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

Good afternoon, everybody. My name is Kimberly Greenberger, I'm the specialty softline, department store and branded apparel analyst for Morgan Stanley, and we're very pleased to host REVOLVE with us this afternoon. REVOLVE is a $1 billion-plus market cap next-generation fashion e-commerce retailer that targets millennial and Gen Z consumers and REVOLVE completed its IPO in 2019. The company generated over $600 million in sales last year, with 79% of net sales at full price. REVOLVE sells both third-party brands and its own brands on its website. Unlike many of its e-commerce peers, REVOLVE's business model translates to actual profit and cash flow with an operating margin of 8% and free cash flow of $34 million last year. REVOLVE is supported by a proprietary technology platform, which enables a data-driven read-and-react merchandising model and customized user experience as well as a deeply engaged community of millions of consumers and a network of more than 4,500 influencers. Today, we're joined by Co-CEOs, Mike, and if I butcher your name, I apologize for that, Mike Karanikolas and Michael Mente. They founded the company in 2003 and have served as co-CEOs since then. Before founding REVOLVE, they worked together at NextStrat, which was a software company. Thank you both for joining us today, and welcome.

Thank you, Kim. Pleased to be here and nice to chat as always.

Great. We're going to start today's session in a question-and-answer style fireside chat, where we'll explore some of the investor questions that we've gotten most often in recent months. We'll also utilize the session to answer some of the audience questions. [Operator Instructions] Lastly, before we begin, I do need to remind everyone that for important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And with that, we'll kick off the session.

Mike, as I just mentioned, REVOLVE went public last year. So the market is still getting to know the story. REVOLVE describes itself as the next-generation fashion retailer from -- for millennial and Gen Z consumers. Could you elaborate on that description as well as explain how REVOLVE competes within the broader retail landscape? And how should investors think about the most relevant peers for REVOLVE, both public and private?

Yes, definitely. So we've built what we believe is the premier destination for younger consumers and younger generations that are seeking premium fashion. And we think there's a lot of white space around us, and we've achieved a position in the marketplace that is very differentiated from others out there. And I think broadly speaking, as you look at the landscape, you have the department stores who are trying to market to all generations and really not doing a great job speaking to any 1 particular generation who have been seaming shares to newer generation retailers like us over time. And then you also have a number of players out there that are doing a great job at -- also at connecting with younger generations, companies like ASOS or boohoo, PrettyLittleThing, Fashion Nova. But who operate in very different spaces than us and at very different price points, where we're really the only 1 of the bunch that's focused on that premium price point in the premium merchandise. And so we think it's very differentiated and that we have long-term tailwinds behind this.

Great. Excellent. Michael, I wanted to move over to you. REVOLVE's history as a public company is particularly unique, as the COVID pandemic unfolded less than a year into its public company life, can you walk us through how REVOLVE initially reacted to COVID as well as how the business changed its strategy or ways of working to adjust for the new environment. Talk about, in particular, categories, own brand penetration, your inventory strategy, marketing and how you view growth opportunities.

