Revolve, the online fashion retailer that gears itself to millennial and Gen Z consumers, saw net sales dip a slight 2 percent to $151 million. But as the company continues to expand its product line across popular beauty and loungewear categories, it also saw record net income of $19 million and record earnings at 27 cents per share marked by its highest full-price sales for a third quarter in more than 10 years.
In a Nutshell: While third quarter sales had a slight decline, the period began with low-single digit growth in July and August that was offset by a larger single-digit decline in September.
The company’s active customer base actually increased 5 percent to 1.5 million, but orders placed dropped 4 percent to $1.1 million and average order value (AOV) dipped 16 percent from $275 to $232.
The year-over-year decline in AOV was primarily driven by a shift in net sales mix to “at home” product categories, such as beauty and loungewear, according to Jesse Timmermans, Revolve’s chief financial officer. Beauty saw more than a 100 percent increase in year-over-year net sales for the second consecutive quarter. Revolve had made it a point to pivot toward selling more in these “at home” categories at the start of the Covid-19 pandemic to match shopper demand, but these items typically bear lower average price points.
For the third straight quarter, the company has seen a decline in net sales in its largest category, dresses, which typically carry higher AOV. At the same time, Revolve reduced markdowns in the quarter to drive stronger margins after increasing markdowns in the second quarter to offload accumulating inventory.
“Occasion wear product categories faced the most significant headwinds since many special occasions remain on pause due to social distancing concerns, and as we worked through our markdown inventory in those categories in the second quarter,” said Mike Karanikolas, co-CEO and director of Revolve in the company earnings call.
“To provide some context regarding the impact of reduced markdown inventory on net sales in the third quarter, our largest category, dresses, is a good example,” he added. “If year-over-year growth in markdown sales of dresses alone had remained consistent between the second quarter of 2020 and the third quarter of this year, our total net sales would have actually increased year-over-year in the third quarter.”
Although Revolve temporarily pulled back on its “Owned Brands” offerings at the start of the pandemic as part of its merchandise adjustment, co-CEO and director Michael Mente says the retailer is now making the investments necessary to increase its style production and assortment again, targeting a 50 percent increase in the number of Owned Brand styles delivered by the end of the year.
“I’m pleased to report that the early results are extremely encouraging, with a significant improvement in productivity per style, as compared to the same period last year,” Mente said in the call. “While we are optimistic on the trajectory of our Owned Brands, bear in mind that despite the increase in new styles delivered in the coming months, due to inventory dynamics, we still expect a sequential decline of our Owned Brand penetration in the fourth quarter of 2020, before beginning to increase sometime in mid-2021.”
Total inventory at Revolve was $73.6 million, a decrease of 29 percent year over year, or $30.2 million, from last year’s inventory balance of $103.7 million. Quarter over quarter, Revolve increased inventory 14 percent, or $9.1 million.
Gross profit for the third quarter was $83.5 million, bringing gross margin to 55.3 percent. This total was well ahead of the company’s initial expectations, benefiting from a higher mix of full-price sales and shallower markdowns, according to Timmermans. Revolve anticipates fourth-quarter gross margin to fall more in line with the prior-year period’s gross margin of 53 percent as a result of a lower mix of Owned Brand sales year-over-year, as well as a prolonged holiday promotional cadence.
Cash and cash equivalents are $158.7 million, having increased by $107.6 million when compared to the $51.1 million as of Sept. 30, 2019.
Net Sales: Net sales for the quarter declined 2 percent year over year to $151 million from $154.2 million the year prior. The quarter reflects a 10-percentage point improvement on a sequential basis compared to the 12 percent decline in net sales in the second quarter.
The company’s Revolve segment brought in net sales of $130.6 million, a year-over-year decrease of 3.6 percent. Revolve’s in-house luxury label, Forward, had a much better quarter comparatively, with sales increasing 9 percent to $20.5 million. The handbag category was a particularly strong contributor to Forward’s growth in the third quarter.
International net sales were also a major success for Revolve, increasing 18 percent year over year, significantly outperforming domestic net sales, which declined 6 percent. By territory, Australia, Canada and Western Europe each delivered strong double-digit growth in net sales, partially offset by a more challenging comparison in Asia.
The prior-year comparison in the third quarter of 2019 included $1.5 million in net sales realized as a result of a change in estimate related to store credit breakage. Adjusting for the change in estimate in the prior-year quarter, total net sales declined 1 percent year-over-year in the third quarter of 2020.
Net Earnings: Revolve saw record third quarter net income and adjusted EBITDA despite the sales decline. The digital native took in net income of $19.4 million, an increase of 103 percent over last year’s quarter, which brought in $9.6 million. Adjusted EBITDA reached $24 million, a 66 percent increase over the $14.4 million taken in last year.
The company attributes these to a strong increase in gross margin, which was the company’s highest ever for a third quarter, alongside effective cost controls and operating efficiencies.
Diluted earnings per share totaled 27 cents, more than double the diluted earnings per share of 13 cents reported for the third quarter of 2019. The quarter benefitted from a lower effective tax rate of 9.8 percent, compared to an effective tax rate of 25.6 percent in the prior-year period.
CEOs’ Take: Although the company pulled back on markdowns for the quarter to what Karanikolas referred to as “historical lows” for Revolve, he isn’t too concerned about losing customers who may come to the company for the discounts.
“If you look at how we normally perform in the third quarter—certainly there are some customers that aren’t buying now, but would buy if we have markdowns—it’s great as the performance of the quarter was and is great as our momentum is,” Karanikolas said. “And in what we believe is our ability to manage inventory. We will have quarters in the future that have more markdowns. So that customer will come back, then I think more importantly, we know that there is a huge portion of customers out there that know us, that love us, that haven’t forgotten about us dying to shop, but just don’t have the right occasions to shop in the ways that they normally shop.”