Revolve Earnings: Tough Macro Environment Hammers Sales Momentum and Profitability, but Shares Cheap

After digesting no-moat Revolve’s RVLV mixed fiscal 2023 first-quarter results, we plan to trim our $33.50 fair value estimate by a high-single-digit percentage, reflective of our less sanguine outlook for the year and into 2024. We now forecast a slight decline in net sales growth and 4.6% operating margin for the year, down from preprint estimates for 6.3% growth and a 5.7% margin. Despite a 3%-4% pullback on the print, shares offer a compelling buying opportunity at current trading prices (trading nearly 40% below our revised valuation), although a turnaround catalyst may not materialize until macro pressures subside.

In the quarter, Revolve’s net sales of $280 million (down 1%) fell short of our $291 million estimate, but diluted EPS of $0.19 surpassed our $0.14 forecast. An 11% drop in orders per customer and flat average order value growth indicated lackluster demand, as the firm’s customers ratcheted back discretionary spending in response to inflationary strains and macro pressures. As a consequence, Revolve’s profits shriveled, with gross and adjusted EBITDA margin deteriorating by 468 and 580 basis points, respectively, to 49.8% and 5.4% due to the combination of lower full-price sell-through (as the firm strives to rebalance its inventory, expected to be on track by the end of second quarter), elevated return rates (which stood at 57.4%, up 310 basis points year over year), and higher fuel surcharges. Nonetheless, we view these impacts as largely transitory and continue to expect the firm to reach low-teens EBITDA margins longer term, aided by normalized fuel surcharges, private-label expansion, and sales-driven operating leverage.

Taken together, despite near-term uncertainties, our confidence in the underlying health of the business remains intact. We believe category and geography expansion, moderating return rates, and cross-selling between Revolve and Forward should support low-teens average annual sales growth over the next decade (beyond fiscal 2023).