Update on Revolve (NYSE: RVLV), YETI (NYSE: YETI), and Deckers Outdoor Corporation (NYSE: DECK)

The focus of this writeup will be a bit different from my usual posts. It will cover three of the larger businesses that I’ve analyzed, what I got wrong about them, their performance since, and lessons learned. The stock price of the first two businesses that I reviewed are down considerably. The stock price of the third business has gone gangbusters when my conclusion was that it was overvalued at the time.

Revolve Group (NYSE: RVLV)

Publishing date of my writeup: 6/7/2022

Link to my writeup: https://possiblevalue.substack.com/p/revolve-group

TL;DR conclusion: Compounder and would buy the stock if the price went down

Closing price of 6/7/2022: $32.06

Closing price as of 7/1/2024: $15.44

Stock price performance since 6/7/2022: -52%

Why have I been wrong about Revolve Group?

It’s been a little over two years since I published my research on Revolve Group. It was a highflyer at the time. Revenues were increasing significantly almost every quarter and its returns on invested and incremental-invested capital were so good that they would make any Compounder Bro salivate.

The business hasn’t experienced rapid growth like it did during COVID and was subsequently punished for the slowdown since. Sales, profitability, and cash flow growth have cooled considerably since the end of 2022 / beginning of 2023.

Revenue and profitability

The screencap below showcases Revolve Group’s Income Statement from Q1 2022 – Q1 2024.

Source: TIKR and Revolve Group’s publicly available financial documents

The income statement hasn’t looked great over the last year or so. Revolve has managed to exceed $1 billion in revenue for the last two years, which it deserves credit for, but hasn’t been able to grow meaningfully above that milestone. Quarterly revenues have been down YoY since Q1 of 2023 as have gross profits. Operating income has been hit even harder with consistent decreases since Q2 2022. Net income also experienced sequential YoY decreases in each corresponding quarter (Q1 2022 vs Q1 2023, Q2 2022 vs. Q2 2023, etc.). Not exactly encouraging stuff here.

Revolve also provides segmented and customer data in public filings which I have shown in the screencap below.

Source: TIKR and Revolve Group’s publicly available financial documents

The data above paints a similar story not only to the income statement, but also to what was happening when I posted my original writeup. The REVOLVE segment still accounts for the majority of overall sales and the United States is the dominant market for Revolve’s products. The business hasn’t experienced much growth in its FWRD segment or increased sales meaningfully to the “Rest of the world”. Active customers are up ~25% since Q1 2022, but total orders placed, and average order value haven’t increased meaningfully.

Free Cash Flow

The screencap below shows Revolve’s real free cash flow (RFCF) from Q1 2022 – Q1 2024.

Source: TIKR and Revolve Group’s publicly available financial documents

Revolve’s RFCF varied a ton between 2022 and 2023. It was only $12.41 million in 2022 which was down a whopping 77.6% compared to 2021’s RFCF of $55.32 million. RFCF increased 2.68x in 2023 to $33.31 million, but that figure was only a bit more than Revolve’s RFCF in 2019. Sadly, Q1 2024 RFCF is down YoY again like it was in 2023.

Based off its current market cap of ~$1.126 billion, Revolve trades at ~34x 2023 RFCF which is quite a lofty valuation.

Returns on Invested Capital (ROIC)

The screencap posted below shows Revolve’s updated ROIC calculations since 2018.

Source: TIKR and Revolve Group’s publicly available financial documents

What a difference two years makes. Revolve’s ROIC was out of this world through 2021, but has taken a nosedive ever since. Not exactly what I want to see as someone who was quite bullish on the business in my original writeup.

Returns on Incremental Invested Capital (ROIIC)

Revolve’s updated ROIIC since 2018 are shown in the screencap below.

Source: TIKR and Revolve Group’s publicly available financial documents

Again, what a difference two years make. My analysis in the original writeup indicated that Revolve had been compounding the value of its business by 30% - 31% a year since 2018, but with its downturn in profitability ever since, that same compounding rate has gone negative. Not only does this highlight how bad my intuition was at the time, but it also shows how quickly things can go from seemingly great to the pits. Thank God I didn’t invest in this business. To be fair, the main reason why I didn’t was due to not having any money at the time. This was one of the rare times where being broke saved me some money in the long term.

