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

Great. So we're going to get started. Thanks for -- everybody for joining us. You guys all know me, Ross Sandler from Barclays Internet. We're super excited to have Michael Mente from Revolve back at the conference. Virtual unfortunately, but we'll get back in person at some point.

But Michael, maybe to kick things off, if we start kind of high level. You guys have done a great job of managing through what was kind of a tumultuous period over the last 12, 18 months. So as we look today, what are you seeing in terms of just kind of overall levels of engagement and growth at this stage of the post-pandemic period for the business?

No, it's been -- good to see you, Ross. I'm excited to join you in person sometime soon. But I'm feeling -- honestly, it's super awesome about with the way everything is going. This most recent quarter, it almost makes me nervous because there's always some clear challenge or some clear problem. But every now and then, everything is pumping, everything is going well and you're like, oh, what's going on, everything is perfect and feeling good. Of course, sales are awesome across every -- across the board, REVOLVE, FRWD, the sales are incredible. Domestic, international, both sides are growing well. So that feels awesome. Traffic is going well. Active customers for the quarter in Q3 was a record, which is, of course, super important. And across active customers it's a good, perfect balance. New customer acquisition is awesome. Retention is awesome, kind of reacquisition of lapsed customers has been awesome. So across the board, things are awesome. And if you look at Q3 on a 2-year stack, we're accelerating compared to -- Q2 compared to Q1. So things are really coming in hot, feeling really, really good there. And I think, yes, everything is awesome right now. And I think there's been a lot cooking, a lot of prepping, and I think looking into the future, I think we're really geared up for a really strong next phase of post-pandemic world. I guess as we gradually transition. And I'm just like looking at the marketplace overall as a whole, I think it's clear. Of course, we only have kind of public numbers as well as U.K. numbers of larger private companies and such. And if you look back at that 2-year stack and compare us across the board, it's super clear that we're gaining share, both in the REVOLVE business and the FRWD business. It's super clear that growth is awesome. Things are robust. Profitability is really strong. A lot of investments to be made. So it's a great way to enter this holiday season.

Yes. No, you guys have done about as good a job as anybody in your category over the last 2 years, it's been awesome to watch. So if we look at like the business, it's changed a bit from pre-pandemic to today. You've got some new subcategories. What's showing the most traction right now as far as like your core apparel business versus some of the newer accessories that you launched during the pandemic? Yes, and what's changed the most in the last 2 years?

I guess like it's kind of been -- depending on which exact period you're lining up. But if you're looking right now, of course, the going out business, of course, during the pandemic was severely, severely hit as the world became a stay at home kind of a social distance world. So that took a huge hit. But that's come back with a vengeance. And I think the best proxy or the most -- the simplest proxy for us is usually our dress sales, as you're probably not wearing a dress when you're at home or -- but dress sales are really coming back aggressively. It's nearly triple-digit growth on a year-over-year stack. But on top of that, though, we're seeing some of the newer categories that we always intended to nurture, are really continuing to accelerate. Things that were important that -- beauty, handbags, shoes, things that accelerated in the middle of the pandemic, it's clear that we're really still holding onto those categories. They're still growing, while the historic categories are really accelerating back. So these were things that we always intended if you look -- if you talked to us 2, 3 years ago, longer. But with dramatic shifts in the environment, we were able to really accelerate some of those changes faster than we originally would have. So I think we're coming out of the pandemic in this new era in a really stronger position with a wider offering, positioned well to gain share across a broader range of categories and needs. And I think that was something we always wanted and -- well, here we are today.

Awesome. And FRWD was one of -- that was one of your babies and it's done extremely well, north of 100% on a 2-year stack for a couple of quarters now and outperforming most of the peer group in luxury. So what's been the key to kind of getting that one going the way that you have?