Well, it's definitely -- I think it's for all of us, I'm sure it's been quite an eventful year, and it's also crazy to think that this kind of macroeconomic kind of disaster is the second time we've been around, we feel very much like a very young company, but at the same time, with craze, I think that Mike and I have been doing this for 18 years. So we've experienced an event where top line decreases nearly overnight by, call it, 40% to 50%. Last time we did it, we were a small company, self-funded. This time around, it smelled very familiar. So we acted very, very decisively. We kind of understood the things we did right last time around, the things we did wrong. So immediately, we knew that the world was different. We were in a high inventory position, preparing for kind of like a long, warm main season for us. And then all of a sudden, we have a stay at home. So our team and our systems really let us know that what our consumers were buying was completely, completely different, but that's why it's important for us to have close to 100,000 styles any given time, really to get that data to really understand and have those kind of like those -- that knowledge across the board. So very much knew that on 1 of the extreme, particularly the fancy is going out close or very less relevant things like -- for like going to clubs or going to big events and gowns and such. And the other extreme, it was loungewear, things for at home as well as this new category of masks, which is quite interesting, we were sure that gets masked into our system as soon as possible, but it was really a matter of days, even before it was -- it was standard or [indiscernible] mutually, but we really saw it across the board, the dramatic shift from 1 end of the tail to the other end and then shifts in between as well. So we quickly adjusted our inventory of both what we had in the warehouse as well as what we had at the company. We also shifted our marketing kind of cadence to tackle these events. We're just about to enter 2 incredible -- I think they've largely been 2 of the biggest events in the year and of course, we're allowed to have those. When we shifted to a largely digital strategy, I think that was obviously not by choice, but by demand. We wanted to do so. And this is really in tandem of nurturing that new lifestyle and new categories as well as the increased [indiscernible] mindset. We were able to have very effective kind of like innovative kind of new kind of approaches. One of the things that has been helpful for us that our activewear business is really, really on fire. It's always been core to our lifestyle. I think that our customer is a healthy, younger consumer with a lot of vitality with an active lifestyle. It's a lot of a sense that the person who's going to wear a dress out and go out quite a bit, we've complemented the merchandising with the marketing shift. And literally, we'll have workouts every day for tens of thousands of people watch our workout content, worked out with us. That's a big positive long-term development that I wouldn't have expected that -- very proud that the team has been able to nurture that aspect of the business so far [indiscernible]. There's, of course, the core cost-cutting exercises that we -- that are always essential in times like this. So we're never too much slack, but there's always levels that [indiscernible]. And the 1 last thing that was probably very notable is that we clearly reduced own brand very, very dramatically. It looks like a simple extension of that. We wanted to ensure that we have a very broad assortment, really able -- really there for the consumer across the board. A broad assortment also to [indiscernible] across the board [indiscernible]. But to do so while minimizing our inventory position for every style that we bring in on our own -- that's from our own brand, there's a dollar commitment. But we shifted to the great third-party designers that we do have and have an incredible selection, while reducing the overall amount of inventory. So the offering to the consumer was, interestingly, robust. But behind the scenes, from a financial perspective was a lot more [indiscernible]. But as we see the business begin to recover [indiscernible]. That's a lot of the things that have been going on lately [indiscernible]. But it was dramatic. Very, very proud of what happened, and I think we're positioned incredibly for it.

Great. Thanks, Michael. This is Alex on Kimberly's team. I'm just going to step in quickly for her -- on the next question, while she resolves a quick tech issue. So Mike, I'll kick it over to you. One of REVOLVE's key differentiators compared to more traditional retailers we cover is its use of data analytics, particularly the data-driven approach to inventory management. Looking back, could you walk us through the drivers of the strong inventory turns results in recent quarters? Could you also touch on some of the factors that led to the inventory challenges towards the end of 2019 as well as your key learnings and how you've kind of built on that this year? And then even to take this up further, looking ahead, could you also just address REVOLVE's long-term inventory management strategy and how it differs from peers?

Yes, definitely. So broadly speaking, we believe we've approached the problem in a very different way than traditional retailers where decisions are made with proprietary technology that we built over a nearly 20-year period. That's my background, is actually computer engineering and Michael's background is in financial analysis. And so we always approach the problem very differently, and the organization has been built differently from the ground up, has a very different DNA than other organizations as far as how it solves that problem. And the result of that, I think, is if you look over a long period of time is gross margins and full price sales that are very favorable compared to what they typically look like across the industry. And that being said, you're still going to see some fluctuation. As great as we think we are at managing things, it doesn't take all the risk out of it, particularly with regards to overall inventory levels and other strategic problems. So kind of going back to that point, what happened in the back half of last year was really a result of strategic decisions that we were making to really press our foot on the gas on the own brand division and on our low price offering, superdown, which we were offering, and we had to support those with certain inventory levels that were tougher to reconcile with other goals that we had from an inventory perspective. And so it resulted in a little bit of pressure compared to the previous period. Still really high full price sales and gross margins compared to what others accomplished, but a bit lower than what we've seen in the prior period as a result pressure. We've maintained our discipline, we followed our systems and our processes and things quickly recovered into the first half of this year, where the last 2 quarters we've actually seen our highest profits ever in very rapid inventory turns. And so there's going to be fluctuations period to period but as a whole, we think our approach to managing is much better than what others do.