Outlook

It’s tough to gauge Revolve’s prospects going forward. I reread the conclusion to my original writeup and was kind of shocked at how confident I was with Revolve’s medium to long term prospects. Now, two years after the fact, I don’t think I can tell you how I feel one way or another. One the one hand, it is financially robust with a no debt besides its lease obligations, minimal amounts of goodwill, and almost $275 million in cash on its balance sheet. On the other hand, I could have said almost the exact same thing two years ago except its cash balance was a little closer to $240 million.

The biggest concern is with revenue growth. Revolve’s revenue has stayed relatively steady for the past 24 months for one reason or another. Its public filings cite competition, higher return rates from customers, high interest rates, “cost pressures”, etc. We all know what corporations say when things aren’t going their way. There has been an interesting development in the last two quarters that may help Revolve with this issue. Per its Q4 Prepared Management Remarks and its 2023 Annual Report, two luxury e-commerce competitors, Farfetch and Matches Fashion, were acquired in distressed buyouts and there was a third, unnamed, competitor that was listed as “discontinued” by its parent organization. It looks like the luxury e-commerce market hasn’t been great for anyone post-COVID, but Revolve has managed to survive thanks to its business model and robust capital structure. Perhaps the tide is turning? Only time will tell, and I’ll continue to keep my eye on this business.

Last note, management has initiated a stock buyback plan. Per p. 101 of the 2023 Annual Report, “During 2023, we repurchased and retired 2,198,854 shares of Class A common stock for a total cost of $30.6 million, exclusive of broker fees and excise tax, at an average price of $13.91.” Per p. 12 of the Q1 2024 Prepared Management Remarks document, “Our strong financial position enabled us to continue to invest in the business while repurchasing Class A common shares as part of our commitment to enhance shareholder value. During the first quarter, we repurchased approximately 530,000 Class A common shares at an average price of $15.17. Approximately $61 million remained under our $100 million stock repurchase program as of March 31, 2024.” I love a buyback, but I’ll have to wait and see if these end up being prudent investments.

Lessons Learned

• Way overestimated how good of a business Revolve was.

• Underestimated how competitive the online luxury fashion market was and probably still is.

• Overestimated how good its brand was/is.

• Shouldn’t have bought the hype about its valuation. It wasn’t reasonably priced then and it’s not cheap now. It was never at a “heads I win, tails I don’t lose much” valuation.

Yeti (NYSE: YETI)

Publishing date of my writeup: 8/2/2022

Link to my writeup: https://possiblevalue.substack.com/p/yeti-holdings-inc-nyseyeti

TL;DR conclusion: Compounder and would buy the stock if the price went down

Closing price of 6/7/2022: $51.80

Closing price as of 7/1/2024: $36.94

Stock price performance since 6/7/2022: -29%

Why have I been wrong about Yeti?

Similar to Revolve Group, growth has slowed. Revenues increased by 13% in 2022 to $1.595 billion which was encouraging when considering the growth of the business during COVID. However, growth slowed noticeably in 2023 as revenues topped out at $1.658 billion which was a 4% increase versus the previous year. The business was able to remain profitable in both years and real free cash flow was positive too, but they weren’t as robust as they were during COVID.

Revenue and profitability

Yeti’s income statement from Q1 2022 – Q1 2024 is shown below.

Source: TIKR and Yeti’s publicly available filings

Year over year (YoY) growth in revenues for the first three quarters of 2022 was excellent, but gross profits over the same period were up less than 8% due mostly to a spike in freight costs and a recall of products in the Hopper and SideKick lines of business. Higher SG&A expenses, also related to increases in distribution, freight costs, and the recalls, led to decreases in operating income for the year. The fourth quarter was really tough as COGS and SG&A both ticked up significantly, which crushed operating income. Net income was negative for Q4 and the total for the year was ~$89.7 million. That figure was ~68% lower than the $212.6 million in net income Yeti achieved in 2021.

Revenues in 2023 were mostly flat except for Q4 which finally got back to meaningful growth of 16%. Gross profit bounced back nicely in the last half of the year. Gross profits increased by 24% for the year due primarily to the lower impact of product recall reserves, lower inbound freight costs, and lower product costs. Net income increased substantially for 2023 to ~$170 million.

Q1 2024 got the business off to a nice start. Revenues were up 12.7% YoY, gross profits were up 20% YoY, and operating income was up 68.6% YoY. Net income bounced back considerably to $15.86 million which was a gain of more than 50% YoY.

