Chit Chat Stocks - Revolve Group (RVLV) | Deep Dive

Episode Date: March 11, 2021

Revolve Group operates as a type of online fashion retailer with operations that are driven by the rise of influencers. Revolve connects these fashion influencers, consumers, and all types of brands. Brett, Ryan, and Ian dive into the business and how it may perform in the future. Enjoy the show! Subscribe to 7 Investing with the code "CCM": https://7investing.com/subscribe/ Follow Ian and check out his work on Twitter: https://twitter.com/IanGrayLive Follow us on Twitter: https://twitter.com/chitchatmoney Subscribe to our Youtube Channel: https://www.youtube.com/channel/UCG5Ni-SI-jyrEsoNUhqftNQ Email us: [e-mail] Timestamps Company Background | (2:26) Industry | (7:28) Management & Ownership | (11:13) Valuation | (15:07) Earnings | (15:42) Balance Sheet | (18:45) Our Analysis | (23:17) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Brett Schafer and Ryan Henderson are general partners and portfolio managers at Arch Capital. Arch Capital and its partners may hold securities discussed on this show. Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, host Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Ryan and Brett are also general partners at Arch Capital, and Arch Capital may have positions in the securities discussed in this podcast. Anything discussed on Chit Chat Money by Ryan or Brett or any other podcast guests is not formal advice or recommendation. Now, please enjoy this episode. Welcome in. This is the Thursday Deep Dive episode. We're here with Ian Gray, as always. Ian, you were on vacation last week on the beach. You said you were watching the market volatility

from your phone on the beach. I thought it was a funny story. How are you doing? um yeah doing well it was uh it was a good week i think on monday if i'm remembering right i more than paid for the vacation and i was like wow that's kind of nice and then the rest of the week i watched as i lost about you know 20 times what the vacation costs so um you know fun week but got to buy some uh deals on the dip and while sitting on the beach so that's kind of a you know at least for at this point in my life that's more of a once-in-a-lifetime opportunity so So it doesn't happen that often where I'm buying stocks on the beach, but it was pretty fun last week. Yeah, there we go.

And today we're going to be talking Revolve Group. Ryan will introduce the company, but we have to talk about seven investing first with our CCM. I think it's my turn, right? Yeah, sure. Go ahead. Yeah, the company's a year old and they do seven picks a month. And so far over the last year, their picks have beat the market by upwards of, well, depends on when you look at 20 maybe uh versus the s&p 500 so really strong performance from the team there um and if you use our promo code ccm at checkout you can get ten dollars off your first

month we talk about it every show great but it's a yeah i mean it's a great deal seven bucks for one month trials are going well too i haven't checked a little email thing we you know whenever someone signs up we get an email and every morning there's like two or three so everyone's everyone's doing the right thing don't stop you know keep it going yeah everyone is doing the right thing signing up for seven invest because that is a smart thing to do for us i mean for your for the listeners yes it's smart for you uh but ryan you want to just revolve group yeah so they're digital digital fashion retailer for gen z and millennials so here's a quote from their 10k they said our dynamic platform connects a deeply engaged community of millions of consumers thousands

of global fashion influencers and more than a thousand emerging established and owned brands so most of the clothes that they offer are youthful i guess is a nice way to put it they're kind of more revealing more going out type of clothes and they're targeted towards females and they aren't cheap so it's like i guess you could call them i know forward so there's pretty much two retail segments there's the revolve and then there's forward forward is like i believe that's their own luxury brand. Am I getting that right? Yeah. Well, it's theirs now, but they acquired it, I believe, a few years back. But yeah, this stuff isn't cheap. It's like $1,000 dresses on the high end. And I think 77%, I believe, was the number of purchases in 2020

came at full price. So it's definitely not a discount retailer. Marketing is also a major part of their business so they were really one of the pioneers of influencer marketing so they they have basically a network of thousands of what they call influencers but i mean some of them are like bloggers and fashion bloggers that kind of stuff but then a lot of them are more instagram models sort of very um attractive is yeah yeah they're very attractive sort of models that kind of they market the products by just taking pictures whether it's on a beach or at concert or something like that. And a lot of their influencers are paid with in-store credit. I think there might also be like paper post type of things, but a lot of it is paid for