I think that's -- it's been a long, long-term vision and build there. I think it's nothing dramatic. Even though while we're starting to see this massive growth in the numbers, we're compounding big numbers now, but it's really been a long-term vision and journey here. Right before the pandemic, I think it was Q4 '19, Q1 '20, before things all got crazy, FRWD was really starting to kind of show signs of strong growth. There was a multiyear period of kind of building the right roster mix and kind of calibrating and recalibrating inventory positions and approach there. But ultimately, things were -- we started to get things really right. And then, of course, we had the -- enter the chaos of 2020. But as things have steadily at least climbed back, FRWD has been positioned awesomely. One big aspect of that is that we've been stronger and a lot more heavily invested into cross-marketing REVOLVE and FRWD. FRWD has always originated because we knew that the millennial consumer would -- ultimately will shop luxury and she's going to want a luxury experience that's really focused on her. And I think ultimately, that positioning of FRWD compared to our competition as luxury for that younger generation, I think, is really shining as the demographics continue to age. And that's really showing through in terms of how we're crossing over the REVOLVE customer to the FRWD customer. I think it's crystal clear to me that if you're spending nearly $300 on a REVOLVE card or a REVOLVE shipment, it's a high, high probability you're going to spend $1,000 to $2,000 on a handbag or a splurge pair of shoes. And it was clear that they were just getting it from elsewhere. And now that she's learning that she can get all of that product from us with that same level of trust and that same level of curation, that same level of service, combined now with integrated loyalty rewards, we see that customer on the REVOLVE side going to FRWD on a very consistent basis over the past few quarters. And penetration, the amount of REVOLVE customers who shop out of FRWD, as of the most recent numbers that we've shared, is still in the single digits with very consistent growth over the past few quarters. So we see quite a long kind of journey there of continued expansion of FRWD. So feeling awesome. Lastly, you combine that with finally identifying and feeling it's the right time to make investments in the FRWD brand. Of course, REVOLVE has a lot of this brand heat and this brand magic that we've built through the years. And we've been very disciplined to find the right time and moment for when that made sense for FRWD, and that time has arrived. I think this -- in Q3, we've had our biggest brand marketing spend on the FRWD side with the hiring of Kendall Jenner as our Creative Director and the launch of that at New York Fashion Week. And that was received incredibly well across the board. It was really just our kickoff event and things are going well. And working with Kendall and her team has really been a dream. And it's super clear that we see the world the same way. We have the same vision. Our taste levels and kind of our goals across the board are uncannily kind of completely aligned, which was absolutely perfect. So there'll be a lot more for that to come. So FRWD is going extremely well. If you look at the most recent period, I think top line is outpacing, in the most recent period, pretty much everyone that we know of. And I think that's great, and I feel that it's really just the beginning for us. There's been a lot cooking, there's a lot in the works, and we're positioned awesome for many, many years now.

With Kendall Jenner, how did that end up come into fruition? I'm sure that you were pretty much the spearhead of that effort. But how did that come about? And then what kind of impact do you think that, that will have kind of near term if we look out into 2022 in terms of her impact on the overall FRWD business?

Yes. Well, we worked with Kendall for years. So we're doing things on smaller type projects and engagements for many years. And we've been looking for the opportunity to do something bigger and better than we felt both of us could get behind in a huge way. We're huge fans and we know that her relevance is only going to continue to grow and grow. So she's amused to us and to our customer base, not just from the classic way in terms of modeling and kind of look and feel, but also layered with her taste level and their style and kind of like her creative vision. So it was just a natural awesome, awesome fit. And as you go into -- looking into '22 and beyond, we'll ramp up some of the brand marketing spend historically from a REVOLVE level. We talked about this many times how, call it, 3/4 of the spend is on digital marketing, performance marketing and 25% was on brand marketing, even though it seems that, that brand component is really kind of outsized, it's not something that's very, very visible. But that hasn't been the case with FRWD, but that will be the case with the FRWD moving forward. Those percentages might not be exact with FRWD, on a whole, would probably be a little bit -- it will be similar, but FRWD will be a lot more balanced and a lot more on the offense this coming year. So far, so good driving sales, driving customer acquisitions. Hopefully, we'll see a lot more of that for a long period of time.

