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Revolve Feels the Heat From Higher Return Rates, Fuel Surcharges

Revolve saw a record $290.1 million in net sales in the second quarter, increasing 27 percent year-over-year on net income of $16.3 million.

Stock dropped more than 16 percent in after-hours trading on Wednesday after sales and earnings per share both missed Wall Street projections in the wake of increased cost pressures related to return rates and fuel surcharges. Revolve stock was trading down 13.03 percent Thursday afternoon at $26.91 per share.

In a Nutshell: In previewing the third quarter, net sales in July increased approximately 10 percent year-over-year amid the current uncertain macroeconomic environment, with the millennial and Gen Z-loved fashion brand referring to both inflation and low consumer sentiment as factors slowing growth.

“We estimate that Revolve’s average household income could fall in the $60k-$75k range, and core customers are aspirational shoppers who typically allocate an outsized portion to discretionary apparel,” Oliver Chen, senior equity research analyst at Cowen, wrote in a research note. “We believe these customers are likely to pull back in spending in the near term as macro uncertainties loom.”

While sales growth has slowed, Revolve is doing better in acquiring customers. The company saw quarterly growth of approximately 124,000 active customers during the second quarter of 2022, the highest ever for a second quarter.

Total active customers reached 2.2 million, a 39 percent year-over-year increase. For the trailing 12-month period, net sales per active customer were $488, a 9 percent comparable increase.

Total orders placed shot up 27 percent to 2.2 million, growing from 1.8 million in the year-ago period. Average order value (AOV) increased 19 percent to $303 per customer from $255 in the 2021 second quarter.

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Mike Kazanikolas, co-CEO, co-founder, and chairman of the board at Revolve, said in an earnings call that cost pressures came largely from customer shipping expenses, specifically higher return rates and fuel surcharges. Fuel surcharges in the second quarter were more than 4x what they were in the prior year, and increased 60 percent for the first quarter.

In particular, Revolve experienced a higher return rate year-over-year with normalizing product mix being a key contributor as dresses grew to 32 percent of net sales in the second quarter of 2022 from 24 percent in the second quarter of 2021.

Chief financial officer Jesse Timmermans said the return rates are trending above 2019 levels. He also indicated that the company is factoring in that return rates will remain elevated throughout 2022.

Inventory was $208.5 million, an increase of 75 percent from the inventory balance of $118.8 million as of June 30, 2021.

“Our inventory investments are reflective of our efforts to keep pace with the robust consumer demand we had experienced over the past several quarters,” Timmermans said in the call. “However, with the demand trend shifting during the second quarter, as discussed, our inventory balance ended the quarter in a place that is higher than we would like. While we feel good about the quality of inventory, the overall balance is elevated, and we are working diligently to bring it back in balance.”

Revolve will have more room to complete this balancing act after opening its first East Coast warehouse in Shoemakersville, Pa.

“Over time the benefits will be on the outbound, being able to shift to customers closer from that distribution center, versus shipping all the way from L.A. to the East Coast. It’s not going to be 100 percent of the inventory, but there is a small impact there.”

Gross margin was 55.9 percent, an increase of 29 basis points (0.29 percentage points) year-over-year from last year’s 55.6 percent margin, marking the company’s highest-ever gross margin for a second quarter.

The margin increase is driven largely by strong full-price selling, a favorable mix shift and a higher owned-brands mix of net sales year-over-year. It was partially offset by inventory valuation adjustments due to the higher inventory levels.

The Revolve brand generated a gross margin of 57.5 percent in the quarter, up from the 57 percent rate in the prior-year quarter, while the company’s luxury fashion segment FWRD had a gross margin of 47.2, down from the year-ago period’s 49.4 percent.

Cash and cash equivalents as of June 30, 2022 were $237.9 million, an increase of $18.3 million, from June 30, 2021. Revolve’s balance sheet remains debt free.

Net Sales: Total net sales were a record $290.1 million, an increase of 27 percent year-over-year over the $228.6 million taken in during the 2021 second quarter.

Revolve segment net sales were $244.7 million, an increase of 30 percent year-over-year from $188.8 million in the year-ago period.

FWRD saw net sales of $45.3 million, an increase of 14 percent year-over-year from $39.8 million. FWRD faced a much more difficult growth comparison against the prior-year comparable period as net sales had increased 151 percent year-over-year in the second quarter of 2021.

Domestic net sales increased 30 percent year-over-year to $240.9 million in the quarter, up from $185.4 million in the 2021 period.

International net sales increased 14 percent year-over-year to $49.1 million, compared to $43.2 million generated in last year’s second quarter. The international results reflect foreign currency headwinds resulting from the stronger U.S. dollar and temporary headwinds in China due to Covid-19 preventative measures.

Net Earnings: Second-quarter net income was $16.3 million, a year-over-year decrease of 48 percent from the prior-year quarter’s $31.5 million. Revolve attributed the dip to meaningful differences in its effective tax rate—which jumped to 23 percent from 3 percent in the prior-year period—and the growth in operating expenses.

Diluted earnings per share (EPS) totaled 22 cents, a year-over-year decrease of 48 percent from 42 cents per share in the 2021 second quarter.

Adjusted EBITDA was $26.9 million, which dipped 24 percent from $35.4 million a year ago.

CEO’s Take: Co-CEO, co-founder and director Michael Mente also talked about the company’s recent FWRD Buyback launch offering luxury handbag resale.

“Our proprietary resale program dedicated to circular luxury shopping, FWRD Buyback extends [the] life cycle of high-end designer bags from coveted brands, allowing our customers to exchange their past purchases for credit to shop our full product offering,” Mente said. “It enables us to expand our customer touch points and deepen our relationship with her while further strengthening the value proposition for our loyalty program members, since in addition to the credit loyalty members earn up to 2,000 points for eligible handbags they exchange.”

Mente said initial feedback from Revolve’s luxury brand partners has been “outstanding,” with the program driving more than 40 percent sell-through of its initial inventory in the first couple of weeks after its July launch.