Revolve Group, Inc. annual report, FY2021

Revolve Group, Inc. — Form 10-K Summary

Business context and reporting period

Revolve is an online premium fashion retailer serving primarily Millennial and Generation Z consumers through the REVOLVE and FWRD segments. Its platform offers apparel, footwear, accessories and beauty products from third-party and owned brands, supported by data-driven merchandising, influencer marketing and proprietary technology.

This filing covers the fiscal year ended December 31, 2021, with comparisons to 2020 and 2019. The filing was dated February 28, 2022. Fiscal fourth-quarter 2021 net sales were $239.8 million and net income was $29.4 million.

Financial and operating metrics

Metric	2021	2020	Change
Net sales	$891.4 million	$580.6 million	+53.5%
Gross profit	$489.8 million	$305.3 million	+60.5%
Gross margin	55.0%	52.6%	+240 bps
Income from operations	$105.3 million	$61.1 million	+72.4%
Net income	$99.8 million	$56.8 million	+75.8%
Diluted EPS	$1.34	$0.79	+69.6%
Adjusted EBITDA	$114.6 million	$69.3 million	+65.5%
Net cash provided by operating activities	$62.3 million	$73.8 million	-15.5%
Free cash flow	$60.1 million	$71.4 million	-15.9%

Operating expenses increased to $384.5 million from $244.2 million. Marketing expense increased 83.8% to $140.4 million, while selling and distribution expense increased 65.9% to $133.5 million. General and administrative expense increased 26.0% to $89.3 million, and fulfillment expense increased 29.5% to $21.3 million.

Active customers increased to 1.840 million from 1.472 million.
Total orders placed increased to 6.636 million from 4.499 million.
Average order value increased to $271 from $236.
Approximately 87% of 2021 net sales were at full price, compared with 77% in 2020.
REVOLVE segment net sales were $745.1 million, up 48.8%; FWRD segment net sales were $146.3 million, up 83.4%.
International net sales were $165.1 million, or 18.5% of total net sales, up from $113.1 million, or 19.5%, in 2020.

Liquidity, cash flow and debt

Cash and cash equivalents were $218.5 million at December 31, 2021, compared with $146.0 million at December 31, 2020.
Working capital was $279.6 million, compared with $171.2 million in the prior year.
Inventory increased to $171.3 million from $95.3 million, reflecting increased purchasing to support stronger demand.
The company had no borrowings outstanding under its revolving credit facility at year-end and was in compliance with all financial covenants.
The amended credit facility provides up to $75.0 million of revolver borrowings and expires March 23, 2026. Borrowings are secured by substantially all company assets and the facility restricts certain debt, investment, asset-sale and dividend activities.
Management stated that cash, operating cash flow and available credit capacity should be sufficient for anticipated needs for at least the next 12 months, while noting that COVID-19 and other uncertainties could change that assessment.
Operating leases recognized at year-end included $6.9 million of present-value lease liabilities. Additional leases expected to commence in 2022 were not included in that balance.

Material changes versus the prior comparable period

Results recovered materially from COVID-19-affected 2020 levels as restrictions eased, vaccinations expanded and consumer demand improved.
Revenue growth was driven by higher order volume and average order value, aided by stronger demand for dresses and other social-occasion merchandise, increased customer engagement and renewed marketing activity.
Gross margin improved due to a higher full-price sales mix and shallower markdowns, partly offset by higher inventory write-offs, inbound freight, receiving costs, import expenses and a greater mix of third-party brands.
Operating cash flow and free cash flow declined despite higher earnings, primarily because inventory investment increased by $76.0 million during 2021.
Marketing investment was restored and expanded in 2021 after COVID-related reductions in 2020. Management expects marketing spending may remain elevated during periods of customer acquisition and brand investment.
Owned brands represented 20.1% of REVOLVE segment net sales, down from 26.7% in 2020 and 36.1% in 2019. Management invested in the owned-brand platform during 2021 and expects the mix to increase in 2022.
The company adopted lease accounting under ASC 842 in 2021 and ceased to qualify as an emerging growth company after becoming a large accelerated filer. The adoption had no impact on the statements of income.

Guidance, outlook, commentary and risks

The filing does not provide specific numerical revenue, earnings or margin guidance. Management expects continued investment in customers, inventory, headcount, owned brands, technology, fulfillment capacity, international markets and marketing. Management also expects short-term pressure from higher wages, freight and material costs, carrier constraints and potentially higher return rates.

COVID-19 and macroeconomic conditions: Demand, consumer discretionary spending, marketing events, staffing, supply chains and fulfillment operations remain exposed to the pandemic, variants, restrictions and potential economic weakness.
Inventory and returns: The company purchases inventory ahead of demand and generally cannot return unsold products. The sales return reserve was $49.3 million at year-end, compared with $25.6 million in 2020; estimating returns was identified as the critical audit matter.
Supply chain and China exposure: A majority of owned-brand products and a substantial portion of third-party merchandise have historically been manufactured in China. Port congestion, labor shortages, freight costs, tariffs, trade restrictions and supplier disruptions could pressure margins and product availability.
Customer acquisition: Competition for influencers, paid media and social platforms is increasing. Apple’s application-tracking restrictions have made customer acquisition and retention more difficult and costly.
Fulfillment concentration: Most fulfillment is centralized in a 281,000-square-foot Southern California facility, creating exposure to capacity, labor, natural disaster, public health and operational risks.
Technology and privacy: Cyberattacks, system outages, data breaches, privacy regulation and third-party technology failures could interrupt operations, increase costs or result in liability.
Governance and ownership: Class B shares have ten votes per share. The co-chief executive officers and their affiliate controlled approximately 89% of voting power at December 31, 2021. The company also qualifies as a controlled company under NYSE rules.
Contingencies: A California wage-and-hour class action settlement approved in January 2021 was paid during the first quarter of 2021. Management stated that no currently known legal or tax matters were expected to have a material adverse effect.

Most important facts for investors to verify

Whether 2021 revenue growth and the 120% cohort net sales retention rate are sustainable after the post-pandemic reopening comparison.
Whether gross margin can remain near 55% despite freight, labor, materials, tariffs, returns and inventory write-off pressures.
Whether inventory growth is matched by demand, or results in higher markdowns, returns and working-capital consumption.
Whether higher marketing investment produces sufficient customer acquisition, retention and lifetime-value returns.
The recovery and future mix of owned brands, which generally carry higher margins but represented a smaller share of REVOLVE sales in 2021.
Exposure under the $75.0 million secured credit facility, its financial covenants and restrictions on dividends and other corporate actions.
Future lease commitments, including approximately $6.3 million of leases expected to commence in 2022 and an additional approximately $7.3 million lease entered into in January 2022.
The effect of COVID-19 variants, supply-chain disruptions, China-related trade risks, privacy changes and social-media platform policies on demand and profitability.