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Revolve: Costs for Digitally-Native Brands Continue to Rapidly Rise

Thomas Paulson
Aug 12, 2022
Revolve: Costs for Digitally-Native Brands Continue to Rapidly Rise

Revolve's 2Q22 update gave us an opportunity to revisit the brand's past success in connecting with more affluent Gen-Z/Millennial females and its high-quality financial disclosure (which allows for a good understanding of digitally-native brand (DNB) unit economics).

  • Revolve’s premium brand (Revolve) posted net sales of +30% and its prestige brand (FWRD) saw net sales growth of +14% during the quarter compared to the same period in 2021. FWRD was affected by a pullback by its Chinese customer (COVID) and other international customers (due to the strong dollar). We also suspect that FWRD’s slower results may also reflect the uptick in international travel among this consumer (which we believe has impacted online purchases for other high-end brands this summer).
  • Active buyers were up 124K QoQ as demand for "concert wear" is in high demand (see our comments on concerts and Live Nation). However, incremental orders/active were slower suggesting that existing customers had moderated their buying.
  • In terms of the business model, gross margins improved due to better full-price selling, but that was more than offset by higher shipping and distribution center (DC) costs as well as higher costs for acquiring customers. Shipping & DC costs per order were $23.20 compared to $18.25 last year and in 2019. Said differently, the cost to digitally serve has increased by 27% YoY. The cost to acquire a new customer, or CAC (on a net basis) increased to $281 per active versus $190 in 2Q21, or +47% YoY. That increase, aside from changes to IDFA policies, is the result of a lower response rate to its ads, which lowers the ROI and which demands more investment for a similar number of acquisitions. (This lower response/ROI trend has also been evident in the recent results of Pinterest, Snap, Meta, and others).
  • Revolve’s customers may also be seeking out the higher level of sales and bargains at other retailers – we will soon know with the results pending from Macy’s, Nordstrom, and TJX.
  • Unfortunately for Revolve, the business materially slowed in June (which sees across retail) and remains slow in July at only +10% revenue and flattish unit growth.
  • The slowdown leaves the company high in inventory levels and lower on inventory turns. Fortunately for Revolve, it has just opened its first East Coast FC allowing for 1-day delivery in the market. This service offering has shown to be very popular in the Los Angeles market.

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Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more. He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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