Revolve Group, Inc. annual report, FY2020

Revolve Group, Inc. 2020 Form 10-K Summary

Business context and reporting period

Revolve Group, Inc. is a digitally native premium fashion retailer serving primarily Millennial and Generation Z consumers through the REVOLVE and FORWARD platforms. The filing covers the fiscal year ended December 31, 2020, including fourth-quarter results. The business offers apparel, footwear, accessories and beauty products through third-party and owned brands, supported by influencer marketing, proprietary technology and a centralized fulfillment operation.

COVID-19 materially affected demand, product mix, marketing events, supply chains and operating decisions throughout 2020. The company had 843 employees at year-end and operated primarily from California.

Key financial metrics

Metric	2020	2019	Change
Net sales	$580.6 million	$601.0 million	Down 3.4%
Gross profit	$305.3 million	$322.0 million	Down 5.2%
Gross margin	52.6%	53.6%	Down 100 basis points
Income from operations	$61.1 million	$48.1 million	Up 27.0%
Net income	$56.8 million	$35.7 million	Up 59.2%
Diluted EPS	$0.79	$(0.09)	Improved
Adjusted EBITDA	$69.3 million	$55.6 million	Up 24.6%
Cash flow from operations	$73.8 million	$46.1 million	Up 60.2%
Free cash flow	$71.4 million	$33.6 million	Up 112.6%

Net income benefited materially from a lower effective tax rate of 5.5%, compared with 24.4% in 2019, primarily due to excess tax benefits from stock-option exercises. Adjusted EBITDA and free cash flow are non-GAAP measures.

Cash and cash equivalents were $146.0 million at December 31, 2020, compared with $65.4 million at year-end 2019.
Working capital increased to $171.2 million from $97.8 million.
Inventory declined to $95.3 million from $104.3 million, reflecting order cancellations and delays early in the pandemic.
The company had no borrowings outstanding under its $75.0 million line of credit at year-end and was in compliance with all covenants.
Total assets were $305.8 million and stockholders’ equity was $200.1 million at December 31, 2020.
Operating lease obligations totaled $11.2 million, primarily due through 2023.

Operating and segment performance

REVOLVE segment net sales declined 5.0% to $500.9 million, while FORWARD net sales increased 8.1% to $79.8 million.
International net sales increased 15.3% to $113.1 million and represented 19.5% of total net sales, compared with 16.3% in 2019.
Active customers decreased to 1.472 million from 1.488 million, and total orders declined to 4.499 million from 4.715 million.
Average order value decreased to $236 from $275, driven by greater sales of lower-price categories such as beauty, fewer units per order, lower full-price mix and higher markdowns.
Approximately 77% of sales were at full price, compared with 79% in 2019.
Owned brands contributed 26.7% of REVOLVE segment net sales, down from 36.1% in 2019, as the company shifted toward third-party inventory and shallower initial buys.
Existing customers generated approximately 74% of orders and 76% of net sales. Net sales retention from prior customer cohorts declined to 74% from 89%.
Fourth-quarter 2020 net sales were $140.8 million, down from $147.6 million in fourth-quarter 2019. Fourth-quarter net income was $19.0 million, compared with $8.4 million.

Material changes versus the prior comparable period

Revenue declined despite stronger international sales and growth in FORWARD, primarily because of lower order volume and average order value in REVOLVE.
Gross margin contracted because of a higher third-party brand mix, lower full-price sales and pandemic-related markdown pressure.
Operating profitability improved because management reduced fulfillment, selling and distribution, marketing, and general and administrative expenses.
Marketing expense decreased 14.3% to $76.4 million, principally because in-person events, including #REVOLVEfestival, were cancelled or postponed and performance marketing was reduced.
Management implemented pay reductions, furloughs, limited layoffs, lower capital spending, delayed or cancelled inventory receipts and extended vendor payment terms. Most compensation reductions were reversed by the end of the third quarter.
Capital expenditures fell to $2.3 million from $12.5 million following the completion of the prior-year fulfillment-center expansion and automation investments.
Net cash increased by $80.6 million during 2020. The company temporarily drew $30.0 million on its credit facility in March 2020 and repaid it during the year.

Guidance, outlook, risks and unusual items

The filing does not provide formal numerical revenue or earnings guidance. Management expects COVID-19 to continue adversely affecting operations and results in 2021, including consumer demand, social-event activity, supply chains, staffing, inventory availability and marketing efficiency. Management expects owned-brand contribution and overall gross margin to remain under pressure in the near term, while marketing spending as a percentage of sales may return toward historical levels.

Principal risks include the duration and severity of COVID-19, discretionary consumer spending, fashion and inventory risk, merchandise returns, customer acquisition and retention, competition, and dependence on influencers and social media platforms.
Supply-chain exposure is significant, particularly to manufacturers and suppliers in China. Tariffs, trade restrictions, shipping disruptions, labor costs and supplier noncompliance could increase costs or reduce product availability.
The company relies heavily on a centralized 281,000-square-foot fulfillment facility and third-party shipping providers.
Privacy, data security, payment fraud, evolving consumer-protection laws, CCPA/CPRA, GDPR and social-media regulations may increase compliance costs or restrict marketing practices.
The company had a pending California wage-and-hour class action settlement accrued at approximately $1.0 million at year-end; court approval was obtained in January 2021 and the settlement was subsequently paid.
The credit facility expires March 23, 2021, and management expected to negotiate a renewal or replacement. The facility is secured by substantially all company assets and restricts additional debt, acquisitions, investments and dividends.
The company reported effective disclosure controls and effective internal control over financial reporting as of December 31, 2020. KPMG issued an unqualified audit opinion but was not required to audit internal control effectiveness because the company remained an emerging growth company.
The dual-class structure gives Class B holders ten votes per share. The co-chief executive officers and their affiliates controlled approximately 92% of voting power at year-end.

Most important facts for investors to verify

Whether revenue, active customers, order volume and average order value recover after pandemic-related disruption.
Whether gross margin can stabilize as owned-brand sales, full-price sales and product mix normalize.
The renewal terms, borrowing capacity and covenant requirements of the credit facility after its March 2021 expiration.
Inventory levels, markdowns, return rates and supply-chain availability as demand changes.
The sustainability of 2020 earnings and cash flow after considering the unusually low tax rate, cost reductions and working-capital benefits.
Progress in rebuilding owned brands, international sales and customer retention without materially increasing acquisition and marketing costs.
Potential effects of privacy, social-media, tariff, tax, labor and data-security developments on operating costs and customer acquisition.