Revolve Q3 profit slips 27% despite 20% sales jump to $356m

Revolve Group turned in third-quarter sales of $356 million, up 20 percent for the three months ended 30 September. That beat the 16.9 percent gain analysts had pencilled in, according to Yahoo Finance. The stronger top line, however, never made it down to profit.

Net income dropped 27 percent to $15.5 million, while adjusted EBITDA dipped 7 percent to $23.5 million. The company blamed higher fuel surcharges attached to its logistics costs for the shortfall. Investors answered by trading the shares down 4.8 percent to $20.50 after hours on Tuesday.

The two divisions moved in near lock step with the corporate figure. The namesake Revolve segment generated $306.8 million, and Fwrd contributed $49.2 million. Both rose at roughly the same pace as the group, leaving neither business as the standout in the quarter.

Revolve describes itself as the next-generation fashion retailer aimed at Millennial and Gen Z shoppers. The active customer base grew 18 percent to 3.2 million over the trailing 12 months, and those customers placed 19 percent more orders.

Yet the average order value slipped 5 percent to $292. The company said the decline was primarily down to early sales of Grow-Good beauty products, which carry much lower price points. Grow-Good launched in the spring as a joint venture with Cardi B.

What the cofounders told analysts

Michael Karanikolas, cofounder and co-chief executive officer, framed the momentum against a softer backdrop. "Our strong top-line results and the momentum in our customer base in recent quarters is especially noteworthy in an environment where many in our industry have seen softer trends," he told analysts on a conference call.

He said the results show the company's investments are paying off and reflect disciplined execution on key growth initiatives. Karanikolas also pointed to the return rate, which fell by more than 2 percent from a year earlier. Category diversification, he said, was a big driver of that shift.

The company has now reduced return rates in eight of the past ten quarters. That improvement, Karanikolas added, helped absorb the impact of the higher fuel surcharges on logistics costs this quarter, cushioning what would otherwise have been a steeper squeeze on earnings.

The shipping strain arrived precisely as the revenue did, so the sales gain could not convert properly further down the ledger. It is the awkward line in a quarter the company otherwise touted: growth everywhere at the top, and less profit for it.

Michael Mente, the other cofounder and co-CEO, pointed to recent launches as the yardstick of brand strength. He cited the physical retail push behind Revolve Los Angeles, the inaugural Revolve Magazine, the new joint venture with Donatella Versace, and expanded partnerships with Kendall Jenner and Dwyane Wade.

We last reported on the Versace arrangement when Donatella took the role of chief creative officer on a venture that launches first in beauty. What the third quarter adds is some idea of the wider spending pattern behind all these launches at once.

Marketing spend keeps climbing

Revolve put 14.3 percent of sales, or $50.8 million, into marketing during the quarter. That is up from 13.7 percent, or $40.4 million, a year earlier. The jump is a real dollar rise of more than $10 million, not merely a function of larger revenue.

The company said the increase reflected higher performance marketing and brand marketing investment to support growth initiatives, including the first namesake label, Revolve Los Angeles, within its owned brand assortment. The owned-brand push is now a stated cost rather than an ambition.

And it is only going up. Revolve plans to devote 16.9 percent of sales to marketing in the fourth quarter, and enters it with a fresh customer base of 3.2 million to convert. That is the company's own guidance and it signals the holiday quarter will be spent aggressively, betting the customer growth compounds faster than the margin shrinks.

The contrast is the point of the story. Customers, orders and revenue all rose sharply. Profit fell, and marketing is budgeted to rise again. The unspent question is whether the next quarter's sales can outpace a marketing share that now approaches one dollar in six.

What comes next

Whether the return rate keeps falling will decide how much of the next sales jump survives to the bottom line.

The company has given no profit guidance for the quarter ahead, only the marketing share. For a retailer whose top line already beat forecasts, the test over the holidays is whether the shipping and spending costs finally let that growth through to earnings.

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Image: Revolve