E-Commerce Q4 - case studyThis is a long post so grab a glass of Ungava Gin, it's as good as they say, and settle into a comfy chair.
Many "investors" have told me how e-commerce would be the dominant model for fashion because its one warehouse without any store costs. When I asked them to take me through how that could possibly be they looked at me like I was living under a rock. E-commerce is like gravity.
First principals tells us e-commerce only is not the best Q4 business model. Imagine Lynn wants a dress for the holidays but is not sure what size to order so she orders a couple of different sizes. January is a hard stop so unsold dresses need to be liquidated. Lynn is very busy during the holidays with work, friends and family so returning one of the dresses is not top priority. Fashion e-commerce only has bad economics and as Buffett once said "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact."
REVOLVE, founded in 2003, is an e-commerce ONLY fashion retailer for millennial consumers.
It leverages digital channels and technology to transform the shopping experience being a pioneer and leader in social media and influencer marketing.
Revolve is a bit of a puzzle for me as on one hand I think their management is great while on the other hand I think fashion e-commerce is a bad model for Q4. I think it is very hard to make decent sustainable Q4 profits with e-commerce only.
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Q4 ending Dec 31st, 2023 Operating margin is 0.9%. Remember Reitmans Q4 includes January which is the worst month. Since Covid Q4 operating margins have deteriorated.
Some Selling, Distribution & Fulfillment costs might be accounted for under head office. Also G&A had some one off costs. Not sure why a one off legal settlement would go in G&A.
The selling and distribution costs primarily reflect the higher return rate year-over-year which was partially offset by progress on initiatives to reduce logistics costs through optimized shipping.
The Revolve, apparel e-commerce only, business model is currently based on free returns. As sales scale so do the bad economics. Last mile distribution costs will only keep increasing stressing this model even more in the years to come.
One thing to remember - Omni Channel is the better business model because there is flexibility. Zara and H&M are now charging shipping returns. Sooner or later Reitmans will follow.
Reitmans is cash rich. Management realize PENN is special. Management can roll out new stores based on the rebrand. Scale gives PENN an opportunity to share their new store design with customers. The company should be spending the PENN advertising budget on nice new stores where PENN customers feel like they are at a better version of Zara or Aritzia that is taylor made. Shopping is usually a frustrating experience for plus sized women. Customers know PENN will have their size. The fitting rooms with generous spaces. The stores can be larger as addition elle needs space and gross margin will be higher. PENN could be $500 million in revenues on day. It starts with Reitmans investing in their customers experience and turns into a perpetual money making machine without competition