Revolve stock jumped more than 22 percent in after-hours trading Wednesday after delivering record second-quarter earnings of 20 cents per share, record adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of $21 million, record operating cash flow of $53 million and its fastest quarterly inventory turns in six years, with only a 12 percent overall net sales dip to $142.8 million.
Earnings far outpaced Wall Street expectations of 2 cents per share, while net sales beat estimates of $119.4 million.
In a Nutshell: The online-only fashion brand geared toward millennial and Gen Z shoppers increased its active consumer base 13 percent on a year-over-year basis to 1.53 million. Active shoppers are defined as unique customer accounts that made at least one purchase in the preceding 12 months.
While total orders placed in the quarter only dropped 10 percent to 1.2 million, average order value (AOV) dipped 26 percent from $275 to $204 per customer. As previously announced in its first quarter, Revolve pivoted to sell more lower-margin products within “at home” categories such as beauty, loungewear, intimates and accessories to capture new customers, causing the AOV decline.
But the more diverse product mix is what Revolve hopes will help the company in the long run. For instance, in July, the company generated year-over-year growth rate in net sales of approximately 30 percent in denim, 80 percent in intimates and nearly 100 percent in accessories.
These categories will be important if the company’s largest product category, dresses, continues to be a weak spot for Revolve. While net sales trends in dresses have improved in recent months, year-over-year comparisons remain negative, with the category share of total Revolve brand sales falling six percentage points.
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Total inventory for Revolve adds up to $64.5 million in the second quarter. The better-than-expected net sales combined with Revolve’s reduced inventory buys led to a 37 percent decrease in the company’s inventory balance year-over-year at its Revolve and Forward brands.
“Our Revolve segment inventory turned approximately 30 percent faster year over year, serving as a key driver of our strong cash flow, illustrating the effectiveness of our buying strategy to efficiently manage inventory dynamics in such an uncertain environment,” said Revolve co-founder and co-CEO Mike Karanikolas. “We are confident that our agile team, flexible business model and strong balance sheet position us well to navigate through what continues to be an uncertain environment.”
Fulfillment costs totaled $3.8 million, or 2.7 percent of net sales, as compared to 3.3 percent in the second quarter of 2019. This was an improvement over Revolve’s initial expectations, particularly since a lower AOV is typically a headwind for fulfillment costs as a percentage of net sales.
Selling and distribution costs, which consist primarily of shipping, merchant processing fees and customer service were $19.1 million, or 13.3 percent of net sales, a decrease from 14.6 percent from the year-ago quarter. The company attributes the decrease to a lower returns rate.
Cash and equivalents as of June 30 were $150.8 million, an increase of $47.2 million from $103.6 million as of March 31, despite the company’s repayment of $6 million on its revolving credit line during the second quarter. As of June 30, $24 million remained drawn on the revolving credit line, a decrease from $30 million as of March 31.
Revolve declined to provide traditional guidance due to the Covid-19 pandemic.
As a result of the better-than-expected net sales in the second quarter, the company has rolled back many of its Covid-19-related cost containment actions commensurate with improved net sales trends compared to its initial working assumption. Effective Aug. 1, the company returned the majority of its furloughed employees to full schedule and salary.
Net Sales: In the second quarter, net sales decreased 12 percent to $142.8 million, with monthly net sales improving throughout the quarter. In fact, June was Revolve’s first month of positive year-on-year growth in net sales since the pandemic began.
Revolve segment net sales were $126.9 million, a year-over-year decrease of 11.8 percent, while sales at its sister luxury e-commerce brand Forward were $15.9 million, a year-over-year decrease of 11.6 percent.
International net sales increased 3 percent year-over-year, outperforming the domestic net sales decline of 15 percent year-over-year. By territory, Western Europe showed strong growth in net sales, partially offset by a more challenging comparison in Asia.
The positive year-over-year net sales growth in June has carried through to July and early August with the quarter-to-date period showing “low-single digit growth” on a year-over-year basis. The Revolve team doesn’t expect significant growth beyond these current levels.
In July, net sales in the beauty category increased more than 100 percent for the fourth consecutive month, while sales of other “at home” categories also increased “significantly” year-over-year and benefited from newly sourced and expanded relationships with third-party vendors and owned brand suppliers.
Net Earnings: Net income for Revolve in the second quarter was $14.2 million, an increase of 12 percent. Diluted earnings per share in the quarter were 20 cents, up from a non-adjusted loss of 57 cents per share and adjusted diluted earnings of 18 cents per share in the second quarter of 2019.
Adjusted EBITDA reached $20.9 million, a 10 percent increase from the year-ago period.
Consolidated gross margin was 50.5 percent for the second quarter, a decrease of approximately 530 basis points from the 55.8 percent the prior year and directionally consistent with the company’s commentary last quarter predicting gross margin headwinds for the balance of 2020. Gross profit dipped 20 percent in the quarter to $72 million.
CEO’s Take: “We’re very hopeful that our shift in product mix can represent an expanded wallet share,” Michael Mente, co-CEO and director of Revolve, said in an earnings call. “So in addition to performing really well in high return categories like dresses, we hope over the longer term that our gains in beauty and some other categories also become drivers for us and that would have an impact on return rate. And there is a few other things we’ve done on the return rate side as well, but I think high level, it’s too early to say.”