Despite net sales tanking 20 percent in March due to COVID-19, first-quarter net sales at millennial- and Gen Z-driven fashion retailer Revolve increased by 6 percent to $147.08 million, outperforming Wall Street expectations and sending shares up as much as 13.39 percent in after-hours trading Wednesday.
The trendy e-commerce merchant expects more sales of “at home” goods such as loungewear and beauty products to be part of the norm as shelter-in-place mandates continue, cutting into long-term gross margins but carving out the potential to develop deeper customer relationships over time.
In a Nutshell: Active customers at Revolve, defined as unique customer accounts that made at least one purchase in the preceding 12 months, increased 21 percent to 1.53 million in the first quarter of 2020 from 1.26 million.
The company expects gross margin for the full year to fall below the 48.6 percent gross margin reported for the first quarter of 2020, largely due to three factors: a further expected reduction of net sales from Revolve’s owned brands in 2020, the shift to lower-margin product categories such as “at home” goods like beauty and loungewear products, and an increased promotional environment industry-wide as retailers seek to shed excess inventory.
“The great thing is that a lot of the beauty business is really driven by reorders,” co-CEO Michael Mente said in the company’s quarterly earnings call. “So we’ve been able to offer a whole range of skin care, hair care, self-care tanning across the board, and we’ve been able to replenish and chase into that business. So that beauty business is very, very favorable for us in terms of lack of markdowns and also very, very low return rates. I think this has been an awesome opportunity where we’ve really introduced our customer to another aspect of our business.”
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Although Revolve is digital only, the company experienced the pains of its traditional apparel counterparts, forced to align its cost structure with the reduced consumer demand in the current environment. The company adjusted variable costs in fulfillment and customer service costs by reducing work hours, significantly reduced non-personnel operating expenses and significantly moderated marketing investments.
In total, the full-year 2020 capital expenditure target has been cut 60 percent from an initial projected $5 million to a new estimate of $2 million.
Additionally, the company has reduced work schedules, lowered salaries, instituted furloughs and conducted an unspecified number of layoffs. Mente and co-CEO Mike Karanikolas have had their salaries reduced to $1 each while chief operating officer David Pujades and chief financial officer Jesse Timmermans will take salary cuts of 50 percent.
Due to the unpredictability associated with COVID-19, Revolve is not providing net sales or adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) guidance for future quarters or 2020. Previously, Revolve’s full-year outlook called for EBITDA to grow between 1 percent and 10 percent for a range of $56 million to $61 million.
In March, Revolve drew down $30 million from its line of credit. The fashion retailer has $103.6 million in net cash and cash equivalents as of March 31.
The company pledged to donate more than 200,000 medical-grade masks to healthcare workers, and has already donated more than 90,000 masks to hospitals and clinics across the country.
Sales: In the first quarter, net sales increased by 6 percent to $147.08 million, beating Wall Street estimates of $139 million. Average order value (AOV) remained flat at $259 per customer.
Revolve segment net sales were $124.5 million, a year-over-year increase of 1 percent, while sales at its sister luxury e-commerce brand Forward (FWRD) tallied $21.6 million, marking a 47 percent uptick from the prior-year period.
The first quarter began strong with year-over-year growth, as net sales across January and February jumped more than 20 percent. But after a strong first week of March, COVID-19 impacts resulted in year-over-year decreases in net sales of nearly 50 percent through the latter part of March when the bottom fell out of the economy. AOV in the first two months totaled $266, dropping to $240 in May.
For the full month of April, which is not counted in the first-quarter earnings report, net sales decreased approximately 40 percent year over year. The company indicated the drop was bigger than a typical month as the revenue-driving #REVOLVEFestival event, usually held in the Coachella Valley during April, was postponed due to the pandemic. AOV tumbled to $204 per person during the month.
For the first 10 days of May, net sales improved to a roughly 25 percent year-over-year decline.
In total, Revolve said the shift in category net sales mix throughout April and May will result in a “meaningful” AOV decrease in the near term.
Earnings: Net income has dipped 16 percent year over year from $4.96 million to $4.15 million in the first quarter of 2020. GAAP diluted earnings per share (EPS) declined 14 percent from seven cents per share to six cents per share in the same time period.
Adjusted EBITDA plummeted at a much greater pace (34 percent) to $5.6 million during the first quarter, from $8.5 million in the comparable frame.
Gross profit, which does not count fulfillment, selling, marketing and distribution costs, improved slightly to $70.95 million from $70.75 million.
The 48.6 percent gross margin in the quarter represents a decline in 290 basis points from the 51.5 percent gross margin in the year-ago period.
CEOs’ Take: Karanikolas highlighted Revolve’s efforts in keeping its employees safe, noting that corporate staff successfully transitioned to working from home, while distribution center staff have their temperatures checked daily, wear gloves and masks, and practice social distancing. Facilities undergo frequent deep cleaning.
“Ensuring the health and safety of employees is our top priority,” Karanikolas said. “The team has done an outstanding job transitioning to working remotely, where possible, and safeguarding employees where their roles require them to remain on site, all while staying laser focused on maintaining exceptional service for our valued customers.”
While April and May sales totals haven’t boded well for total second quarter numbers so far, Karanikolas highlight the “sequential improvement in the year-over-year net sales declines for each of the past four weeks.”
Co-CEO Mente showed faith in the company’s ability to ride trends: “We believe the pandemic will further accelerate the shift to consumer spending online. We are confident in our ability to manage through this environment and thrive over the long term.”