with in-store credit, which is pretty cheap compared to if you had to pay them with real dollars, cause it also boosts your top line. But anyway, there's a quote here from the LA times. There was an LA times article that was kind of fascinating on the company. It said the company hosts more than a hundred social events annually one of its biggest and most exclusive that is celeb laden latin parties happens every year at the same time as coachella music festival it also sends influencers on trips to enviable vacation spots around the world all designed to maximize instagram worthy moments in clothing sold by revolve so yeah that might make your eyes roll to the back of your head but it almost yeah fomo works it works uh and to those festivals

they spend a lot of money so it's important for the business and their marketing strategy yeah ian you got something yeah i was just gonna say and this is one of those cases where it seems like it actually is working like there's a lot of brands that want to have that fomo factor they want to have people dying to be at their parties all that type of stuff and and we can debate about whether these are the most effective uses of cash, but they have developed a little bit of that it factor where people do want to go to these things. So at least, at least to that extent, they've been successful. Yeah. And in my, I guess, vetting process of management, maybe not a vetting process, but when you hear that like social events are a big component of it,

your worry is that maybe this is a business where the CEO is self-serving and could just potentially, and there's two CEOs as co-CEOs, but you're worried that the parties are kind of designed to boost their ego. It seems like the CEOs are more focused on fashion and they really like the industry. Yeah. Well, they've been doing it since 2003. So, they have a long-term mindset and yeah, I mean, you kind of worry about, you know, Fyre Fest, kind of stuff like that, you know, hit and miss. But the longevity, I think, shows that they're not just in it for the party. Yeah. So they were founded in 2003 by their now co-CEOs, Michael Mente and Mike Karanikolas. I might be getting that wrong, but they both met at a dot-com company that went belly up during the dot-com bubble. And they ended up starting Revolve coming out of that. But it was originally just a place to buy premium jeans online. Apparently in like 2001, 2002, premium jeans were like a big thing, like really fancy jeans. And they were based in LA. So maybe fashion trends don't transcend across the country, but they didn't actually start working with influencers until 2009. So if that gives you a better idea of that, this wasn't like their main game plan. Yeah, they had six years of business where that wasn't included and they launched Forward, which was that luxury brand or Forward was launched in 2008. But you said it was acquired.

yeah i should confirm that uh we probably should look at that before the show but we'll get it at the break and we'll talk to we'll mention on the second half but revolved in an ipo until 2019 so relatively new i think it's been the public markets for about two years now so not too bad you want to talk uh competition industry yeah so from the 10k uh they gave out some numbers so they might be a little biased here but i don't think they can really fudge these numbers um they're really targeting people that are born after 1981. Sorry, if you're older than that, they might be ageist towards you, but that's just unfortunate. They represent about 22% of consumer spending in 2019. This is people born after 1981. And that should probably grow to the majority of spend

by 2030 or close to it. Because we're seeing, I mean, it's just each year, the millennial and Gen Z demographic gets older. And as they get older, they have theoretically more dollars to spend. Ian, do you have something to add there? Yeah, I just had a question for you, actually. Do you think that that's, is it reasonable to expect that they will continue to be targeting people born after 1981? Or 10 years from now, are they going to be targeting people that are born after 1991? Do you know, is this like generation bounded? Or is it age bounded? do you know yeah it'd be tough to tell i would guess that it's based on sort of the lifestyle of the people which it tends to be more to 20 like 30 year olds that kind of thing people that

are going out this is really kind of going out clothing whether it's concerts going to the bar uh that kind of stuff yeah you could argue that as well i would say i don't see a lot of 50 year olds in 20 years or whatever rocking uh sleeveless t-shirts and stuff who knows but maybe i'm wrong the uh yeah because either they're going to have to graduate to the younger generations or they're going to have to go with um their current cohorts as they age uh you'd hope they can either do one or the other uh but if they can't do both the business would be in trouble uh but if they can if they can do both you know that that would be great but i'll go back to some of the industry numbers. They face competition from basically everyone. You know, there's e-commerce sites,

even Amazon, Walmart, whatever, Target. There's sites of all sizes. There's smaller ones powered by Shopify. There's boutique shops, department stores, basically anyone that sells clothes. And in the fashion industry, they're competing with Revolve Group. So there's a ton of competitors out there. But with that, you probably shouldn't be concerned about market saturation or like finding product market fit of what a lot of tech companies or software or apps are looking for, because this business model is so simple that they can really, I mean, they're selling clothes to people, very scalable. Everyone wears clothes. But it's really how they position themselves versus the competitors, how that brand is looked at. And you can probably see that they have a

