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Revolve Blames Coronavirus for Lower Sales Outlook

Revolve’s Q3 inventory challenges are now compounded by a new threat: coronavirus.

In a Nutshell: The millennial-friendly fashion company slowed down its intake of new inventory in the fourth quarter after warning of possible margin issues in Q3. This impacted the company’s conversion and revenue growth, Revolve co-founder and co-CEO Mike Karanikolas said in a quarterly conference call on Tuesday, despite what he characterized as “strong” consumer interest and traffic growth.

To address the inventory situation, Revolve implemented a “higher-than-normal” mix of markdowns in FY19, the company said. As a result, gross margin is expected to continue its fall in FY20, landing somewhere below the 52.9 percent recorded in Q4, according to Revolve.

Revolve reduced inventory growth to 15 percent in Q4 after posting an expansion of 30 percent year-over-year growth in Q3, the CEO said. Year-over-year receipts were “essentially flat” in Q4 but margin and conversion impacts will likely continue into the first half of 2020 as Revolve works its way through existing inventory.

On top of these inventory issues, Revolve indicated that it expects to see delays in shipments from China due to the coronavirus outbreak, officially known as COVID-19. As a result, Revolve said it has reduced its FY20 sales outlook by 1 percent to 3 percent in order to account for supply constraints from third-party brands sourcing out of China.

Revolve described the situation as “fluid and uncertain” and expects to lose business due to lower consumer demand in the region.

Sales: In the fourth quarter, sales increased by 16 percent to $147.56 million, below the Wall Street estimate of $152 million. Margins also fell from 54.1 percent in the comparable period to 52.9 percent in Q4.

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For the full fiscal year, Revolve reported net sales of $601 million, up 21 percent year-over-year. In FY20, Revolve said it estimated growth would fall between 13 percent and 17 percent, with revenue in the range of $679 million to $703 million.

Revolve’s active customers in FY19 grew to 1.488 million compared to 1.175 million in 2018, and total orders placed for the year grew to 4.715 million from 3.71 million. However, Revolve’s average order value fell from $279 to $275 over the same period.

Earnings: Profits totaled $78.1 million for Revolve in the fourth quarter, leading to net income of $8.4 million or 12 cents per share, edging out Wall Street estimates of 11 cents per share.

Using EBITDA instead of GAAP net income due to the uncertainty and variability of expenses and non-routine items, Revolve reported $55.6 million in earnings for FY19, an increase of 20 percent.

Looking to FY20, Revolve’s outlook is for EBITDA to grow between 1 percent and 10 percent for a range of $56 million at the low end and $61 million at the high end.

CEOs Take: Revolve co-founder Michael Mente said: “We are proud to extend our long track record of achieving top-line growth and profitability, delivering net sales growth of over 20 percent, continued growth in profitability and exceptional cash flow in 2019.”

“We are excited about our 2020 initiatives to continue building on the recent momentum in the Forward segment and international markets, while further investing in the core Revolve segment, including enhancing the owned brands platform and continuing to innovate in marketing, technology and customer experience,” Karanikolas added.