Great. So Michael, maybe we can take it back to you now. Another 1 of REVOLVE's key differentiators is its higher-margin owned brand offering, which you touched on a bit. It was about 36% of sales in 2019 compared to 30% in 2018. But this year, you're planning owned brand penetration to fall. Could you just elaborate on why the business is intentionally lowering its own brand mix and what you see as the appropriate long-term levels? And then even from a broader perspective, what does this mean in terms of your long-term 55% gross margin target?

I touched a little bit and just to reiterate that on a per dollar basis per style, we have to -- per style -- we have to invest more dollars per style on own brands than third party. For a third party brand, we can literally buy 6 units or something, kind of like we used to when we first started the business. It's important to really have that broad selection, especially in a time that's as turbulent as this. So we pulled own brands back. And now we're ramping up again. I think that the ramp-up is going to be exciting. And I think that the team is very excited. At our peak, we were making, call it, $14,000 a year. Now we're calling it, call it, $7,500 or plus/minus. It's very exciting for the team to make -- the same team to make less product really investing into quality, both from a manufacturing and a construction perspective as well as from a style and a trend perspective. So I think as we exit this period, I think the style is going to be on a pound for pound basis, it's going to be much better than they were, call it, a year or 2 ago. So very excited about what's coming ahead. I think we're going to be able to achieve the same penetration on much fewer styles. So I think the economics will be incredible there. The 55% gross margin target, I think, is quite exciting in the sense that the damage of the systems, which Mike just talked about, performed amazingly. And of course, it's not just magic black box. Of course, there's human oversight, which we always emphasize. But as demand decreased overnight, and we started to reduce prices, started to discount. And then as the world stabilized a little bit and that stimulus came, we actually were in a position to raise prices while moving through inventory in a period where we didn't have to spend too much money on marketing. So it was really beautiful to execute and see how that goes. And now we're on the upside and the ramping up side. We're able to see that we're in a very great position where we're able to achieve some -- close to or even exceed some of our long-term gross margin targets, while having lower own brand. So I think actually, some of our longer-term gross margin targets will actually increase as we kind of calibrate in a new world. It's not necessarily a rush to get there. I think ultimately, we have to give the consumer what the consumer wants, which ultimately also leads to what is the kind of like end state number. And I think it's very important. The way we view it is that there's no 1 number there. I think it's important and -- but I think this period, this year, more than anything, probably in an extreme way, really emphasizes that you have to be fluid. Things will be different at different times. And sometimes own brand might be more than 50% because we see that own brand is able to provide products that we're not getting from third parties. On the contrary, there may be periods where our third-party brands are supplying things that are outside of our own brand kind of wheelhouse. So we'll constantly always have to monitor that and really stay fluid with what's going on in the world. We'll continue to invest into own brand capabilities, supply chain manufacturing techniques and design talent. And I think we're going to be able to achieve a lot with less. And ultimately, when the time is ready for more and more, we will ramp up. And I think that's already happening.

Perfect. I think this may be a good segue into an investor question, now that we've kind of covered inventory as well as owned brand thoughts. And the question is really around what's your inventory composition heading into the fourth quarter and the first half, especially as the pandemic potentially lifts some impediments to larger events? And then also, how are you guys thinking about category exposure with the shift to casual?