That's great. And another story that you guys have that's somewhat like the FRWD one is the owned brand strategy. So it kind of -- was really hot out the gate a few years ago, and then there was a bit of a reset and a recalibration, and now it seems to be kind of coming back in a new way, new and improved. So can you just walk us through like what were the learnings and where we're at today with the owned brands?

Yes. Pre-pandemic, I guess, call it around IPO period, leading up to the IPO, it was one of those aggressive rocket ship phases for us with owned brand, where what we had was working extremely well and we were growing it very, very aggressively. It was kind of like this rocket ship start-up within kind of like the overall organization. And I think, especially when we were in a pre-IPO mode, it was always -- the style was a little bit different, where it's pushed things to the point where they potentially break a little bit and then fix them quickly, calibrate, reset, readjust and learn quickly. We were already beginning to kind of reset and calibrate prior to the pandemic, but the pandemic really kind of pushed things forward in an even more dramatic way. I think that's kind of like a unique kind of just structural aspect is that, when the world became very uncertain and we knew that all the product that we had coming and that we planned for was for a world that doesn't exist anymore, we dramatically shifted away from owned brand because owned brand has a lot -- a meaningful, higher capital requirement per style and we wanted to be sure that we had a wide net in this turbulent period. So we reshifted to third party because -- when you were talking about, call it, Lucia buying a sweatshirt, if we're going to make one, it will about, call it, say 100 units. But if we're going to buy a sweatshirt from a third party, we can buy 6 units. So we can have this awesome selection and be light on inventory but still be sure that we have our customer -- everything our customer needs. So that was a dramatic shift. And so we bought back owned brands pretty tight, and we began rebuilding. The rebuilding was great because we really knew that prior to that period when we began to cut back, it was really a lot of saturation in certain zones. And I think zones, meaning kind of price points, categories, kind of like use cases, where it was a lot of going-out dresses in the $150 to $200 zone, for example. And if you look at those kind of like those -- kind of course zones, our owned brand penetration at some points was like 50% to 70% in certain key categories. And ultimately, I think that we pushed it too far. So we started to dial it back. And throughout the pandemic, even though we weren't delivering a lot of styles, there's been a lot of kind of R&D and investment, not necessarily R&D and investment from a financial kind of like line item way, but in terms of like an activity way. So as we're coming out of the pandemic with owned brands, we -- we've kind of hit the trough of where our penetration will be and we're starting to steadily climb. And it's coming -- it's doing so in a much, much healthier way. We have a lot more diversity and price points across the board, a lot more diversity in categories across the board, end uses and such and how you'll be using the product. So ultimately on a pound-for-pound or on a style-for-style basis, I think the styles now mean a lot more than they did call it, say, 2 years ago. So there's an increased focus on efficiency and productivity and profitability per style. And we're in an awesome position where gross margins are absolutely awesome. Plus our own brand penetration is a little bit down compared to historic highs, so there continues to be even more room and a higher ceiling than we originally -- call it, 2 years ago, than we originally thought we could get to. So feeling really great about that. It's a very disciplined long-term mindset with the owned brand division now versus that aggressive, aggressive start-up mindset that it was a few years ago. So ultimately things are maturing. And I think over the course of '22, it will probably be the best demonstration of that with a number of different types of products coming down the pipes. You've had some recent releases, some recent kind of launches, which have been awesome. Denim is an underpenetrated category of our owned brand, and we just launched this awesome kind of recycled denim program for lovers and friends, which is going well. That's something that was in the works throughout the pandemic period that we're super proud of. And there's a lot more coming, I think. You fast forward to probably at the end of Q1, I'm sure there's going to be some exciting new things to share with the world, both The Street and in the customer side.

Sounds good. I often joke with you guys that like you kind of thrive on some of the chaos that's been going on in the world because you're really good. You have these in-house systems and from inbound supply chain to your warehouse, to your inventory management, to your reorder process, like it's all very streamlined. And so when stuff is like breaking out there in the world, you guys are usually quicker to adapt to it than a lot of your peers. So everybody is complaining about these supply chain problems and availability of inventory around the holiday. I know you're not really much of a holiday pure play, like you don't come to Revolve and shop just for the fourth quarter. But any comment just on how you view like the supply chain bottlenecks. Are they having any impact on your business right now or into '22? And I think you guys use air for the most part on your inbound, which would get away from all this like Long Beach port problem, but any comment just on how you're navigating the supply chain disruption.

