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Category: Revolve Group (RVLV)
Date: 12 November 2020 Stock price of Revolve Group: $22.44 We take a look at the 3rd quarter 2020 earnings report of Revolve Group (RVLV) a trusted, premium lifestyle brand, and a go-to online source for discovery and inspiration, we deliver an engaging customer experience from a vast yet curated offering of apparel, footwear, accessories and beauty styles. The group reported net sales of $151 million and net income of $19.43 million for the quarter.
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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 - co-founder and co-CEO Mike Karanikolas "
More About Revolve Group
Revolve Group, Inc. (RVLV) is the next-generation fashion retailer for Millennial and Generation Z consumers. As a trusted, premium lifestyle brand, and a go-to online source for discovery and inspiration, we deliver an engaging customer experience from a vast yet curated offering of apparel, footwear, accessories and beauty styles. Our dynamic platform connects a deeply engaged community of millions of consumers, thousands of global fashion influencers, and hundreds of emerging, established and owned brands.
We were founded in 2003 by our co-CEOs, Michael Mente and Mike Karanikolas. We sell merchandise through two differentiated segments, REVOLVE and FORWARD, that leverage one platform. Through REVOLVE we offer a highly curated assortment of premium apparel and footwear, accessories and beauty products from emerging, established and owned brands. Through FORWARD we offer an assortment of iconic and emerging luxury brands.
We were founded in 2003 by our co-CEOs, Michael Mente and Mike Karanikolas. We sell merchandise through two differentiated segments, REVOLVE and FORWARD, that leverage one platform. Through REVOLVE we offer a highly curated assortment of premium apparel and footwear, accessories and beauty products from emerging, established and owned brands. Through FORWARD we offer an assortment of iconic and emerging luxury brands.
Overview of Revolve (RVLV) 3rd quarter 2020 earnings
Net Sales
Profitability and Operating Expense Drivers
- The 2% year-over-year (YoY) decline in net sales in the third quarter reflects a 10-point improvement on a sequential basis compared to the 12% YoY decline in net sales reported for the second quarter of 2020.
- REVOLVE segment net sales were $130.6 million, a YoY decrease of 3.6%.
- FORWARD segment net sales were $20.5 million, a YoY increase of 9.0%. The handbag category was a particularly strong contributor to FORWARD’s growth in the third quarter.
- International net sales increased 18% YoY, outperforming the domestic net sales decline of 6% YoY. By territory, Australia, Canada and Western Europe each delivered strong double-digit growth in net sales YoY, partially offset by a more challenging comparison in Asia.
- As previously disclosed, 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% YoY in the third quarter of 2020.
Profitability and Operating Expense Drivers
- Diluted earnings per share (EPS): Diluted EPS was $0.27, more than double the diluted EPS of $0.13 reported for the third quarter of 2019. The third quarter of 2020 benefitted from a lower effective tax rate of 9.8%, 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% in the prior-year period.
- Gross margin: Gross margin was 55.3%, the highest-ever reported for a third quarter, up nearly two percentage points YoY from 53.6% 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 YoY increase in the percentage of net sales at full-price and a YoY decrease in the depth of markdowns. In addition, we believe 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 YoY 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: Operating expenses remained highly efficient in the third quarter, reflecting outstanding execution by teams throughout the company while maintaining exceptional service levels for our customers.
Revolve (RVLV) management commentary on their 3rd quarter 2020 earnings
LOS ANGELES--(BUSINESS WIRE)-- Revolve Group, Inc. (NYSE: RVLV), the next-generation fashion retailer for Millennial and Generation Z consumers, today announced financial results for the third quarter ended September 30, 2020.
“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 record net income of $19 million, exceptional operating cash flows of $14 million, and record Adjusted EBITDA of $24 million, which increased 66% 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.”
“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 record net income of $19 million, exceptional operating cash flows of $14 million, and record Adjusted EBITDA of $24 million, which increased 66% 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.”
Results Since the End of Q3 2020
COVID-19 has continued to have a negative impact on REVOLVE’s operations and financial results in recent weeks since the end of the third quarter. The macro environment remains highly uncertain, as demonstrated by many U.S. states and international countries reporting higher levels of COVID-19 cases in recent weeks, and in many instances, imposing additional social distancing restrictions. We believe the absence of an expanded U.S. stimulus measure in recent months, combined with high unemployment rates, adds to the challenging climate for our customer demographic.
