Revolve (NYSE:RVLV) Beats Q4 Sales Targets, Shows User Growth

Full Report / February 23, 2023
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Online fashion retailer Revolve Group (NASDAQ: RVLV) reported Q4 FY2022 results beating Wall St's expectations, with revenue up 8.07% year on year to $259.2 million. Revolve made a GAAP profit of $7.87 million, down on its profit of $29.4 million, in the same quarter last year.

Revolve (RVLV) Q4 FY2022 Highlights:

  • Revenue: $259.2 million vs analyst estimates of $240.4 million (7.8% beat)
  • EPS: $0.11 vs analyst estimates of $0.10 (14.4% beat)
  • Free cash flow was negative $12.3 million, down from positive free cash flow of $8.62 million in previous quarter
  • Gross Margin (GAAP): 51.4%, down from 54.8% same quarter last year
  • Trailing 12 months Active Customers : 2.34 million, up 0.5 million 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 25.5% annually. 

Revolve Total Revenue

This quarter, Revolve beat analyst estimates but reported a mediocre 8.07% year on year revenue growth.

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 21.7% annually to 2.34 million users. This is a strong growth for a consumer internet company.

Revolve Trailing 12 months Active Customers

In Q4 the company added 0.5 million active buyers, translating to a 27.2% 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 17.3%. The ability to increase price while still growing its user base shows the value of Revolve’s platform. But this quarter, ARPU shrank 15% year on year, settling in at $110.75 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 relatively expensive for Revolve to acquire new users, with the company spending 46.5% of its gross profit on marketing over the last year. This level of sales and marketing spend efficiency indicates Revolve has to compete for users 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 came in at $14.1 million this quarter, which translated to a 5.46% margin. Over the last twelve months Revolve has shown a solid, above-average profitability for a consumer internet business with average EBITDA margins of 8.11%.

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 burned through $12.3 million in Q4, increasing the cash burn by 88.2% year on year.

Revolve Free Cash Flow

Revolve has generated $18.3 million in free cash flow over the last twelve months, a 1.66% 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 Q4 Results

With a market capitalization of $1.87 billion Revolve is among smaller companies, but its more than $234.7 million in cash and positive free cash flow over the last twelve months put it in a very strong position to invest in growth.

We were impressed by how strongly Revolve outperformed analysts’ revenue expectations this quarter. And we were also glad to see the user growth. Overall, we think this was decent quarter, that could leave shareholders feeling positive. The company is up 2.22% on the results and currently trades at $25.27 per share.

Is Now The Time?

When considering Revolve, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. Although Revolve is not a bad business, it probably wouldn't be one of our picks. Its revenue growth has been solid, though we don't expect it to maintain historical growth rates. But while its user growth has been strong, unfortunately its sales and marketing efficiency is sub-average.

At the moment Revolve trades at next twelve months EV/EBITDA 20.0x. We don't really see a big opportunity in the stock at the moment, but in the end beauty is in the eye of the beholder. And if you like the company, it seems that Revolve doesn't trade at a completely unreasonable price point.

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