Revolve
Revolve Group LLC, an e-commerce retailer, announced its plans to offer 11.8 million shares priced at $16 to $18 in its initial public offering.
Trading on the New York Stock Exchange with the ticker symbol “RVLV,” the company will sell 2.9 million of its class A common stock, with shareholders offering 8.8 million.
Morgan Stanley, Credit Suisse and BofA Merrill Lynch are lead underwriters on the deal with 6 others banks acting as co-managers.
Founded in 2003 by co-chief executives Michael Mente and Mike Karanikolas, Revolve is focused on millennial shoppers, both women and men, who rely on technology to browse and shop. The company is comprised of the namesake site, which generated 83% of the company sales through new, established and private-label brands, and luxury-focused Forward, which generated 17% of 2017 sales.
In 2017, Revolve-wide sales totaled $399.6 million and net income was $5.0 million, up from sales of $312.1 million and net income of $2.4 million in 2016.
Many companies — both new retailers, like Stitch Fix Inc. SFIX, -2.28% , and traditional retailers, like Macy’s Inc. M, -2.59% and Nordstrom Inc. JWN, -2.89% — have turned to technology to meet customer needs, become more efficient and improve the merchandise turnover to meet trends.
But there are risks to retail as a whole, and Revolve specifically, that are important for investors to note.
Here are five things to know about Revolve:
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Two stock classes, no dividend
Revolve will offer class A and class B stock.
“The dual class structure of our common stock will have the effect of concentrating voting control with our executive officers, directors and their affiliates, and it may depress trading price of our Class A common stock,” the prospectus said.
In addition, Revolve said it has never paid any cash dividends and doesn’t intend to “in the foreseeable future.”
“We currently intend to retain all available funds and any future earnings to support operations and to finance the growth and development of our business,” the prospectus said.
Inventory management is key to Revolve’s business
“We believed that traditional retail was either too mass or too limited, struggled to consistently provide on-trend merchandise, and was failing to connect with younger consumers,” the prospectus says. “To improve on the merchandise offerings from traditional retail, we have built a custom, proprietary technology platform to manage nearly all aspects of our business, with a particular focus on developing sophisticated and highly automated inventory management, pricing, and trend-forecasting algorithms.”
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Revolve makes “shallow initial buys” and replenishes merchandise based on whether the data tells them there’s demand.
“This approach facilitates constant newness, with over 1,000 new styles launched per week on average, while mitigating fashion and inventory risk,” the company said. “As a result, in 2017, approximately 75% of our net sales were at full price, which we define as sales at not less than 95% of the full retail price.”
The company has already had accounting problems
Revolve admits that it has “identified material weakness” in its financial reporting controls. It says that, as a private company, it simply hasn’t had to prepare these sorts of financial statements in the past.
“[W]e and our independent registered public accounting firm identified a material weakness in our internal controls in 2017 related to the lack of resources necessary to perform adequate review of our financial information,” the prospectus says.
The company has hired additional skilled staffers and external advisors to solve the problem.
“While we continue to implement our remediation plan, we cannot assure you we will address the underlying causes of the material weakness or that we will not identify other control deficiencies,” the company warns.
Revolve has a network of thousands of influencers
Revolve uses social media and influencer marketing to engage with its “next-generation customers” who base a lot of their purchasing behaviors on influencers, the company writes. Campaigns have included the #RevolveFestival at Coachella and a variety of #Revolovearoundtheworld events.
“We believe that much of our growth in our customer base to date has originated from social media and influencer-driven marketing strategy,” according to the prospectus.
As of June 30, Revolve says it had a global network of 2,500 social media influencers. The company plans to leverage its influencer network to grow internationally.
“While social media and influencer marketing are key components of our strategy, 75% of our marketing expenses is devoted to performance media efforts,” the prospectus says. “Once we have attracted potential new customers to our sites, our goal is to convert them into active customers and then encourage repeat purchases.”
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However, the company acknowledges risks attached to this strategy, like the inability to maintain good relationships with its network.
Gil Eyal, chief exeutive of influencer marketing platform HYPR Brands highlights other risks as well, like choosing an influencer that has a large following but isn’t aligned with the Revolve brand, or influencers that get involved in a scandal.
Andrew Garson, executive vice president of entertainment and influencer marketing at MWWPR says federal regulations could also become an issue.
“As the business of influencer marketing continues to become an integral part of the marketing mix, the scrutiny by federal and state regulators and the Federal Trade Commission will become more demanding,” he said.
Garson notes an eMarketer stat showing that only 11% of the marketers who use influencers understand the social media guidelines.
“[I]nsufficient transparency from these creators can now not only damage the brand’s reputation, but also the investor’s bottom line,” he said.
The U.S.-China trade war could be an issue
Revolve has operations in China, which could become an issue if the U.S. or China abruptly changes its rules and as the U.S-China trade tussle continues. The company says it may not be able to obtain or retain legal permits to operate in China. It’s worried that the threat of tariffs lingers, and there are concerns that third-parties in China could disclose confidential information.
“While it is too early to predict how the recently enacted and proposed tariffs on items imported from China will impact our business, such tariffs could require us to increase prices, which could reduce the competitiveness of our products or, if we do not increase prices, result in lower gross margin on products sold,” the prospectus says.
Both Walmart Inc. and Target Corp. have warned about the impact that tariffs could have by turning off businesses and households to costlier goods.
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“In either case, increased tariffs or trade restrictions implemented by the United States or other countries in connection with a global trade war could have a material adverse effect on our business, financial condition and results of operations,” Revolve writes.
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