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

Okay, guys. Thanks, everybody, for coming. I'm Michael Binetti, our digital retail and softlines analyst at Credit Suisse. Thank you so much for coming to the 2022 conference. We're so happy to have everybody here. Happy to have, for the third time, Revolve, our friends at Revolve. We have Jesse Timmermans, the CFO of the company. Third time I've been on stage with him doing this, and it's just a treat to have these guys here every year bringing us up to date on the consumer in the tech world. They've got some slides they'd like to run through, just kind of bring us up to date on the business, a little bit of information, then we'll go into a couple of questions.

All right. Sounds good. Well, thanks for having us. Always great to be here. And sorry, can we go back a few slides? We got ahead of ourselves a little bit, maybe to Slide 1. The other way. Slide 1, there we go. Okay. Disclaimer quick. So we'll start with just a quick introduction if you're not familiar with the Revolve Group. We believe we are the leading fashion destination for this next-generation consumer. We serve her through a data-driven technology platform, all homegrown, that's led to a data-driven merchandising strategy that puts the best product in front of her on a daily basis. It's comprised of not only third-party brands but also a portfolio of our owned brands, which carry a premium margin and also speak to her in unique and different ways. We engage with her through a very innovative and engaging marketing strategy with our brand marketing events, REVOLVE Festival picture here. You can see that happens in April of every year. And then another example is REVOLVE Gallery during New York Fashion Week in the fall. We have been profitable all but 1 year in our existence. We were founded almost 20 years ago by Mike and Michael, who are still, to this day, are co-CEOs and run the business on a day-to-day basis. We sit in a very unique position at the intersection of 2 shifts that are happening right now: one is the shift in purchasing power to this next-generation consumer; and two is the shift to online. If you think about this next-generation consumer. She shops digitally, she engages socially. She wants discovery every day. You can see her purchasing power here almost more than doubling over the last few years, and we expect that to continue to shift as she grows in her career, earns more money. I keep referring to her. 2/3 of the apparel market is driven by the female purchaser, which we are squarely focused on. And then e-commerce. We do think there's a long-term shift to e-commerce. You can see it here happening over the last several years. We had 2020 that over-indexed due to COVID, and we've had some pullback reversion to the mean in 2021 and further into 2022. But we do believe that over the long term, the market will continue to shift to online. We serve her through 2 complementary destinations, REVOLVE and FORWARD, REVOLVE being the majority here at a $250 AOV. It is known for dresses. It's curated, it's easy emerging brands, constant discovery, constant newness. If you think about the assortment, almost 80% is the combination of either an emerging brand or one of our portfolio of owned brands. That's complemented with FORWARD, which is 16% of the business. This is a much higher average price point. These are iconic and emerging luxury brands. Kendall Jenner is our creative director on the FORWARD side. And if you think about the mix, this is complementary in that FORWARD skews more handbags and shoes. We know that if that REVOLVE customer is buying a $200 dress, she's also buying a multi-thousand-dollar handbag somewhere. Why not FORWARD? Also very uniquely positioned in the peer group landscape. We kind of think about 13 companies in this online fashion retail peer group, only 1 of which has increased net sales and generated profitability and positive cash flow in the most recent quarter, and that being REVOLVE. But that's not a new phenomenon. Again, we've been around for nearly 20 years. Mike and Michael, co-founders, still co-CEOs, very entrepreneurial, founder-led, still own 45% of the company. Very disciplined in our approach, very capital efficient. So very consistent growth over time. You can see here just the last 3 years, a 20% CAGR. That's been relatively consistent over the 20-year history with, of course, some peaks and valleys over time. But again, over the long term, a 20% CAGR with profitability, again being profitable in all but 1 year during the Great Financial Crisis. In the last couple of years, doubling our both net income and adjusted EBITDA from that pre-pandemic period. Not only have we grown consistently and consistently profitable, we're very capital efficient with CapEx being less than 1% of net sales, which has led to positive free cash flow and a very strong balance sheet, closing the last quarter with $244 million in cash from operations. This isn't -- the vast majority of this is operational cash flow, not from external financing. So this puts us in a really good position, especially in a macro environment like we're in today that can be challenging, and sets us up to remain offensive in these volatile times. If we take it just maybe a click below the high-level metrics of net income and bottom line, thinking about our customer and kind of what's driving that consistent growth and profitability over the long term. It's a very active customer, a very loyal customer. As of the most recent quarter, we have an active customer base of 2.2 million. This is a customer that engaged with us, ordered from us in the last 12 months. So this is a trailing 12-month figure. Very high retention rates from this customer. You can see here on the right, 120% which is a recovery from the 74% of 2020. But again, over time, nearly 90% retention