Editor's Note: Below is a flashback on our short Revolve (RVLV) from Retail analysts Brian McGough and Jeremy McLean. RVLV has been a mainstay on our weekly Investing Ideas Newsletter since September 2022. McLean reiterated the short on The Pitch in January 2023, and since then, the stock is down is down nearly 50% and keeps grinding lower.
Click HERE for further in-depth retail research included in Retail Pro.
HOW IT STARTED...
WHAT JEREMY SAID JAN. 31 ON THE PITCH (RVLV AT $28.54)
- Revolve rode the boom of apparel demand in 2021 and saw huge growth rates, up 60-70 percent. You've got a very difficult comparison here in 4Q 2021, and another tough one in 1Q 2022. And you've seen what the trends have been. You're looking at something around zero, low-single-digit growth in 4Q 2021, that's likely to go negative in the 1st half of 2023. It's a growth story that's not really a growth story anymore.
- Inventory's become a problem. This is a model that's supposed to be high full price, sell through, supposed to be limited buys. It's not supposed to have inventory problems and for the second time in its history, it has an inventory problem again here.
- Covid saved the company. Before the pandemic started, they were over-assorted with high sale items. In spring 2020, nobody cared about what your margin looked like in the pandemic. You could clear out product, they were able to reset inventory position. Over the past 4-5 quarters, you've seen a step up in SKUs on the site, sale items and final sale items all at or approaching all-time highs and at the same time, we're seeing revenue growth trending to zero or negative in the coming quarter.
HOW IT's GOING...
WHAT JEREMY WROTE MAY 20 (RVLV AT $16.91)
Revolve reported 1Q 2023 earnings this week and put up a weak quarter. Revenue was down 1%, a deceleration from +8% last quarter. We aren’t surprised by this major deceleration and expect it to continue, especially with April revenue down 7% Y/Y. Active customer growth slowed again this quarter, adding only 84K from the 91K last quarter. The Y/Y change in active customers was +19%, down from +27% last quarter. Gross margins were down 468 bps this quarter, sequentially worse than last quarter down 340 bps. We expect this gross margin degradation to continue for the next couple of quarters with inventory still up Y/Y. The stock is down 20%+ this month, now sub-$20, with PE multiple up this week to over 26x. The business model has evolved here, and not in a good way. Things can and will continue to get worse here. People might chalk up the miss to cyclical factors, but we think it’s more secular – this company is running out of TAM. We’d press the short.
#TIMESTAMPED RETAIL TEAM CALLOUTS
...AND A BONUS STOCK PICK FROM JIM CRAMER
(FROM THE SAME WEEK JEREMY SHORTED RVLV ON THE PITCH)