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

Okay. I think we're ready to start. So thanks, everybody, for coming. I'm Michael Binetti, the digital retail and e-commerce analyst at Credit Suisse. Great to see everybody. Thanks for coming for our first live event. Very happy to have you here. We have -- we're happy today to have Revolve Group with us today. We have Jesse Timmermans, the CFO of the company. Erik Randerson is also here from IR. In case anybody has a meeting, I recommend stopping up and saying hello, if you can. I think Jesse is going to start with a few slides that they brought along just kind of bring everybody up to date on the story in the latest year.

Yes, yes. Thanks for having me. Good to be here in person once again. Kind of weird not talking to people on little boxes on a screen that will take it. So we'll start with the forward-looking statements. You know the drill. I'll give you 2 seconds to look at that. But if we jump right in, for Revolve, we've got to really kind of step back in the time machine and go back to 2003 when it was founded by Mike and Michael, who were not fashion guys. They saw an opportunity in the market, very data-driven. Mike is an engineer by trade. Michael is a business major by trade. They just -- they really wanted to work together and saw this opportunity in the market. So 18 years ago, founded Revolve. Very core to the platform was data, everything being data-driven from the merchandising to the marketing and then also just the team and having the team centered around data. The technology stack is proprietary. From day 1, it was free shipping, free returns, really focused on the customer and that experience. So from that data-driven core, you go out and extend merchandising. This really feeds everything in our merchandising plan and platform, and that also extends to own brands. We have an own brand platform with just over 20 brands that we design, develop and outsource to manufacturer that supplement our third-party brands. And all that leads to a very profitable and capital-efficient business model. We've been profitable for 17 out of 18 years with the one unprofitable year being back in the financial crisis. So bootstrapped, very capital efficient and a long road ahead of us. If we look at where Revolve sits, we're squarely in these 2 big shifts that are happening in the market. One is this consumer purchasing power. Moving to this next-generation consumer. She -- you can see here, shops digitally engaged socially and wants discovery. That's what Revolve was founded on. She hasn't come to us for a deal. She hasn't come to us when she knows exactly what she wants. She comes to us for discovery for that full price purchase or when she's going out but not when she's just when she's going out but when she's stuck at home during COVID for the mask, for the sweat pants for the beauty product, which is one of the ways we benefited from COVID and really expanded the product assortment. Then we have the digital shift that everybody is aware of it. It was happening pre-COVID at a healthy rate, and then COVID really accelerated that shift into digital and depending on what report you look at, 5 years and 3 months; 3 years and 3 months, whatever it was but a dramatic shift though. So we're well positioned in these 2 really big shifts in the market. If we go to -- sorry, just keep cutting out. We operate 2 different destinations, very complementary destinations, REVOLVE and FORWARD. REVOLVE is the lion's share of the business, 8% of the total business where FORWARD is 16% of the business. REVOLVE, you can see the similarities and differences here, both focused on that millennial consumer. REVOLVE, a little bit more skewed younger towards that Gen Z, FORWARD skewed a little bit higher in the Gen X. FORWARD is a much higher average order value focused on luxury products. The most compelling part of these complementary 2 platforms or 1 platform, 2 complementary destinations is that REVOLVE skews more towards dresses and tops apparel. FORWARD, on the other hand, is predominantly handbags and shoes, so really focused on her whole head to toe wardrobe. We knew she was buying statement pieces whether it's shoes or handbags somewhere. Now she knows that she can get those pieces from FORWARD, both very highly curated, REVOLVE, again, founded on this data-centric mindset and really looking for discovery focused on emerging brands, similar for FORWARD. So it's the luxury brands you all know but also looking for emerging designers and being very curated, having a very differentiated point of view, very L.A. style, younger than the traditional luxury players and a huge market to capture on the luxury front, and again, all based on the same platform, all the same technology