Yeti, like Revolve, provides segmented information on its sales by product, geography, and channel. I have posted the data for each segment in the screencap below.

Source: TIKR and Yeti’s publicly available filings

Direct to Consumer (DTC) is still the dominant sales channel for Yeti which continues the trend from my initial writeup on the business. DTC made up 58% and 60% of sales in 2022 and 2023, respectively.

Drinkware is still the top dog in terms of product sales. It has led the way every quarter over the last two years and shows no signs of slowing down.

The United States remains as Yeti’s biggest market by far. With that being said, sales outside of the country have increased rapidly from $143.3 million in 2021 to $259.8 million in 2023 which is a CAGR of ~22%. Impressive growth on that front.

Free Cash Flow

The screencap below shows Yeti’s real free cash flow (RFCF) from Q1 2022 – Q1 2024.

Source: TIKR and Yeti’s publicly available filings

Yeti’s real free cash flow (RFCF), like Revolve’s, varied significantly over the last two years. Its RFCF was just a tad over $37 million in 2022 which was a decrease of 50%+ versus 2021 RFCF of $74.93 million. 2023’s RFCF was excellent at $205.45 million which was the second highest amount of RFCF Yeti achieved since going public. Overall, RFCF at the business has been all over the place. Between 2017 and 2023, its RFCF per year is as follows:

• 2017 - $92.16 million

• 2018 - $141.96 million

• 2019 - $2.48 million

• 2020 - A whopping $341.85 million

• 2021 - $74.93 million

• 2022 - $37.16 million

• 2023 - $205.45 million

I know it’s a brand-driven product business, but I’d just like to see a little bit more in terms of consistent RFCF. In its defense, Yeti was probably a bit unlucky to go public not long before COVID hit which seemed to pull a lot of growth forward as evidenced by its 2020 RFCF.

Based off its current ~$3.25 billion market cap, Yeti trades at ~16x 2023 RFCF which is a lot more reasonable valuation than its 57x RFCF multiple when I first wrote up the business.

Returns on Invested Capital (ROIC)

The screencap posted below shows Yeti’s updated ROIC figures.

Source: TIKR and Yeti’s publicly available filings

The last two years, at least from a ROIC perspective, have been pretty good for Yeti. The business, despite the factors affecting profitability mentioned above, managed to keep its ROIC above my threshold of 15%. Kudos to Yeti for that achievement.

Returns on incremental invested capital (ROIIC)

Yeti’s updated ROIIC are shown in the screencap below.

Source: TIKR and Yeti’s publicly available filings

My analysis in the original writeup indicated that Yeti had been compounding its value somewhere in the range of 29% - 40% with its stock price having CAGR’d at 32% since it went public. That data was a little bit off as I included 2017 in the mix which was a year before Yeti went public.

Fast forward almost two years later, with updated data that starts with 2018, and my analysis indicates that Yeti has been compounding its value somewhere in the range of 10% - 15% per year since 2018. The screencap below from TIKR shows that its stock price has CAGR’d at ~16% a year since going public which indicates an ever so slight overvaluation, but which is mostly in line with my calculations.

You’ll notice that Yeti has bought back $200 million worth of shares between 2022 – Q1 2024. Per its Q1 2024 10-Q, management is authorized to spend an additional $200 million on buybacks.

Outlook

Like what I said about Revolve, I reread my conclusion about Yeti and was surprised at how confident and absolute I was about its prospects. I was totally fine with it being “fully priced” and was bullish considering the risks facing the business and its varying RFCF. I would be down more than 20% if I made the decision to buy the stock and would’ve looked like a fool yet again. It wasn’t a low risk bet and I feel the same way today. I do like its RFCF multiple a lot more now versus then, but it’s lacking the growth in revenue and profits that I so desire.

There are some additional notes I’d like to mention about Yeti before wrapping things up. I mentioned product innovation as a risk for Yeti in my original writeup. To its credit, the business has managed to keep introducing new products. During 2022 it introduced its Hopper soft backpack/coolers, two new sized of its Camino Carryall along with new colorways, the Roadie Wheeled Cooler, the Rambler Colster, the Ramlber Straw Mugs, and the Yonder Water Bottle. Unfortunately, the Hopper M30 Soft Cooler, Hopper M20 Soft Backpack Cooler, and SideKick Dry gear case had to be recalled during 2023, but were reintroduced later in the year after being redesigned and improved. 2023 also saw a slew of new products. Per the 2023 10-K, the new products were the LoadOut GoBox, a stackable Rambler Lowball, Rambler beverage bucket, a cast iron skillet, new sizes of the Hopper M15 Soft Cooler and M12 Soft Backpack Cooler, and specialty Rambler cups and mugs.