tailwind from e-commerce. They're definitely an advantage at e-commerce versus someone like Macy's. who has all the physical locations and yeah, millennial and Gen Z buyers should continue to buy online. Uh, just as a note, uh, for what they plan, I think this is very important. The revolve brand had 4.4 million followers on Instagram. Again, that's something that makes as an investor, you're like, all right, whatever. Uh, at the end of dad, 4.4 million followers at the end of 29, 2020. Uh, and that's up 44% year over year. I think that's pretty good indication that uh people like whether that's the top of the funnel or whatever i think that's that's a good sign yeah it's easier marketing for sure uh and their enterprise value to instagram followers

looks pretty cheap at this multiple yeah yeah what's my yeah the answer but uh no like if you're trying to think of 4.4 million is a lot for reference lululemon i think has 3 million followers so uh it is sort of more prominent on social media than lululemon which is obviously a huge brand. Ian, you want to hit management and ownership? Yep. So as we alluded to earlier, this company has co-CEOs, which is typically a bit concerning to me. Doesn't generally make a whole lot of sense, I don't think, especially in a business like this that has really one product. Sometimes you see co-CEOs in a situation where one's running the investment portfolio and one's running the operating business or something like that. But especially in a situation like

this where there's really one business, that's a bit concerning to me, but they seem to be doing it well. Both the CEOs are co-founders, as we've mentioned, and they've been working together since 2003 in this company. And they were working at the same company before this. So they seem to probably do this fairly well, know their responsibilities, break out the kind of the management between them. And it seems to work. So the two guys are Mike Karanakolas and Michael Mente. Half of the shares outstanding are controlled by a company called MMK Development Inc., which is an entity that's owned by the co-founders. So they basically, in effect, own a little over half of the company, which also translates to over 65% of voting rights.

So they have control of the firm. That's something that sometimes can be concerning to us because investors can't go in, replace management, they can't, you know, demand things of management, things like that, because management has control. But it's also can be a positive if you trust management, because they're not going to be pulled by short term trends, necessarily, they're going to be more focused on hopefully more focused on the long term, if you trust management. And I know that this is something that Marcus Limonis, the, I guess the TV CEO, and also the CEO of camping world. Um, he, he talks about this a lot because he has control of his firm is, Hey, I can take a whole, a long-term view of things. I don't have to get

pulled this way or that way by the market. I know what's best. I don't want people telling me what to do. Um, so they've got that at revolve. So it'll be interesting to see like, that has to be something you become comfortable with. Um, the last thing I'll say is I like the way that they've handled the pandemic. They seem to really pare back on costs and do a good job of generating cash even though revenues declined this year. And then they're staying aggressive now. They've started ramping up inventory in the fourth quarter, which I'll get into later. And they don't seem to have really gotten tentative. They seem like they're good managers and they know this business well. Yeah, there's plenty of examples there. I loved what they did with inventory this

year where they ramped it down for the summer. I mean, it was pretty easy to see why they should do that, but now they're ramping it back up for hopefully the reopening. And yeah, definitely the founder thing can be a double-edged sword if they have that voting control. But if you like the management, I think it's a huge positive because they don't have to worry about one, you know, just getting a bunch of stock options that can dilute shareholders. Now they already you have 65% or, you know, half of the shares, they're going to do just fine without getting a bunch of stock comp and they don't have to worry about short-term dynamics. I know they saw their stock price get cut down by like 70% post IPO. And if you were a short-term manager,

then that might concern you. They might've done some things to hurt them or to, you know, get something quick in the short run, but in the long run, they weren't ready, but it seems like they were able to invest enough to i don't know just hope things could do well in the long run yeah i think that ownership is kind of a big deal because they don't so many uh so many compensation packages are incentivized based on whatever one year ebita goals or something like that and yeah having a huge ownership means you just don't have to care about what happens in given year because you're not that's not where your compensation is tied to yep all right i'll hit the valuation probably on that uh market cap right now is about 3.37 billion ticker is rvlv

uh ian will hit the balance sheet they have i think minimal liabilities to the enterprise value is a little lower than that uh but price to sales is about 5.8 right now price to gross profit of 11 pe trailing is about 59. uh we're seeing you know the margins were a little weak this year. You maybe think they can get margin expansion in the future. And then price to free cash flow was about 48. So definitely a premium valuation. I think we've seen the stock up about 300% or more since the March lows. So they've done really well during the pandemic, even though their revenue has actually done worse. So I think people are looking towards the future as then as a, you know, quote, reopening play, although there could be other factors there. And then the last