stack, leveraging the same team. If we go to the last very volatile couple of years. We are impacted by COVID in the early days. We went from growing 20% to down 50% really overnight. The team was able to pivot and reassort into COVID categories that we're really checking. This year has been phenomenal coming out of COVID. So you can see here growing on a 2-year stack, so comparing the quarterly growth of our quarterly sales in 2021 to the quarterly sales in 2019, 30% in Q1, up to 40% in Q2, and in this most recent quarter 58% over 2019. And really highlighted by that FORWARD segment that grew triple digits for the past 2 quarters. And then this is driven by really active customers. You can see here the phenomenal growth in our active customer base, which is driven by a couple of things. One, we're cycling out of lower growth, softer COVID quarters and layering on really strong post-COVID quarters but also the engagement by the customer. So our orders per active customer have increased. The customers that we had pre-COVID that maybe went away during 2020 and didn't purchase at all have come back in a very powerful way in this post-COVID world. So average order value frequency, and this is what we've seen over the past 18 years as well, our cohorts are very consistent. So once those customer sticks, they're very strong. And they order at higher average order values, and they order more frequently over time. Kind of zooming out from the most recent couple of years. One of the very compelling attributes of REVOLVE is the long history and the consistent growth and profitability, so not sacrificing growth for profitability or vice versa. We've delivered really consistent growth over time. You can see the 2020 impact here with COVID, but in general a very consistent 20% growth rate with profitability. So we've grown net income significantly over the past 5 years. And then if you look at adjusted EBITDA, very similar, pushing a 13% EBITDA margin in the most recent 12 months and continue to expand there, which with a capital-efficient business model translates almost directly to the balance sheet. So very capital-efficient. And our CapEx is generally in the low single digits of percentage of net sales and very consistent. In 2019, we made a pretty meaningful investment in our fulfillment centers, centralizing, automating. That was a big year for us, and it was still very capital-efficient. And then that results in the cash balance most recently of $220 million. So a strong balance sheet and very -- set up very well in this post-COVID world to capitalize on this next generation in the new world of demand. So then looking forward, key growth drivers. Number one is continue to push on that core REVOLVE customer in the U.S. Still a very low penetration in the U.S., whether you look at it from a number of females in this demographic or a sales number, very low in the kind of 2% to 3% zone. And another way to look at it is compared to other retailers out there, if you look at our active customer number of 1.7 million versus the others, you can see here a lot of opportunity and really taking share from the historical players and really engaging with this next generation. The next area of growth opportunity is FORWARD. I've mentioned that a couple of times, growing triple digits in the last 2 quarters. FORWARD has been a long road. It's getting a lot of attention recently, but we've been working hard on this segment for several years. It started with really building the relationship with the luxury suppliers. Once we had that, we could double down on marketing and really leverage the power of REVOLVE in social media and influencers. That is, in part, what made REVOLVE so great into that forward business. We can also leverage that REVOLVE customer. FORWARD customers that shop on REVOLVE are still in the very low single digits of that 1.7 million customers. And we think that 1.7 million customers on REVOLVE is very addressable by FORWARD. She is buying handbags, she's buying shoes, she's buying that luxury product somewhere. A couple of ways we're doing this and really engaging with that customer, one is a loyalty program. So we have a loyalty program on REVOLVE that we launched earlier this year. We recently expanded that to FORWARD. So now you can use your points that you earn on REVOLVE on the FORWARD segment and vice versa. We also recently named Kendall Jenner -- partnered with Kendall Jenner is our Creative Director for FORWARD. We launched that and announced that in Q3 in conjunction with New York Fashion Week and a lot of activity that took place around that time. And she's been very engaged. We couldn't have picked or partnered with a better person in our view, very engaged with the existing luxury players, also tapping emerging