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

Okay. We're going to get started. So on behalf of Barclays, we want to thank REVOLVE for attending this year's conference. This is second year in a row. It was much nicer when we were together in the Palace last year, Jesse, but such is life in 2020. So thank you for attending.

I guess just to start things off, the stock price has been somewhat volatile throughout this kind of COVID 2020 situation, and you've had a little bit of an overhang with one of your big early private equity backer has been kind of slowly unwinding. So where does that stand? And is that overhang still there?

Yes. Well, I guess, first, thanks for having us, Ross. So it's good to, I guess, "see you". We'd much rather be doing it in person, but like you said, such is life and we'll get back out there soon. So yes, in terms of the stock price in the overhang, we did have a pretty meaningful overhang there since going public. TSG still held a meaningful amount of shares, which created a really low float, low public float. Mike and Michael still own a majority of the company, which is great. And TSG has since over the course of the last few months, liquidated their holdings. So that overhang is gone. We feel really good about that. TSG has been a great partner over the last 8 years. But they're, of course, not in the business of owning stakes in public companies. So I think it's very healthy for TSG, for us, for the shareholder base and the public flow. So we're excited about the future and what's in store for us.

Great. No, that's great. So I guess, just coming off of your last call, you guys had characterized the environment as, like, stable, but it started to weaken a little bit in October. And we've only kind of seen, I mean, you're in, L.A., I'm in San Francisco. We've only seen restrictions around mobility increasing. And we haven't seen stimulus checks, and your demographic tends to be -- to skew a little younger and maybe rely on some of that to a greater degree. So how would you characterize the environment? Where do you think you stand right now?

Yes. Yes. And maybe I'll back up a little bit and kind of talk through the COVID, kind of history of COVID for us. And I won't comment too much outside of what we said on the earnings call a few weeks ago. But for us, REVOLVE is known for our very unique, aspirational, great in-person events. The product mix is centered around going out and dresses historically. So when COVID hit, we went from growing 20% to minus 50% almost overnight in that mid-March time frame. And then things steadily started to recover as states opened up, stimulus checks came out, extra unemployment was there for this customer until we had that, call it, second wave in late June into July, where we felt some incremental pressure. And then to your point, things stabilized, and then October was down in the high single digits. And since then, we've seen cases increase, restrictions increase heading into this holiday time frame. So things definitely haven't gotten better out there. And also, like you said, no additional stimulus unemployment running out. I think we're feeling the combination of a lot of those things. That $1,200 check helped, the extra unemployment helped and all that kind of starts to go away. And our customer is a millennial female, the unemployment rate over indexes on millennials plus, like I said, our product assortment was centered around going out in dresses, none of which can happen. And just the whole kind of social aspect of REVOLVE. So whether it's the product or our marketing, she's just not going out, and she's not having that opportunity to interact with our friends and with that interaction comes with, "Hey, where do you get that dress?" And her friends saying, "REVOLVE". So we're missing out on a lot of that kind of in-person referral, which is a large source of our traffic and over half of our traffic is from, call it, free or low-cost sources. And a big portion of that is that friend referral and that interaction and social aspect of the brand.

Yes. Yes. Now, you guys are almost like a classic reopening play versus what we see across the rest of the e-commerce universe with being COVID beneficiaries. I think that's pretty unique as we look at the world starting to get vaccinated and light at the end of the tunnel, as we like to say. So I guess just rewinding back to that down 50 situation, I mean, you guys, unlike some of the other kind of up and coming e-commerce stories that maybe hadn't been around in other recessions, like your 2 founders are pretty hardcore from that perspective. And they did a great job in '08, '09 navigating that. And it seems like when March hit, it was just all hands on deck and kind of a complete 180 to the point where you printed your highest EBITDA quarter, like in the middle of that downtick. So how -- what was going on back then? How was the DNA of the 2 founders and living through '08, '09, helping with the situation in 2020?