from that customer. And the cohorts are very consistent over time. Again, I'll go back to the nearly 20 years of data. So this is not new. It's very consistent behavior over time. And she buys at full price, very premium full price mix here. 87% in 2021, that was a record. We don't expect to achieve that record going forward, but we do think we can maintain a high full price mix, probably starting [ with an ] 8 over the long term. And again, she's very active. So if you look at the frequency of her purchase and her average order value over time, that has increased. And you can see it here, about half of our customers are a pre-existing customer, and that half of the customers placed 76% of the orders and represented 77% of the net sales. So this showing that, that 50% of existing customers is more active over time, generating more orders, and not only that, purchases at a higher average order value generating that 77% of net sales. And now maybe shifting to more recent trends. It has been challenging. Despite the long-term growth and profitability profile, we are not immune to these macro factors that are facing everyone today. You can see a sequential decline in the growth in our active customers. Again, this is a trailing 12-month number. We do expect that to continue, that growth rate to decline over the next coming quarters as we lap some of those recovery quarters of late '21 and early 2022, but still really strong growth, and again, that 50% of existing customers representing 75% of the sales. Growth rate, also a culmination of facing some really tough comps from coming out of COVID last year and then also the macro environment that we're in. We saw a pretty significant downshift in early June of this year, right when all the headlines hit. We're coming off of record low consumer confidence. So again, it's going to be a challenging couple of quarters on a comp basis and then a very uncertain macro environment that we're in right now. Despite that, continuing to focus on the customer, and again, we'll get into some more of the offensive maneuvers here in a minute, but really pride ourselves in that best-in-class customer experience. And you can see it here with hitting record customer satisfaction scores in the most recent quarter. So again, just really focused on serving her. That comes with free shipping, free returns, great customer service are -- again, the technology is all homegrown. Our inventory management is homegrown. We know where every product is. We can serve her in a really not only cost-effective way but a very customer-centric way. And again, the macro environment, not immune to the headlines that you're hearing out there about the inventory situation. We do have more inventory than we would like. Coming out of COVID, we are chasing demand. We over-indexed on inventory and then a significant downshift that we saw in June left us with more inventory than we would like. We are working through that, but it's going to take some time, probably a couple more quarters before we're kind of rightsized with demand and inventory. That's going to have an impact on margin. You saw it in this most recent quarter going down to 53% from last year's 55%. But we're disciplined when it comes to inventory. It's a low carrying cost for us. We're willing to hold on to it longer than maybe others. We don't have to clear expensive floor space to make room for the next season. The markdown strategy is algorithm-driven with some human oversight, with the strategy of, again, balancing inventory levels with margin optimization. And here, we get into more of the offense. So despite the challenges out there right now, we have been profitable, cash flow positive, also very disciplined even when the macro environment is very favorable. So benefits us in times like this where we can make moves and stay on the offensive. So these are just a few examples. If you start with a couple of our owned brand launches that we launched recently, REMI x REVOLVE and the Helsa collection. So 2 very interesting, unique and exciting opportunities for us. On the REMI side, this was an opportunity that came via a TikTok video from REMI herself and enabled us to expand our size range with REMI standing behind that brand. Helsa was a really exciting launch for us in that -- and this is Elsa Hosk, supermodel, partnered with us to do this launch, and we're now on our second drop of this collection. This is unique in that it's an elevated price point, elevated aesthetic and sells on both REVOLVE and FORWARD. Historically, the owned brands have been more centered on REVOLVE, so we think this is a very exciting opportunity to kind of keep pushing the envelope in price point and kind of aesthetic. Continue to engage with her in these really impactful marketing events, whether that's REVOLVE Gallery that just happened in September, or through the Brand Ambassador program on FORWARD. We launched the Brand Ambassador program on REVOLVE about a year ago. This is a way for us to interact directly with the influencer and determine which product is selling, which is influencer is working, pay her a cash commission or clothing credit for the sales that she generates. This has quickly become one of our larger marketing channels on the performance marketing side on REVOLVE. So we're really excited about launching this on FORWARD, which just launched last week. If we continue on FORWARD again, new ways to interact with the customer and new ways to expand the assortment through the ReNew program, which is a handbag buyback program. So if she bought a handbag on FORWARD, we're willing to buy that handbag back and resell it on the FORWARD platform. Also expanding this into new and different brands via pre-authenticated handbags for sale on FORWARD. And then on the operational side, a new distribution center on the East Coast, which will