players and emerging brands to be on the FORWARD platform. So it's from a buying perspective, a marketing perspective, a halo perspective and also just little things day to day like redesigning the FORWARD logo. So she's very passionate about the business and fashion, and you can see the results here. Margin is another area that's really improved on the FORWARD business over the last couple of years. You can see here pushing 50% versus the 40s in the early days of FORWARD and very sustainable over time as we build leverage with these vendors. Compared to the competitor group, clearly taking share, if you look at both the 1-year and 2-year growth rates on FORWARD. So again, very optimistic on the luxury segment. And if you go back to that previous slide, you know it's hundreds of billions of market share to be kind of up for grabs in that luxury segment. International, another key pillar of growth. It's, call it, 20% of the business now. It has increased its penetration over time. The international story is largely one of customer experience to date. So historically, we've served all of these countries, but it's been more difficult for that customer to purchase from us. It hasn't been the stellar customer experience that you would experience domestically. So over time, we've layered in localized customer experience in these countries, which means the traditional REVOLVE style, free shipping, free returns. Also, duties are included in the price, so you don't have sticker shock when you go to that checkout. We started in Western Europe and then expanded into Australia and then most recently Canada. And there's a clear change in the trajectory of growth when we launched this in those major countries. I think -- and then just partnering -- now that we've got the customer experience dialed in internationally in some of these regions, then we can dial up the merchandising and also the brand marketing strategy. Social media really has no boundaries. So the influencers cross borders, and we can leverage the power of that REVOLVE brand and the REVOLVE influencers to these regions. And then loyalty wallet share through expansion of product categories. Again, this is one way in which COVID benefited us and made us stronger coming out of COVID. Historically, she came to us for the dress when she was going out, when she was going to festival, to the brunch, to the party on Saturday. Didn't necessarily come to us for her beauty product or activewear or loungewear. We knew she was buying that somewhere. It wasn't necessarily from us. Then through COVID, we had to reassort into some of these stay-at-home categories, also market to some of these stay-at-home categories. So the merchandising and marketing has to work hand in hand. So now going forward, she sees us for more than just that dress. It's beauty, it's active. It's some of those other categories, which beauty, for example, you can see here, grew at triple digits last year. We're comping that and still growing through that this year. So really optimistic about that broader assortment that we can offer her. That also goes back to FORWARD and giving her that assortment of tops and dresses on REVOLVE, handbags and shoes on FORWARD, complement that with beauty, active and some of the other categories, jewelry, you can see here, accessories. Sustainability is another opportunity that we've recently increased the emphasis on. We launched a sustainable line within our Tularosa owned brand called Tularosa Green, and then we most recently launched a sustainable denim line within our Lovers and Friends brand. And then finally, own brands. Own brands has been core to our both growth and profitability since 2014, really, that expanded to 36% of the mix in 2019. We pulled back as a result of COVID and resetting that business in 2020. So it came down to 27% of the business in 2020. It will be lower than that in 2021 before we reaccelerate into 2022 and beyond. And part of that strategy is expanding into some of these other product categories. Historically, it's been very, again, dress-focused but now bringing in designers and talent to assort into some of these other categories. And own brands are important, not just from a margin perspective because they carry significantly higher gross margin than a third-party brand but they're also traffic-driving brands. 6 of the top 10 brands on our side are our own brands, and they're truly owned brands. They're not kind of knockoff brands. These are true brands in the eyes of the consumer. They don't know this is our brand versus a third party. So it's important from a brand building perspective as well to have this assortment. So I'll leave it there. We can pause on this slide with kind of the core attributes here and open it up for your questions.