thing I'll say about the valuation. If you look at the shares outstanding from the end of 2018, 2019 and 2020, they've gone from 68 million to 69 million to 71 million. So a little bit of dilution. They had the IPO in there as well. And they had some different preferred stock that got converted to common. But it seems like the share dilution shouldn't be a giant issue. But you got to expect it with a company. All companies are kind of going to do it. Yeah. SBC is not huge. I think it was, oh gosh, 3 million. Out of 500. Yeah, it was about three, yeah, 3 million.

On like 580, well, it's 581 million in revenue. Yeah, 580 in revenue. Yeah, their nose is aura or whatever, doing 40%. Yeah, anyway, so 581 million in revenue for 2020. And that was down 3% year over year, as you might imagine. Just, and if you're wondering what started driving that down, less people going out less need for this kind of clothes uh just in general drives less volume right and there's less in-person events uh gross margin was 52.6 percent um it has sort of ebbed

and flowed but it tends to be above 50 percent roughly um they like i said they are not selling stuff cheaply so it is uh definitely a premium price and then 71 million in free cash flow free cashflow margin was about 12.2%. They have 1.5 million average customers in 2020. That's roughly 1.5 million. And the average order value was $236. So that's kind of the average ticket. And it's actually down quite a bit. So you typically it's closer to 300 than 200. Interesting. Okay. I didn't see that, but the, as I said earlier, 77% of the products in 2020 were bought at full price. Only 12.2% of revenue is spent on sales and marketing. I thought that was a little interesting considering that marketing, marketing is such a big part of

their business. But I think it might be a little misleading because some of the marketing expense is paid in store credit. So that kind of just balances out with the revenue. So you might as well look at it as sales and marketing as a percentage of gross profit instead. Yeah. And like i said sbc was pretty small not very big at all there was a sizable inventory decline that helped boost free cash flow i think they the inventory dropped about 10 million dollars year over year which without that it would have been more like 60 million of free cash flow that's why if you're looking at free cash flow margin it was so much higher than operating margin typically operating margin is right around eight to ten percent right now normalized

it can probably expand over time. I imagine there's some operating leverage in the business, but yeah, that was basically all the earnings. Ian, you want to hit balance sheet? Yep. So they've got about $146 million in cash on the balance sheet. That was a big bump from last year, almost an $80 million bump because of this free cashflow. No debt. They did have a line of credit that they drew on and repaid in 2020. So they've got some liquidity if they need it, but they seem to be, they should be able to fund their business with cash at this point. The inventory is down a bit from last year, I think 9% or something overall, but they expect it to increase in the coming year. And they had a 29% sequential increase in Q4. So they're already

starting to ramp up. They're trying to be aggressive, get in front. They don't want to be caught without inventory once the reopening starts. They've made statements that we don't know exactly when people are going to start buying for the reopening, but we want, we want to make sure we don't miss it. And they've got the liquidity that they can handle bumping up inventory a little bit. That's not a problem at all. The inventory turnover is about 2.6 times. So that means that's how many times they sell through their entire inventory in a year, which is about the same as the prior year, just slightly higher. I'd love to see that if they could bump that up to three times or something like that, just increases margins and increases

free cashflow. So that'd be great. But but the inventory turnover is it's been fairly steady over the last four years. So I wouldn't necessarily expect that they had, they have talked a little bit about trying to get smarter about inventory. And I think we've seen some of that this year, as you alluded to Brett, that, you know, it's gone, went down when they didn't need it. Now it's kind of ramping back up when they do need it. And it's kind of, it's normalizing, but anyways, it's an interesting, that's, that's a big piece of this business is how well they handle inventory because you don't want to get caught with like last year's stuff either because then you have to discount it brings down your margins all that type of stuff so it's it's a

very um inventory is super important here um the other thing i'll say is they increased accounts payable a lot um in the past year slower to pay suppliers i think instead of like paying suppliers in 30 days they were paying suppliers in like 45 days roughly so um i suspect that was due to the pandemic they were trying to just they got some better terms from their suppliers um but that helped with that helped with cash flow um and things like that so between accounts payable and the inventory changes it was like 18 to 20 million dollars that was added to the free cash flow line and so um as ryan was alluding to that would take it down to something more like 50 million dollars in free cash flow if you didn't have these adjustments from accounts payable and