I think I feel great about where we're positioned on a inventory level. And I think 1 interesting layer, which is a little bit nuanced is that we've started to view things a little bit more by end-use than by category because we're finding a lot of different nuances within categories. We've seen periods where -- in this pandemic period where the dress business is down quite a bit. But as we enter the summer, certain components of the dress business are up a bit. And that's because people want comfortable kind of casual clothes at home and such like that. They want to get out of their sweat seats because it's warmer weather and such. So we've really started to view things by end use. And I think we'll have a lot more of a -- kind of a stronger curve where on the ends, one end, we have going out gowns, I mean dresses, things you wear at weddings or formal events or going to clubs and such. The other end is super, super loungewear, sleepwear, things like that, that are the extreme end. We're really going really much into the core, what we call kind of day time at any time, particularly any time. And any time is this kind of kind of a self-explanatory [indiscernible] and I guess a good example is kind of like a sweater dress. A sweater address is something you could wear on a Zoom call for work. If you wanted to put tights on and some boots and go out, you go out to a nice dinner. And if you're buying into quality, sweating dress could be, sipping a glass of wine, watching Netflix on your couch because it's comfy and cozy, next to the fire, next to the Christmas tree or whatever. Those are the categories that I think we're able to nurture, core fashion product that also has diverse end uses. And we'll also have product on the fringes and both extremes to really be calibrated there. And the systems will constantly adjust. I think it's important to note that depending on the period, reorders account for a very meaningful amount of our inventory. So even though our composition is a certain way, the customer and our reorder algorithms will really dictate where we go and where we get weighted. So I feel really good about our balance entering this season. I think there's minimal risk that the world returns to normal and we're not ready I think -- like, I think we're very, very prepared, and Mike is spending, particularly a lot of time trying to understand vaccine distribution, hopping on a lot of calls and then seeing what the experts are saying to really be prepared. And basically, it's a lot of work for the team, but the team is chomping at the bit. We're ready to get back to what some of our historic core strengths are. And basically, every month, there's multiple activations of various scales that we're ready to go with. And I think that's going to be back to the marketing side. And depending on what's going on, we'll be ready to deploy capital. We had a very nice activation that was supposed to be this week actually, holiday-theme oriented activation, but stay-at-home lockdowns and things that are in place so we had to cancel that. But every month, moving forward, we are positioned well with inventory, and ultimately, we'll be able to go where our customer goes.

So you already touched on -- a little bit around the marketing and social media strategy and how that's changed a little bit more recently, and particularly during the COVID pandemic, and that's really been a key differentiator for REVOLVE. And particularly as it relates to acquiring new customers and driving spend around events. Can you just explain how REVOLVE's marketing strategy stands apart from competitors, for those that are newer to you guys? And then can you also just comment a little bit on how it's evolved throughout COVID?

Definitely. Yes, I can't talk a lot of the things -- I always -- said earlier that I can't talk about merchandise without marketing. But when it comes to marketing, I think the 1 aspect is that -- the key, key aspect, which is hard to quantify is that -- is the deep emotional connection we have with our consumers. And I think that really shows right now where we're missing our best marketing playbook. We talk about the big events. But really our best marketing playbook is our customer is wearing a cloth and sharing it with their friends. We've really seen that 2/3 of our new customer awareness comes from other social media or a referral from a friend. But it definitely happens a lot, lot less over Zoom calls when you're socially distanced. I think the classic you see your friend before you go out to dinner and ask her what she's wearing, and you guys exchange niceties and get excited, that's some of the best marketing that we can do, and that's something that we're really missing right now. So I think that really shows the power of the brand when our existing consumers are evangelizing what we are about. So we do have really technical data assistance, Mike and performance marketing team, with just 3/4 of our spend is really an incredible. But you layer on top of that brand spend that we've been really innovative on, we've been some of the pioneers on various aspects of social media from pre-Instagram days working with bloggers to, of course, Instagram days and a lot of the things that we're doing now with YouTube and IGTV and whatnot. But to fast forward to this period, we really have to always just stay close to where our consumers' lifestyles are. [ We really don't have to singular it ]. I think we evolve as the consumer evolves and a lot of our biggest playbooks out -- throughout the years that we've nurtured and literally, like over many, many years, we've really kind of become great at having in-person events with a lot of excitement and a lot of scale, it's -- we're able to deploy a lot of -- and invest a lot of marketing capital into these awesome events, and it's been an important part that really integrates with the performance marketing channels. But now we've had to really kind of shift with -- to what is our customer doing, what makes you feel good. Now, I think like the best example is that nowadays, we have a workout every single morning on IGTV. It's on IG stories. And I think it's -- I'm sorry, it's on IGTV. And we have tens of thousands of people tuning in every day to work out with us. It's become kind of this whole separate thing. We know that activewear business is really synergistic with our lifestyle. And I think, ultimately, we know that our consumer thinks about us when she's getting ready to go out to a nice event. We know she's thinking about us when she's getting ready to go on vacation or go to a music festival or go to a party, and now we really have permission from them to really have both the merchandise offering, the brands as well as the marketing offering because she wants to think about us, when she's working out, which she does all the time. So I think that's been a really good kind of example of how we've had to adapt from this time period, accommodate and connect with a different part of our lifestyle as well as shift away from in-person events to digital events. And I think long-term wise, they will be very complementary. It's not really 1 or the other. These will really complement themselves and allow us to really connect with the consumer on a deeper level. These were things that we were trying to do that were really accelerated in this time period, really forced us to make those innovative investments. And we're very excited with that progress there, where we can -- but it will be incredible when we can work out together all week-long and then go to a nice party on the weekend and wear our addresses and go out, we'll be doing all of this together, so.