Let's keep going on our owned brands. I thought we worked with these guys on the IPO in 2019. It's been one of the most interesting parts of the story and clearly one that you guys have been most enthusiastic about over time. Talk to us about -- a little bit about what we'll see with owned brands in 2022 as you guys kind of get back on offense. You've reset it. I mean you just pointed to the authenticity that you have with the consumer. I think you have some categories where your brands are a higher price point than some of the very well-known brands in those categories. So this is core to the business. So what did you learn, there was -- we had to pull back some inventory starting in late '19 carried through 2020. What did you learn? What do you think you'd do differently as you pivot back to growth? And what are we going to look at in '22?

Yes, yes. And thanks for bringing up that price point component to because that is important. So these aren't brands that we are copying or marking down or having at a lower price point than a third party. These are at or higher price point than the equivalent third-party brand. So it's where we see gaps in the assortment where we see opportunity that we can serve the demand of the customer. Where we went wrong back in 2019 in true REVOLVE fashion, we're a very fast-paced, very entrepreneurial. We push hard -- we pushed too hard on own brands. We did what we did really well, but probably too well. So we were over-assorted in certain categories and price points. So if you think about $150 dress manufactured in China, we were 60% penetrated, 60%-plus in some of those price points. So that resulted in -- and we also launched a lower price point brand as well and really kind of over-inventoried there just to meet the demand. We had to have the inventory to serve that initiative. So a couple of things resulted in kind of just a general broad over-inventory position that we had to pull back on, and again, being over-indexed in a couple of those categories. The decision was let's pull back, let's reassort into some of these other categories where we see opportunity, be more diversified, both geographically and product based. So we started that at the end of 2019, early 2020 and then COVID hit. On the owned brands, you have to manufacture, I guess, back to our data-driven merchandising strategy. We buy very broad and shallow. And then if a product hits, we doubled down, and we reorder into that product. So on the third-party side, we can buy very few units. On the owned brand side, we have to produce at higher minimums, which on reduced demand during COVID, didn't support that owned brand strategy. So it kind of accelerated the pullback and then reinvesting, and that reinvestment and what it looks like in 2022 and beyond is more senior level design, talent and teams across the board into some of these other categories so that we can assort into these other categories and serve more of her needs. Also focused on that distribution across price points and categories. We think we can get to a similar economic profile that we were at, at that 36% but on a much lower mix by watching this distribution. And again, very important from a traffic-driving perspective as well, not just from a margin perspective.

It's interesting at this point in time where you're starting to see some of the e-commerce beneficiaries during COVID period, to call them beneficiaries in obviously a tough period, but they're starting to slow on their own tough comps. You guys are still showing very strong growth rates. And now there's a lot of worry in the traditional retail side that some of these businesses are over-earning, there's no markdowns in the world, and they have -- they're going to have some margin pressure next year. And you guys have one of your primary margin drivers flipping to a tailwind for you and accelerating next year, should be a fairly interesting dynamic for you guys versus the peer group, I think.

Yes. Yes, agree.

One other topic that -- and we've heard a bit about it in your meetings today is IDFA and CAC. How are you -- how have you been so resilient to IDFA? How much did it impact you? And maybe talk a little bit about how important retargeting is for you the kind of some of the tranches of marketing that have been impacted by that a little bit.

Yes, yes, retargeting is a meaningful channel for us. So IDFA did have an impact if you look at that retargeting channel specifically. We're able to redeploy those dollars into other digital marketing channels and stay plus or minus at the same efficiency as we were at before. I think one reason we were able to do that and it gives us a lot of air cover through these times of disruption in marketing is the brand and the brand that we've built over the last 18 years, so having that REVOLVE brand halo, having the customer engagement, also the brand marketing component. So historically, of our marketing line item about 25% is brand marketing. So in that is influencers, social media, brand marketing events, whether its REVOLVE festival, New York Fashion Week. So that provides a lot of cover on the digital marketing side, makes digital marketing more efficient as well. So we have pulled back on the brand marketing in 2020 because you just couldn't frankly go out and do things, and we couldn't market to those categories or even get out. We reinvested heavily in Q3. So that kind of coincided with the IDFA and I think provided a lot of benefit to get us through that initial disruption.

And sticking with marketing for a minute, the influencer strategy. You guys were early. A lot of people are chasing now, obviously. Instagram is always kind of doing some things to get their bigger share of the pie there. How have their strategic changes impacted you? And then just the number of influences is obviously growing but demand for them is growing as well. I'm just seeing -- are you guys seeing any pressure or any disruptions as other people come for your strategy on the influencer side?

