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

Okay. Great. I guess the bright lights mean that it's time to start. Welcome, everybody, to the first day of the Morgan Stanley Global Retail and Consumer Conference. And thank you, everyone, for joining us for this session. My name is Kimberly Greenberger, and I work with Lauren Schenk at Morgan Stanley. Lauren has lead coverage of Revolve. I'm super happy to step in. I worked with the Revolve team throughout the IPO process and for the several -- first several years after the IPO. Lauren is actually at the NASDAQ conference in London today so she could not be here. And I just want to say thank you so much to Jesse Timmermans for -- the CFO of Revolve, for joining us today. We really appreciate you making the trip out from California, and thanks for letting me host this.

Yes. No, it's good to see you in person again. Thanks for having us. Good to be back in New York.

Before we start our session today, I do need to remind everyone that for important research disclosures, please do see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. And Revolve may make certain forward-looking statements today that are subject to the safe harbor statements in their SEC filings.

So with all the legal precursor out of the way, let's launch into the fireside chat today. Maybe we could start bigger picture and talk about -- for investors who are newer to the story, maybe you could start off by talking about how Revolve differentiates itself, what you view as your market opportunity and just the architecture of your strategy.

Yes. Yes, a great place to start. I think a lot of people think we're kind of new out there given our younger demographic and the focus on this next-generation consumer. We've actually been around for 20 years. Mike and Michael founded the business 20 years ago out of their garage, basically. Mike is a technology guy, Michael's an analyst. So they had to rely on data to make their decisions. They weren't fashion people. So that is at the core of who we are. And a big differentiator for us is that data-driven merchandising. The other more visible component is our brand marketing, influencer marketing, social media, which we've been kind of at the forefront of even pre Instagram, where we worked with bloggers that then turned into influencers and now are kind of in this transition into TikTok, [ In video ]. But very much front and center, top of funnel marketing, being in front of that next-generation consumer wherever she's at. From a financial profile, I think very differentiated in this market, especially in tough times like this. Consistent grower, consistently profitable outside of 1 year in the great financial crisis, whenever that was. 2008, I guess, was the year. So I think very consistent growth. Very consistent profitability. Founder-led, ownership, kind of owner mindset. So we're -- definitely a challenging period right now, but we're optimistic for the opportunity that lies ahead and coming out stronger.

Fantastic. A lot of investors are asking about the health of the consumer in the current macro backdrop. How would you describe the health of the core REVOLVE and FORWARD consumer? And what sort of trends or changes are you seeing in consumer shopping behavior? And is it different or the same at both divisions?

Yes, yes. And I'll stick to kind of what we talked about on our Q3 earnings call, which was that we did see softening out there. It really started in June, kind of in that late May, early June, when you saw the headlines around inflation and everything going on. So we did see a step down at that point. Q3 was 10% growth. We saw that soften even more into October; we had 3% growth. So our consumer is definitely challenged. Our brand is all about aspirational, going out, living your best life, feeling good. And when you're faced with these macro challenges, that impacts kind of how you're shopping and how you behave. So definitely, a challenge. International, even more challenged. We price in -- we buy in USD and then translate to the foreign currencies to price locally. So when you see European currency shift dramatically, that has a direct impact on our sales. So that's hurting the consumer there. I think over the long-term, still a very healthy consumer in that she allocates a disproportionate share of her wallet towards apparel and going out and clothing and accessories. I think we're seeing higher price points hold up better than lower price points, even outside of the FORWARD/REVOLVE dichotomy. Even within REVOLVE, we're seeing higher price points hold up better. And what's to come in 2023, not sure, but cautious on inventory and where the consumer's mind is at.

Great. That's a perfect segue into my inventory question. Inventory has been a little bit elevated relative to sales growth. And exiting the third quarter, I think it was still quite high. Could you talk to the -- both the overall level of inventory, the mix of inventory. And how do you sort of think about the process of clearing through the excesses and when do you sort of target to have inventory growing more in line with sales growth?

