 2020 | Q2 2019 | Change |
|---|---|---|---|
| Net sales | $142.8 million | $161.9 million | (11.8%) |
| Gross profit | $72.1 million | $90.4 million | (20.3%) |
| Gross margin | 50.5% | 55.8% | (530 bps) |
| Income from operations | $18.8 million | $17.7 million | 6.1% |
| Net income | $14.2 million | $12.7 million | 11.7% |
| Diluted EPS | $0.20 | $(0.57) | Improved |
| Adjusted EBITDA | $20.9 million | $19.0 million | 10.1% |
| Free cash flow | $53.0 million | $2.0 million | Increase |
For the six months ended June 30, 2020, net sales were $288.9 million, down 3.5%; gross profit was $143.0 million, down 11.3%; gross margin was 49.5% versus 53.9%; operating income was $22.7 million versus $24.6 million; and net income was $18.4 million versus $17.7 million. Adjusted EBITDA was $26.5 million versus $27.5 million, and free cash flow was $60.5 million versus $12.9 million.
Q2 operating expenses declined to $53.3 million from $72.7 million. Marketing expense fell 41.2% to $14.6 million, general and administrative expense fell 16.2% to $15.8 million, selling and distribution expense fell 19.4% to $19.1 million, and fulfillment expense fell 28.3% to $3.8 million. Cost reductions more than offset lower sales and gross profit, supporting higher operating income and net income.
Active customers increased to 1.533 million from 1.359 million, while Q2 orders placed declined 10.1% and average order value decreased to $204 from $275. The six-month average order value was $231 versus $268.
Liquidity, Cash Flow and Debt
- Cash and cash equivalents were $150.8 million at June 30, 2020, up from $65.4 million at December 31, 2019.
- Working capital was $118.9 million, compared with $97.8 million at year-end 2019.
- Six-month operating cash flow was $61.9 million, compared with $22.7 million in 2019, primarily reflecting lower inventory receipts and favorable working-capital changes.
- Capital expenditures were $1.4 million for the six months, compared with $9.8 million in 2019.
- The company drew $30.0 million on its revolving credit facility in March and repaid $6.0 million in June; $24.0 million remained outstanding at June 30, 2020 at a weighted-average interest rate of 2.2%.
- The credit facility provides up to $75.0 million of revolver borrowings, is secured by substantially all assets, expires March 23, 2021, and prohibits cash dividends. The company was in compliance with its covenants.
Material Changes Versus the Prior Comparable Period
- COVID-19 materially reduced demand beginning in March 2020, with lower orders, average order value, full-price sales and gross margins. Management reported sequential improvement during Q2 and year-over-year sales growth in June, but noted continued weakness entering the third quarter.
- REVOLVE Q2 sales declined 11.8% to $126.9 million; FORWARD sales declined 11.6% to $15.9 million. For the six-month period, REVOLVE sales declined 5.7% to $251.4 million, while FORWARD sales increased 14.8% to $37.5 million.
- International sales increased 2.6% in Q2 and 9.4% for the six-month period, reaching $26.5 million and $52.3 million, respectively, despite pandemic-related disruptions.
- Gross margin contracted because of heavier markdowns, lower full-price sales, a shift toward lower-margin categories such as beauty, and a lower contribution from owned brands and a higher mix of third-party brands.
- Management reduced payroll and other operating costs through salary reductions, furloughs and limited layoffs, canceled or delayed inventory orders, extended vendor payment terms, and deferred nonessential capital expenditures. As conditions improved, certain furloughed employees were recalled and most corporate employees returned to pre-pandemic pay levels.
- Inventory declined to $64.5 million from $104.3 million at year-end 2019. Management expected inventory to increase in the second half of 2020 but remain below prior-year levels.
Outlook, Commentary, Risks and Unusual Items
Management did not provide specific revenue or earnings guidance. It expects COVID-19 to materially affect operations and results through the remainder of 2020. The company expects near-term average order value and gross margin to remain pressured and cautioned that inventory shortages or excess inventory could result if demand changes faster than purchasing plans can be adjusted.
The company believes cash and operating cash flow will meet anticipated needs for at least the next 12 months, including repayment of the line-of-credit balance upon expiration. Management also stated that this assessment could be wrong if the pandemic is more severe or prolonged than expected.
- Principal risks include renewed government restrictions, weaker discretionary spending, supply-chain and manufacturing delays, vendor financial distress, inventory shortages or markdowns, and increased competition and promotional activity.
- Marketing events, including #REVOLVEfestival and other influencer and travel activations, were postponed or canceled, potentially affecting customer acquisition and demand.
- The company relies heavily on third-party suppliers and manufacturers, particularly in China, and remains exposed to tariffs, trade restrictions, currency movements and logistics disruptions.
- A purported California wage-and-hour class action is subject to a settlement memorandum requiring court approval. Approximately $1.0 million remained accrued at June 30, 2020.
- The dual-class structure gives Class B holders ten votes per share. Pre-IPO holders collectively controlled approximately 97% of voting power, and an entity controlled by the co-CEOs controlled approximately 70%.
- Management reported effective disclosure controls and procedures as of June 30, 2020, with no material changes to internal control over financial reporting during the quarter.
Investor Verification Checklist
- Verify the sustainability of the Q2 sales recovery and whether year-over-year growth continued after June 30, 2020.
- Assess the effect of markdowns, product mix and reduced owned-brand contribution on future gross margins.
- Monitor inventory levels, purchase commitments, product availability and potential excess inventory or write-downs.
- Confirm liquidity relative to the $24.0 million credit balance, the March 2021 facility maturity and pandemic-related cash needs.
- Review subsequent developments in the wage-and-hour settlement and other legal or regulatory matters.
- Evaluate customer retention, order volume, average order value and marketing efficiency as pandemic conditions evolve.
- Consider governance and dilution implications of the dual-class structure, outstanding equity awards and potential Class B share conversions.