Revolve Group, Inc. (RVLV) Earnings Call Transcript & Summary

All right. Thanks, everyone, for virtually attending our next fireside chat with Revolve. I've got Mike Karanikolas, Co-CEO, Co-Founder of a profitable e-commerce business, which is always, always a great thing. But thank you, Mike, so much for joining us. I wish we were in Laguna Beach so it's closer to you, but this will do for this year. In 2021, hopefully, we'll change that. But look, it's a rare company where we don't have to talk about store volumes and reopening trends. So that's kind of a nice thing. But Mike, just for anyone who's not super familiar with your story, maybe I'll give you a minute or 2 just to kind of give us the state of the union on your business and kind of where you stand today during this very, very difficult time, I guess, for everybody.

Yes, definitely. So we founded Revolve 17 years ago. We were profitable from the start, self-funded for 9 years, and we've created what we think is the next-generation of fashion retail. And we say that because we're digitally native. We market in a very different way where we're really pioneers and innovators in social media and influencer marketing, data and technology-driven with proprietary technology. That's my background, engineering. We've been building custom systems for over 17 years to manage our inventory and other aspects of our business. And then we've created what we think is really the premier destination for younger consumers seeking premium online fashion. And we think there really isn't any comparable website out there that -- for kind of millennials and Gen Zs that are looking for aspirational premium merchandise that has created the level of destination that we have for that consumer. And we think that's been key to our historical success.

Got it. I mean, Mike, I want to dig into some of that stuff. There was one question I wanted to ask just before we kind of kick everything else off, just before we go into the story in greater detail. [indiscernible] last week, I think one of your largest shareholders. Looked like they sold a good portion of their stock, TSG, I believe. I mean, I think this is a firm or a client investor that's been involved since pre-IPO. But a couple of investors have asked about it, do you want to address that real quick?

Yes, definitely. So they've been investors 8 years at this point. I think the typical holding period is 5 to 7 years. So they're already past the holding horizon. And I think more importantly, they're not in the business of holding public companies. They're private equity. When the companies go public, that's what they're going to do there, they're going to sell down. And I think if you look at the only other case or at least recent case where they took the company public, Planet Fitness has kind of stuck around the IPO price for a long period of time. And TSG, I believe, sold the majority of their stake during that time and then since then has quadrupled. So I think it creates buying opportunities for other investors. It's just part of the natural life cycle of a TSG investment.

That's very easy to clear up. Let's go back to kind of some of your introductory about the business model. Just -- it's such a unique business. It's a unique type of brand. I mean, can you describe the competitive differentiation that you guys have in the market? And then why is she shopping you guys over someone else? Who is your real competition? How do you think about the landscape in that sense?

Yes, definitely. So we think we have a lot of white space around us. I think there's 2 broad sets of competitors, if you will, but we're very different from each of those sets. And so I think one set of competition is the traditional department stores that have operated at premium price points like a Nordstrom's or Bloomingdale's. But I think we have a huge competitive advantage over those guys because we're more focused in our offering in the consumer that we're going after. They're going after all kind of age ranges of consumers, all demographics, all fashion aesthetics, really, at the premium price point. And we're a little bit more focused in terms of the consumer we're going after, where we're going after millennials and Gen Z. And it's still quite a broad set in a huge market, but it gives us an advantage when a consumer goes to our website versus one of their websites, where they're going to see that focused assortment that fits their style and their aesthetic, and it's age-appropriate for what they're looking for. And if you look over the years, I really think that's where a lot of the share that we've been gaining as we've grown at a rapid rate has been coming from those traditional department stores. And I think that trend will only accelerate as those businesses continue to experience challenges. And then I think on the other side of the competitive landscape, you have newer companies that have done a great job connecting with younger consumers as we have. They also kind of know, as we do, how to connect with consumer -- younger consumers through social media and newer channels. So call it like a Boohoo, Pretty Little Thing, ASOS, Fashion Nova. And so there's some competition for wallet share in our consumer demo with those guys. But our offering is very different, and so in many cases, completely different customer. When it's the same customer, it's for different areas of her wardrobe. So our price points and AOVs are very elevated compared to those companies. So our AOV historically on Revolve has been around $250. ASP is around $110, $120. And if you look at an ASOS or a Boohoo, it's much lower price points, less than half of those numbers. And so it's just a very different offering. And I really don't think there's anyone else out there like us.

It's always interesting to talk about categories and what's going on in the market. Obviously, we're all at home. We're seeing athletic, and loungewear and comfy pushing up. Those are the types of things that seem to really be accelerating. When I think of you guys, I think fancy dresses and going out to parties and Coachella. Can you talk about what you've seen in the business over the past couple of months or I guess the past 2 quarters, whatever you -- is easier to talk to? And just what's going on from a category perspective underneath the hood if we're to see kind of like what she's shopping for, what is she searching for when she goes at the site? Any detail around those kind of dynamics?