allow us to inject returns, bulk ship back to the West Coast more cost effective than shipping onesie-twosie units across the country. And then also over the long term, being able to stock new units on the East Coast and serve that East Coast customer faster and cheaper. And then finally, on the marketing front and also strategic front, partnering with Muus Collective to develop a mobile game, which we're really excited about over the long term. Almost half of the mobile gamers out there are female. A new way for us just to engage with her and keep that diversified marketing channel and stay at the forefront of this next-generation consumer. Just a quick quote from Mike and Michael from our most recent earnings call, which again, is just kind of reiterating the kind of entrepreneurial founder-led mindset that we have in the company. And this permeates through the organization. So if we use that as a segue into future growth initiatives: number one, we still think we're very low penetrated in this U.S. market, and that's just in the U.S. If you think about international being much larger than even the U.S. market, a lot of opportunity there. But if we just focus on the U.S., whether you look at our 2.2 million active customers compared to the number of women that are aged 18 to 44 in the U.S., 3% penetration. You can look at that on a spend basis. It's roughly that 3% or stack it up just against some of the other players in the industry and look at our active customer base versus some of the others. We have a long way to go and a lot of white space around this premium price point that we're offering. Second is FORWARD. I'm really excited about FORWARD growing more than 2.5x over the last 3 years and still just a very, very small part of this $100 billion luxury industry worldwide. Some of the growth drivers there, even outside of just that massive market opportunity that we have, an opportunity to cross-market FORWARD to the REVOLVE customer. We still have approximately 5% overlap with the REVOLVE customer. Again, we know that if she's buying a $200 dress, she's buying a multi-thousand dollar handbag somewhere, really nice pair of shoes somewhere. Why not FORWARD? It's very differentiated with the curation that young luxury consumer, that Kendall Jenner as our creative director. So elevating this with the loyalty program that you can cross pollinate between REVOLVE and FORWARD, the Ambassador program that we just launched and FORWARD ReNew. If you stack it up against, put it in perspective with some of the other players out there, continuing to take share from some of the other players in the industry. Internationally, I mentioned massive opportunity internationally, still 19% of our sales. Kind of phase 1 of international is get that customer experience up to par with our U.S. customer experience, which we've layered in 9 regions over the last few years with free shipping, free returns and you can really see the results, if you look at -- pick Canada, which quadrupled within the last 6 quarters after launching that localization initiative. And just to maybe go into a little bit more detail on that. What does that mean? Pre initiative, she would have sticker shock at the checkout where all the Canadian taxes were added into the checkout. On top of that, she would have to pay for her return coming back into the U.S. She wouldn't get refunded all of her Canadian taxes. She would have to go to the Canadian government to get those taxes back. Post implementation, the pricing is in CAD. The pricing is inclusive of all the Canadian taxes. If she returns, we refund her not just the purchase price but all of her taxes. And then we, REVOLVE, go to the government to get those taxes back. So again, triple-digit growth after launching that initiative. Does increase the return rates, but we're more than happy to take that higher return rate with the increase in net sales. And then just more opportunity in some of the more emerging markets and addressing more of the international customer out there, whether that's the Middle East or Greater China over the long term. Merchandising, marketing will follow the customer experience, potentially localized fulfillment centers to serve that customer faster. But even right now out of L.A., we can serve 80% of the international sales in 2 to 3 business days. And then owned brands. And this is both margin accretive but also more importantly, it's a new way -- a different way to interact with the customer. So we can read the data, we can fuel sales and demand through creating these own brands that serve a new customer or a different aspect of the customer, a different share of her wallet. Again, we mentioned the Helsa collection, which is a influencer/celebrity collaboration or the REMI collection, which addresses an expanded customer with extended size ranges. We also think there's opportunity in additional categories, whether that's lower price points, active, intimates. And then just the brand positioning around our owned brands and within the existing owned brands, 5 of our top 10 brands are owned brands, and so there's still opportunity to leverage the brand equity that those brands have to serve more aspects of her life. And then finally, and this kind of dovetails with the owned brand, is just expansion into more categories and again, capturing more market share or wallet share, I should say, whether that's active or beauty. Beauty is a good example where we know she's buying beauty somewhere. You could really see this in COVID when she pulled back on her dress purchases and going out, and shifted more to beauty accessories. Men's, still a very, very small portion of our business, but we do think there's opportunity there to serve this next-generation male consumer, which I'm [ personally ] excited about. So with that, maybe I'll leave it there for questions.