Yes. I think it's just that. The DNA and that founder-led -- it just kind of culture and drive that happens internally, very entrepreneurial very quick to react, all the system -- most of the systems are internally developed, which means we can pivot really fast and make changes really fast. So I think living through that '08, '09 recession. And at that point, Mike and Michael were still boot strapping REVOLVE. So they lived through some pretty tough times back then, made some really tough decisions. So I think they were well prepared for this. This is different in many aspects, but well prepared, and we're able to make really quick, really hard decisions that positioned us well, and to your point, enabled us to deliver record profitability for the past 2 quarters. And a lot of that is just that founder-led moved fast, the whole team acts in that way. So from -- in mid-March, we're already starting to cut back on inventory, reassort into some of those categories that we're working. COVID hit during our -- really our peak season, where we were geared up, pump was primed for REVOLVE Festival. Inventory was committed. Marketing activities were committed. So couldn't have happened at probably a worse time for us, but able to react really fast and reassort into the product categories that we're working, redeploy, to the extent possible, those marketing dollars into content and not the in-person events. So I think -- and lessons learned from the prior recession, I think, promotions weren't as deep as they were in that '08, '09 financial recession. So I think not just us, but I think everybody learned from that and able to deliver really high full price sales. And again, not as promotional as we had initially anticipated.

Yes. Yes. No, you guys definitely did a good job in a rough patch. And I guess back to the like reopening versus COVID winter dynamic, a lot of your apparel e-commerce peers, if we look at the Europe guys like Zalando, boohoo, ASOS, even Stitch Fix, who reported on Monday, are seeing the top line recover. And in cases of the Europe guys, like it's accelerated throughout this whole episode. You talked a little bit about how your customer is different. But I guess is it just that? Is there anything else about your business that is different than those folks? And then the flip side is we're going to have Coachella and REVOLVEFest in '21, your business will be accelerating massively as we go through the quarters next year, whereas these other folks are going to have the opposite impact. So how do you think about that?

Yes. Yes, I think there's a number of things packed in there. I think if you look geographically, international and that international customer has performed better across the board. So I think if you compare us to some of those international players, we're more comparable. So our international business grew almost 18% in the third quarter. I think maybe the other countries are managing through COVID differently, arguably better than domestically here. Also, the international market is more diversified across different regions and countries. So the impact of COVID is less acute at any given point. So that's on the domestic versus international. Then if you look at the product set as well, we're in that, call it, aspirational price point, premium price point, not quite luxury, but also not low price points. So you're seeing lower price point performing really well. You're seeing the luxury consumer really strong. But that -- in between that millennial, that aspirational purchase is being impacted harder than some of those other categories. Then if you layer on the -- again, the whole kind of centering around social experiences, the product assortment being focused on dresses. Dresses was 1/3 -- over 1/3 of our product mix going into COVID. That changed as a result of COVID. But we weren't heavy on Activewear and Loungewear and Beauty going into COVID, where if you break out some of those players that are more focused on some of those categories have performed better. And then we don't have brick-and-mortar stores. So we don't have that, call it, benefit of traffic moving from the brick-and-mortar to the e-commerce business. We've always been digital first. So we feel really great about reopening and what reopening does look like. We think there is going to be a resurgence. We think she's probably going to be going out even more than she was in the pre-COVID world just to make up for lost time. And she's not going to wear it -- going to want to wear that same dress that's been sitting in a closet for -- by the time we're said and done over a year. So we're gearing up for that, both in terms of inventory commitment, starting to plan for marketing. There's probably going to be investment ahead of the demand. So there's going to be some deleverage in that interim kind of transition time frame. But we want to be out there. We want to be first out there. We want to be the place that she's going when she starts to go out again.

Yes. Yes, that makes sense. I think we're all just going to be out there, not just her but everybody, hopefully. When we look at the category mix you just mentioned, some of these areas that you had to pivot to in 2020, like the Loungewear and Beauty as we look forward, I mean, those now have kicked up in terms of penetration broadly across the internet and are like, yes, once the shift happens, it tends to not go back. So do you view your business 3, 5 years from now as you're somewhat diversified away from dresses and some of those heavy categories that you were in before and some of these low penetration ones like Beauty, et cetera, might be a bigger part of the business on a go-forward basis.

Yes. Yes, that's our hope. Historically, in the pre-COVID world, when she was going out, when she was going to Coachella, when she was traveling, she thought of REVOLVE, and that's where she went and that's where she got her gear. She didn't think of us for Beauty. She was going somewhere else for Beauty. She was going somewhere else for active. Now through this COVID era, we've been able to merchandise end market in some of these other categories, and that mix has increased. So she now sees us for more aspects of her life than maybe she did in the past. So our -- this has to be proven out, and we have to prove it, but our hope and goal is that in the post-COVID world, she continues to see us for more than just the dress and top and going out, and she continues to come to us for Beauty. Beauty is a great add-on product. Some of these other lower price points like the lounge and swim, et cetera are great add-on products. So I think for us, it's -- the goal is it's an and not or. Those product categories do increase in mix, but it doesn't come at the expense of dresses. She's still coming to us for the dress. Dresses are going to come back. But it is a more diversified product assortment, and that will come with a lot of benefits in terms of marketing, merchandising, margins, return rates, inefficiencies across the board.