Yes, definitely. And it's been a challenging period for us despite being online for exactly the reason you identified. When you think of us, just as our consumer, you think of fancy dresses, you think in social locations, you think of parties, you can think of living your best life. And that's not happening right now for really anyone. And so it's been quite challenging for us. And we've seen in categories that correspond more to kind of that type of lifestyle and particularly the subsegments within those categories, those areas have been hammered because it doesn't matter if you're online or off-line, people don't need that kind of merchandise right now. And that's historically what we've been known for and really what consumers have come to us for. But I think, really, kind of the silver lining for us in this challenging period is it's given us an opportunity to market into kind of other areas of products with consumers. That have always been longer-term opportunities for us, but it's really accelerated that process for us, where we've invested a lot more in our consumers' mind share into categories like beauty or activewear, loungewear, intimates, kind of other stay-at-home type categories. And we've seen huge growth and success in those categories. Triple-digit sales growth rates consistently on the beauty side of the business. Really high sales growth in some of those other areas that I mentioned. And so for us, what I'm really excited about is as the world gets back to normal -- first and foremost, for me personally, I want to get out of the house. But beyond that, for the business, I think we're going to really thrive because these areas that are -- we've done well and historically the consumers have come to us -- for us historically, are going to rebound when that happens. But then we're confident we're also going to gain a lot of the mind share and wallet share that we gained in some of these newer categories. And so we're quite excited.

So Mike, maybe can you talk about like the pre-COVID growth rates in the business? And then I guess how do we think about your pre-COVID growth rates relative to what we could expect into the future, assuming there's no vaccine, assuming we're not kind of 100% back to normal, we're still socially distancing, big parties and bars are really not okay? Like how do we think about what's really possible for the business to do until we kind of really get out of this thing, whether it's in 12 months, 18 months down the road?

Yes, definitely. Well, it's been a challenging period for us. We've still done some really great things in this period. We actually had our most profitable quarter ever, all-time, in the second quarter. Revenue was down a little bit year-over-year. So there's been challenges but also opportunities for us in this period. And so certainly as we comp kind of COVID periods with COVID periods, we believe we'll see some nice growth there. But we're hopeful, time line-wise, that it'll be less comp-y and more of a non-COVID versus COVID -- or transitional period, if you will. I don't think it's going to turn on a dime. And I think if you look historically what we've been able to achieve, we've grown the business every single year, except one, historically. Our historical growth rates have almost always been in the 20% to 30% range in terms of where we've been able to grow the business. And so that's where I'd look towards in terms of long-term growth rates and midterm growth rates and where we're looking to get to.

When we talk about your -- the branded mix in the business, third-party brands, owned brand. Can you kind of give us a quick update on where you stand with that strategy, where the mixes are today. And maybe specifically on the owned brand side, where would you like to see that mix kind of move to?

Yes. Definitely. So the owned brand has been an incredibly powerful driver for our business for a couple of reasons. Certainly, the product's exclusive, and so the customer has to come to us for it. It's also a much higher margin. It's also very synergistic with our marketing efforts in terms of when we're working with influencers and other social media icons and they're wearing -- our product is from our brands. It's very synergistic from a capital standpoint. And so for us, long term, the strategy there remains unchanged. In terms of the trajectory of the company, we did get ahead of ourselves in the expansion of that zone for some areas that we've talked about before on kind of previous calls, where -- the nature of the production elements there and the depths we generally have to commit to, to get the right economics, it became a bit challenging to balance those commitments with our inventory health as a whole, and that caused a little bit of noise in the back half of last year. Entering this year, we had talked about how we're going to temporarily dial back owned brand to get it to a more controlled level for the current size of the business and certain capabilities because that was another problem, that we hadn't really built out enough capabilities in different production areas and it was too much production all in the same area. And so we've been executing on that when COVID hit. We took it down another notch just to help us better manage the COVID period. I think the great news there is we're already back in a build zone, where we're building off of those kind of lower points from a kind of new style design and new style arrival perspective. And also, we're seeing really encouraging metrics there versus where we've been in the past couple of years in terms of the performance of those styles. So we feel really great about the trajectory. And then long term, in terms of what share of the business it can be, we generally don't guide specific numbers. We think it can be quite significant. At the same time, third-party is always going to be important. The most important thing for us is providing the best destination for the consumer -- For this younger consumer that's looking for premium merchandise. That's always going to include a mix of third party. And so whatever balance works best for her, that's where we're going to be long term.

So especially in a time where -- and we talked about cocktail dresses, party. All that stuff is a little bit under pressure. How do you deepen share of her wallet right now? Are there other categories that you try to push onto her? I mean, beauty, I think, is something you guys have talked about. Can you maybe talk about gaining wallet share especially at a time where your main kind of bread and butter for her for her is really out of favor?

