Revolve had all the signs of becoming one of the pandemic’s early fashion casualties.
The coronavirus reached the US just before the spring festival season, the crowded calendar of concerts and parties that in the previous year helped drive nearly one-third of the Los Angeles-based e-commerce retailer’s annual sales. Coachella, where Revolve hosted dozens of influencers for its own elaborate mini-festivals, was cancelled. Plans for tricked out Hamptons houses and scenic Amangiri trips were on hold. The company’s Instagram-friendly dresses and jumpsuits suddenly seemed to be from another era. Its share price plunged 65 percent in the space of a month, hitting an all-time low in mid-March.
“The buying team literally had to cancel a whole season of buys and re-buy the whole season from home,” said co-founder and co-chief executive Michael Mente.
And then, improbably, the pivot worked. Sales in the second quarter fell 12 percent compared with a year earlier, less than many of its competitors and a far smaller decline than the 27 percent average drop predicted by analysts, according to B.Riley. It’s still profitable too, a rarity among online retailers; In the third quarter of 2020, the retailer’s net income reached $19 million, up 103 percent year-over-year, hitting a record third-quarter gross margin at 55.3 percent. Revolve’s stock ended 2020 at $31.17, up 65 percent on the year.
Revolve really looks like a retailer that was built for the 21st century.
“Revolve really looks like a retailer that was built for the 21st century,” said BMO Capital Markets analyst Simeon Siegel.
How did a fashion retailer built around music festivals and parties go from one of the pandemic’s obvious losers to one of its few winners?
A Solid Foundation
Revolve is inextricably associated with an of-the-moment Instagram fashion influencer aesthetic, but its e-commerce roots go much deeper.
Revolve started in 2003 as an online contemporary fashion retailer and was early to invest in influencer-driven marketing strategies over the last decade. The company went through a growth spurt, nearly doubling revenue between 2016 and 2019, to $601 million. An initial public offering in mid-2019 valued the company at over $2 billion, with investors impressed by its success in dominating its corner of the fast-growing Instagram fashion market. Solid profit margins in a sea of money-losing start-ups helped too.
Strict Inventory Controls
Revolve produces around twenty in-house labels, which it calls “owned brands,” representing 36 percent of the Revolve’s sites sales in 2019. The retailer uses them to fill gaps in assortment and generate higher margins than third-party brands.
When the lockdowns began and loungewear replaced festival gear in shoppers’ baskets, the retailer was able to quickly reduce upcoming orders of its owned brands and fill in the gaps for stay-at-home garb from third parties.
Revolve’s owned brand products have since pivoted from party dresses to cozy sweatsuits. The label Song of Style, launched with fashion influencer Aimee Song in May 2019, has expanded into knitwear and stretchy pants in recent months.
Mente said Revolve plans to increase the number of products from owned brands again in mid-2021, though it still plans to feature fewer dresses and more denim, activewear and “sustainable” collections.
The owned brands may also sell at higher price points in the future, Mente said. (The average Revolve dress sells for less than $200.) He described an opportunity in the “premium aspirational” space between Revolve’s core offerings and its smaller luxury sister site Forward, which sells items from Gucci and Bottega Veneta, among other brands.
More Than Party Dresses
As sales of dresses plummeted during the pandemic, sales of home goods, beauty products and activewear grew. Beauty net sales more than doubled year-over-year in both the second and third quarters. To promote its activewear, Revolve began hosting free workouts on Instagram’s IGTV.
They may have come to us for going out dresses and hopefully, now, more and more are coming to us for gym clothes and beauty and at-home.
“They may have come to us for going out dresses and hopefully, now, more and more are coming to us for gym clothes and beauty and at-home,” Mente said. “This is really something that will really shape the way we approach the consumer over the long term.”
Masks have also become an important category, growing into a “low seven-digit net sales business at attractive margins,” co-founder and co-chief executive Mike Karanikolas said on the second quarter analyst call in August.
Before the pandemic, Revolve was working on increasing the rate at which it sold its products, a metric that had been less of a focus at the business because as an online retailer, it wasn’t in danger of running out of shelf space. Before the pandemic, its turn rate, or how often it sold through its inventory, was estimated at just over three times per year, according to analysts, compared with an average 7.13 at other apparel retailers, according to CSI Market. Instead, new products were seen as the key to sales, with more than 1,000 styles on average arriving on the site each week.
But in 2020, that changed. In the second quarter, turns for product sold on the Revolve site were up 30 percent year-over-year, the highest rate in six years. That was partly down to Revolve having less inventory for sale (down 29 percent year-over-year by the end of the third quarter). The retailer, previously only a reluctant discounter, nodded to reality with higher markdowns in the second quarter.
Siegel said it’s unclear if Revolve’s better inventory turns are a temporary side effect of the pandemic crisis. But it could be a key advantage if it remains moving forward.
“If at the other side of the pandemic, Revolve walks out with an improved perspective on inventory management, and events return, they will have walked out as a healthier company than they came in,” he said.
Before the pandemic, Revolve shoppers returned more than half of the items they ordered. In the second quarter, that figure fell to 40 percent, according to analyst estimates. Items in hot categories such as home goods and beauty products are returned less frequently than clothes, explaining part of the drop. Siegel posited that consumers who once mailed returns on their commutes are shopping more carefully now that they work from home, and can’t mail packages as easily.
It’s an open question whether Revolve can continue to hold down its return rate (the metric increased to 43 percent in the third quarter).
Karanikolas told analysts in November he expects the shift to non-apparel categories to help keep returns low, along with “investments we’ve been making on our side in terms of our quality and presenting the product inaccurately… [that] came to fruition at the same time as Covid hit.”
“We’ll have to see post-Covid to what extent those initiatives hold up,” he said.
Growing International Business
Most of Revolve’s business is focused in the US, and in 2019, 16 percent of sales were international. But in the third quarter, with the US market still soft, sales grew faster abroad, up 18 percent. Western Europe, Australia and Canada were all strong.
Karanikolas said Revolve’s priorities for more international growth are related to logistics and customer experience, like payment methods. After all, a customer in Berlin or Sydney can follow along with the action at Coachella just as easily as a shopper in New York.
Revolve invested $10 million in one centralised fulfilment centre, including automation, in 2019, and it paid off during the pandemic when many competitors saw shipping delays or had to temporarily close warehouses.
In the third quarter, Revolve’s fulfilment costs per order decreased 15 percent year-over-year. And 99 percent of customer orders received by noon Pacific time were shipped the same day.
Revolve may have expanded beyond its party reputation this year, but the real test will come when vaccines are widely available and the retailer’s core customers resume their social lives.
Mente said that preparing to meet that moment requires “triple work, depending on a number of different events, depending on timing.” Coachella, for example, was rescheduled for April 2021 but is reportedly moving to October, according to Rolling Stone, though those plans could change.
Other challenges on the horizon include increased competition. Many brands invested in e-commerce during the pandemic, and won’t retreat from online sales once it’s over.
Plus, while Revolve has saved money by not staging its elaborate influencer marketing events in 2020, those marketing costs will come back along with the festival circuit.
But Revolve’s distinct brand identity, and relatively small size, will help.
“They have meaningful market share opportunity,” said Siegel. “They are still at a level where the path forward is large enough that it’s up to them.”
The Great Influencer Shakeout
Is the Future of Luxury E-Commerce Big or Small?
Revolve’s Shares Soar in First Day of Trading