I think we are all looking forward to that time in the future. I have dialed back in via audio. So we're doing it the old-fashioned way with us since I'm having challenges with my Zoom here. Mike, I wanted to move the next question to you. Many investors are looking at international expansion as a really nice growth opportunity for REVOLVE. In your latest earnings report, international comprised 20% of total revenue. How are you thinking about this opportunity? And what are the primary growth levers going forward?

We think it's a big opportunity for us, a big growth driver going forward. And as far as how we think about it strategically, it really starts with our brand marketing, our brand message, which we believe resonates globally, particularly through the mediums that we broadcasted, which is primarily social media, which, by and large, doesn't have borders in the same way as traditional media marketing does. So we've been building up this brand in overseas regions, particularly western markets. And we just haven't been able to properly leverage it by not having the right service levels, right capabilities, right trust with consumers in those local regions as far as the experience they're going to get when they make their purchase. So that's where we've been focusing as far as making investments, upgrading the experience. And we're seeing the results of that in recent periods where internationally, international has consistently outperformed domestic. And we've seen growth on the international side, despite what is a very challenging environment for us as a social brand where consumers historically typically go to REVOLVE for those events and social occasions in their life that they're not having right now. And we're still seeing growth on international side. And we're continuing to make investments there. It's a long process to get the fundamentals in place in those regions. Even recently in Canada, just a couple of weeks ago, we announced that we finally have all-inclusive pricing in Canada. It sounds simple, but it's really important from a practical perspective. Until we launch that, consumers couldn't get from us a refund on their -- on the duties that they were paying when we were shipping items to them, unless they shipped it to the border and drove to the border to pick it up. So it's a huge thing even though it's simple, but it takes time. In fact, we're waiting, I believe, about a year, it might have been more than a year, for the Canadian government to approve our application to process duty refunds. So we're making those investments around the world, and we think it's going to be a big driver for us.

Okay. Great. That's excellent. Now I can hear myself. Can you hear me on the audio again on my Zoom?

Yep.

Oh, great news. Okay. Sorry, we're having some tech issues here on my side. I apologize. All right. So...

Kim, I think you went out.

I'm happy to step in for her here as well. I think now we've covered some of the basics of the business. We'll transition to your first year as a public company as well as some recent performance. So Mike, perhaps I'll start with you on the revenue front. The REVOLVE segment, growth rates slowed in the last -- late last year, even before COVID kind of really started to take a toll on the whole industry. So what was happening in the business at the time? And what is your view of the segment's sustainable long-term growth rate?

Yes, definitely. If we look at our history, we've grown it in excess of 20% in nearly every single year and nearly every single quarter that we've been operating in. So we view that, that 20% to 30% growth range is a sustainable long-term target that we believe we can achieve. And as far as the fourth quarter of last year, things were actually really strong from a customer interest standpoint and from a traffic standpoint, where we actually had some of our strongest traffic growth in several quarters in that period. But we just didn't do as good a job converting consumers coming in, in that period. And so that's why growth dipped a little bit lower. And a big driver of that was the discipline that we put in place on the inventory side, which had a temporary impact on demand. But then we're already seeing accelerate in Q1 before COVID hit, where actually in January and February combined between the REVOLVE and FORWARD business, we were growing at 20% again, and through January and February before COVID hit. So there's going to be fluctuations quarter-to-quarter and blips here and there, but we think it's very sustainable.

Perfect. So Michael, let's go to you for the FORWARD segment. That business returned to growth in 2019 and has rebounded super well from the COVID impacts in the second quarter, growing 9% year-over-year in the third quarter. Can you just walk us through the segment's 2019 turnaround, the current dynamics driving its robust recovery as well as your view on the future growth opportunities there.

