Revolve Earnings: Macro Challenges but Long-Term Prospects Still On-Trend; Shares Very Attractive

No-moat Revolve’s RVLV challenging second-quarter results and tempered guidance sent the shares down 11% in afterhours trading, but we think the market is overly fixated on the near-term macro challenges, leaving shares deeply undervalued. Underpinning the reaction, management trimmed its fiscal 2023 outlook to a 52%-52.5% gross margin (down from 52%-53%) while projecting slightly higher operating costs for the balance of the year. We plan to adjust our near-term estimates into the guided range, and consequently expect to trim our $31 fair value estimate by a low-single-digit percentage. We maintain our midteens top line growth over our explicit forecast (after fiscal 2023).

During the quarter, Revolve’s net sales of $274 million (down 5.6%) came in below our $285 million forecast, but its $0.10 adjusted EPS edged our $0.05 estimate on strong administrative cost containment. Its core customers continued to ratchet back discretionary spending, as illustrated by 11% and 1% drops in orders per customer and average order value, respectively. To buoy softening demand and normalize its inventory levels, Revolve’s promotional cadence remained elevated, which led to lower full-price sell-through and a gross margin contraction of 198 basis points, to 54%. Higher markdowns and return rates also pulled Revolve’s adjusted EBITDA margin down 550 basis points annually, to 3.8%. Nonetheless, we attribute the bulk of margin degradation to macro challenges, and believe that Revolve can reach low-teens adjusted EBITDA margins longer term as near-term pressures abate and its efforts to optimize its fulfillment network come to fruition.

Against this backdrop, we are encouraged that Revolve is taking prudent steps to grow its business. Specifically, we believe continued investments in technology, loyalty, and expansion into adjacent product categories should drive higher conversion, better brand awareness, and increase cross-selling between the Revolve and Forward platforms.