Yes. Yes, there has been pressure. I wouldn't say it's a new pressure. It's been happening over time over the past several years as people have seen the benefit of social media, the power of influencers, the power of this next-generation consumer and have seen how well REVOLVE has executed on this strategy. So it's been building. I think where it impacts us is that the Instagram feeds get busier. You have to do things differently. You have to stay relevant. You have to do more to get the same engagement that you maybe did 4 or 5 years ago. I think we've got a head start. We have a network of 7,000-plus influencers. It was 7,000 at the end of the year. It's probably -- it's more now. And those influencers range anywhere from very top tier paid, they at the pinnacle may have a brand like a Camila Cabello or Aimee Song, where we've partnered to develop an own brand with them. They may get paid a contract fee. And then as you get down further in the pyramid, a bulk of those influencers are not paid. They may get closed, they may go to a trip, they may pay their own way to a trip just to be part of the REVOLVE experience because at the end of the day, the influencers are content creators. They're brands in and of themselves. So they're looking to REVOLVE to partner with to really build their brand as well. So I think we've got a head start. The authenticity is key in giving them creative freedom and partnering with brands. It's important to have the marketing and the brand working hand in hand. You can have great brand marketing, but if you don't have the merchandise to support it, it's not as effective and vice versa. And then always staying ahead on the strategy, whether it's channels, looking at TikTok and some of the newer channels. YouTube was really impactful for us during COVID as people were shifting from the in-person events to spending more time online and watching videos. And then New York Fashion Week is probably a great example where historically, we wouldn't have entertained going to New York Fashion Week. It was pretty closed off. It was the old school. We saw an opportunity as the world reopened to be a big part of New York Fashion Week launched -- announced Kendall Jenner launched a new own brand and really opened up New York Fashion Week to the public. We hosted 6,000 people over the course of 3 days at the REVOLVE Gallery, which was partnering with multiple brands and influencers to create an experience there. So continue to be creative, try to stay ahead and really build the relationship with the brands and the influencers.

As far as the creativity of the marketing program, I'm always surprised and delighted by the new ideas you come up with. One that I thought was interesting was the brand ambassador program. I don't know if everybody here knows it. Maybe you could talk us through it a little bit, but I thought it was a creative spin. It comes at a time when there's pressure in other parts of social media marketing but it seemed pretty unique. I'd love to hear a little bit more about it.

Yes. Yes. No, that's a good example. Thanks for bringing that up. And maybe I'll back up to the loyalty program as well. We historically didn't have a loyalty program. We had a very loyal customer. So she would come back to us, purchase more frequently at higher average order values over time and cohorts behaved very consistently but we weren't rewarding her. So finally being able to reward that loyalty through our loyalty program and not just through the traditional points but also having the opportunity to attend one of these really great REVOLVE events. So kind of started with the loyalty program. which was all internally developed similar to this brand ambassador program. So the brand ambassador program really is an extension of, I guess, 2 things: one, the loyalty; and two, the influencer program. So extending that influencer attribute to the customer and allowing customers to really be our ambassadors, promote the product, sell the product. And the benefit for us, among many things: one, battling the CAC pressures that we see out there, so constantly thinking of new ways to acquire customers; two, rewarding that loyalty; and three, really driving, I guess, for three, driving that customer engagement. Word-of-mouth is one of our highest traffic driving sources when you look at the organic, so really kind of boosting that word of mouth. And then the fourth one gets back to the proprietary data-driven mindset at REVOLVE. Now we have very direct data on which customers, which influencers, which products are selling that we can feed back into the merchandising system and continue to get smarter on the algorithms.

I mean to connect that to FORWARD, since you went back to the loyalty program, and I know connecting the loyalty program has been a big initiative this year, an exciting one. But I mean at the time of the IPO, you guys were resetting FORWARD, and it's been fine, but REVOLVE has clearly been the story since that time. FORWARD has been a rocket ship here lately though. Then you throw Kendall Jenner on top of it. We've all seen how much her media clout and her family's media clout brings these businesses seems to be taking on a life of its own at this point. Talk to us about what you can bring to the program. I know you mentioned a few things during the slides. And then how -- as you kind of look at that, the luxury business, the FORWARD business with fresh eyes, how -- strategically, how are you going to differentiate that? There's a lot of people selling luxury now today. I've always thought you guys had a different angle on -- I think you described it as like an L.A. spin on it. But maybe just tell us a little bit more about how you think about for the nonfashion folks like me and how you see it as different from the Farfetch and the Net-a-Porters in the world?

