Business Context and Reporting Period
Revolve Group, Inc. is an online fashion retailer serving Millennial and Generation Z consumers through the REVOLVE and FORWARD segments. The unaudited Form 10-Q covers the three months ended March 31, 2020, compared with the same period in 2019. Results were materially affected by COVID-19, particularly during the final two weeks of the quarter.
Key Financial Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $146.1 million | $137.3 million | 6.4% increase |
| Gross profit | $71.0 million | $70.8 million | 0.3% increase |
| Gross margin | 48.6% | 51.5% | Down 290 basis points |
| Income from operations | $3.9 million | $6.9 million | 44.1% decrease |
| Operating margin | 2.6% | 5.0% | Down 240 basis points |
| Net income | $4.2 million | $5.0 million | 16.2% decrease |
| Net margin | 2.8% | 3.6% | Down 80 basis points |
| Adjusted EBITDA | $5.6 million | $8.5 million | 34.4% decrease |
| Net cash from operations | $8.1 million | $15.9 million | 49.2% decrease |
| Free cash flow | $7.5 million | $10.9 million | 31.2% decrease |
REVOLVE segment sales increased 1.5% to $124.5 million, while FORWARD sales increased 47.0% to $21.6 million. Active customers rose to 1.528 million from 1.262 million, total orders increased 3.3% to 1.172 million, and average order value remained $259.
Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents were $103.6 million at March 31, 2020, up from $65.4 million at December 31, 2019.
- Working capital was $103.8 million, compared with $97.8 million at year-end 2019.
- Inventory was $101.4 million, down from $104.3 million at December 31, 2019.
- The Company drew $30.0 million under its secured $75.0 million revolving credit facility in March 2020; no borrowings were outstanding at December 31, 2019. The weighted-average interest rate was 2.3%.
- The credit facility matures March 23, 2021, is secured by substantially all Company assets, restricts certain activities, and prohibits cash dividends. The Company was in compliance with its covenants.
- Management believes cash, cash flows from operations, and available liquidity will meet anticipated needs for at least the next 12 months, including repayment of the revolver at maturity, but cautions that COVID-19 assumptions could prove incorrect.
Material Changes Versus the Prior Comparable Period
- Sales growth slowed sharply after January and February 2020, when combined sales increased more than 20% year over year; March sales declined significantly year over year as COVID-19 reduced demand.
- Gross margin declined because of increased markdowns, lower full-price sales, product mix changes, reduced owned-brand contribution, and a relatively higher contribution from FORWARD.
- Marketing expense increased 12.6% to $22.0 million, including higher spending on REVOLVE-branded events before COVID-19-related cancellations and postponements.
- Operating expenses increased 5.1% overall, causing operating income to decline despite higher sales.
- Operating cash flow declined primarily because of unfavorable working-capital changes, including a $14.1 million reduction in the returns reserve compared with a $8.0 million increase in the prior-year period.
- Capital expenditures fell to $0.6 million from $5.0 million as the Company completed prior fulfillment-center investments and deferred or canceled non-essential projects.
- The effective tax rate was negative 4.4%, compared with 25.8% in Q1 2019, primarily because of a $1.2 million excess tax benefit related to stock-option exercises. The Company stated that it could not reliably estimate its annual effective tax rate because of COVID-19 uncertainty.
Guidance, Outlook, Risks, and Unusual Items
The filing provides no formal quantitative revenue or earnings guidance. Management expects COVID-19 to materially adversely affect net sales, earnings, cash flows, and operations through the remainder of 2020. April and early May results were also materially adversely affected, and management expects second-quarter orders and average order value to decline.
- Management reduced executive and employee compensation, implemented furloughs and layoffs, reduced fulfillment hours, cut non-payroll costs and marketing investment, deferred capital expenditures, canceled or delayed inventory receipts, and extended vendor payment terms.
- Brand-marketing events, including #REVOLVEfestival and other activations, were postponed or canceled, potentially reducing customer acquisition and demand.
- Supply-chain risks include manufacturing and shipping delays, particularly involving China, vendor financial stress, and broader global logistics disruption.
- Management expects higher markdowns, lower full-price sales, reduced owned-brand contribution, and continued gross-margin pressure in the near term.
- Temporary return-policy extensions for March through May 2020 purchases may increase future returns and pressure liquidity and earnings.
- The Company accrued approximately $1.0 million for a California wage-and-hour class-action settlement. The settlement remained subject to court approval as of the filing date.
- Other significant risks include discretionary consumer spending, inventory obsolescence, competition, dependence on influencers and third-party vendors, fulfillment-center disruption, cybersecurity and privacy compliance, foreign currency and tariff exposure, and the concentrated voting control of Class B shareholders.
- Disclosure controls and procedures were assessed as effective, and no material changes to internal control over financial reporting were reported.
Facts Investors Should Verify
- Subsequent-quarter sales, gross margin, order volume, average order value, and cash flow after the COVID-19 disruption became more pronounced.
- Whether the $30.0 million revolver borrowing is repaid, increased, or refinanced before its March 2021 maturity.
- The adequacy of liquidity under scenarios involving prolonged demand weakness, increased returns, deeper markdowns, or supply-chain disruption.
- Inventory aging, markdown exposure, owned-brand performance, and the potential for inventory write-downs.
- The effect of employee furloughs, layoffs, compensation reductions, and event cancellations on customer acquisition, fulfillment capacity, and future growth.
- Final court approval and payment terms for the approximately $1.0 million wage-and-hour settlement.
- Whether COVID-19-related changes in consumer behavior, international demand, and marketing effectiveness impair the Company’s ability to return to revenue and margin growth.