Well, why don't we do a couple of questions? So we've got a room full of stock guys. I want to talk strategy with you, but the [ matter ] can't get out of here without talking about something macro. So there's a lot of digital retail stocks that have been under some pressure. One of the reasons, there've been concerns about profitability and cash flow during what could be a weaker economy over the next year. Talk to us about how REVOLVE is differentiated in that backdrop. It's striking to me that we've been up here 3 years and the first thing out of your mouth every time is how long you guys have been in business and how, excluding the Great Financial Recession, profitable every year. And I think that's becoming a bigger differentiator for you as we look at tough times ahead here.

Yes, yes, for sure. I think that's the first place we'd go is just that historical track record. I think second is that founder-led entrepreneurial spirit, being disciplined constantly, whether it's macro pressure or macro opportunity. I think ways that we can adjust, there's always ways to tighten. A vast majority of our P&L is variable, whether that's the fulfillment line item, the selling and distribution, which is predominantly freight, or marketing. And 75% of that marketing spend is performance marketing, the traditional digital channels, which is variable. Brand marketing is an area we want to keep the pedal down and really stay in front of the customer and take advantage of this opportunity to capture market share. On the more fixed G&A component, again, very disciplined in good times and more challenging times. But I think the theme is we'll continue to be disciplined while staying offensive where we can and taking advantage of market opportunity.

And you showed a nice slide there with some of the areas that you're still investing. You guys have the good fortune of actually continuing to make investments in tough macros and you've done in the past. Aside from the marketing that you just mentioned, what are some of the areas that are important for you, even if we do hit a rough patch here, that you really want to make sure to keep the pedal down on the area? What are the most important things for you guys to maintain?

Yes. Outside of that marketing, which you mentioned, it's all about the customer, and that can come in a number of different ways, whether that's through more customer experience, the East Coast distribution center being able to inject returns, cost savings over the longer term, but also serving her faster -- that East Coast customer faster. Or from a customer's perspective, just having the right assortment, having newness, freshness and being there for her is important. The international component is important and continuing to improve that customer experience. So I'd say everything is centered around that customer and whether that's the experience on the site, the experience with her shopping, or the marketing and engaging marketing content. I think on the marketing, important to continue to diversify the marketing playbook. I think that's 1 thing that has benefited us over time is having that diversification. Brand marketing that is more visible in social media and then the performance marketing. And even within performance marketing, the Ambassador program, for example, which has quickly become one of our larger channels and help this kind of battle through things like IDFA or any other kind of macro challenges out there.

