Revolve Sales Climb 20 Percent but Net Income Falls 27 Percent in Q3

Revolve Group grew third-quarter sales 20 percent to $356 million, yet net income fell 27 percent to $15.5 million, as higher fuel surcharges on logistics costs and heavier marketing investment absorbed most of the revenue gain. Shares dropped 4.8 percent to $20.50 in after-hours trading Tuesday on the report, which covered the quarter ended Sept. 30.

The top line beat the 16.9 percent growth analysts had expected, according to Yahoo Finance. Both divisions moved in line with the corporate average. The core Revolve banner rose to $306.8 million, while luxury arm Fwrd tallied $49.2 million.

What drove the volume?

Active customers climbed 18 percent to 3.2 million on a trailing 12-month basis. Those shoppers placed 19 percent more orders, although average order value slipped 5 percent to $292. The company attributed the decline "primarily" to initial sales of Grow-Good beauty products at much lower price points. Grow-Good, launched in the spring, forms part of a joint venture with Cardi B.

Cofounder and co-CEO Michael Karanikolas told analysts on a conference call: "Our strong top-line results and the momentum in our customer base in recent quarters is especially noteworthy in an environment where many in our industry have seen softer trends. We believe that it shows our investments are delivering results and reflects the team's disciplined execution against our key growth initiatives."

How did returns and shipping costs move?

The return rate improved by more than 2 percent from a year earlier, and Karanikolas credited category diversification as "a big driver" of the shift. The company has cut return rates in eight of the last 10 quarters. That improvement, he said, helped "absorb the impact of higher fuel surcharges on our logistics costs this quarter."

The surcharges still kept the revenue increase from carrying through to the bottom line. Adjusted earnings before interest, taxes, depreciation and amortization dipped 7 percent to $23.5 million.

Where is the money going?

Marketing absorbed a growing share of sales. Revolve spent 14.3 percent of revenue, or $50.8 million, on marketing in the quarter, up from 13.7 percent, or $40.4 million, a year earlier. The company tied the increase to performance and brand marketing that supports growth initiatives, including its first namesake label, Revolve Los Angeles, within the owned brand assortment.

Cofounder and co-CEO Michael Mente said in a statement: "Our strong top-line growth and customer engagement metrics are a reflection of our brand strength and a result of our investments in brand building, physical retail expansion and key partnerships, including the recent launch of Revolve Los Angeles and our inaugural Revolve Magazine, our new joint venture with Donatella Versace, and recently announced expanded partnerships with Kendall Jenner and Dwyane Wade."

The spending will not stop there. Revolve plans to devote 16.9 percent of sales to marketing in the fourth quarter, a step up from the third-quarter rate, betting that continued customer acquisition and a falling return rate will outweigh elevated freight and promotional costs through the holiday quarter.