Revolve Group, Inc., the next-generation fashion retailer for Millennial and Generation Z consumers, announced financial results for the third quarter ended 30th September, 2020.
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“Our efforts resulted in record net income of $19 million, exceptional operating cash flows of $14 million, and record Adjusted EBITDA of $24 million, which increased 66% year-over-year. A key driver of our significantly increased profitability was our highest-ever gross margin for a third quarter, which reflects a high percentage of net sales at full price and improved inventory dynamics,” said Co-founder and Co-CEO Mike Karanikolas.
“We achieved the strong profitability while continuing to invest in key initiatives to maximize our growth potential over the long term, such as elevating our international service levels, further innovation in broadening our marketing playbook, and category expansion within our Owned Brands,” said Co-founder and Co-CEO Michael Mente..
The 2% year-over-year (YoY) decline in net sales in the third quarter reflects a 10-point improvement on a sequential basis compared to the 12% YoY decline in net sales reported for the second quarter of 2020.
REVOLVE segment net sales were $130.6 million, a YoY decrease of 3.6%. FORWARD segment net sales were $20.5 million, a YoY increase of 9.0%. The handbag category was a particularly strong contributor to FORWARD’s growth in the third quarter.
International net sales increased 18% YoY, outperforming the domestic net sales decline of 6% YoY. By territory, Australia, Canada and Western Europe each delivered strong double-digit growth in net sales YoY, partially offset by a more challenging comparison in Asia.
As previously disclosed, the prior-year comparison in the third quarter of 2019 included $1.5 million in net sales realized as a result of a change in estimate related to store credit breakage. Adjusting for the change in estimate in the prior-year quarter, total net sales declined 1% YoY in the third quarter of 2020.
Diluted EPS was $0.27, more than double the diluted EPS of $0.13 reported for the third quarter of 2019. The third quarter of 2020 benefitted from a lower effective tax rate of 9.8%, primarily due to excess tax benefits realized as a result of the exercise of non-qualified stock options during the third quarter of 2020. This compares to an effective tax rate of 25.6% in the prior-year period.
Gross margin was 55.3%, the highest-ever reported for a third quarter, up nearly two percentage points YoY from 53.6% in the third quarter of 2019. The strong gross margin benefitted from meaningfully improved inventory dynamics exiting the second quarter of 2020 that contributed to a YoY increase in the percentage of net sales at full-price and a YoY decrease in the depth of markdowns.
In addition, the group believes the external environment became less promotional in the third quarter on a sequential basis compared to the second quarter of 2020, particularly in the luxury segment. These positive contributors to gross margin were partially offset by a YoY decrease in the mix of Owned Brands as a percentage of REVOLVE segment net sales.
Operating expenses remained highly efficient in the third quarter, reflecting outstanding execution by teams throughout the company while maintaining exceptional service levels for its customers.
For the second consecutive quarter, operating efficiency within fulfillment and selling and distribution expenses continued to benefit from customers returning a lower proportion of their purchases.
Key financial and operational benefits resulting from the lower return rate in the YoY comparison include lower required handling of units in REVOLVE’s warehouse reflected within the fulfillment expense line and, in particular, reduced packaging, shipping and payment processor costs within selling and distribution expenses, where the majority of costs are shipping related. It is expected that operating efficiencies realized from lower returns in the fulfillment and selling and distribution expense lines may compress in the future if return rates continue to normalize towards pre-COVID 19 levels in the coming quarters. Since bottoming out in the second quarter of 2020, the gorup’s estimated return rate increased for each month of the third quarter of 2020 and appears to be headed higher in the fourth quarter of 2020 as well.
Marketing efficiency YoY in the third quarter once again primarily reflects reduced investment in brand marketing events since hosting in-person REVOLVE events remained on pause to ensure the safety of its community and in adherence with social distancing requirements. It is important to note that brand building investments will remain a key driver of its growth strategy, and are particularly important for the acquisition of new customers. As a result, the group does not expect the total marketing expense as a percentage of net sales to remain at the significantly reduced levels it has reported for the past two quarters during the COVID-19 pandemic.
The strong YoY increase in gross margin, effective cost controls and operating efficiencies collectively resulted in record net income and Adjusted EBITDA in the third quarter, an increase of 103% and 66%, respectively — despite the slight YoY decline in net sales.
COVID-19 has continued to have a negative impact on REVOLVE’s operations and financial results in recent weeks since the end of the third quarter. The macro environment remains highly uncertain, as demonstrated by many U.S. states and international countries reporting higher levels of COVID-19 cases in recent weeks, and in many instances, imposing additional social distancing restrictions. REVOLVE group believes the absence of an expanded U.S. stimulus measure in recent months, combined with high unemployment rates, adds to the challenging climate for its customer demographic.
During the month of October 2020, net sales declined by a high single digit percentage year-over-year. The performance of product categories in the third quarter of 2020 demonstrates that customer shopping and purchasing behavior continues to be influenced by the COVID-19 pandemic.
Sales of apparel products frequently worn at home and styles for active lifestyles have remained strong. In particular, categories such as beauty, accessories, intimates, sweaters / knits and swimwear remained strong in the third quarter. Beauty was the standout with net sales increasing more than 100% YoY for the second consecutive quarter. On the other hand, outfits for special occasions, such as dresses and skirts, continued to face tough YoY comparisons as many social events have remained on pause.
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REVOLVE continues to be excited about the growth potential for newer categories, such as beauty that is undergoing an accelerating shift from offline to online distribution and a category in which its target customer demographic regularly looks to influencers for beauty product inspiration. Rapid expansion of net sales into newer categories like beauty creates an exciting opportunity to acquire new customers and develop deeper relationships with existing customers over time by serving more of their needs, potentially capturing a greater share of their discretionary spending over the long term.