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Revolve Reported a Strong Q3 But There Could Be Trouble Ahead

Millennial e-tailer Revolve Group Inc. is still resonating with its core 20- and 30-something customer base, but there’s a hint of a possible hiccup or two down the road following the company’s third-quarter earnings report.

In a Nutshell: By all accounts, e-commerce apparel platform Revolve is performing well and carries zero debt. The company said net cash generated from operating activities was $9.2 million, representing a year-over-year increase of 279.7 percent. Free cash flow jumped 308.8 percent to $7.4 million. Cash and cash equivalents of $51.1 million represented an increase of 14 percent from June 30, 2019.

Revolve said it has more than 1.4 million active customers on a trailing 12-month basis, or a year-over-year increase of 33.1 percent. Nearly 1.2 million orders were placed year-over-year, representing a 25.7 percent increase. And the average order value was $275, a year-over-year decline of 1.8 percent but no change from the second quarter.

The cause for concern is Revolve’s decision to narrow its guidance at the high end for the fiscal year, now projecting $598 million to $606 million, versus prior forecasts of $598 million to $608 million.

On a near-term basis, higher inventory levels could lead to margin pressures, Cowen and Co. analyst Oliver Chen noted. Those pressures, he said, are “somewhat self-induced, rather than a reflection of the environment.”

Inventory in the quarter was up 31 percent versus sales growth that was up 21 percent. Moderating demand for company-owned brands requires monitoring, Chen said.

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Jefferies analyst Randal J. Konik expects Revolve’s “disruptive commerce and marketing platform [to lead] to share gains in a large and fragmented fashion industry.” What he also liked about the quarter was 15 percent growth in its international business in Australia, the U.K. and Western Europe. But he also didn’t like the rising inventory levels, much of it from company-owned brands, which he said “may take some time to work through in the coming quarters.”

Net Sales: For the quarter ended Sept. 30, net sales rose 22.5 percent to $154.2 million from $125.9 million.

By merchandise segment, sales at Revolve rose 23.7 percent to $135.4 million. This curated assortment focuses on full-price premium apparel and footwear, accessories and beauty products from emerging, established and owned brands. Sales at Forward were up 14.2 percent to $18.8 million. Forward focuses on iconic and emerging luxury brands. Both Revolve and Forward leverage the same operating platform.

For the quarter, gross margin rose 89 basis points, or up 53.6 percent from the year-ago period.

Earnings: Net income jumped 33.9 percent to $9.56 million, or 13 cents a diluted share, from $7.1 million, or 10 cents, a year ago.

For the full fiscal year ending Dec. 31, the company is projecting net sales at $598 million to $606 million, or a growth rate of between 20 percent to 22 percent.

CEO’s Take: Michael Mente, co-founder and co-CEO, said, “Our ability to drive profitable growth at scale illustrates our unique business model and the deep relationship we have established with our growing customer base.”

Mike Karanikolas, also co-founder and co-CEO, said, “We delivered strong growth in net sales, profitability and cash flows in [the third quarter], while continuing to invest in the large market opportunity ahead of us.”