Yes. Yes, definitely. So yes, we talked about beauty with the triple-digit kind of growth rates, some really nice gains. And I think also that's one area in particular where physical, even post-COVID, is going to be a bit more challenged as to the psychology of trying on product other people have kind of tried on and touching your face with it and whatnot. And so -- but I think more important than that, we historically provide such a great experience to customers, such a strong brand connection that we think once she comes to us for something, she's going to stick with us for that. And we've seen that historically. Other areas, activewear has been huge for us. I mean you've probably seen our marketing side where we've expanded kind of our -- what we do there, where we have all sorts of fitness videos -- at-home fitness videos that we're marketing to consumers. That's been a huge growth area for us. And kind of loungewear and basics have been big growth areas. But I think there's a lot more we can do there, and that's something that we're continuing to ramp up production capacity and bring in new vendors for. And so just a ton of opportunity for all these other areas of her life that we didn't historically touch.

So Mike, if we take a step back and just kind of think about COVID and think about what your conversations are internally with your -- all your executives? And maybe what that look -- maybe what that was pre-COVID. I mean, I guess, what I'm curious -- what we've been asking most of our companies that are attending is, what strategically is different? What strategically is exactly the same? Obviously, you're not a retailer. But a lot of retailers have talked about evaluating the store base or a lot of companies have talked about inventory management and being more conservative there. If we kind of fast forward to 2021 and you're doing your multiyear plans internally, what's different in that conversation that maybe wouldn't have been talked about had COVID not hit?

Yes. Definitely. Well, I mean there's certainly tactical shifts, short-term cash flow shifts related to the COVID period, right? But in terms of longer-term strategic impact, I think certainly the category mix and wallet share is a big one, and we've already talked about that a lot. Beyond that, I think it's really an acceleration of long-term trends that we've seen towards digital and towards online. There certainly will be some bounce back to physical, but I think this will result in a long-term acceleration of those trends. And so for us, kind of properly leveraging that. I think from kind of our marketing tactics even beyond the COVID period is we've expanded our playbook with some new marketing initiatives. I think those are here to stay. We've had a lot of success with some different types of marketing that we haven't done historically. And I think post-COVID, we'll be able to take the best of both worlds and have a kind of a broader, more efficient mix in terms of what we do, including the -- so we're -- the team is continuing to innovate in bringing new exciting things. We actually have a marketing concept called Revolve University that's launching, I believe, any day now. Sorry, I should have the exact date. It's basically -- next week, it's launching. I got a text from my mom asking me if I was starting a university and I said told her no. It's not a full-on university. But what it is, is it's kind of a series of live and prerecorded videos with kind of key business figures and fashion icons to kind of create like a webinar almost or kind of online learning resource for our consumers in terms of how the fashion industry works, like beauty and wellness tips, career advice, entrepreneurship advice. And I think it's really exciting for us. We're really excited to see what kind of consumer engagement we get there. And it actually touches on another area of wallet expansion that we haven't touched on at all in this COVID period because it's certainly -- it doesn't make quite as much sense right now, but as a long-term opportunity, is workwear. That's another thing that our consumer has not thought about us historically. And -- but we're excited about starting to connect with our consumer there in terms of thinking about us as far as how it relates to her career and her life at work.

And is there anything on the cost side that maybe you've had -- you were forced to kind of dig deeper and kind of see that there's layers of cost in the business that don't need to be there? Or you don't need as x amount of workers in some area as you do with, to some degree, less? I mean is there anything else on the cost side that you've kind of discovered over this time?

Yes. We've always been pretty lean. So I think only -- certainly, there's things at the fringes but nothing kind of large. Now some of the changes in owned brand did have some cost implications sort of before the rebuild is completely done. So there was some turnover there. But broadly speaking, nothing on the cost side relates to COVID. There were, however, some nice cost gains that were kind of unrelated to COVID, just things that we already had in the works. We had invested in a new warehouse facility that became operational early in last year. And we've been working on continuing to add and optimize optimization ever since that facility opened. And it has taken some time, but we saw huge efficiency gains year-over-year in the second quarter and also kind of the back half of the first quarter as a lot of that automation really came into fruition. And so that's kind of a long-term cost opportunity. And then also, with regard to the fulfillment center, we're very low in our capacity utilization. We usually have enough capacity for the next 3 to 5 years. And so as the business continues to grow in scale, you'll see some nice leverage there.

And I mean just to go back -- just to get back when we were talking about marketing. You talked about the Revolve University. Is that kind of your answer to these impactful events like Coachella, which are kind of less right now? Is that kind of there to like take the place of those temporarily? Or is that kind of like -- no, she's really into this? This is something that's actually going to stay with us in the future.