The apparel industry has seen rapid change in 2020 due to the coronavirus pandemic. Revolve Group (RVLV 8.32%), an online-only retailer focused on fashion apparel for millennial women, is feeling the best and worst of this change. Demand for the company's products has declined this year, but may be on the verge of a turnaround if the economy opens back up in 2021. Here's why.
Latest quarterly results
Revolve released its third-quarter report after the markets closed on November 11th. Revenue was down 2% year over year to $151 million, while net income was up 103% year over year to $19.4 million.
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Investors might be asking themselves why the company's sales declined when e-commerce has grown so much in 2020. While it is true that Revolve is an online-only retailer, the company sells products made for parties, festivals, and other events meant for large gatherings of people. As everyone knows by now, those events have disappeared because of the pandemic.
But how did net income double if sales fell and demand cratered? Three reasons:
- Revolve's tax rate dropped from 25.6% to 9.8%, because of how the company timed its stock options.
- Gross margins increased from 53.6% to 55.3%, mainly thanks to a faster turnover of inventory.
- Marketing spend decreased by around $4 million. Revolve spends a lot promoting its apparel at live events. With such events paused during the pandemic, Revolve has been forced to pause these efforts.
This trifecta allowed more dollars to drop to the net income line, even though Revolve's sales fell. The company can't repeat that boost from tax rates, and executives mentioned on the conference call that marketing expenses will grow along with sales once the economy opens up, so investors shouldn't expect those cost savings to continue forever. However, the higher margins from better inventory management are sustainable and can help Revolve generate higher net income in the future.
Another metric to watch is the number of orders placed in the quarter. This number dropped 4% year over year in Q3 to 1.14 million -- still a healthy amount, given the current horrendous market environment.
Revolve will benefit from a reopened economy in 2021
It's good that Revolve is weathering the COVID-19 storm. However, investors should be thinking about what will happen when the economy (hopefully) reopens fully in 2021. CEO Mike Karanikolas said on the conference call that the company is prepared to aggressively ramp up marketing and inventory spend once a post-COVID world is upon us. Executives are ready for what they are calling "pent-up demand" for those "special social occasions" the company is known for.
This optimism is likely warranted. Economists and business analysts are predicting that once a vaccine is widely available and large events like concerts and parties are safe again, young people will want to participate in these activities en masse.
This is extra important for Revolve because these large events, like the Coachella Music Festival, not only serve as a reason to buy an apparel item, but are the top of the funnel for its marketing campaigns, as mentioned above. Revolve doesn't give any numbers on how these events attract future customers, but management has mentioned that such efforts have a high return on investment. Whenever large gatherings start up again, investors should be watching for an increase in marketing spend from Revolve, which would then usher in a return to sales, customer, and order growth in subsequent quarters.
Revolve could be in trouble if large social events don't come back for a few years, or if during the pandemic other retailers capture some of its target market and start building brand loyalty. But if Revolve investors can stay patient and ride out the entirety of this pandemic, however long it lasts, they may be rewarded once the economy fully opens again.