During the month of October 2020, net sales declined by a high single digit percentage year-over-year. The performance of product categories in the third quarter of 2020 demonstrates that customer shopping and purchasing behavior continues to be influenced by the COVID-19 pandemic.
Sales of apparel products frequently worn at home and styles for active lifestyles have remained strong. In particular, categories such as beauty, accessories, intimates, sweaters / knits and swimwear remained strong in the third quarter. Beauty was the standout with net sales increasing more than 100% YoY for the second consecutive quarter. On the other hand, outfits for special occasions, such as dresses and skirts, continued to face tough YoY comparisons as many social events have remained on pause.
We continue to be excited about the growth potential for newer categories, such as beauty that is undergoing an accelerating shift from offline to online distribution and a category in which our target customer demographic regularly looks to influencers for beauty product inspiration. Rapid expansion of net sales into newer categories like beauty creates an exciting opportunity to acquire new customers and develop deeper relationships with existing customers over time by serving more of their needs, potentially capturing a greater share of their discretionary spending over the long term.
COVID-19 has continued to have a negative impact on REVOLVE’s operations and financial results in recent weeks since the end of the third quarter. The macro environment remains highly uncertain, as demonstrated by many U.S. states and international countries reporting higher levels of COVID-19 cases in recent weeks, and in many instances, imposing additional social distancing restrictions. We believe the absence of an expanded U.S. stimulus measure in recent months, combined with high unemployment rates, adds to the challenging climate for our customer demographic.
During the month of October 2020, net sales declined by a high single digit percentage year-over-year. The performance of product categories in the third quarter of 2020 demonstrates that customer shopping and purchasing behavior continues to be influenced by the COVID-19 pandemic.
Sales of apparel products frequently worn at home and styles for active lifestyles have remained strong. In particular, categories such as beauty, accessories, intimates, sweaters / knits and swimwear remained strong in the third quarter. Beauty was the standout with net sales increasing more than 100% YoY for the second consecutive quarter. On the other hand, outfits for special occasions, such as dresses and skirts, continued to face tough YoY comparisons as many social events have remained on pause.
We continue to be excited about the growth potential for newer categories, such as beauty that is undergoing an accelerating shift from offline to online distribution and a category in which our target customer demographic regularly looks to influencers for beauty product inspiration. Rapid expansion of net sales into newer categories like beauty creates an exciting opportunity to acquire new customers and develop deeper relationships with existing customers over time by serving more of their needs, potentially capturing a greater share of their discretionary spending over the long term.
Revolve (RVLV) stock price history since their listing
The image below, obtained from Google, shows the stock price history of Revolve Group since their listing. Its not been the best time for Revolve stockholders. At its listing it was trading at around $34 and its currently trading at $22.44. That's a loss of -% suffered by Revolve Group over the last 2 odd years that it has been listed.
The stock of Revolve (RVLV) is trading at closer to its 52 week high than it is to its 52 week low which to us is a clear indication that the short term sentiment and momentum of Revolve Group's stock is positive at this point in time.
The stock of Revolve (RVLV) is trading at closer to its 52 week high than it is to its 52 week low which to us is a clear indication that the short term sentiment and momentum of Revolve Group's stock is positive at this point in time.
Latest stock valuation of Revolve (RVLV)
So what is Revolve (RVLV) stock worth based on the release of their 3rd quarter 2020 earnings report? Based on the earnings reported our valuation model provides a target price (full value price) for Revolve (RVLV) at $13.70 a stock. We therefore believe that the stock is overvalued.
We usually suggest long term fundamental or value investors look to enter a stock at least 10% below our target price (full value price) which in this case is $13.70. A good entry point into Revolve (RVLV) would therefore be at $12.30 or below. Since the stock of Revolve (RVLV) is trading at well above our suggested entry point into the group's stock we rate the stock of Revolve as a sell
We usually suggest long term fundamental or value investors look to enter a stock at least 10% below our target price (full value price) which in this case is $13.70. A good entry point into Revolve (RVLV) would therefore be at $12.30 or below. Since the stock of Revolve (RVLV) is trading at well above our suggested entry point into the group's stock we rate the stock of Revolve as a sell
Next earnings release of Revolve (RVLV)
It is expected that Revolve Group will release their 4th quarter and full fiscal 2020 earnings in early February 2021
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