Revolve (RVLV)

Online fashion retailer Revolve (NASDAQ:RVLV) met Wall Street’s revenue expectations in Q1 CY2025, with sales up 9.7% year on year to $296.7 million. Its GAAP profit of $0.16 per share was 14.7% above analysts’ consensus estimates.

Company Overview

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

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.

Examining a company’s long-term performance can provide clues about its quality. Any business can have short-term success, but a top-tier one grows for years. Over the last three years, Revolve grew its sales at a sluggish 5.1% compounded annual growth rate. This fell short of our benchmark for the consumer internet sector and is a rough starting point for our analysis.

This quarter, Revolve grew its revenue by 9.7% year on year, and its $296.7 million of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 7.9% over the next 12 months. Although this projection suggests its newer products and services will fuel better top-line performance, it is still below the sector average.

Buyer Growth

As an online retailer, Revolve generates revenue growth by expanding its number of users and the average order size in dollars.

Over the last two years, Revolve’s active customers , a key performance metric for the company, increased by 7.4% annually to 2.7 million in the latest quarter. This growth rate is slightly below average for a consumer internet business. If Revolve wants to reach the next level, it likely needs to enhance the appeal of its current offerings or innovate with new products.

In Q1, Revolve added 152,000 active customers , leading to 6% year-on-year growth. The quarterly print was lower than its two-year result, suggesting its new initiatives aren’t accelerating buyer growth just yet.

Revenue Per Buyer

Average revenue per buyer (ARPB) is a critical metric to track because it measures how much customers spend per order.

Revolve’s ARPB fell over the last two years, averaging 4% annual declines. This isn’t great when combined with its weaker active customers performance. If Revolve tries boosting ARPB by taking a more aggressive approach to monetization, it’s unclear whether buyer growth would be sustainable.

This quarter, Revolve’s ARPB clocked in at $109.77. It grew by 3.5% year on year, slower than its buyer growth.

For online retail (separate from online marketplaces) businesses like Revolve, gross profit tells us how much money the company gets to keep after covering the base cost of its products and services, which typically include the cost of acquiring the products sold, shipping and fulfillment, customer service, and digital infrastructure.

Revolve’s gross margin is slightly below the average consumer internet company, giving it less room to invest in areas such as product and marketing to grow its presence. As you can see below, it averaged a 52.5% gross margin over the last two years. That means Revolve paid its providers a lot of money ($47.53 for every $100 in revenue) to run its business.

In Q1, Revolve produced a 52% gross profit margin, in line with the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs have been stable and it isn’t under pressure to lower prices.

Consumer internet businesses like Revolve grow from a combination of product virality, paid advertisement, and incentives (unlike enterprise software products, which are often sold by dedicated sales teams).

It’s expensive for Revolve to acquire new users as the company has spent 52.1% of its gross profit on sales and marketing expenses over the last year. This inefficiency indicates that Revolve’s product offering can be easily replicated and that it must continue investing to maintain an acceptable growth trajectory.

Investors frequently analyze operating income to understand a business’s core profitability. Similar to operating income, EBITDA is a common profitability metric for consumer internet companies because it removes various one-time or non-cash expenses, offering a more normalized view of profit potential.

Revolve has managed its cost base well over the last two years. It demonstrated solid profitability for a consumer internet business, producing an average EBITDA margin of 5.3%. This result was particularly impressive because of its low gross margin, which is mostly a factor of what it sells and takes huge shifts to move meaningfully. Companies have more control over their operating margins, and it’s a show of well-managed operations if they’re high when gross margins are low.

Analyzing the trend in its profitability, Revolve’s EBITDA margin decreased by 5.8 percentage points over the last few years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, Revolve generated an EBITDA profit margin of 6.5%, up 1.6 percentage points year on year. The increase was encouraging, and because its EBITDA margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, R&D, and administrative overhead.

We track the change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

Sadly for Revolve, its EPS declined by 19.5% annually over the last three years while its revenue grew by 5.1%. This tells us the company became less profitable on a per-share basis as it expanded due to non-fundamental factors such as interest expenses and taxes.

We can take a deeper look into Revolve’s earnings to better understand the drivers of its performance. As we mentioned earlier, Revolve’s EBITDA margin improved this quarter but declined by 5.8 percentage points over the last three years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

In Q1, Revolve reported EPS at $0.16, up from $0.15 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Revolve’s full-year EPS of $0.69 to grow 1.9%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Revolve has shown mediocre cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 2.4%, subpar for a consumer internet business.

Taking a step back, we can see that Revolve’s margin dropped by 6 percentage points over the last few years. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the trend continues, it could signal it’s in the middle of a big investment cycle.

Revolve’s free cash flow clocked in at $42.8 million in Q1, equivalent to a 14.4% margin. This cash profitability was in line with the comparable period last year and above its two-year average.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Revolve is a profitable, well-capitalized company with $300.8 million of cash and $44.57 million of debt on its balance sheet. This $256.3 million net cash position is 18.8% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We were impressed by how significantly Revolve blew past analysts’ EPS and EBITDA expectations this quarter. On the other hand, its revenue was in line. Overall, this print was mixed. The market seemed to be hoping for faster growth, and the stock traded down 8.1% to $17.40 immediately following the results.

Updated: May 21, 2025 at 10:18 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

Revolve falls short of our quality standards. For starters, its revenue growth was uninspiring over the last three years, and analysts don’t see anything changing over the next 12 months. And while its sturdy EBITDA margins show it has disciplined cost controls, the downside is its projected EPS for the next year is lacking. On top of that, its declining EPS over the last three years makes it a less attractive asset to the public markets.

Revolve’s EV/EBITDA ratio based on the next 12 months is 18.8x. At this valuation, there’s a lot of good news priced in - we think there are better opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $21.73 on the company (compared to the current share price of $20.47).

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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