Just by its nature, FORWARD is -- has a lot more volatility on a growth basis, kind of on a short period, kind of quarterly basis or such. I think it's really largely driven by the specific drops in the collections from different designers that will affect things quite a bit where some seasons we'll know that they have high confidence levels, that a certain designer was going to be huge, to make big bets and it comes together. Some seasons we'll be a little bit more conservative, where we're not sure where things are going to go. So there's really that curation aspect where we have to see the merchandise and bring it in or whether we bring in new designers and such. So there's a lot more short-term fluctuation there. And also FORWARD also has a much larger international business, and their international business shifts a lot depending on what's going on in the world, things that are outside of our control. So on a short-term basis, there's a lot of things to really monitor and to understand. But on a long-term basis, FORWARD is very exciting, and we think that it's positioned nice. I think that if you look at this segment in times past, it was really divided up by a number of players, whether you had your [ Old Chums ], your Barneys, your Neimans, your Saks, this and that, and that was kind of like a handful of people. And it looks like in a digital world, those players are emerging, and FORWARD is one of them in a sense of like, you have [indiscernible] and this and that. And I think that we all have our own zones and such. The great thing is that I feel awesome that FORWARD's positioning, its curation, its kind of Los Angeles being beautiful in nature is a fresh perspective. I think that you go to other sites because they have everything under the sun, and you're looking for someone specifically. You come to FORWARD for some of the same reasons you come to REVOLVE for, discovery from inspiration from fashion guidance, where your trusted friend introducing new brands and new styles to you and such like that. And of course, FORWARD will be able to draft behind the continued growth of REVOLVE. We know that the REVOLVE consumer buys a range of FORWARD products, you might not be buying $5,000 dresses on a regular basis, but we know that she's always looking at designer handbags and shoes and such like that. So those businesses are very, very complementary over the long term. And I think that the strength of REVOLVE always trickles down to strength in FORWARD as well.

Perfect. So now that we've kind of covered the 2 primary pieces of revenue growth. Maybe, Mike, let's take a look at the full picture of the top line. So on your latest earnings call, I believe you indicated that revenue was trending down in the high single-digit range year-over-year in October. Understanding that you aren't likely to comment on specific trends since earnings release, of course, could you just comment on the broader -- more broadly on the near-term challenges as well as opportunities you see as well as your expectations heading into holiday?

Yes, definitely. So it's been a challenging period for us from a demand perspective for all the reasons that we've highlighted. First and foremost, starting with our brand itself and the product that consumers historically come to us for those special occasions, social occasions, when she's living her best life wanting to look great and feel great. That's not really the world that we live in today. And then beyond that, you get into practical elements of how we typically market ourselves where it's really those social interactions with friends or interactions with social media, where we're actually having real-life social events on social media. And between those things, around 2/3 of our customers historically first find out about us through those interactions. And again, it's just not as relevant in the world we live in today. And then you combine that with a more challenging advertising environment [Audio Gap] in the third quarter, and it leads to some short-term headwinds as far as overall demand side. But for us, we feel great about our positioning in our long-term strategy and we saw a great growth heading into COVID. We recognize it's not the best demand period for us, despite that, we've generated record profits. And then we think a post-COVID world is going to be fantastic for us. There's going to be changes in the world. Things that people didn't love doing before and they discovered they could not do might change a little bit [Audio gap] we'll have to see how coming into the office and things like that play out. But the things that consumers love to do, right, socialize, have fun with friends, go to parties, travel, go to events, these things our customer loves to do. And I think consumers the first chance they can, they're going to do all the things they love to do and have been missing and have been bottled up, not been able to do for the past 12 months. And I think it's going to be a very good period for us. And we're going to be there ready, locked and loaded to be there for our consumer when she needs us.

Great. I think that covers the top line for us. So maybe let's move to 1 of REVOLVE's KPIs, which is average order value or AOV. So last quarter, AOV declined but at a lesser rate than the second quarter. Can you just talk about the drivers of that change? We assume it's, of course, mix shift to beauty, casual, active, et cetera, but also where you see AOV heading in the future?

Yes. Yes, definitely. So see, COVID has had a big impact on AOV. And we're starting to see a recovery there. So as you mentioned, sequentially, the third quarter showed a lot of improvement from the second quarter. And that's a combination of the mix shift that you mentioned, lower ASP items like beauty or even like, call it, loungewear versus a really nice event dress combined with lower units per order. But I note that the lower units per order is on a gross basis, and we've seen really favorable trends on the return rate side. So I think consumers are being more purposeful with their purchases. They're less likely to try something out that they're not sure of in this period where returns are a big barrier. And so we've seen an impact on units per order. But again, that's largely offset by return rate and has been recovering on a sequential basis.