Yes, yes, yes, for sure. Yes, it's been a phenomenal year for FORWARD. But again, it's been a long haul. So first step was build the relationships with the vendors, which meant we had to pretty much buy whatever they told us to buy, whether that's quantity or the specific products. So we did that. When we felt like we had the leverage, we pulled back and really refined the assortment. So step 1 was getting the assortment right, getting the relationships with the vendors really refining. We got there, call it, last year at some point. It's been a slow build. Once we have the assortment, number two was engage in brand marketing and really leverage that REVOLVE customer. So that's where we're in the early stages of really doing that. And Kendall Jenner is a big piece of that -- of that brand marketing component. And then I think the opportunity there and the differentiator is, if you know exactly what you want, if you know the handbag, the name, the brand, you go to Farfetch, they have everything. If you're looking for -- similar to REVOLVE, if you are looking for discovery, what's new, what's interesting, that's where FORWARD comes into play. Very curated, very -- kind of a very defined point of view from the product to the editorial, just the experience on the site, the experience on Instagram, and the products we carry and then very, very young, very different way of kind of L.A., younger vibe compared to some of the other legacy retailers. And that comes through, and again, the editorial the product and Kendall looking for emerging players in the luxury market. She's very into kind of showcasing some of these emerging vendors in addition to having great relationships with the existing. So it's really about assortment and kind of the marketing and editorial.

And I've always found it interesting that I want to put it into your guys' head, what you get enthusiastic to go spend on is you're going to hire more senior people on the own brands side. We want to push hard there. We want to have a point of view on fashion and that's where we want to have our invested capital in, in the influencer program. We want to have bigger parties and bigger -- like people to tell the story. One of the other things is the tech stack. We've had a lot of IPOs lately in the digital space that are selling similar kind of products. And it's become pretty clear through that process, we're talking a lot of these companies and a lot of people like these and investors in those companies, that there's starting to be some differentiation in how people approach tech. I think you guys always really wanted to control it. And I think you believe it's one of the advantages of the company. Maybe tell us a little bit about where you think you're differentiated and any mistakes that you see out there in the marketplace today that you're glad the company you're at doesn't approach it that way in tech.

Yes, yes. No, it's great. And the tech stack is largely proprietary. You do have some bolt-ons here and there where we see opportunities. But it was really Mike from the early days developing the tech stack, and it's been constant improvement since then. Our ERP is internally developed. Our inventory management is internally developed. Our merchandising, planning is internally developed. And all of those work together. And I think that's the power and the differentiator is everything working together and being able to make quick changes. You don't have to wait for your Oracle or your SAP or whatever team to make changes. You can do literally overnight make changes to the product. And that really comes through when you hit these big disruptions in the market like a COVID where you have to pivot literally overnight and make quick decisions, change the tech, change the product, whatever you need to do, and everything has to work seamlessly between again, the inventory, the planning, the merchandising, the brand marketing, the digital marketing and even all the way through the accounting systems and reporting and everything else. So I think it is that fast paced, entrepreneurial, quick changes and really customized and it all centers around the customer experience and being able to serve her, not relying on a third party that may or may not be there in tough times. I mean really controlling your own destiny. So everything is 1P inventory. Everything is 1P fulfillment. And again, then we can control that experience for her.

Got it. We have about 1.5 minutes left, unscripted. We get you back here in a year. What's the one thing that this crowd is going to be surprised that REVOLVE pulls off?

Oh, man. That's a good one.

I didn't tell them that's coming. So don't let Erik influence you.

Yes, that's a great, great one. And maybe it's not a surprise, maybe it is a surprise. I don't -- but it's a continued execution. I think it's day-to-day execution. It's getting to the next how many variants, lockdown, shutdowns, whatever we have supply chain challenges and coming out stronger because of it. And I think we'll see a lot of -- I think the strong really emerges stronger. I think we're one of those. I think FORWARD has got great trajectory. I think we'll see a very -- a much more active REVOLVE than we have in the last couple of years. It's hard -- because we have to go back a couple of years to see the real activity that REVOLVE and the real power of REVOLVE because we just haven't been out there and in person. But if we fast forward to next year having Revolve Festival back, Revolve around the world back, partnerships with influencer celebrities, REVOLVE summer and New York Fashion Week, just being very active and out there and I think really just positioning ourselves as that next-generation retailer that we are beyond reopening, I think that's the key is, beyond reopening. Hopefully, reopening is a retired word, and we're all thinking about just living.

Yes. I think it will be interesting. The number of buzzwords you guys have stacked up heading into next year with the Jenner's and the events coming back and you guys have a lot going on. Thanks so much for spending with us here.

Yes. Thank you.

Great to see you. Thanks, everybody, for joining us. We'll catch up with REVOLVE outside, okay?