inventory. So yeah. So that's something to keep in mind is they may actually free cash flow next year could potentially be lower if they don't have the same benefits from those two areas. But anyway, something to keep an eye on. Yeah. And I think another thing to think about with the balance sheet is one, they have this influx of cash, right? And they took out that revolver because I think they were looking at the spring and they're like, wow. All right. Everything's closed down. No festivals or nothing. That's our whole marketing play. We think the business might totally collapsed. It ended up doing fine. They kind of pivoted and really did strongly with the online stuff through their digital channels, but that helped them save a ton of money on marketing

because they weren't, they were forced to not spend whatever $3 million at a festival. I don't know to help them cost save, but they're going to want to spend that coming to the next year. Ian, do you have anything before the break? Yeah. Just one last thing. I think that's a great example of one of these companies that was very conservative and really cut expenses during the pandemic. And I think the pandemic taught a lot of companies, and I think Revolve is a great example of this, that they can actually be a little leaner than they are. And so when they were forced to lean down, and then coming out of it, they're realizing, you know what, there's not really a reason to bring back on some of this fat. And so I think moving forward, Revolve is a great example.

But I think there's other companies that we've looked at as well, where this is true, that these companies recognize, Oh, we actually have a little better margin profiles than we thought we did. Um, and sometimes those cuts are hard to make and it takes something like a pandemic where you're worried about your business surviving, um, to really force you to make some of those hard cuts. But, uh, I think this was a good example of them slimming down and realizing that that's sustainable. Right. Ryan, do you have anything else before we hit the break? No. Okay. We're going to hit the break. Uh, we finished up, you know, the summary of revolve group here. Now We're going to hit the, you know, more of the analysis, competitive advantages, future growth opportunities, all that good stuff.

Cox Panoramic Wi-Fi includes advanced security to help protect all your connected devices. You'll get real time alerts. Oh, like this one. So you don't have to worry about malware or when your kid downloads a song from a shady link. And now all your computer can play is red color, red color, where are you? all blocked thanks to advanced security included with cox panoramic wi-fi advanced security must be enabled in the panoramic wi-fi app restrictions apply welcome back uh we tried to clear it up when we took the ad break and pause for a second but we're unsure if ford was acquired uh it was pre

ipo so they didn't have to do a press release all you got to know is that forward is owned by revolve group now and it makes up about 10 to 50 percent of their revenue and it's a little different um it's less mainstream it's more of the luxury thousand dollar items you know dresses stuff that is really only for the ultra wealthy uh but once we clear that up yeah it is yeah it's really designer clothes there are two different websites but the partnership does kind of track back all the way to 2012 that's what we found on the old google machine yeah there was like a whole there's like a whole another new press release that came out in 2019 with the revolve launching your in-house brands that made it a little muckier. So why don't we get to the competitive

advantages? Ian, you want to go first? Yep. So the first competitive advantage we're going to look at is brand. One of the things that Revolve has going for it is that it's a very recognizable brand by people who search for apparel. So even today, I knew I was going to be doing this podcast and I was sending out some messages to some people in one of my classes and asked, Hey, has anybody heard of Revolve? And within like two minutes, someone said, Oh yeah, I love Revolve. Revolve is the best. I buy all my stuff on Revolve. So it's recognizable. It throws all these parties and it's got another proof of this is it's got four and a half million followers on Instagram, which like we've talked about is quite a few. It's more than Lululemon.

I think one key metric to watch here to see if their brand continues to improve is active customer retention. So they do track how many active customers they have and that declined by about 1% this year. And they have mentioned that they think that that might, um, continue to have small declines like that, but keep an eye on active customer retention to see if they're really building this brand that they say they are. Yeah. That's a good indicator of whether they can post pandemic, get back to that growth. Uh, and I would note that their active customer number is a trailing 12 month number. So you might not see strong growth, even if like for one quarter, they do well. You need a full year of a good customer growth to really get that number

back up. But it might be a little less misleading on the earnings report, but that is a good number to watch out if that marketing funnel is working for them. Yeah. And there is like, maybe it sounds less important to some listeners, like who cares about their social media presence, but like if they launch like an absolute hit product, they have access to four and a half million customers. Plus the other contractors. Yeah, instantly. And so, it's just an easy funnel. And that really is a competitive advantage. But I'll get into mine, which is that influencer network. I think social media has really normalized or even weaponized envy and FOMO for retailers. Especially Instagram, then. Right. So you've got, I mean, girls want to look like other girls that they admire, whether it's at Coachella or it's on beaches in the Bahamas, it creates a bit of a network effect or even virality, I guess, just because, you know, people, they kind of admire their influencers, if you will.

