I originally did a tweet storm on Revolve’s IPO filing and figure I’d give it a more permanent home.
Had a chance to skim through Revolve Clothing’s S-1 IPO filing. The company is definitely worth following if you’re interested in tracking how a focused, direct-to-consumer fashion retailer can compete with Amazon, and how influencer marketing can drive sales.
Background: Revolve was originally a bootstrapped business founded in 2003, and did not take VC funding until 9 years later in 2012. That’s a lot of operational scar tissue to accumulate, especially when you consider they survived the global financial crisis without any safety net. That bootstrapping DNA is also why Revolve is profitable today, and not a cash burn machine typically seen at VC funded operations.
First Take on Financials: June 2018 LTM adjusted EBITDA of $39M on $447M net sales doesn’t look bad at all. For loose comparison, Stitch Fix reported July 2018 LTM adjusted EBITDA of $57M on much larger $1.2B net sales. Revolve and StitchFix are different business models, but at the end of the day they’re both trying to optimize the purchase funnel.
Metrics Focused: One thing that really sticks out about Revolve is they’re very metrics driven. The business was originally born out of researching popular keywords and selling merchandise against those terms (very lean startup of them). I really like that the company is transparent about their business and the IPO filing is full of useful metrics. A lot of other public companies could learn a thing or two from Revolve, and should consider providing similar levels of transparency and metrics.
Some notable data shared includes:
- 75% of net sales is full price
- 8 of top 10 selling brands are company owned brands (owns 19 brands total)
- Company retained 88% of net sales from prior year’s customers
- 55% of net sales come from customer that visit the site at least 2x per week
- 54% of their traffic comes from free/low-cost sources
I love these sort of metrics because it tells me the company is staying on top of the health of their operations, and allows them to be nimbler with demand and identify emerging issues. With this analytical rigor in place, Revolve is able to apply a “read and react” merchandising approach and launch on average 1,000 new styles per week.
Metrics also provide the foundation to nimbly move and shape the company’s private label businesses which are more productive on a units sold per style basis, with higher average unit revenue, and meaningfully higher gross margins vs. third party brands. It also keeps average order value high at $304.
Unit Economics: Revolve’s high order value is important (and also a risk factor) because it makes the unit economics pretty compelling. The payback period on Revolve’s CAC is on the first order, and a key to maintaining Revolve’s high LTV/CAC is keeping customers happy with merchandise that’s constantly fresh and on trend.
Revolve provides a really nice illustration of their unit economics with a 2014 cohort analysis. These unit economics ultimately provide the foundation to ramp up marketing spend and ensure those dollars are generating a return on investment. Despite significantly ramping up marketing over the past few years, CAC stayed relatively steady from 2014 to 2016.
Marketing Spend: The company went from spending $7.3m on marketing in 2014 to $56m in 2017. Although Revolve is known for their influencer initiatives and campaigns, 75% of their marketing spend is performance based (i.e. retargeting, paid search/listing ads, affiliate marketing, paid social, email).
Of course, the question is how much more performance marketing runway is left before unit economics begin to erode? How can they continue to drive efficient and profitable growth? The company has acknowledged CAC increases and gets less efficient as digital channel spend increases so it will be interesting to see how much more they spend on performance based marketing vs. reallocating more dollars to influencer marketing where they interestingly say spend has an opposite effect and gets more efficient the more they spend.
Revolve has also deliberately increased their marketing spend to target customers for their higher-margin owned brands with a focus on acquiring “full price” customers who they believe have higher LTVs. While CAC increased from $30 to $38 due to this initiative, they still generated a profit on 1st order and with a higher contribution margin.
Canary in the Social Marketing Coal Mine: Going forward, another key question is how will brand and influencer marketing drive future growth. Revolve is considered one of the best at influencer marketing and in many ways are the “canary in the social marketing coal mine” of social marketing. If they can’t make it work, a lot of direct-to-consumer folks are in trouble.
Revolve is also a proxy for Instagram’s social commerce initiatives. They will likely be an early adopter to whatever Instagram decides to pursue, and will have a clear, metrics-driven read through into how things are progressing and what’s working. In theory, Instagram’s commerce success should drive success at Revolve, but only time (and data) will tell.
Final Take: Overall, Revolve’s playbook of shifting to private label, increasing merchandise velocity, and social marketing is working (so far), and a pretty good approach to competing with Amazon and thriving as a standalone company. Having strong analytical rigor to help navigate the qualitative elements (and rapidly changing tastes) of fashion makes them as well positioned as any retailer, and I look forward to following their journey as a public company.
