Near-Term Challenges Abound at Revolve, but Our Long-Term View Intact

After digesting no-moat Revolve’s RVLV fourth-quarter results and factoring in a tepid 2023 outlook, we plan to cut our $36 fair value estimate by a mid-single-digit percentage. This adjustment reflects a combination of lower gross margin guidance (to 52%-53%, down from 54% in 2022), elevated return rates, and lower projected full-price sales mix in 2023.

During the quarter, Revolve’s net sales of $259 million healthily outpaced our $242.5 million forecast, but diluted EPS of $0.11 was lower than our $0.13 estimate. The combination of markdowns, elevated return rates, and higher shipping costs pulled down Revolve’s adjusted EBITDA margin by 880 basis points from a year ago (to 5.5%). We view the bulk of these impacts as largely ephemeral and continue to see a path to low-teens long-term operating margins, supported by private-label expansion, normalizing fuel surcharges, and sales-driven operating leverage, although we don’t expect material improvement until macroeconomic pressures subside.

On a positive note, we’re encouraged by active customer growth of 27% (to 2.34 million), which should drive a sharp inflection in sales momentum as exogenous pressures abate. That said, we continue to see signs of softening demand through a decrease in orders per active customer (down 12.5%) and a deceleration in average order value (up 4.8%, but shy of 15.9% growth a quarter ago). This corroborates our view that despite its enviable price points, Revolve remains acutely sensitive to economic cyclicality. Consequently, we anticipate more pronounced markdowns and a deterioration in sales momentum in 2023, which underpin our flat net sales estimate for the year, with economic health remaining the key exogenous variable. Longer term, we believe that category expansion, normalizing return rates, and healthy cross-selling between its two platforms should support our low-teens (13%) average annual sales growth over the next decade.