Yes. I think it really kind of -- this is a great just masterful kind of demonstration of how we approach business, why we're better and why we perform and ultimately kind of the technology routes that we have. Entering -- in March 2020, we quickly realized as we were ramping up for our main warmer season, we were kind of like getting inventory for the beginning of the season. The world changed and we quickly, like literally knew on, call it a week where it was is, okay, a lot of the stuff that we have right now is not relevant in this world. We need a lot more of this. And not only that, we have a lot of inventory that was previously planned that needs to be completely addressed and readjusted, literally done from scratch, really brought it over and bought for the new world. So that was on the defensive side, it was clear the right moves and, of course, the awesome, profitable quarters that we've had in the really challenging times where we show that. But it was a few quarters ago when we really saw, from a technology standpoint, from like an algorithm standpoint, from a system standpoint, that we really needed to plan for the next phase. And it was clear to us that as uncertain as things are, as uncertain as things were, it was time to rebuild inventory knowing that supply chains were challenged. The supply chain challenges that are super clear, like literally, being in L.A., you see the ports, you see the big ships sitting out there. But this was also crystal clear to us, call it, 9 months ago. So we were making a lot of adjustments then, being a little bit more aggressive in bringing in product earlier and knowing that we would -- it would have to be here. And looking at this holiday season now, I feel like it really shows. It's showing in our numbers and it's showing in our performance. It's showing that when the customers come to site, there's an awesome offering. Of course, there's bumps. It's nothing -- it's not -- the overall performance is awesome, but there's always isolated areas of bumps. And there was periods, a couple -- maybe a couple of months ago when a little bit too much product was on preorder, but we're still capturing this preorder sales, leveraging data from all those preorders, to plan in advance and such like that. So there is challenges. We air everything in. Airfreight, it has increased, hasn't been increased as much as kind of shipping, both from a time perspective and from a dollars perspective. But we feel a little pinch there. But at the premium price point with the margin structure that we have, we noticed it. Of course, we pay attention very closely, but it doesn't structurally affect the business and the profitability of the business in a macro level in a meaningful way. So it's -- I feel for everyone, it is a challenging time. But I think, in a sense, we weathered some of those challenges a little bit earlier. We were really worried about this sort of stuff a little bit earlier and here we are now feeling good and positioned well.

Got it. Okay. And you talked about this a little bit before, but if we kind of rewind to 2019 and before, I mean Revolve has been mostly dresses and kind of going out -- I mean, that's what your customers know you guys for, and you evolved the product into beauty and some of these stay-at-home categories. So looking forward post pandemic, what's your confidence around holding onto share -- potentially gaining share in some of these newer categories that you don't have as much history and your brand is as well known historically?

Yes. I think the cool thing is that we've always had the offering, but it was playing the hot hand for many years, where the rise of Instagram really suited itself for going-out clothes, vacation clothes and things like that. So we can continue to nurture that because it was paying dividends, and it was in an awesome place to put capital to work. But as -- it was clearly always the long-term intention to be this kind of digital department store, and it's very easy to think about, well, you enter the department store, where you know your historic legacy department stores, and there's an incredible beauty counter, there's an incredible selection of handbags and shoes, things that we know our customer wants and needs, but that we weren't highlighting. So we've made awesome, awesome gains in all of these more nascent areas that were always long-term opportunities, and we're holding on to them. So it is awesome. The going-out categories have come back really, really strong. Dress business is up, almost triple digits last quarter. But we're still seeing growth against extremely challenging comps in a lot of these other categories -- beauty, handbags, shoes being crucially important long-term strategic categories. And we're seeing growth and a bigger share of the overall mix, while all of the other portions of -- all the other slices of the pie on a macro level grow. Their ratio to -- their relative size to each other shifts because, of course, some categories are growing faster than others. So feel really, really awesome about that. We were able to expose -- we were given the awesome opportunity to really force our hand to expose all of the other areas of the store. We were always showing her the dress floor, but now we're walking her through the rest of the store, and she likes what she sees and she's continuing to shop. So I think, ultimately, that translates to the great performance in customer -- total active customers for the quarter, new customer acquisition across the board, retention and of course, sales and profitability, most importantly.

