We got the validation we wanted after the close out of Best Idea Short Revolve (RVLV). The company put up a headline beat on both the top and bottom line, but that (and then some) was 100% expected. In fact, the top line came in lighter than the 60% whisper due to an outsized return rate of 54.6% -- almost 1,000bp higher than this time last year. Note that higher returns don’t show up in the credit card data that the stock trades on. RVLV added 201k customers in the quarter, and put up a solid 12.5% increase in average order value. That was the biggest positive. But commentary around quarter-to-date trends made it clear that the top line growth rate is coming down by about half – which is a massive slowdown. Gross margins looked healthy – up 45bps vs last year despite the higher return rate -- but that’s just in time for negative inflation spreads to hit this model’s Gross Margin line in 2H of this year. Any way we cut it, this model is all about deceleration from here. Customer count, revenue, gross margins, and yet the company is keeping its foot on the SG&A accelerator, which should further pressure EBIT margins. In the end, we’re making no changes to our model, which calls for about $1.50 in earnings in perpetuity. We think that’s worth a mid-teens multiple as opposed to the nosebleed 30x pe and 3x sales it trades at today. This is one of the few apparel names that has both downside to estimates AND the multiple over a TREND and TAIL duration. Even though the stock is getting clocked after hours, we’d be pressing the short here, especially with trough short interest of 10% (has been as high as 80%). We went short this stock at $66, and while we’ll take the 40% win, we think there’s another 40%+ downside. We won’t touch it long-side until it falls below $20.
Takeaway: Down 40% since we shorted it, and it’s got another 40%+ left. We’d press the short on this print. The writing is on the wall.