Yes. Yes, that makes sense. I wanted to ask about FORWARD. I mean you guys had a rough patch with FORWARD like 2, 3 years ago and, I have sensed, recovered nicely. And now to the point like we're, FORWARD's outpacing REVOLVE segment. So what are you doing differently in terms of operations at FORWARD? Is the outperformance you're seeing there a function what you talk about before where luxury is just doing better than aspirational? Or are there things that you're doing with FORWARD to take market share?

Yes. I think it's both. We are very pleased with how we repositioned and reset that business. In the backup, FORWARD is younger than REVOLVE. We had to really invest in inventory and build those vendor relationships over time, and that resulted in inventory that was in excess of what was ideal for us and what the systems would tell us was ideal. So to your point, in -- kind of in that 2018 time zone, we repositioned that business, repositioned inventory, which set that business back, but enabled us to reassort into the inventory that we wanted really kind of curate the experience on the FORWARD, and we're seeing the benefits of that now. So I think in terms of what we did, it's the inventory positioning, it's that curated assortment. It's the experience on the FORWARD. It's -- if you want something specific, you might go to one of the bigger pure-play luxury players. But if you're looking for more of a -- again, that curated experience, you're looking for discovery, that's what FORWARD is. We still haven't fully leveraged the REVOLVE platform and customer on the FORWARD site. So we're still excited about the opportunity for FORWARD going ahead, even beyond where we're at today. And that comes in the form of cross-marketing to the REVOLVE customer, which we just started to do. REVOLVE over indexes on dresses, tops, denim. FORWARD over indexes on shoes and handbags. So she is combining $100 pair of jeans with a $20 t-shirt and a $3,000 handbag. So the combination of those 2 sites really completes the product assortment. We haven't fully leveraged the influencer strategy on FORWARD. We launched a loyalty program on REVOLVE a few months ago, actually right ahead of the pandemic. That hasn't been rolled out on FORWARD yet. So we're optimistic about what that can do with the FORWARD customer. So a lot of things that we're doing and definitely not done yet. So we're very optimistic on those FORWARD business. That said, there is a benefit on comps, just that we're working through an easier comp period, and we're heading into some really tough comps in Q4 and Q1. Q1 of this year was plus 47%. And then like you said, the luxury consumer, that customer is out there and is performing well. So we're getting some benefit of that. But we do feel good about that platform over the long term and how REVOLVE and FORWARD complement each other.

That makes sense. You mentioned inventory management in terms of getting FORWARD back on track. And I I mean I think this has been just a strong area for REVOLVE overall in light of the tough environment this year. How does automation in the inventory management and your reordering process, how does that play a role? And you mentioned a few minutes ago that you're going to start leaning back in, what should we expect on that and your overall inventory position heading into this reopening?

Yes, yes. No, we feel great about the inventory position. We feel great about our ability to react really fast back to the earlier comments on working through the pandemic and Mike and Michael's ability to make those quick decisions. So we feel great about that, work through a lot of markdown inventory that we had, even heading into COVID. The core data-driven read and react is still in place, still at the core. That said, it's a little more difficult in such a dynamic environment. I don't think any algorithm out there would have predicted the pandemic and the extent of the pandemic. And it's similar on the reopening. Nobody really knows when the reopening will really take place and how and to what extent. So we have to take some bets outside of the core. But able to continue to buy broad and shallow and reorder into product. And that's especially true in this COVID time where the reorder component of the inventory increased significantly over the last few months. So we're optimistic that we can continue to do that. So I think it's more of the same. It's taking some bets, but continue to buy broad, shallow, read and react, listen to the customer, listen to the data and be nimble. I think we're going to have to be super flexible and nimble on the reopening just as much as when things initially close down.

Yes. Yes, makes sense. Your gross margins obviously dipped during the peak of the COVID impact and then have recovered nicely in 3Q and kind of outperform even what you guys were expecting by a little bit. And this is despite mix shift away from owned and operated brands, which was a big part of the gross margin story historically. So I guess, just how do you feel about the sustainability of that? And how is markdowns playing a role in sustainability and margin. And then I guess, related is we can just do the owned and operated one now. It seems like that strategy has gone on -- from really hot and heavy to on hold during COVID, where do we stand on the own brand strategy heading into this reopening?