Got it. Another big driver of growth over the last few years that doesn't get as much airtime on the conference calls or generally in the investment community, because you guys are mostly known as a U.S. brand, is international. So yes, what are the biggest countries that you're getting traction in international? And if we look out 5 years, how big could the international business be as a percent of the total REVOLVE and FRWD?

The international part of the -- if you're looking long term, the international piece I think is massive. I think ultimately, to get to the tens of billions of revenue that I think we can do over the long term, I think ultimately, we have to be a global business, which I think is great because our brand is global and our marketing is global. So a lot of the things that we do, Instagram, for example, there's no country lens, there's no boundaries there. So we have a massive international following. But what we have to do is built kind of like the consumer experience to be on par with the domestic consumer experience. So that's a long journey and a long road map. And I think the best case study as of recent is the outsized performance in Canada. Canada is growing extremely well. On the biggest scale, it's not like the biggest market in the world by any means, but of course, it's a very important market for us. And for many years -- we ship -- our first shipment in Canada was probably within the first 2 months of our business, just over 18 years ago and the Canadians have been shopping with us for a long time. When you're trying to return a product, you have -- for many, many, many years, you would have to go get your tariffs and duties back manually. You couldn't just get it back on your card. So we went through the process, worked with the government, and we were literally sitting on kind of like permits and applications and approval process for, I'd then call it, loosely a little over a year of just like trying to get -- now that we're here, now that if you order from us and you ship it back to us, we'll refund your duties and everything all as one and you don't have all these crazy headaches. The Canadian business is growing extremely, extremely well. And I think that's a microcosm of what we have to do for the rest of the world. So we've made some of that progress a little bit in Western Europe, a little bit before Canada. But just across the board, we're going to have to do that with the entire world. So the teams are working on a lot of different things. We're seeing lots of strength in a lot of different areas. We've seen the Middle East business with some of the upgrades we've made with shipping. The Middle East business is going great. The China business is going great. But of course, when you're looking at the macro level, there's always a lot of pockets to where there's reasons and been things that are -- where there may be challenges and such like that. But long term, massive opportunity that we have our eyes on is a consistent -- I think you're totally right that it doesn't get as much of short-term coverage on calls and such because there's never like a lot of activity in the international zone in 1 quarter. It's just this consistent, consistent investment in progress over the long term, which is probably why it's not as exciting to talk about, but I think from a fundamental perspective, it's an essential part of our long-term vision.

Got it. And shifting gears to kind of inventory position and gross margin. You've talked about this before, but you have a really sophisticated system for both managing inventory, managing the repurchase of inventory. And this was kind of perfected under the 2019 and prior model with dresses and apparel being the biggest part of your business. And now that we have all this new selection, how does that change your strategy around inventory, around overall selection and around the systems for reordering? Does it work if you are now in all these categories without as much history?

Oh, definitely. It works great. And some categories are better suited than others in terms of things like reorder. So the beauty business, for example, it's a perfect business where we are built for that. We're making sure that we have the appropriate amount of inventory and stock as well as the advanced orders to ensure that we never run out of products so that the offering was already there. That's something that's already core to what we do. So integrating kind of that front-end product nature to the consumer plugs those into our back-end infrastructure beautifully well. Other zones, there may be longer lead times on reorders. Things like some of the designer handbags on FRWD, it's not like there's a warehouse full of them that we put an order in and it gets -- it arrives here the way it does with beauty. But those are things that we have to adjust for different lead times and different supply chains and stuff like that. But I think that there's no challenges in the sense of like -- of changing the way we work. I think the core way we work applies directly, of course, with localized aspects of -- just due to the nature of the product and such. So we're really seeing that. The reorder business continues to be super crucial. We've seen it grow and expand. Reorders, we've always preached about how proven product over the years have higher gross margins than new untested product, and that continues to be more true than ever before. So things are flowing nicely there, and I think that the expansion of the offering really plays into our strength of inventory management.