Yes, yes. We do have more inventory than we like, not alone, but we do have more inventory than we'd like. And kind of how did we get here? We came out of COVID, and there was just phenomenal demand into -- halfway through that Q2 time period on top of supply chain challenges. So even in a data-driven buying philosophy, if you have a spectrum and you have to skew one way or another, we skewed a little bit more aggressive to meet the demand. And then macro challenges starting in Q2 left us with more inventory than we like. Now that said, we feel like the inventory is good inventory. It's not that we're sitting on a bunch of sweat pants and masks from COVID that don't resonate right now. We do feel like the inventory is good. If you split it between REVOLVE and FORWARD, a little heavier on FORWARD given the longer buying cycle on FORWARD versus the REVOLVE that is a large portion of the REVOLVE buys are reorder, quick, read and react very shallow. So it's going to take us a couple of quarters to get through that and get more normalized with the top line demand trends. That's the uncertainties. We're doing what we can to control inventory, but there's the macro uncertainty in what top line does. But again, we feel good about the inventory. We're going to work through it at a disciplined pace. We want to keep newness on the site, keep her coming back, give her a reason to come back. Work through the inventory at a moderate markdown pace. Again, algorithm-driven. We're not going over promotional just for kind of short-term inventory dynamics, let the algorithms do their thing with some human oversight and be more patient. We don't have to clear floor space for the next season, carrying cost is low and again, back to the kind of inventory being just good inventory.

Great. Okay. Excellent. And there's a little bit of sort of uncertainty, if you will, around the consumer, the economy heading into 2023. So how do you think about buying inventory? And as we head into this period of uncertainty, can you sort of, for example, improve some of the chase capabilities in the business; buy a little less upfront? Just talk to us about your overall strategies and how you think about buying and managing inventory in a period of macro uncertainty.

Yes. We are being more conservative on the buys, especially in the first half of 2023 until we get more visibility into what's going on out there and how it's going to shake out. If you look at pre-COVID versus now post-COVID, we have expanded the breadth even more to give us more data points to read, maintain that shallow initial buy so that we can reorder, which has led to still about half of the buys are reorder on the REVOLVE side. So not doubling down, but increasing the focus on that breadth and reorder capability on REVOLVE. And then again, FORWARD is a little bit different given the longer buying cycles in the kind of the super brands out there that we work with. But even on FORWARD, with the Kendall Jenner relationship, working more with emerging young luxury brands on that FORWARD platform, brands that kind of almost cross over between the REVOLVE and FORWARD customer, giving us a lot of opportunity to overlap with that core REVOLVE customer.

Great. Okay. Return rates interestingly have been a little bit elevated this year and obviously, return rates pressure margins because of the back-and-forth shipping. Could you talk about the initiatives you're looking at to both lower the rate of returns and to improve the cost of returns?

Yes, yes. Returns, especially on a year-over-year basis, have increased significantly. That's primarily due to mix. Last year, we were coming out of COVID, lower return rate categories like more casual kind of slip pants. Beauty has a really low return rate. Beauty was really checking during COVID. And then we shifted into this going out in more dresses. And even within dresses, more going out dresses that have a higher return rate, higher price points. So we have seen a year-over-year significant increase in return rate. And then even if you look at pre- versus post-COVID, an increase in return rate. And the drivers there are #1, first and foremost, international, where we've localized the customer experience internationally, where pre-COVID in most of the major regions, we didn't have the capability of free returns for the international customer. So as we layered that in, significant improvement to the top line for those international countries. But on a stand-alone return rate line item, an increase there. Full price has a higher return rate, and that's been checking out record highs. We're starting to come off of that, but that's another factor. Strip away all those and normalize, we are still experiencing a modest increase in the return rate on a normalized basis. And we attribute that to macro, whether that's her kind of second guessing her purchase in this tough environment or she's more comfortable returning online -- buying online and returning. So what do we do about it? We look for win-win ways to reduce the return rate. We're not going to make it harder for her to return. We're not going to charge for returns. We actually extended our return policy from 30 to 60 days at the onset of COVID, and we've kept it at 60 days, again, making it easier and easier for her to return. To get it down, looking for site optimization, experience optimization, size and fit, recommendations, try to educate her and make her first purchase more accurate. But at the end of the day, and this is from day 1 in the garage with Mike and Michael, the thesis was the home is the dressing room, and we want to keep it that way and let her -- give her the permission to try 2 or 3 dresses on at home for that occasion on the weekend. So to the extent we can't get return rate down in a meaningful way in the near-term, what we do to balance the cost? One is our East Coast distribution center that we just opened a few months ago. So this will allow us to inject returns from the East Coast into that East Coast distribution center, bulk ship back to the West Coast more cost effectively than onesie-twosies going across the country. Second phase, keep the returns from the East Coast in that distribution center and reship to that customer. And then third phase would be keep new -- or stock new inventory in that East Coast distribution center to, again, minimize the shipping cost back and forth across the country. And then also, probably more importantly, the customer experience and being able to get our East Coast customers here in New York packages same day or next day.

Yes. I remember when we went through the distribution center tour, there's a large percentage of your orders that are single unit orders. And so if you can actually have some of that inventory on the East Coast, you both improve speed of service and lower your cost. It sort of seems like a win-win on that.