And so that, uh, having that network, having them loyal to, uh, revolve is really helpful. And then also on that influencer side, like girls want to be, or some of the models or the influencers, they want to be revolve influencers. Cause it's kind of, you know, that's, I guess, clout, if you will. And so that they're willing to do it for maybe less than they do it for other brands. They'll take in-store credit instead of just typical pay per post kind of thing. so i mean that's that's a testament i guess to revolve's brand yeah i'd agree with that and the influencer market can kind of seem muddled and seems crowded right but revolve has the scale

where it can reach hundreds or even i don't know if they mentioned they have a thousand partners but they can have hundreds of partners where thousands thousands and i think they count people that have a few as a few thousand followers upwards of you know multiples of millions uh the you know if you're just a brand that's very small and you just do one person and that feels like it's not really going to get through but if you're with a ton of people that can be like oh everyone i mean it's it's the mark everyone knows that marketing tool it's kind of like what every department store has been doing for decades with you know tv advertising stuff like that you need a repetitive effect and the scale can help there but i'll hit my competitive

advantage it's very similar these aren't all like you wouldn't define these at all as like a moat or anything like that but it's more of with these retailers you kind of just got to work with what you got because everyone's running very similar business models so i think the scale at these festivals give them an advantage again if you're someone that doesn't go to these and i i don't go to these it's it's mainly for the you know the people that like to go to these uh concerts and stuff like that it's it's a unique crowd but really like it is important and it's like it's huge to these people um it gives them advantage for a ball for because they have the ability to spend a million dollars or more at one of these concert weekends and it's inconsequential like

other brands it might hurt them to have to spend a million dollars boutique brand will not be able to do that is it worth it on a marketing spend if you look at the customer acquisition cost maybe but it does get that marketing engine going because you have to go there you have to pay whatever your, your, um, models or whatever to, you know, wear your stuff, influencers, whatever, whatever you want to call them. But it gets that marketing engine kind of going. Um, and that's where it has to start. Um, but it was nice to see, I think that they were still able to, I mean, revenue declines of only, what was it? 3% when their entire marketing funnel was kind of killed outside of the social media. I think it was down. Yeah. 3%, 3% for the full

year went a lot i mean that summer was totally crushed uh but who knows maybe that means that that marketing spend isn't really that warranted uh but let's get to the next segment future growth opportunities and what do you have well first i just want to say i it's a shock to me that you're not a big festival guy brett yeah you know me i am not uh not a rave guy for sure okay more more of that seattle grunge maybe yeah that's that's more of my alley okay well my future growth opportunity that I'm really looking at is Forward, their luxury brand that we've talked about. Average tickets for their luxury brand are more than twice as high as their Revolve brand. So they, you know, which makes sense, right? They're selling more expensive stuff on

Revolve. Their gross margins are actually a little bit lower. Last year, despite the fact that Revolve as a whole brand, as a whole company, revenue declined 3%. The forward segment actually grew by 8% last year, despite the pandemic. And so I think that's showing that there's a lot of opportunity there and that there's some strength behind that brand. They believe that they're great brand builders and they say that they haven't in the most recent call, they've said that they haven't focused on forward so far, but they're really going to start devoting more resources to forward. uh one kind of good comp is farfetch which is growing aggressively about 46 a year which is a

it's another it's more of a pure play uh luxury um apparel brand so they're growing about 46 a year and um there should be some there should be some growth prospects there i guess if they're growing 46 a year revolve should figure out a way to continue to grow forward yeah and luxury spending as a whole tends to be more resilient across during recessions and stuff like that even during downturns so yeah the bull case here is just income inequality continue for it yeah yes that's uh that's a bad joke but well but i mean that would i guess benefit uh luxury brands it would potentially but anyway my uh future growth opportunity if it seems like this stuff is dry it's a very simple business right they just skate where the fashion trends are going

