Revolve’s new path from $1B ->$10B

TL;DR

– The 3 Deals that fell apart

– Stopping Revolve from dying by 1k cuts

🧠 The Takeaways

Revolve is dying the slow death of failing unit economics. It’s time to turn the ship around before it becomes a Zombie-brand.

Great growth always starts with tight unit economics.

Revolve needs to better monetize its audience with ads. 

Drive more product sales by bringing Influencers more closely into the merchandising fold.

+ the 3 deals that fell apart.

LBAB Community – 3 Deals fell apart so far

We’ve had 3 deals that got pretty close in the last 2 months. We were very interested in them, but they fell apart.

Not going to lie, it sucks losing every deal, even if it is part of the game. By the time a deal gets to the LOI stage, or to a place we’re ready to write an LOI, we’ve invested a good amount of time into it: understanding the biz + market, reviewing the CIM, financials, competition + team.

And when a deal dies, we have to start the process all over again.

It’s like reverse selling.

In a sales process, you’re looking for the one thing to get you to a yes and close the deal.

When you’re investing, you’re looking for every no that will kill a deal.

We’re looking at a high volume of deals (I must have reviewed 150 this year), and only the ones that survive, have to make it through every no.

Unfortunately, every deal we’ve worked on has fallen victim to a no. I’ve signed NDAs up to my ears, so, I can’t get too specific, but I can give you all a look into where the 3 real deals we were looking at fell apart.

Deal/LOI #1: The financials of the biz didn’t match its current performance while we were in talks with the seller. The biz hit hard times, and the delta between what they wanted + what we could reasonably pay was too far off.

Deal/LOI #2: This was the closest deal we’ve looked at. We were aligned on almost all of the terms and had the most compelling offer, but there was 1 legal term that was too complicated for us to execute on that was a non-negotiable for the seller. We had to back out because the legal fees to accommodate it would have destroyed our return profile.

Deal #3: This was the deal I was most excited about, but we were nowhere near the seller’s expectation on valuation/multiples. I was the most wrapped up in the biz + the plays we could have run with it, but there was just no way to bridge their expectations + what the market would pay for the deal.

1 of my advisors from my college startup has this great line that entrepreneurship is like “Plowing a field with your face”. And for me it couldn’t be more true. I’ve got the scars to pri 

But 1 thing all this effort has sewn is a much stronger discipline not to chase what I know isn’t going to be a good fit.

A great ex. of this: 

Fan posted about a $24m womenswear brand doing 19% EBITDA margins.

While my impulse is to get an intro + meet an incredible founder to learn about the biz, their story, and unique insight into the world… I know once we get into it, we’re not gonna wanna do the deal.

Women’s apparel bizs = our anti-thesis, and despite the metrics being right in our sweet spot and the founders have reasonable multiple expectations makes it a compelling deal.

4 months ago this was an immediate DM to schedule a call with the founder for this up coming week. 

Poof There’s 20-40 hours over 4 weeks gone.

Now, it’s something I’ll forget by next week as we focus on deals that make more sense.

Let’s Examine This Biz

Revolve Group is watching its profits evaporate as sales shrink. Luckily, they have enough assets on the balance sheet to weather the storm. But for how long?

Trading at $15/share with a $1B market cap, -55% L5, this biz is experiencing shrinking sales, rising costs, and… You guessed it! Profitability circling the drain.

Financial Summary

TLDR Analysis: Falling Sales Crush Profits

Sales ⬇️ & COGS ⬆️ = the wrong trends. 😬

Nothing is terrible, but no metric is great either. 🤷

Only has a 2.6% Net Income Margin. 😰

Nobody needs to get the paddles, but we’re watching this biz slowly sink.

In 2021, it made $114.5m in Net Income coming off the COVID highs.

In 2023, it made $28m with all the wrong trends. (Falling Rev + Rising costs.) 

It’s mind blowing this Digital Retailer is still trading at 45x its Earnings.

Let’s Scale This Biz!

Here are the 3 ways I’d turn this biz back into the Influencer Darling it was.

1) 1 Swift Prune

None of their metrics are awful. All of their costs are reasonable. But they’re all trending in the wrong direction. Revolve is dying by 1k cuts.

To get the biz back to profitability, they need to have 1 swift correction across the P&L and get:

COGS back to 45% of Rev (Currently 48%)

Marketing & Distribution back to 30% (Currently 34%)

G&A back to 10% (Currently 12%)

If they can grow Rev at the current costs, problem solved. But that’s harder said than done. Especially in its current shape. 

I always follow the philosophy that it’s better to control costs than hope for Rev increases.

Growing Rev is a great way to superhero your way out of a sticky situation.

Controlling costs is the best way to buy you more time and avoid the need for superheros in the first place.

Do they need to cut right now? Yes + No.

No: They have the balance sheet to weather this storm + ride out potential unprofitable years.

Yes: They need to get their act + unit economics together to hit the next level of scale. Or there won’t be a biz to grow.

It’s the hard, unpopular move that might seem unnecessary when things aren’t going terribly, but it’s also the proactive move. It sets the tone internally + externally, showing where this biz is headed and what its values are.

Takeaway: Trim the fat to unlock the next level of growth.

2)   Sell Ads on Revolve.com

Retail margins are too thin to only sell products online anymore. Retailers need to think about multiple ways to monetize their audience. The lowest hanging fruit here is to clone Amazon (really, department/grocery stores) and run ads to their traffic.

They are already sort of doing this with their own brand (in the weirdest way possible), calling the cross promo of FWRD, Revolve’s sister brand, a “sponsored unit.”

But c’mon. This is obvious. Allow the thousands of brands that sell on Revolve to advertise their products across Revolve’s properties.

