Weaker Consumer Pinches Revolve’s Near-Term Sales Prospects; Firm’s Long-Term Narrative Compelling

Business Strategy and Outlook

The Revolve Group has carved out an interesting competitive niche in the attainable luxury category, leaning heavily into the strengths of the e-commerce channel–breadth of selection, scalability, and ubiquity of access–to reach a mobile-first, millennial and Gen Z audience across its online properties. With approximately 50,000 stock-keeping units (SKUs) sitting on its Revolve and Forward (luxury) marketplaces at any given time, and with 900 new styles launching weekly, the firm has positioned itself as an “online source for discovery and inspiration,” capturing almost 40% of apparel wallet share among its base of 2.04 million active buyers as of the first quarter of 2022. The firm’s strategy is viewed positively, with an ongoing shift toward mobile and e-commerce channels figuring to provide meaningful growth tailwinds in the near to medium term. Roughly 65% of Revolve’s sales came through mobile devices in 2021, more than double the volume of U.S. e-commerce retail sales in aggregate (35%), while e-commerce penetration continues its inexorable rise in the U.S., seeing apparel category sales approach a 40% online mix in 2021.

Revolve maintains a handful of growth levers that should allow it to capture more than its fair share of industry growth. The addition of beauty, athleisure, and casualwear sales layers, snowballing momentum from the nascent loyalty program, and a growing international business represent the lowest hanging fruit. Growth remains the top priority, with Revolve estimating just 3% penetration among its target demographic in the U.S., and return on advertising spending continues to look alluring. Further, a growing mix of private-label fare should drive moderate near-term gross margin expansion, as the retailer surgically rebuilds inventory around its 24 proprietary brands after pulling back amid pandemic concerns.

Finally, considering management’s openness about its pursuit of a tuck-in brand acquisition, the pursuit of a strong label in underpenetrated offerings like luxury, beauty, or menswear could bolster the firm’s competitive position and help capture incremental wallet share.

Financial Strength

Revolve’s financial strength is assessed as sound. The firm has generated positive operating cash flows in each of the last four years and maintained a $271 million cash and equivalents balance as of the end of the first quarter of 2022. Given the firm’s early stage in its growth cycle, the decision to eschew secured debt and the restrictions it bears is viewed as both prudent and consistent with firms across the coverage in similar stages of their respective lifecycles. With a net cash position and minimal interest cost, management is effectively unencumbered in its pursuit of strategic M&A, internal investment opportunities, and, down the line, shareholder distributions. These opportunities, in the order outlined above, represent the allocative priorities of the firm in the near to medium term.

With a highly cash generative model, averaging 9.5% free cash flow to sales over the next five years, shareholder pressure for distributions is expected to build at approximately the same time that the firm encounters a step-down in sales growth, most likely in the mid-2020s. While the forecast anticipates share repurchases and the initiation of a cash dividend as early as 2023 and 2024, respectively, this horizon could be pushed backwards by a brand acquisition (purportedly high on management’s wish list) and would require an amendment to the outstanding credit facility, in the case of the latter.

As growth slows, the preferable course of action would be for the firm to add leverage to optimize its capital structure and flag modest conflict of interest to that effect – management controls more than 90% of voting power through its Class B shares, and studies suggest that owners tend to assume less than optimal leverage, attributable to a combination of wealth concentration and risk aversion. Any impact on valuation to that effect would fall in the latter half of the decade but remains worth monitoring longer-term.

Bulls Say’s

Revolve offers attractive exposure to a quickly growing e-commerce apparel segment, representing one of only a handful of profitable pure-play online only stores.
Increasing private-label fare should provide a nearterm boost to gross margin performance and can be used to fill holes in the marketplace’s product assortment as the firm continues its category expansion.
The loyalty program should see better traction as in person events return, offering an attractive vehicle to gain wallet share and encourage cross-shopping Revolve and Forward marketplace properties. .

Company Profile

The Revolve Group is an emerging e-commerce retailer, selling women’s dresses, handbags, shoes, beauty products, and incidentals across its marketplace properties, Revolve and Forward. The platform is built to suit the “next generation customer,” emphasizing mobile commerce, influencer marketing, and occupying an aspirational but attainable luxury niche. With $891 million in 2021 sales, the firm sits outside the top 20 apparel retailers (by sales) in the U.S. but has consistently generated top-line growth north of 20%-25% as the industry continues to favor digital channels. The firm generates approximately 20% of sales from private-label offerings, while focusing on building an inventory of unique products from emerging fashion brands with less than $10 million in annual sales.

(Source: MorningStar)

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