Yes, absolutely.

Okay. Good stuff. Let's pivot to customer ads for a moment. Growth in active customers has remained really strong despite some of the macro and some changes in the advertising backdrop, if you will. Could you talk about how your marketing strategies have changed over the past 12 to 18 months with IDFA, the rise of TikTok and where you're seeing some of the best returns the, I guess, ROAS?

Yes, yes. Definitely a lot of shifts within this COVID dynamic, a lot of shifts. But then even if you strip away that COVID period and look kind of pre- versus post-COVID, one is IDFA, and that definitely had an impact on us on that specific retargeting channel. A differentiator with us is that diversified marketing playbook and portfolio, where we have -- we're not overly reliant on that retargeting and just driving customers through CAC. Part of it is brand marketing. One of the most exciting things recently in that marketing playbook is the launch of the ambassador program. So this is a homegrown, call it, affiliate program, where we are working with influencers/customers. The lines are kind of blurred there because their followers are typically lower than what we've historically worked with. So this allows them to post a product on Instagram with a link. If their friend/follower buys through that link, they get a commission either in cash or clothing credit. So that's quickly become one of our top traffic driving channels. In addition to being efficient, we get the benefit of getting direct data feedback on not only what product is working, but what influencer's working. We can feed that back into the system, different than a third-party affiliate program, where it's kind of almost a black box on exactly what's working. So we're pretty excited about that. We launched that on REVOLVE about a year ago. And then on FORWARD, just last week, or a couple of weeks ago. So really excited those now ambassadors can post both FORWARD and REVOLVE product, again, increasing that overlap of the REVOLVE customer. More brand marketing, more marketing power on FORWARD. And again, very, very cost effective. We had, I think, 10,000 ambassadors on the wait list when we first launched it, and now we're kind of magnitudes higher than that in the portfolio. So that's the one to call it. And then I think shifting to consumer behavior and how she is interacting. Again, pre-COVID, TikTok was just starting to be talked about a little bit, but it was all about that static post on Instagram and influencers posting on Instagram. Since then, of course, the advent of TikTok. And not just TikTok, but the shift to video, whether that's TikTok or on Stories and Reels within Instagram. She is engaging more on video than she was in the past. So that impacts how we work with influencers, which influencers that we work with and definitely impacts how we measure things as well.

Okay. Very interesting. Following up on that, REVOLVE was one of the pioneers in influencer marketing. How has your influencer and event strategy changed over the last few years? And how do you see that landscape continuing to evolve going forward?

Yes. I think the biggest change is that shift from the static post to the video. In terms of our influencers and events, it's remained largely the same. We did pull back during COVID because it just didn't make sense to be out there, and we couldn't be out there in person. But we were pretty excited to get back out there again with REVOLVE Festival. I guess Super Bowl kind of kicked it off for us last year and then that worked into REVOLVE Festival. New to the playbook is REVOLVE Gallery at New York Fashion Week in September. This was our second year of doing that, ended up getting really good engagement at meaningfully lower cost. So kind of experimenting in 2021, kind of reinventing in 2022. So pretty excited about that. And that being more focused on the second half of the year than we were pre-COVID. We're historically a kind of a Q2 seasonal company. That's our peak. It's all about kind of festival, going out; the spring and summer; and swim, dresses, travel. So getting some more activations in the back half of the year to really drive more colder weather purchases. We're not historically a gift-giving destination necessarily, so Q4 hasn't been the peak quarter for us. Next -- no, this week. I guess, in a couple of days, we're launching REVOLVE Winterland which is an activation in LA where customers can engage. Similar to REVOLVE Gallery. That's another shift that's taken place historically, where primarily influencers coming to these events and posting. We've now started to interact with the customer more. So at REVOLVE Gallery, we had 6,000 people come through the gallery over a few days. Looking forward to this Winterland event. Ahead of Festival this year, we had a pop-up in Melrose, where we were open kind of a storefront for 6 weeks for customers to engage with the brand, and we had 20-plus events over the course of that 6 weeks, again, for customer and influencer to engage and really build the community.

Fantastic. Maybe we can talk about the FORWARD business here for a bit. This sort of designer customer, this higher-end more luxury customer been just remarkably strong, I think, over the last particularly 18 months. Could you talk about how FORWARD differentiates itself from the sort of broader luxury e-commerce space? And what cross-shopping opportunities or sort of synergies do you see with the REVOLVE business?