Yes. Yes. No, really great margin performance. And largely due to those decisions again, to cut really fast and really deep at the onset of COVID. So we work through the inventory in that late Q1 into Q2. And that resulted in less markdown inventory to really sell-through. So high full price mix. And then even within that markdown inventory, really healthy markdown margin. So sitting on a very healthy inventory balance, which has its benefits. That said, we do feel like we missed out on some top line because we didn't have the market inventory levels that we had in the past. So overall, a great problem to have and a great position to be in and able to invest in inventory again. But to your question on sustainability, full price is really high right now. The markdown margin is really healthy. As we invest back into inventory, that will normalize, so that will create some pressure. So I just want to caution everybody that there is some COVID benefits that will not continue in the future. We -- also, to your point, on the own brands. Own brands carry a richer margin profile than a third party. We have been investing heavily in own brands ahead of COVID. And then decided to pull back. We went really hard, really fast on owned brands. And on top of that investing into lower price point, particularly superdown. So that created some excess inventory in some less than optimal dynamics on the inventory kind of KPIs and style performance. So even before COVID started to reposition that business to become more diversified in terms of geography, product set, price points, then COVID hit, and that's one area that, with demand falling off to 50% down year-on-year. We're buying into own brands at 100-unit minimums, where on third party, we can buy in significantly lower than that. So own brand just doesn't work as well in a significantly reduced demand environment. So we come back even further, it really accelerated our repositioning of that component of the business. We're already starting to invest back into that business. And that starts with designers and getting the talent in place to design into some of these other categories that are working in athleisure, athletic, loungewear, fem, things like that. We've got the dresses covered. So it's assorting into some of these other categories in the own brands. And that's already starting to take place. So I think looking ahead, we'll have some pressure from working through the COVID benefits that we're experiencing. We have more markdown inventory to sell-through, which will benefit us on the top line, but create some margin pressure. Own brands, as a percentage of the business, is going to decrease further before it starts to increase again. But over the long term, we're optimistic in continuing to build margin through that own brand business and increasing the mix of the business there again. But again, it's going to take a few quarters before we see that start to increase again. But over the long term, we feel good still confident in our longer-term 55% gross margin target.

Got it. Okay. One more question on just how to think about marketing as we head through this reopening stage. I mean a lot of your marketing goes to things like REVOLVEFest and these live events that Michael loves to host. But you can crank up the digital now in theory, and everybody is on the Internet. They're stuck in their house. They're not going out yet, but they're there. So how do we think about digital, when you step on the gas as far as customer acquisition? And then when do the in-person events start to really kick in next year?

Yes. Yes. On the digital front, first, to your point, everybody -- the consumer is out there. She's online, she's shopping. But also, every other competitor is out there. The brick-and-mortars have moved from more physical to the digital marketing and rates have increased significantly, especially from the depths of COVID. We saw significant rate improvements and benefits in the early days of COVID, and that has more than reversed in the last several months and even higher year-on-year. So we are balanced in our investment and approach there and trying to make every dollar really meaningful. And with in-person events not taking place, there's only -- we think the dollar can be spent better at a different time versus now or, call it, in Q3. That said, we are starting to invest. So we'll see Q4 tick up and then keeping some dry powder for when we get a little bit closer to reopening. And then on your -- when do we get back to in-person events? It's a really, really hard one to answer. But I think it goes back to staying flexible, nimble. The team can pull off a pretty large-scale event in a matter of weeks. So we continue to watch. We continue to read and learn about the vaccine dynamics and when we can potentially get out there. We definitely don't want to be too early. But we don't want to be too late. We want to be the first one out there. We want to be what she's thinking of and where she's going, when things do open up. But there is an aspect of being too early, which we don't want to do. So based on where everything is trending, I don't think it's going to be early spring. I don't think it's going to be probably even late spring. So we're probably looking at summer plus. But again, we can react really fast. We want to be ahead of it. There's going to be some deleverage because we are investing ahead of the demand, but only for a short-term kind of transitionary period.

Awesome. No, that's great. It looks like Coachella is going to be like in October next year. So you've got some time there. And REVOLVEFest, I'm still waiting for my invitation on that. But now on behalf of Barclays and everybody on the line, just want to thank you guys for attending. We really appreciate it. You guys have been great coming last year and this year. And just wish you the best of luck as things start to open back up.

Yes. Thank you. Thanks for having us. Stay healthy, happy holidays.

Take care.

All right. Bye