It's interesting because we worked with these guys on their IPO in 2019, and we had a bunch of numbers guys in the room, kept saying, "Wait a minute, half this stuff gets returned to you. How do you get that number down? How do you -- it's just going to kill your economics." Here we are years later, and you're still telling us how you're trying to make it easier and easier for her to transact with you, be it through returns through East Coast fulfillment centers to make it easier and easier for her. So you guys put your money where your mouth is from the very beginning, it's been good to see. I have to ask because as more and more softlines retail categories move online, do you see any competitors making what you think are strategic misjudgments that you guys could take advantage of market share-wise? Maybe you don't want to give us the secret sauce there, but I'd be curious [ to know ] ...

Yes, yes. Maybe not picking on anybody or any secret sauce. But I think it comes back to the cost discipline but also staying offensive in times like this. I think there's been a lot of players that have popped up that have lived on Facebook marketing and just driven CAC to really high levels. I think seeing some opportunity as people pull back, capital dries up, for us to take advantage of [ turn ] people down. And that comes being more strategic opportunities as well.

Let's talk about FORWARD for a minute. That's been something that's really been impressive over the last few years. First, let's talk about Kendall Jenner and her partnership. Talk to us about her involvement and what are some of the marquee inputs she's had. I know it's early on for her joining the team, but some of the marquee input she's already had for that business.

Yes. Yes, we're really excited about the partnership. It's just over a year new at this point. I think the most -- kind of the most visible impact in benefit is just her presence, her social media, her posts, which generate phenomenal activity for us. I think if you take it to the next level or kind of other ways in which she's engaging with us and with the customer, her monthly picks, her Kendall Edits are some of the best-performing campaigns that we do every month. More recently, the activation we did in New York Fashion Week with her [ as specific ] Kendall and the FORWARD event, where she was behind the camera and she was editing that campaign. I think brand equity, brand relationships, brand acquisitions. She's been very active in not only identifying new and emerging brands that are exciting for us, but working with existing brands. And I think a lot more to come. We just did another event just last week with another brand and kind of a Kendall x Jean Paul Gaultier launch, which was a really elevated experience, really exciting and really resonated with this young luxury consumer. And I think that's a theme, is this young luxury consumer, and that's where FORWARD is differentiated. It's a different look and feel, different curation than maybe what she's used to from some of the other players.

And it did look for a while like FORWARD was still kind of finding itself and now it seems like there's a much more sustainable business there. The growth rate has been great. You showed us 2. What do you -- there's a lot of places for consumers to go for luxury goods online. There's other companies here that sell goods to luxury goods online. What do you see is the biggest whitespace opportunity for FORWARD or a competitive differentiator for FORWARD?

Yes. I think number one, it's that curation and that edit. I think if you just pull up FORWARD against anybody else on the website alone and looking at that editorial and that look and feel that Forward has compared to others, I think that's number one. The selection is important that kind of ties into that with this more emerging luxury brands than maybe you'd see elsewhere. And then I'll go back to the customer experience as well. I think just having that phenomenal customer experience and shipping experience, fast, free returns, better than many of the direct brand kind of relationships that the customer would have -- and then international, maybe I should mention too, luxury skews a little bit and Forward skews a little bit higher international than domestic. So again, with that massive international market, we see a lot of opportunity there.

I want to talk about international in a minute, but let's talk about the logistics. It's a logistics business at its core, and you guys do a very good job. But you also have the CFO's dream, which is 1 scaled-up, very efficient distribution center in Los Angeles that until recently was servicing the entire world. You mentioned the East Coast facility. Maybe a little bit about the new facility, what the numbers will look like while it ramps. But then I think the bigger question is, you have 19% of your sales outside of the U.S. right now, there's clearly demand. You guys launched Tmall, resonated very, very well in China. When do you have to start adding assets outside the U.S. to keep the experience going?