Got it. If we look at marketing, it's a huge part of growing any e-commerce business' overall strategy. And I mean, half of the companies that we cover blew up on this IDFA Apple iOS 14.5 change. You guys seem to have navigated it pretty well, like you do almost all of these little wrenches that are thrown your way. So I guess can you just talk about like, yes, how you managed through that? And then with the recovery in some of your events like New York Fashion Week and as we look into '22, like what's the overall philosophy around performance in off-line marketing?

Yes, some of these things that we've talked about, like they -- it was always important to us to have a diversified marketing kind of arsenal. And really -- and I think that's what's driven success in great times, but also that's what allows us to navigate the challenges when they do arise. We -- historically, we've probably said this to a lot of you before, but like it does feel that the brand marketing and the Instagram marketing is kind of like the bulk of what we do on the marketing side. But I think it's important to note that it's about 1/4 of our spend there, that brand marketing spend; whereas 3/4 is what we call performance marketing, which is within the performance marketing stack, it's highly diversified across a number of channels, a number of technologies. And this goes back to really building this business over many, many years. It used to be 50-50 Yahoo!, Google way in the beginning. And then, of course, Google took over their share. And then with the rise of Facebook, that rose. Then Instagram. We're targeting -- a lot of different things that the team does, and at this point, Mike runs that team, so there's probably even other aspects and a whole level below there in terms of all the different programs across all the channels that are uniquely different. But it's extremely, extremely diversified. That was always my intention. One, every new marketing channel that we can master is potentially highly efficient customer acquisition and retention, but also the diversity and the less reliance we have on any particular channel. So that was crucial from us structurally from the beginning, and it really -- is really highlighted in a period where if you are reliant on one particular method or one particular channel or whatnot, you're really at the risk of your marketing partner. And I think ultimately, it was important to us to not be at risk there because to build the big business we need, we can't have some other organization dictate our future.

Yes. Makes sense. Time for one more, and it's kind of related to marketing. But you guys have always been really good with influencers and you've even taken it beyond just kind of using influencers to talk about REVOLVE, but you now have like some of these co-branded different products and different lines that you're doing, like with Camila Coehlo, for example. So could you just talk a little bit about that strategy? And then as we -- as TikTok becomes like a more viable medium for the younger demo, are you starting to get some of these TikTok folks involved?

Yes. The -- we've learned to work with influencers from like the early days when it was just like trying to get some tags and things like that. This was pretty much since the beginning of Instagram. And ultimately, collaborating in deeper ways with -- whether it be one-off capsule collections or long-term kind of brand partnerships. We continue to learn. We continue to evolve. And coming into '22, we will see some exciting new evolutions of that. We think ultimately constant iteration and improvement in advancement is ultimately there. And compounding those gains over a long period of time ultimately build incredible, immense value. So we feel great about that kind of program and that approach. We feel like we're getting better than ever at it. So we will have continued investments there that we'll see shortly. And as far as TikTok goes, completely agree. I think that's a fun new zone to reel in another big opportunity there. It is adjacent to Instagram, but it's dramatically different as well, which I think is awesome. This is exactly what we were talking about earlier in terms of like diversity of channels and ultimately being able to be strong in a number of ways is crucial for just long-term defensibility. And it's also crucial for growth, especially efficient -- highly efficient profitable growth, which is kind of like our philosophy and kind of our mantra. So you'll also be seeing a lot more on the TikTok zone for us as well.

Awesome. Look, Michael, this is great. As always, we super appreciate having you guys at the conference. And hopefully, next year, it will be in person and Revolve stock will double by then. So yes, take care and thanks again.

Thank you. Hopefully to see in person and happy holidays.

Sounds good.

Thanks, guys.