Last September, Revolve, the digital- and influencer-first retailer, filed to go public. It outlined a multi-faceted but interrelated business that relied on influencers, private labels, owned manufacturing and modern marketing that grew the company to nearly $400 million in 2017 sales, and more than $500 million in 2018 sales.

Between 2017 and 2018, Revolve’s financials painted a rather promising picture that spoke to its future potential. As you read about last fall, in 2018 Revolve stocked over 500 total brands with more than 110,000 unique styles and served more than 840,000 active customers. In 2017, no third-party brand accounted for more than 2% of the company’s overall sales, while Lovers + Friends, one of Revolve’s private labels and its top-selling brand, accounted for 5% of sales ($16.6 million), though they curiously fell to $11 million in 2018. However, owned brands accounted for 20% of total revenue in 2017 ($80 million), rising to 31% in 2018.  

But then something interesting happened: Revolve never went public. More than six months later, the company is in the same exact financial position it was back in September 2018. Putting the IPO on hold is telling; The only logical reason for the decision is that because of its business model, investor appetite was lower than Revolve had hoped. As it aims to change the narrative from a wholesale-driven retailer to something more promising, the company is debuting a new strategy. Starting on May 13th, the retailer will launch its first owned brand with an influencer (Aimee Song) at the helm. The 50-piece collection Revolve made with Song, who has over five million Instagram followers, marks the first time Revolve has put a face on one of its private labels.

The most interesting part of the arrangement is in its economics: Alliance Apparel, which Revolve bought in 2014 and which manufactures all of the retailer’s private labels through its network of 130-plus suppliers around the world, will make the collection, “sell” it to Revolve and then the company will pay Song a royalty off the top. To better understand the economics, a jacket in the collection retails for $238. Alliance Apparel makes it for an estimated $50, “sells” it to Revolve for an estimated $110 (the wholesale price) and then Revolve retails it for $238. This means Alliance Apparel (owned by Revolve) makes $60; Song, with a generously estimated 10% royalty, makes $23.80; and Revolve (the retailer) makes $104.20. Revolve, in total, makes $164.20 when bundled with Alliance’s earnings, while Song walks away with just under $24, leaving Revolve with a nearly 69% gross margin in this hypothetical scenario. This is significantly more than the 48.5% gross margin from third-party brands that Revolve reported in 2017.

While the company seemingly comes out on top from a pure dollar perspective, Song should also do well given the minimal amount of work she will have to dedicate to the line, compared to someone who owns and operates their own brand. At the same time, Song owns 100% of the brand and can sell its product to other retailers after the multi-year exclusivity window with Revolve expires. While Revolve will also handle a lot of the marketing, Song will also promote it extensively on her on social accounts.

This setup contrasts with other manufacturer-creative partnerships such as that of New Guards Group (NGG) with its creatives and associated brands like Off-White (Virgil Abloh), Palm Angels (Francesco Ragazzi) and County of Milan (Marcelo Burlon). In these cases, NGG owns an estimated 80% of the brand and the creative owns the other 20%. NGG made over $264 million in 2018 revenue and is projecting $472 million for 2019, operating profitably with no debt.

While Off-White likely accounts for more revenue than any other brand in the portfolio—say at least $100 million in wholesale revenue—Abloh, by owning around 20% of the label, could walk away with millions of dollars a year in profit, not to mention whatever salary he earns as its creative director. (Liquidity is a more interesting question, since NGG as the majority owner is in control and is rumored to be selling a stake to LVMH.) Even so, Abloh’s earnout (and ownership) is more associated with the brand’s profitability, while Song’s is focused on her brand’s topline revenue, leaving the profitability problem to Revolve. Additionally, Abloh is earning money on the wholesale price (Off-White is primarily a wholesale brand) while Song is earning money on the retail price, since it’s selling directly through Revolve. Right now, Abloh makes a lot more money from his arrangement. Even if you assume both brands are doing $100 million in revenue, Abloh would still out-earn Song, as she would only make $10 million from her estimated royalty, and Abloh would be building more brand equity that could be cashed in on at a later date.   

With these details in mind, Song’s relationship with Revolve is most like Kylie Jenner’s relationship with Seed Beauty—the vertically-integrated manufacturer that is hugely responsible for Kylie Cosmetics’ success. Both Jenner and Song rely significantly on their manufacturer/distributor to make everything work, yet Revolve can profit from setting both the wholesale and retail price, while Seed Beauty is only making money on the wholesale price. Additionally, both influencers own 100% of their brand. As we’ve previously covered, liquidity is the complicated part, since what can these celebrities actually sell? Revolve and Seed Beauty own all of the infrastructure that makes each brand work, while Song and Kylie respectively own their brand names and the associated IP. But, dependent on their manufacturers to make clothing or makeup, the brands are worth little on their own.

Coming back to Revolve, the main question is how many people like Song are out there who want a similar arrangement and can make it economically viable for both parties. Plenty of versions of “influencer brand platforms” are floating around, but few have made any real progress. New Guards Group and Seed Beauty are the most successful, but they are also much more than influencer platforms—they are vertically integrated manufacturers and distributors that have selective taste about the people they support. The size of an influencer’s audience is another consideration: Song’s 5 million pale in comparison to Jenner’s 133 million, though Abloh’s 3.8 million prove that Instagram audiences do not necessarily correlate to how many followers convert into shoppers. Revolve has a shot at joining the club, but it remains to be seen if the company can transform its business from a third-party to primarily a first-party retailer, with influencers at the forefront. It’s one-third of the way there, but still has a ways to go.