One change to our Position Monitor this week...
RVLV: Our conviction level around Revolve (RVLV) short-side is higher after last week’s squeeze on a sub-par quarter. Though the company’s headline beat estimates, we saw more evidence that the business model is flawed, and has turned from a select curated assortment of apparel to a high-end customer, into an over-assorted online version of the promotional department store and specialty store distribution it originally set out to disintermediate. One glaring statistic is that revenue for the quarter was down 12% -- at a time when the online retail category is growing at 20-30%. Heck, even Kohl’s is growing its online business over 20%. And yet a so-called ‘category killer’ like RVLV put up sales -dd to last year? Very underwhelming, especially for a name that trades at 22x EBITDA and 36x EPS. While other online retailers are adding customers at record rates, RVLV only added 5000 and put up an average order value decline of (-26%). The company said return rates are better, but that is to be expected when your sales are consolidating within a smaller group at lower order values, they better know their sizing, preferences, and are apparently experimenting less with purchases. Also the company has had a lot of final sales items go out, that can’t be returned. At the end of March Revolve.com had ~5600 items on final sale on the site, that’s down to 2700 now – bullish at face value. But the company is signaling that return rates (and final sale items) are heading back up. Bearish. Profitability looked good, or at least better than expected, but it didn’t come from Gross Margin, which was down 500bps. The company leveraged every line of SG&A as the company was in cost cutting mode including salary cuts and layoffs and big pullbacks on marketing expenses. Not what a growth multiple wants to see drive the upside. Most costs should revert back up, with G&A settling a bit lower than pre-covid levels with a lower headcount. The company is hosting fewer in person marketing events, so that means some marketing reductions vs past levels until social distancing restrictions are totally lifted. Inventory position is much improved, down 37%, the company has been clearing old product, and likely reducing orders given the prior pressure on the supply chain and the low levels of apparel imports over the last few months. The company is guiding for continued margin pressure in 2H, and while that seems appropriate, the real problem is the lack of top line growth. Ultimately, while ecommerce as a category is ripping, RVLV’s EBITDA upside is driven by lower SG&A while gross profit is down 20% YY. For now this looks more interesting short side on the squeeze. RVLV is on our short bias list.
