Cost Pressures Hammer Revolve's Profitability in Q2, but Shares Still a Bargain

No-moat Revolve Group delivered mixed second-quarter results, as net sales of $290 million topped our $285 million estimate but diluted earnings per share of $0.22 missed our $0.32 forecast. While we are encouraged by the solid growth in active customers (up 39% annually to 2.2 million) and average order value (up 19% to $303) in the quarter, July’s mere 10% net sales growth leads us to deduce that demand may slow in upcoming quarters, dragging materially on profitability. We now expect 2022’s operating profit margin will roughly halve to 6.1% from 11.8% a year ago (against our prior forecast of 11.4%), with a recovery to 2021’s figure stretching out until 2024 as Revolve’s core customers, indexing younger and early in their careers and income progression, tightens their belts on nondiscretionary spending. Despite enviable price points, Revolve behaves more like an apparel company than a luxury brand during cyclical downturns, suggesting near-term turbulence. Therefore, with meaningfully slower sales growth and a protracted route to management’s long-term 14% adjusted EBITDA target, we expect to shave about 25% off our $61 fair value estimate. Nonetheless, we view the shares as undervalued.