Revolve Group Inc.’s luxury business FWRD continues to face pressure as discretionary dollars dissolve among the aspirational set that helped sales soar the past few years.
Broader macroeconomic pressures – inflation, interest rates and geopolitical uncertainty – are weighing on a luxury sector that’s already been resetting from pandemic highs.
“Aspirational luxury consumers who were flush with cash 18 months ago, just don’t have the same capacity to spend in the current environment,” Revolve co-CEO and co-founder Mike Karanikolas said during the company’s quarterly earnings update this week.
Net sales for the FWRD luxury business slipped 14 percent during the third quarter ended Sept. 30 to $39.9 million.
The CEO cited Bank of America third-quarter data that showed a 16 percent decline in U.S. luxury fashion spending to point to a broader market trend.
The environment for luxury is “recalibrating after two years of extraordinary growth coming out of Covid,” Karanikolas said.
That’s not unlike the broader reset that happened across fashion and retail coming out of the pandemic, but the slowdown’s making it difficult to move through luxury inventory, given the constraints set by high-end brands on markdowns.
As a result, Karanikolas said it will take longer to “rebalance” FWRD’s inventory level.
Increasing Pressures
Although the FWRD business saw the largest percentage decline in sales during the quarter, the company’s namesake Revolve also faced pressure from the spending slowdown.
Revolve net sales fell 2 percent to $217.7 million.
The combined business ended the quarter with net sales of $257.6 million, which was off 4 percent from the year-ago period. Net income in the quarter dropped 73 percent to $3.18 million.
“We believe spending on discretionary products by our consumer demographic is being pressured by many factors, particularly in the U.S., including persistent inflation compounded by higher interest rates, reduced savings and significant uncertainty in the macroeconomic and geopolitical climate,” Karanikolas said.
As a result, promotions are up across both nameplates. That’s in line with an industrywide trend that’s taken hold most of this year with sample sales, liquidations and outlet strategies ticking up to clear through excess product.
Opportunity for Disruption
This isn’t the first period of economic uncertainty for the Revolve Group, which celebrated 20 years in business this year.
“Our long history operating the businesses taught us that periods of macro challenge can often present opportunity for market disruption,” co-CEO and co-founder Michael Mente said.
To that end, the business has continued to test new technologies, such as artificial intelligence across the organization.
FWRD saw the launch of virtual try-on and size comparison tools last quarter for its bags and accessories that Karanikolas said has helped drive down return rates. The company recently began testing the feature on Revolve.
Meanwhile, beauty’s continued to be a growth story for the company, with net sales up 44 percent year-over-year. Beauty, while still small, grew to 4 percent of overall net sales in the third quarter from 3 percent in the year-earlier period.
In the long-term, Revolve thinks beauty can eventually grow to somewhere in the range of 15 percent to 20 percent of the overall business akin to legacy retailers like Neiman Marcus, Mente said by way of example.
The CEO added: “Our goal is to become the preferred beauty destination for our customers.”
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