Perfect. So another KPI is active customers. COVID seems to have slowed that growth a little bit. Can you talk about what you're seeing there now? And how consumer behavior has changed this year? Taking a step further, what would you expect active customer to look like when the world returns to normal?

Yes. So as I mentioned, from a demand perspective, for a number of reasons it hasn't been the best period for us to drive the type of demand and demand growth that we've seen historically on a very consistent basis, but we expect a post-COVID world to be a great world for us. We think our consumer, she's been pent-up for -- she has been pent-up for 12, 15 months. And we think we're going to see really nice growth in active customer counts and really nice growth in demand. When we get back to the world that is a REVOLVE world, which is a world where you're living a great life and socializing with your friends and looking your best.

Perfect. I think this is a good opportunity to kind of introduce 1 of our investor questions, which is really around customer cohort behavior, which I know you provided some of that information at the IPO, but people are trying to get a grasp on, have you seen a change in cohort behavior in COVID? How sticky are these customers? If you could kind of walk us through what these newer customers look like?

Yes. We're seeing very similar trends from a customer cohort perspective as far as the behavior of newer cohorts versus older cohorts. In general, the cohort's performance has been slightly challenged compared to historical. Again, just given the demand environment and what consumers come to us for historically, we actually feel quite great about our ability to retain revenue in this environment, but it's not quite as strong as it's been historically. And yes, recent cohorts are performing really well. And there's slight mix shifts in terms of where those customers are coming from. Historically, our stickiest cohorts are the cohorts that come from friend referrals or from social media, seeing our brand marketing events on social media. And that's kind of a little bit lower as a mix, but overall, the behavior is very consistent.

Perfect. Now that we've covered the top line and some of your key KPIs, perhaps I'll move to gross margin. So REVOLVE impressively expanded its rate to 55.3% in the latest quarter, its highest ever reported gross margin for the third quarter and also above your long-term target of that 55% level. Can you just discuss the dynamics driving that result as well as the path to maybe more sustainable 55% plus level? Just the different puts and takes there and how you're thinking about those, particularly in the fourth quarter as well?

Yes. Yes, definitely. We're really proud of the result we achieved in the third quarter, particularly coming after some inventory challenges in the back half of the previous year to achieve a record result so quickly. It's a result of a lot of discipline that we showed on the inventory side and improving inventory health. And in the short term, is a bit of an outlier, but I think it's a nice kind of proof point of our ability to achieve that long-term target. There's going to be fluctuations quarter-to-quarter. And to achieve that on a sustainable basis, we need to continue to execute against our long-term plan, which means continue to grow own brand penetration in the right way, we got a little ahead of ourselves in the back half of last year. But we think if we do it at the appropriate pace, even a lower penetration level, it's actually more accretive to gross margin and we're really excited about the investments we would make on the own brand side to deliver the right product to consumers that she's going to love, and that's going to have the right full price sell through. And we feel very confident in our ability to deliver those gross margins on a consistent basis over the mid to long term.

Perfect. So I think this is also a good opportunity to bring up 1 of the investor questions we're getting, which is related to what you're seeing on the promotion front. We know that a lot of retailers saw a benefit in the latest quarter from a less promotional environment. So can you just walk us through what you guys saw in your latest quarter, if that's changed more recently? And then also, it appears people are focused on if that's different in FORWARD versus REVOLVE. So like a more luxury type market versus a little bit lower.

Yes, definitely. So yes, in the third quarter, we saw a lot lower-than-anticipated pressure as far as discounting and things of that nature. And it was a highly uncertain environment. We weren't sure what to expect coming in with regards to how physical stores were going to react. I'd say that trend has reversed itself a little bit in terms of what we're seeing competitors do, where we saw around Black Friday, Cyber Monday. Some of our closer comps get a bit more aggressive on the promotional side than they have historically. And then in terms of REVOLVE versus FORWARD, on both sides, we've been very disciplined with our inventory position. I think on the marketplace side in luxury, which is important in luxuries and the dominant marketplaces out there. There still continues to be pressure in the form of physical stores that are liquidating merchandise at margins below what we historically see, which is not something we want to enter the fray into with FORWARD since we own the inventory and we'd be reducing our margins if we did that.

