RVLV | Epic Trainwreck -- Going Sub $20

The RVLV 2Q print was clear confirmation of the model and multiple risk we’ve been highlighting and why it’s in our top 3 of Best Idea Shorts. A headline miss for RVLV, 2% revenue miss and EPS of $0.22 vs $0.31 expected . Revenue slowed to 27% growth YY from 59% last Q.  Gross margin expanded 30bps, but at a slowing rate, while SG&A deleveraged significantly, driving EBIT margins down 620bps YY.  EBITDA inflected from 35% growth last Q, to 24% decline. As for the guidance trend. The CFO was relatively clear about the direction of the model.  July has slowed to 10% growth, management expects further slowing in the rest of 3Q. The CFO then flagged 4Q as the most difficult comp, meaning expect further slowdown in 4Q.  To us that says 4Q is likely to be negative while the street is currently modeling mid-teens growth.  Then there’s margins… the CFO expects gross margin performance to weaken in 3Q to 53.5% and 54%, or 150bps below the street, and then be worse again in 4Q. We’re not sure even management realizes how bad margins could get in 2H.  The company now has a problem with rising returns and rapidly building inventories.  On inventories, management struggled to characterize it’s problem.  The balance is up 76% YY and the company admitted it has too much, but it also noted it has high quality inventory, and that it will retain its value, but because of softening demand, and the desire to reduce that inventory, there will be some measured promotions.  Maybe this is possible in a normal environment, but EVERY APPAREL COMPANY HAS TOO MUCH INVENTORY.  Good luck moving inventory in a measured fashion when every company is trying to clear product at the same time.  Margins can easily disappoint again in 3Q and 4Q. Let’s not forget that this model is supposed to be built on full price sell through with limited excess inventory.  Yet this is now the second time in 3 years that it has an building inventory problem.  The model has changed/eroded due to overassortment and eroding customer connectivity -- especially upon reopening. There’s your multiple risk as the market realized this is not much different from an online department store.  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 think it’s heading lower still.   We went short this stock at $66, we won’t touch it long-side until it falls well below $15.