So it's not, there isn't like one thing they can do that will totally change the company. So I just took Tailwinds, which is social commerce. Revolve would definitely be a beneficiary of if like direct buying on Instagram became sort of normalized or it was really successful. And they were one of the beta companies on that. So kind of, yeah, hopefully they can be one of the first people to do that. Or if TikTok got into e-commerce, I don't know if they already do. i'm uh in i don't i'm not on tiktok so uh but yeah it's just a very social driven brand and

their ability to be accessible everywhere is gonna benefit as e-commerce continues to grow i still think e-commerce is certainly certainly in its early innings um but yeah they're like i said earlier there isn't one obvious future growth opportunity it's retail it's fragmented but they've done a really good job yeah and like you can say oh they have nothing that's differentiated but you could have said that about mason's jc penning nordstrom they're all the same brands maybe not maybe not the examples we want to use no not not today but i'm saying 50 years ago those were phenomenal businesses and potentially i don't want to get too bullish but potentially revolves repeating that with their online brand but i'll get to my future growth opportunity

this is the simple one and it's straightforward and this is a little short term but the reopening the US economy. The combination of a fully vaccinated population coming at Memorial Day weekend, which is the end of May for anyone that's international, with a year of people not doing social activities, I think that's a giant boom for Evolve Group's products. I don't think there's a better reopening stock. Maybe you could argue a few other things, but the tailwinds in the short term seem phenomenal. Again, the stock is probably pricing in that it's at a premium valuation relative to its tramling earnings is probably pricing in a lot of margin expansion and growth. And they've seen some really strong examples internationally too. Australia and Israel

have both done really well dealing with COVID-19. And they said that, I believe it was either over the last two months or in the fourth quarter itself, that sales in Australia grew 30% and Israel grew 50%. I think that's a very strong example of what could happen in the United States, their core market um over the next maybe year and a half or so yeah it definitely is i mean we are of the camp that if vaccinations are out by memorial day we're gonna have yeah we're gonna have a summer full pent-up demand um yeah and there's no doubt the revolve would benefit from that but uh and you have anything else on future growth opportunities before we hit No.

Okay. Do you want to hit your highlights on what I said? Yeah. So kind of speaking to what you were just saying, one of my highlights is strong international growth. They said they had 24% international growth in Q4. So if we can kind of extrapolate that forward, like you're saying to the US, once things open up a little bit more as people, you know, the weather gets a little nicer, all those

types of things. That's pretty encouraging. They also had revenue growth of over 20% year over year in the first two months prior to COVID in 2020. and so they were showing strong revenue growth and then COVID hit. So I, this is one of those companies I think you can really look at and say COVID had a real effect. It was, it's just, it's not just the thing that they're saying that management's saying to cover their backside. They're actually, it had a real effect on their business. Um, strong free cashflow generation,

uh, just pretty solid business in my opinion. Um, low lights, some mixed reviews, actually, uh, some people love them. Like, like I mentioned, my classmate earlier, she was talking about how much she loved them for buying all sorts of things, but some people don't. Um, if you go look on like, uh, I think it was like Facebook reviews or something, it's got like 2.3 out of five stars and yeah. And most of that is like, Oh, they didn't respond to me about this, you know, thing or my thing came with a stain on it or stuff like that. And you never know how stuff like that is resolved. Um, but it seems to have a little bit of mixed reviews. So I'd want to dig in a little further on that. And then I'd say also the decline in active customers by 1%,

Not entirely surprising given the pandemic, but a little disappointed. It would be nice to see active customers staying steady or growing a little bit, but not a huge red flag. Yeah, it'd be important for active customers to get back for sure. That's a key number to watch. Ryan, do you have anything on highlights and lowlights? Yeah, I think the reopening play here is real. I think they will. I mean, you've witnessed it sort of internationally.

But the other thing that's important is that I feel like a lot of their business in the U.S. is done sort of on the West Coast and they have a lot of California based events, a lot of concerts like that. And I hate to be political, but I think California will be probably slower to open than maybe the rest of the country. And so not only do we need to see some opening across the country, but it really needs, everyone needs to be open, I guess, to have kind of a blowout 2021. And honestly, there is some pricing in going in right now in terms of the enterprise value that there is going to be a solid 2021. want so if that doesn't happen i guess that's my low light you could flip it we are hoping that it happens and the price reflects that so that's a little dangerous but i guess the only other potential low light is that i don't know if there's a moat yeah um i don't know if there needs to be one but or if there's just a way yeah it's like yeah there's not really any way they can