There are a whole host of benefits to running ads from a P&L perspective, but the strongest reason Revolve should create this offering is because, at its core, that’s all Revolve’s biz model is:

Convincing customers to buy other brands’ products.

But with every retailer, what starts with tight, curated collections has exploded across SKU count & Categories (they sell Clothing, Accessories, Footwear, Beauty). It’s a never-ending maze of products.

Like all traditional retailers, they should be charging brands to sell their products in premium locations on the site. Think digital end caps.

It can start with simple placements like the weird Footer ad above. But the real pro move would be to bring in Influencers who work with the brand to curate collections & promote the products. Revolve is already mastering this playbook with Kendall Jenner & FRWD. 

If they can turn it into a service, it’ll unlock 3 key new growth drivers for Revolve:

The most obvious = Insanely high Gross Margin Ad Rev.

New Site experiences for customers where Revolve can invest deeper into building collections.

Deeper access/partnerships with brands.

Revolve sells ~1k different brands on their site. Their Designer page is longgggg. 

But as we all know, the 80-20 rule applies here as well. There are probably 20-50 brands that they sell really well and this type of partnership makes sense for.

They have all the data. 

They know what products/brands customers are viewing, buying, abandoning. 

They collect their emails and can send them targeted messages. 

Striking the right balance will add billions in Ent value.

It might seem like they have multiple motives, but online retailers like Revolve were always in this biz. As it gets more expensive to make sales, they need to offload that expense somewhere. And it’s rarely to the customer.

Takeaway: Monetize your audience every way possible.

3) Have more Influencer Curation

As a retailer who sells hundreds of other brands’ items, Revolve’s entire biz model comes down to curation. AKA How well they can select what’s cool/in right now. And Revolve’s curation has always been Influencer curation.

At $1B in sales, it’s safe to say they have their finger on the pulse, but they need to take this to the next level.

The biggest step function is to outsource/collab their curation with as many “it” tastemakers as they can—regardless of whether the curation is literally done by Revolve’s internal team or the Influencer(s). 

For 1 simple reason: It’s a built-in distribution plan to acquire new audiences. This is the same underlying principle as the Crocs/ELF Stunt Collab model. Generate more free media (Old school and/or Social) by working with other big names that the press will pick up.

They already get this concept. They went deep with Kendall Jenner, making her the Creative Director for their luxury sub-brand FWRD. She poses for Summer ‘24 photos and, it gets picked up by the press. 

I see so many brands blow their budgets on the big influencers/celebrities, but they don’t get the micro-to-mid-sized influencers (who are the Mega influencers’ clones) involved as well.

But on core Revolve, where they do 80% of their Rev, this is who they’re pushing as your stylists No offense to these 3 people—I’m sure they’re great at their job—but who TF are Kim, Stephanie and Erin?

They have all the components to make this playbook work. You can check out Kim’s customized looks here.

They need to flip this from Revolve employees to upcoming influencers. And explode into the next phase of growth:

Sure, Kendall gets a FT job + great comp package. Because she’s a celebrity w/ 293m IG followers.

But what about the Mid-level influencers? Why not pay them to curate + Promote 1-off collections.

Micro-influencers will probably create their favorite outfits for free.

Then, where the real magic happens is having them talk about each others’ collections.

The Influencer pyramid of content.

If you seed the Micro-Mid influencers with the Celebrity wannabes, then you will create your own natural press bubble, where they can create a hurricane of content all around your launch. It’s basically trickle down clout.

The Mids will talk about the Celebrity content. 

The Micros will talk about the Celebrity + Mids content

Each level will talk about others in their level.

The Influencers at all levels appear more cool, in the know, and reputable. (👈 what they really care about) And customers’ feeds are dominated by all the content that eventually leads back to your site. You’re essentially manufacturing earned media. 

And with all this influencer buzz, you’re greatly increasing your odds that traditional press outlets will pick up the story as well, because it’s “hot on social.”

Takeaway: Leverage Wannabe Influencers to supercharge celebrity activations.

Final Thought

There are large step functions to growth that are hard to map out if you’ve never been through them before. Revolve is a perfect example of a brand stuck in the middle of one right now.

In 2021, they were crushing it at $891m in Topline, 55% gross Margins, w/ a 12% Net Income margin. Their costs were reasonable. And they printed money.

But crossing the $1B Topline threshold is one of those massive step functions. The amount of operations, heads, and complexity the biz needed cost more than they could grow. It’s very much the Biz equivalent of growing pains.

Their rate of topline growth hasn’t matched the increase in costs. And, to be clear, it’s not like Revolve did something “wrong.” They’ve stayed disciplined with small increases in costs relative to their overall growth, but the Topline just hasn’t been there.

But you can tell by their decrease in Gross Margin + increases in OPEX that this isn’t the playbook that will get them through this next major step function. Some of this can be blamed on the post-COVID pullback, but at this point 2.5 years later, it’s their playbook that’s the issue.

They need to adapt to what’s going on and push through this challenge in their growth.

For a brand built on Influencers, they haven’t really done anything innovative in the Influencer space in a while. Most of the content they’re creating is the same playbook we were running back in 2017.

The most obvious expansion opportunity for them is to go back to ground and invest in finding the next play in Influencer. The fact that every Fashion/Beauty influencer who’s launching a new brand isn’t launching it through Revolve is the obvious 🚩🚩🚩.

If Revolve wants to be a $10B brand, they need to become the home for Influencers’ brands, and take their influencer-led, this-is-the-cool-fashion playbook to the next level. It won’t be easy, but if they can pull it off, it’ll be enormously valuable.