Yeti made two acquisitions during Q1 of 2024. The first was in February for Mystery Ranch which the Q1 2024 10-Q describes as “a designer and manufacturer of durable load-bearing backpacks, bags, and pack accessories.” The total price paid was $36.2 million which was funded by cash on hand. This acquisition will help Yeti further “expand out capabilities in our bags category.”

The second acquisition was of Butter Pat Industries in late March. Butter Pat was described as “a designer and manufacturer of cast iron cookware. We plan to integrate Butter Pat products into our product portfolio to further expand our capabilities in the cookware category. This transaction was accounted for as an asset acquisition and is not material to our consolidated financial statements.” From my research, the cast iron skillet mentioned above seemed to be a collaboration between Yeti and Butter Pat about a year before the acquisition. In true Yeti fashion, the skillet retailed for $400.

Lessons learned

• Way overestimated how good of a business Yeti was.

• Overestimated how good its brand was.

  • Look at the recent success of Stanley with its Tumblers although that already seems to be dying out.

• Need to be more aware of how fickle brands can be.

• Bought the hype and should’ve been more concerned about its valuation.

Deckers Outdoor Corporation (NYSE: DECK)

Publishing date of my writeup: 2/7/2023

Link to my writeup: https://possiblevalue.substack.com/p/deckers-outdoor-corporation-nyse

TL;DR conclusion: Above average to pretty good business, but thought it was overvalued

Closing price of 2/7/2023: $417.61

Closing price as of 7/1/2024: $936.30

Stock price performance since 6/7/2022: 124%

Why have I been wrong about Deckers Outdoor Corporation?

Its HOKA and Ugg brands have continued their double-digit growth each quarter since I posted my initial writeup on the business. Investors continue to be willing to pay a high cash flow multiple for the business. Stock buybacks have reduced shares and aided performance.

Revenue and profitability

The screencap below shows Deckers income statement from Q4 FY2023 – Q4 FY2024

Source: TIKR and Deckers Outdoor Corporation’s publicly available filings

Revenues and profitability of the Deckers Outdoor Corporation continue to impress. The 7.5% growth in Q4 2023 seems paltry compared to what the business experienced over the next year. While COGS increased, gross profit really took off with growth of 10.40%, 17.50%, 38.20%, 28.60%, and a massive 36.20% over the last five quarters. SG&A expenses increased every quarter too, but they couldn’t blunt the impressive growth in operating income. Net income growth over the last two fiscal years has been impressive too. $516.82 million of net income in FY 2023 was 14.3% higher YoY and $759.56 million in FY 2024 was a staggering ~47% increase versus FY 2023.

Like Revolve and Yeti, Deckers provides segmented revenue data which is displayed in the screencap below.

The first takeaway is that Deckers fortunes continue to be tied to the growth of Ugg and HOKA.

Ugg’s YoY revenue growth over the last five quarters was 16.1%, 6%, 28.1%, 15.2%, and 14.9%.

HOKA’s YoY revenue growth over the same period came in at a white hot 40.3%, 27.4%, 27.3%, 21.9%, and 34%.

Deckers’ three other brands, Teva, Sanuk, and Koolaburra, just haven’t been able to keep up on the growth front. I feel like it’s getting to the point where these brands should be discontinued or sold-off because they’re so overshadowed by the performance of Ugg and HOKA.

The split between domestic and international sales is still heavily favored towards the United States, but its International segment has grown revenues more on a percentage basis.

Over the last five quarters, the Domestic segment has grown revenues YoY by 4.1%, 9.1%, 21.1%, 15.6%, and 16.8%.

Over the same period, International sales have grown YoY by 15.8%, 11.4%, 33.3%, 16.7%, and 21.1%.

There’s not much else to be said about Decker’s performance over the last year or so from a revenue and profitability perspective as it seems to have hit its stride.