do that and what's i just keep thinking what's to stop like what's the barrier to entry for the next revolve like how is that scale and marketing because they're spending 10 a year on marketing 10 of revenue on marketing that's really it's social channels is something they have a little bit of a competitive advantage versus department stores you have that uh you know property leases that's really crushing them yeah besides that i i don't know nothing i don't know if there needs to be a moat i don't know if there will ever be a business with a massive moat in retail like this but retail i yeah it's just hard to kind of pin anything down there what about you um i'd agree big tail went from reopening margins look good to me um i think looking at gross margins if they can

stay in between 50% and 60%. You could probably reasonably say a 10% marketing expense, maybe 10% G&A, maybe lower, and then you got about 10% for fulfillment and stuff like that. You could think that they get to 20% operating margins, maybe 25% if you're optimistic and they have some pricing power and gross margins can expand. I think the margins could be a lot better in normalized environments and when they're not growing as quickly. I think they do have a bit of a competitive advantage with paying influencers, getting the prime real estate at these festivals. And there's no real, you're not worried about expansion in customers. There's only a million customers or a million five that, I mean, there's not any worry about reaching any sort of saturation,

I think. And I would compare them strongly to an online Macy's, something like that. i worry again because the department stores were able to last so long because the real the physical real estate mattered so much can instagram replicate that if they get someone upwards of you know 20 million instagram followers i doubt it i wish that would concern me a bit it's just less costly to be a massive retailer in the digital world than it is i mean marketing the start of your CAC marketing as I guess, the old operating leases. Yeah. So you, yeah,

it just seems like it's easier for competitors to come in. E-commerce is always hard to compete with. It's muddled more on Instagram and stuff like that. There's just way more, just more, I don't know, marketing thrown at you. Yeah. So that's, I don't know, but overall business seems pretty strong. I don't think anything to complain about.

Balance sheet looked great, but let's kick things, or sorry, finish things up more or less interested in, what do you think? I'd say I'm more interested for sure. I, uh, I hadn't looked at this business before, but I like it pretty simple business model, sell clothing, easy to understand. And, um, you know, I think they've got some good tailwinds here, especially if they could ever capture that, that Instagram audience and really selling direct through Instagram at scale,

that would be, as I think Ryan was mentioning it, that would be a huge boon to this business. If they could just capture people as soon as they see their favorite influencer wearing something and just buy it immediately, that makes a lot of sense to me. So definitely a business I'm going to be keeping my eye on. All right, Ryan. I am more interested.

I don't think the price is alarmingly high or anything like that. I do like management, which is sort of a big worry for me for a business like this because there's so much social stuff going on. I just didn't want, you know, you want to vet they're not self-serving in that regard you don't want billion right uh yeah and um so yeah i'm more interested i'm gonna have to keep digging to see sort of i hope to find maybe a better competitive advantage i really struggled to find one today i think we all did because it's

such a fragmented space so uh yeah if i can identify something that's really sustainable that would probably help yeah that is the big worry i say i'm more interested as well again premium valuation uh but the big concern with that is like all right we're us three we're not afraid we invested in the past in stuff that would be considered overvalued premium valuation but when you invest you got to think all right can this grow for years to come how confident am i in that and a big part of that is the defensibility of the business which comes from any competitive advantages and not that's got to be the big concern here but i'm definitely more interested i just it's such a simple business model and it seems like we probably talked in

circles a bit on this show right uh it could have been maybe half as long but it it works it really works yeah yeah i mean i would pay less attention to the last 12 month numbers and maybe extrapolate back five years to see what a normalized environment would look like yeah all right i it's a good way to wrap things up but ryan we have your choice for next week's show what did uh what did we agree on i'm forgetting i thought uh i think i told you guys before uh farfetch was it farfetch was it farfetch no it wasn't farfetch it was uh oh five below no it wasn't no it wasn't no it wasn't five below no it was something that was a little more growthy it'll be a surprise oh oh um it's gonna have to be surprising sorry for

everyone that's waiting all right well it'll be a surprise hopefully just know it was growthier we can't remember it all right all right that's great anticipation well that's gonna do it for this episode thank you all for listening remember we are not financial advisors anything we say on this show is not formal advice or recommendation. Ryan and I are general partners at Arch Capital. Arch Capital clients may hold positions in any securities discussed on this podcast. Thank you all for listening. We'll see you next episode.