Revolve Earnings: Sluggish Demand Remains Near-Term Concern, but Long-Term Fundamentals Are Intact

No-moat Revolve RVLV delivered solid fiscal 2023 third-quarter results, with net sales of $257.6 million topping our $248.9 million forecast, while diluted EPS of $0.04 matched our estimate. Although we intend to trim our near-term forecast, consistent with tempered fourth-quarter guidance, we plan to lower our $29.50 fair value estimate by a low-single-digit percentage as we view long-term prospects as largely intact.

Pressured consumer spending has sent shares spiraling, with Revolve shedding 48% of its market cap during a challenging 2023. In some ways, this is a reasonable response, with luxury category spending falling 16% in the United States in the most recent quarter (Bank of America data), but we struggle to envision a world where Revolve sees nearly 60% of its gross sales returned (against a 52% historical median), low 20s private label penetration (against 26%), and punitive markdowns forever. We believe Revolve is poised to capture greater wallet share from its core customers through additional category layers, higher cross-selling between Revolve and Forward, and international expansion when macroeconomic pressures ease.

Positively, Revolve’s active customer count clocked in at 2.5 million (up 11.6%), attesting to the firm’s effective marketing strategy and growing momentum in its beauty category. Still, lower average order value (down 6.6% to $299) and elevated return rates indicate that consumer demand remains depressed. While we attribute languishing demand to macro pressures, we believe virtual try-ons, product videos, and more detailed size guidance should help reduce return rates, regardless of operating environment.

Regarding profitability, adjusted EBITDA margin decelerated 290 basis points to 3.7% on lower full-price sell-through, higher operating costs, and lower owned brands. Still, we view our low-double-digit operating margin forecast as attainable longer-term, driven by higher own-brand penetration, normalizing returns, and sales leverage.