Online retailer Revolve Group is the latest in a string of fashion and fashion-adjacent companies launching an initial public offering (IPO).
Fashion purveyors, particularly ones that have come to the market recently, like Farfetch (FTCH -8.42%) and Stitch Fix (SFIX 2.36%), tend to be as volatile and erratic as the many clothing trends that come and go. Might Revolve Group be the exception to this apparent rule?
Image source: Revolve Group.
You say you want a revolution...
Revolve Group is a retailer that focuses on the millennial and Generation Z demographics. It sells clothes and accessories from over 500 brands, 21 of which are its own labels. As its home is online, it emphasizes customer acquisition and retention through digital means.
Revolve Group likes to use "influencers," i.e., noted social media figures, to help push its wares. This seems economical -- it says it has relationships with around 3,500 of these people, yet they consume only about 25% of total marketing expenses. Revolve also raises brand awareness through activities like sponsorships -- for example, the #REVOLVEfestival held during the annual Coachella Valley Music and Arts Festival.
Revolve Group has provided a somewhat limited set of financials in its prospectus. Going by these (seen in the charts below), revenue is still rising, although the rate of growth is declining. Costs are being held in check, if anything, and the company is profitable, yet erratically so (which is not unusual in this industry).
| Metrics | 2018 | 2017 | 2016 |
|---|---|---|---|
| Net sales | $498,739 | $399,597 | $312,082 |
| Operating expenses | $223,508 | $173,168 | $139,834 |
| Net income | $30,685 | $5,347 | $2,403 |
| Net margin | 6.2% | 1.3% | 0.8% |
| Metrics | Q1 2019 | Q1 2018 |
|---|---|---|
| Net sales | $137,343 | $113,305 |
| Operating expenses | $63,853 | $48,928 |
| Net income | $4,962 | $5,379 |
| Net margin | 3.6% | 4.7% |
Data Source: Revolve Group IPO prospectus.
A fickle industry
Revolve Group cites data from researcher Euromonitor indicating that the global apparel, footwear, accessories, and beauty market -- all of which are segments it covers -- will rise at a compound annual growth rate of over 5% from 2018 to 2021. The outlook for online retail in the same years is much brighter: It's forecast at a CAGR of 12.5%. There is clear opportunity here for a sharp online operator like Revolve Group.
I admire the company for being consistently profitable, at least to the degree that's being presented. Also, it really seems to have its finger on the pulse of digital marketing and sales.
The thing is, it's hardly the only fashion retailer living in the digital world -- in fact, there's broad realization across the industry that sales need to be driven by web "stickiness," and that influencers matter. It's basically a rule now that any ambitious fashion or lifestyle brand has to carve out a notable presence on social media sites.
And even for experts and veterans in the fashion industry, it's awfully hard to determine when, if, and for how long a brand or a product line can be hot. This is why the fundamentals of this business tend to be very up and down.
Look at the volatility of recent(ish) fashion sector IPO stocks headed by clever people, like styling service Stitch Fix, luxury portal Farfetch, and conglomerate Capri Holdings (CPRI -3.82%) -- known as Michael Kors prior to its purchase of Versace and Jimmy Choo:
No matter how sharp company management might be -- and it seems quite smart in Revolve Group's case -- there's no guarantee it will maintain any kind of grip on its target market(s). Fashion does tend to turn on a dime.
So while I think there's much to like with Revolve Group, I'd probably be hesitant to add it to my shopping bag. The volatility and unpredictability are too high for me.
The details
Just over 11.7 million A shares of Revolve Group are being sold in the IPO, at a per-share price between $16 and $18. (B shares, which confer much stronger voting rights, are not being sold.) The A shares will subsequently be listed on the New York Stock Exchange under the ticker symbol RVLV, and start trading on Friday, June 7. Seventy-five percent of the shares in the IPO are being sold by existing stockholders.
An estimated $43 million or so in net proceeds will be received directly by Revolve Group. The company said it will utilize roughly $41 million of this for repurchasing B shares from existing investors.
The IPO's underwriting syndicate is headed by Morgan Stanley, Credit Suisse, and Bank of America Merrill Lynch.