Free cash flow

Shown below is Deckers’ free cash flow from Q4 FY2023 – Q4 FY2024.

Source: TIKR and Deckers Outdoor Corporation’s publicly available filings

Real free cash flow (RFCF) bounced back considerably in both FY2023 and FY2024. The YoY growth in the former was more than 4.5x while the latter more than doubled. At the time of my writeup, the business traded at 116x RFCF which was an eyewatering multiple. Now, a little over a year later, the business trades at ~28x FY2024 RFCF given its current market cap of ~$25 billion. While the multiple has come down considerably, it’s still a high price to pay.

Returns on Invested Capital (ROIC)

The screencap posted below shows Deckers updated ROIC figures. I used the last 10 fiscal years because I just wanted to focus on its more recent ROIC performance and highlight the last two fiscal years.

Deckers has managed sustain its impressive ROIC and even raised it during FY2024 to 30%. Its post-COVID performance has been outstanding.

Returns on Incremental Invested Capital (ROIIC)

Deckers updated returns on incremental invested capital (ROIIC) are shown in the screencap below.

In the original writeup my ROIIC analysis indicated that the business had been compounding its value between 15% -17% per year since 2002 with its stock having CAGR’d by 33% per year. We’re almost a year and half on from that and Deckers has managed to increase the compounding rate of its business to 17% -19% per year since 2002 which is a substantial increase in a relatively short amount of time. Given its performance, the stock price since I posted my original writeup has taken off like a rocket ship to $936.30/share and Deckers has become one of the darlings of the market.

Due to its continued growth, Deckers stock price CAGR increased to ~34% per year between FY2002 – FY2024 which still indicates a sizable spread between my analysis and what the market thinks of the business.

Outlook

It’s all looking rosy for Deckers at the moment.  I stated in the Risks section of my original writeup that my concerns were centered on its capital allocation, its DTC strategy, buybacks, and whether HOKA was a fad or not.

Deckers has not made any acquisitions in the last two fiscal years, and it seems like its most recent, Koolaburra in 2015, hasn’t really worked out. So, I’ll give it a strike for that.

Its DTC strategy seems to have turned around judging from its continued growth in revenues to $1.466 billion in FY 2023 and $1.855 billion in FY 2024.

Buybacks have continued and aided its stock price performance. Per company filings, Deckers repurchased approximately 928,000 shares of common stock for $297.4 million in FY 2023. During FY 2024, the business repurchased an additional 715,000 shares for $414.9 million and is authorized to spend an additional $941.7 million on buybacks.

Finally, is HOKA a fad or not? I really don’t think so. I continue to see them everywhere I go. Growth has slowed a bit but is still running hot given its performance since my original writeup was published.

I’m not seeing a lot of holes in Deckers’ business currently. Its multiple is high and not worth it for me, but I don’t see it coming down if the business continues to grow at these rates. I do think it will get punished severely if/when growth or profitability slows or decreases, especially in its HOKA segment, but only time will tell how that’s going to play out.

Lessons learned

• Underestimated how well the business would be rewarded for revenue and profitability growth.

• High ROIC and ROIIC continue to be indicators of increasing stock prices and multiples paid.

• Underestimated HOKA a bit.

• Sticking to my guns about the business being overvalued.

This update was a nice dose of reality and humility. Looking back at how strongly I felt about each business and how wrong I’ve been about them makes me realize that I should never criticize other investors for their ideas. To be fair, I’d like to be judged over the long term (5+ years or so), but I’m not off to the best start with these three ideas.

This update was a nice dose of reality and humility. Looking back at how strongly I felt about each business and how wrong I’ve been about them makes me realize that I should never criticize other investors for their ideas. Another takeaway is that I clearly have plenty of room to improve my craft. To be fair, I’d like to be judged over the long term (5+ years or so), but I’m not off to the best start, at least with these three businesses……………. Away I go to analyze more of them.

Thanks again as always for reading. If you liked this writeup, please feel free to share it and subscribe!

Please reach out to me at possiblevalueresearch@gmail.com, @PossibleValue on Twitter and @Heshy on MicroCapClub with any comments, concerns or questions. Lastly, don’t forget to tell someone that you love them.

*** Remember that this isn’t investing advice. Consult a trusted financial or investment advisor before making any kind of investment decision. ***

Disclosure: I do not own stock in Revolve, Yeti, or Deckers Outdoor Corporation