Yes, yes, great question. CFO's dream. I thought you were going to say consistent growth, profitability, great team. But yes, there's a lot of things. But yes, it is -- has been very efficient and effective to have that single distribution center. We moved -- we kind of consolidated distribution centers back in 2019 and have grown into and driven efficiencies there. If you look today versus 2019, [ you can ] call it 30 basis points of efficiency despite a lot of macro headwinds. That said, it's taken us a while to have a more diversified fulfillment network, in part because our merchandise strategy is to be very broad and shallow. So it hasn't made sense from a scale perspective until today to have more distributed fulfillment centers. So on the East Coast, phase 1 is to be able to inject returns into that East Coast distribution center, give the customer credit faster, then bulk ship that product back to the West Coast more cost effectively. Step 2 is can we then keep some of those returns on the East Coast and just re-fulfill so we're not shipping back and forth across the country, which we're very close to at this point. And that's both from a customer service perspective, being able to get to her faster on the East Coast and also from a cost perspective. And then phase 3 is, can we stock new inventory there, again, from a customer service perspective, reach her faster and cheaper. International, we are starting to look at the potential for international distribution centers. Again, hasn't made sense up until this point to start thinking about it due to kind of scale on that broad shallow assortment, but it is starting to get more interesting. So I think over time, there will be an opportunity for fulfillment centers in local markets or at least kind of regions.

Okay, I want to be mindful of time here. I wanted to ask a little bit more about international, but I don't want to leave without talking about Web3. You guys had a really interesting announcement. Let's lean into the future a little bit. You announced an exciting partnership to create fashion for online mobile gaming. You're partnering with, I think it's pronounced Muus, to develop a fashion centered Web3 mobile gaming experience that aims to revolutionize how consumers engage with fashion. Talk to us a little bit about the partnership. It's very interesting. You guys were excited about it on the call. I know it's early days, but tell us what you're trying to do.

Yes. Yes, early days, and we are excited about it. This is another good example of being cost-effective, capital-efficient, looking for strategic ways to engage with this next-generation consumer. So partnering with Muus, which are some of the best in the industry, backed by Griffin Gaming Partners, which is the top VC in the gaming industry. So a really solid team there. I think from our perspective, again, just a new way to interact with this next-generation consumer. We know that she is gaming via mobile. We know that she's interested in fashion so can we gamify that experience, engage with her in different ways and also kind of bridge that kind of virtual Web3 with the physical world. It's, sometime in 2023, we'll launch. But again, just excited about just new engagement and new ways of interacting with her.

And do you see -- is this an extension of the marketing campaign? Or is this a profit pool eventually?

Initially, probably more to the marketing front and just engaging with her and providing her with kind of, again, more experience with the brand. But we do think there is a financial upside here as well from a profitability, and also combining owned brands and physical product with the virtual world.

Interesting. And we've got about a minute -- a minute or 2 left so I want to go back to international for a minute. You talked a little bit about FX causing some volatility in your trends outside the U.S. I'm assuming that has something to do with pricing. We didn't get a lot of questions on it. Aside from that though, I also want to ask, what are some of the biggest opportunities you see outside the U.S. today, particularly in China? You guys have done a very nice job launching in Tmall. I think one of your slides said that, that was very helpful in enhancing the business on your own and through your own channels in China. Maybe talk to us about those opportunities.

Yes. Now on the currency front, kind of the challenges there, so we price initially in U.S. dollar and then convert our pricing to the local currency, call it on the fly. It's not daily, but pretty frequently. So when you see currency shift by, call it, 20% against the U.S. dollar, then we are kind of price challenged by 20%...

[ price dollar for the ] consumer, I got you.

So when you're competing against maybe a local player that's -- whether that's euro- or pound-based, then we're at a pricing disadvantage. That won't last forever. And we're looking at ways to optimize that. But it is a challenge right now and it has a very direct impact to the net sales. And then you add on the macro factors to that, makes particularly Europe, very challenging right now. And then China, we see as a great long-term opportunity. It is challenging. It's very different even on the marketing front, where really social media has no borders outside of really China. So we have to be able to interact with her differently. Tmall is a great way to do that. And it's been very effective for us, but it's going to be a longer-term challenge to really penetrate that market.

Great start. It'll be fun to watch you guys get on with it there. I think we're up on time. So I'm going to thank Jesse. These guys will be in meetings around and will be happy to follow up with you guys afterwards. Thanks, everybody, for coming.

Thank you.