Revolve Group reported a 2 percent year-over-year decline in net sales in the third quarter ended September 30 to $151 million. The performance reflects a 10-point improvement on a sequential basis compared to the 12 percent year-over-year decline in net sales reported for the second quarter of 2020.

Among segments, Revolve’s net sales were $130.6 million, a year-over-year decrease of 3.6 percent. Forward segment net sales were $20.5 million, an increase of 9.0 percent. The handbag category was a particularly strong contributor to Forward’s growth in the third quarter.

International net sales increased 18 percent year-over-year, outperforming the domestic net sales decline of 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.

Gross margin was 55.3 percent, the highest-ever reported for a third quarter, up nearly two percentage points year-over-year from 53.6 percent in the third quarter of 2019. The strong gross margin benefitted from meaningfully improved inventory dynamics exiting the second quarter of 2020 that contributed to a year-over-year increase in the percentage of net sales at full-price and a year-over-year decrease in the depth of markdowns. In addition, Revolve said it believes the external environment became less promotional in the third quarter on a sequential basis compared to the second quarter of 2020, particularly in the luxury segment. These positive contributors to gross margin were partially offset by a year-over-year decrease in the mix of Owned Brands as a percentage of Revolve segment net sales, consistent with the outlook shared on recent investor conference calls.

Operating expenses remained highly efficient in the third quarter, reflecting outstanding execution by teams throughout the company while maintaining exceptional service levels for its customers.

The strong year-over-year increase in gross margin, effective cost controls and operating efficiencies collectively resulted in record net income and Adjusted EBITDA in the third quarter, an increase of 103 percent and 66 percent, respectively despite the slight year-over-year decline in net sales.

Diluted EPS was 27 cents a share, more than double the diluted EPS of 13 cents reported for the third quarter of 2019. The third quarter of 2020 benefitted from a lower effective tax rate of 9.8 percent, primarily due to excess tax benefits realized as a result of the exercise of non-qualified stock options during the third quarter of 2020. This compares to an effective tax rate of 25.6 percent in the prior-year period.

“Strong execution on our merchandising and operational initiatives led to another quarter of record results. Despite the challenging backdrop and short-term pressures, we continued to drive efficiencies throughout the business in the third quarter, leading to higher margins and record profitability,” said Co-Founder and Co-CEO Mike Karanikolas. “Our efforts resulted in a record net income of $19 million, exceptional operating cash flows of $14 million and record Adjusted EBITDA of $24 million, which increased 66 percent year-over-year. A key driver of our significantly increased profitability was our highest-ever gross margin for a third quarter, which reflects a high percentage of net sales at full price and improved inventory dynamics.”

“Our strong results underscore the power of our brand, the strength of our business, and most importantly, the incredible execution of our team,” said Co-Founder and Co-CEO Michael Mente. “We achieved the strong profitability while continuing to invest in key initiatives to maximize our growth potential over the long term, such as elevating our international service levels, further innovation in broadening our marketing playbook, and category expansion within our Owned Brands.”

Cash Flow and Balance Sheet

  • The combination of profitability, efficient management of inventory, and its capital efficiency led to another strong quarter of cash flow generation. Free cash flow was $13.9 million, a YoY increase of 86 percent. For the nine months ended September 30, 2020, free cash flow was $74.4 million, more than doubling its free cash flow reported for all of 2019.
  • The strong cash flow further strengthened its balance sheet and liquidity. Cash and cash equivalents as of September 30, 2020 were $158.7 million, an increase of $7.9 million from $150.8 million as of June 30, 2020, despite the repayment of $9 million on its line of credit during the third quarter.
  • Cash and cash equivalents have increased by $107.6 million YoY when compared to the $51.1 million as of September 30, 2019.
  • As of September 30, 2020, $15 million remained drawn on the line of credit, a decrease of $9 million from $24 million drawn as of June 30, 2020. Revolve said it had no amounts drawn on the line of credit in the year-ago period.
  • Inventory was $73.6 million, an increase of $9.1 million, or 14 percent, from June 30, 2020. Inventory decreased $30.2 million YoY, or 29 percent, from the inventory balance of $103.7 million as of September 30, 2019. By comparison, net sales declined just 2 percent YoY, illustrating its increased inventory efficiency. Going forward, Revolve said it intends to continue to invest in its inventory position, particularly in targeted categories that reflect current lifestyle trends such as loungewear, athleisure, and knits

Photo courtesy Revolve Group