Great. That's a helpful overview. Lastly, on the -- some P&L questions, we'd like to just address the puts and takes around revolves, SG&A expenses. Which we know are comprised of 4 distinct line items. So that's fulfillment expense, selling and distribution, marketing and then G&A. Can you just walk us through your approach to managing those line items and how it's evolved throughout COVID? And where you see more lasting savings post COVID? And taking it even a step further, where is the most variability amongst those line items? Which ones can you toggle most easily as you kind of try to manage through the COVID recovery?

Yes, definitely. It's been a very unusual landscape in terms of how it's affected these different line items. And so starting with fulfillment and then also I'll lump -- or selling and distribution in there as well. We've seen a big impact there from the change in return rates on the consumer side. Most of those changes, we believe, are related to the kind of COVID consumer mindset and environment. There are some that are related to some things we've been doing on the product side that we're hopeful will stick long term, but we need to see that post COVID to be certain of it. And then with fulfillment, the return rate has been beneficial there. But then also the investments we made on the automation side, early last year, where it took some time to really start reaping those benefits in a big way, but we're seeing really big benefits from those investments that we've made has had a pretty big impact there, and that'll be a longer-term impact. On the marketing side, marketing expenses went down a lot in Q2, less so in Q3. It was kind of both a reaction on our side certainly to the environment, but also what we're able to do in this landscape, particularly on the brand marketing side, it's just harder to deploy the dollars in the same way -- in the same effective way with the message that we want to send to consumers in the environment. And so it ties our hands a little bit. We'd like to invest more, but we're also disciplined as far as the metrics and the return that we expect to see there. And we'd rather hold back a little bit on the marketing side now, so we have more capital and more ammunition to fire as leading up to kind of post COVID world, which we think is going to be fantastic for us and where consumers will flock to us. And then the last thing on the G&A, certainly, there were some temporary cuts to G&A when the world was looking quite uncertain and consumers were in a panic in early April. Those cuts have largely been reversed. And then the cuts that have stayed with us, maybe a bit longer but are going to reverse out over time are within the own brand division, where we may -- cuts both as a reaction to COVID as well as taking into account that we wanted to build it up in the right way and not just immediately reverse out those cuts and kind of be in the same situation we're in, in the back half of 2019. So we're building it back up. And I think a steadier, more sustainable way than we were entering COVID.

Great. I am getting the notification that we are running up on time. So before we wrap it up, is there anything that we didn't talk about today? Or just a key message that you'd like to leave the audience with?

Yes, definitely.

Sorry, Mike, I was on mute, but I can go in the sense you've had all the challenging, walking everyone through the P&L up and down, but I guess the 1 thing -- I think we covered a lot in terms of who REVOLVE is, how we've been doing in the meantime and such. And I think it's just, wanted to reiterate that it's been definitely -- and we don't have to explain how challenging of a time period has been for all of us. I think we probably -- Mike and I feel the most and that we, of course, wish that, that top line be better. But we're extremely proud of how we performed. We think we -- out of all the things that we've had in our control. I think we've made all the right moves. And I think it resulted in our 2 most profitable quarters ever, I think, really is a testament to that. I think that it really highlights the way we approach things, but that long-term mindset and that discipline, and I think that rather than fighting over a little bit over this quarter or next, I think really our ability to have the most profitable quarter as ever, while continuing to invest in the long term, I think we're positioned incredibly well for what's to come. Timing of that, maybe there's probably a few months of uncertainty in terms of where timing is, but we're ready. Our brand ethos, our team is ready. We have all of the marketing playbook and all of the exciting things that we're great at, that we're known for, that our consumers are loving and craving. We're ready to go, whenever that may be. Continue to make investments in own brand and the product that we have coming will be better than ever. And I think just a little bit more patience, we're going to be an incredible, incredible spot. And I appreciate all you guys sharing time with us today.

Perfect. Well, Mike and Michael, thanks so much for your time today. It was a super helpful session. And thanks, everyone, for joining.

Thank you.

Thanks, guys. Always nice to chat with you guys.