Revolve (NYSE:RVLV) Delivers Impressive Q1 But Stock Drops

Full Report / June 29, 2022
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Online fashion retailer Revolve Group (NASDAQ: RVLV) announced better-than-expected results in the Q1 FY2022 quarter, with revenue up 58.4% year on year to $283.4 million. Revolve made a GAAP profit of $22.5 million, improving on its profit of $22.2 million, in the same quarter last year.

Revolve (RVLV) Q1 FY2022 Highlights:

  • Revenue: $283.4 million vs analyst estimates of $256.7 million (10.4% beat)
  • EPS (GAAP): $0.30 (miss)
  • Free cash flow of $52.7 million, up from negative free cash flow of $6.52 million in previous quarter
  • Gross Margin (GAAP): 54.4%, in line with same quarter last year
  • Trailing 12 months Active Customers : 2.04 million, up 564 thousand year on year

Launched in 2003 by software engineers Michael Mente and Mike Karanikolas, Revolve Group (NASDAQ: RVLV) is a next generation fashion retailer that leverages social media and a community of fashion influencers to drive its merchandising strategy.

Revolve Group is focused on Millennials and Generation Z customers, who spend significant amounts of time on social media, and often look to social media and digital content from influencers as their source of inspiration and discovery and to inform their purchasing decisions. Revolve has taken a data-driven buying and merchandising model, which monitors and also spends its marketing dollars on a network of over 3,500 social media influencers’ fashion choices on TikTok, Instagram, and YouTube. The company’s ‘read and react’ merchandising approach identifies and invests behind new trends in small initial order quantities. The company employs a “test and reorder” model, which like brick and mortar fast fashion peers creates scarcity, while also minimizing fashion risk.

The company has two main brands. Revolve which focuses on constant newness and a broad yet curated assortment of premium apparel and footwear, accessories and beauty products. Its Forward brand is meant to offer an emerging luxury brand feel.

Consumers ever rising demand for convenience, selection, and speed are secular engines underpinning ecommerce adoption. For years prior to Covid, ecommerce penetration as a percentage of overall retail would grow 1-2% annually, but in 2020 adoption accelerated by 5%, reaching 25%, as increased emphasis on convenience drove consumers to structurally buy more online. The surge in buying caused many online retailers to rapidly grow their logistics infrastructures, preparing them for further growth in the years ahead as consumer shopping habits continue to shift online.

Revolve Group (NYSE: RVLV) competes with Stitchfix (NASDAQ: SFIX), The RealReal (NASDAQ:REAL), Poshmark (NASDAQ: POSH), Asos (AIM:ASC), and boohoo group (AIM:BOO).

Sales Growth

Revolve's revenue growth over the last three years has been strong, averaging 26.8% annually. Revolve's revenue took a hit when the pandemic first hit, but it has since rebounded strongly, as you can see below.

Revolve Total Revenue

This quarter, Revolve beat analyst estimates and reported a very impressive 58.4% year on year revenue growth.

Ahead of the earnings results the analysts covering the company were estimating sales to grow 19.7% over the next twelve months.

Usage Growth

As an online retailer, Revolve generates revenue growth by growing both the number of buyers, and the average order size.

Over the last two years the number of Revolve's active buyers, a key usage metric for the company, grew 11.1% annually to 2.04 million users. This is decent growth for a consumer internet company.

Revolve Trailing 12 months Active Customers

In Q1 the company added 564 thousand active buyers, translating to a 38.1% growth year on year.

Revenue Per User

Average revenue per user (ARPU) is a critical metric to track for every consumer internet product and for Revolve it measures how much customers spend per order.Revolve ARPU

Revolve’s ARPU growth has been decent over the last two years, averaging 18.5%. The ability to increase price while still growing its user base shows the value of Revolve’s platform. This quarter, ARPU grew 14.6% year on year, reaching $138.90 for each of the active buyers.

User Acquisition Efficiency

Unlike enterprise software that is typically sold by sales teams, consumer internet businesses like Revolve grow by a combination of product virality, paid advertisement or incentives.

It is expensive for Revolve to acquire new users, with the company spending 49.7% of its gross profit on marketing over the last year. This level of sales and marketing spend efficiency indicates Revolve is not highly differentiated and points to Revolve likely having to continue to invest to maintain growth.

Earnings & Free Cash Flow

Investors typically look at a company’s operating income to get a sense of how profitable a core business is. Adjusted EBITDA is the most common profitability metric for consumer internet companies, similar to operating profit, but removes various one time or non-cash expenses to give a more normalized measure of profitability.

Revolve's EBITDA was $31.5 million this quarter, which translates to a 11.1% margin. Over the last twelve months, the company has exhibited strong profitability with average EBITDA margins of 12.4%.

Revolve Adjusted EBITDA Margin

If you follow StockStory for a while, you know that we put an emphasis on cash flow. Why, you ask? We believe that in the end cash is king, as you can't use accounting profits to pay the bills. Revolve's free cash flow came in at $52.7 million in Q1, up 62.3% year on year.

Revolve Free Cash Flow

Revolve has generated $80.3 million in free cash flow over the last twelve months, a 8.06% of revenues. This FCF margin is a result of Revolve efficient business model, and provides it with the optionality to further invest in the business.

Key Takeaways from Revolve's Q1 Results

With a market capitalization of $3.23 billion Revolve is among smaller companies, but its more than $270.6 million in cash and positive free cash flow over the last twelve months give us confidence that Revolve has the resources it needs to pursue a high growth business strategy.

We were impressed by how strongly Revolve outperformed analysts’ revenue expectations this quarter. And we were also excited to see the really strong revenue growth. Zooming out, we think this was a good quarter, but the market was likely expecting more and the company currently trades at $26.9 per share.

Is Now The Time?

Revolve may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. Although we have other favorites, we understand the arguments that Revolve is not a bad business. We would expect growth rates to moderate from here, but its revenue growth has been solid, over the last three years. And while its sales and marketing efficiency is sub-average, the good news is its EBITDA margins indicate very healthy profitability of its business.

The market is certainly expecting long term growth from Revolve given its EV/EBITDA ratio based on the next twelve months of 22.7x is higher than many other consumer internet companies. There are things to like about Revolve and there's no doubt it is a bit of a market darling, at least for some. But it seems that there is a lot of optimism already priced in and we are wondering whether there might be better opportunities elsewhere right now.

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