Yes, yes. The differentiation is a, call it, a young luxury consumer. It's more of a West Coast feel, younger emerging brands, more curation, editorial. I think if you pull up the FORWARD site or Instagram feed and compare it to some of the other luxury players, you can really get that feel. It really comes through in Kendall Jenner and her kind of that aesthetic and coming through on the brand. So we're pretty excited about that. Brands love it, love working with us, Kendall helping on kind of brand acquisition, also her edits every month, one of our top traffic driving e-mails that we send, and then overlap opportunity. If you look at the merchandise assortment on REVOLVE versus FORWARD, REVOLVES skews heavier dresses and apparel, FORWARD skews heavier handbags and shoes. So we know that this REVOLVE customer, if she's buying a $200 dress, she's buying a $3,000 handbag and nice pair of shoes somewhere. Why not FORWARD? Right now, we have about 5% overlap. So 5% of the REVOLVE customers shopping on FORWARD. So we think there's tremendous opportunity there. And we do think that we have 2-plus million active customers on the combination of the 2 platforms. We do think that that number is largely addressable, and we can sell to her. Maybe it's not the frequency that she's purchasing on REVOLVE, but there is a point in her life or her -- kind of that annual purchase cycle that she would buy from FORWARD.

And I remember, I mean, I think even going back 3 or 4 years, that overlap was still around that 5% level. So there's obviously an opportunity to sort of push that forward. Is there -- is it a matter of sending the FORWARD marketing to the REVOLVE customer? What are like some of the kind of levers that you've got to grow that? Because that would seem like a real untapped opportunity.

Yes, yes. It started with loyalty, our loyalty program on REVOLVE and then launching that in FORWARD, and customers, high-value customers being able to use those loyalty points cross site. Also making FORWARD more prominent on the REVOLVE site on the headers and shop our other sites, including it in e-mails and just kind of making her more aware of that FORWARD destination. Kendall Jenner, another great way to market to her and get to her. That's kind of the start. If you think back last year at around the REVOLVE Gallery at New York Fashion Week, that's when we launched -- kind of really started to push on FORWARD brand marketing. Just another great activation 2 weeks ago with the brand. So I think it's the combination of cross-marketing through that direct-to-site interaction, then also the brand marketing. And then most recently, that ambassador program that we launched a couple of weeks ago, giving the influencers the ability to work with both brands.

Excellent. Okay. Great. International, another opportunity for REVOLVE. It's still a relatively small piece of the business. Could you just remind us where you have a presence, which countries, which geographies you have a presence in? And where you're looking ahead? Where would you like to go in the future if you're sort of thinking about the sort of 3- to 5-year path? And how do the economics of the international business differ maybe from the economics of the U.S. business?

Yes, yes. And maybe the first part of the question and the last part of the question tie together in that we don't have a presence, a physical presence in any international geographies. So we serve everything out of our L.A. headquarters and warehouse and remarkably able to get product to 80% of the international revenue and 2 to 3 businesses from L.A., which feeds into the economics. It's expensive to ship in 2 to 3 days across the world. We do have -- we reach all major regions and countries. The bigger ones are, of course, the U.K., Europe, Australia, Canada, Asia. Excited about Middle East and some of the emerging regions. And first phase of international growth for us is really that localization. From day 1, REVOLVE was about that home is the dressing room, free shipping and free returns, really easy. We didn't have that in the international markets until starting in 2019 and since then have layered it into those major regions with the free shipping, free returns and also all-inclusive pricing. So Canada is a great example where if you were in Canada and purchased from us, you'd have sticker shock in the cart because you get all of the Canadian taxes added to your purchase, which are significant. Then if you return, you not only had to pay for that return, but you didn't get your full purchase price back, you only got the product cost back, then you as the customer had to go to the Canadian government to get all the taxes back. So since the localization, all-inclusive pricing, if you return the product for free, then you get the full purchase price back, including taxes. And then we, REVOLVE, go to the government to get -- to reclaim those taxes. So significant customer service improvements. Next step is optimizing the fulfillment and shipping lanes, similar to what we're doing on the East Coast. It's a little bit further out on international because we need more scale to do that, but just kind of constant improvements in the customer experience. Next after that would be optimizing merchandise and marketing geographic-specific and starting to do a little more of that and more specific brand marketing activities in those regions, and eventually maybe some presence with small-scale fulfillment.

Very interesting. Do you find that what customers really want to buy in the U.K. or Europe or Australia is similar to the U.S. or different from the U.S.?

Yes. More similar in those regions, different in the Asian countries. But more similar in U.K., Europe, Canada, Australia, where they are looking for emerging brands. They're looking for newness, freshness and that kind of differentiation, similar to the domestic customer.

Okay. Interesting. Fantastic. Let's talk a little bit about holiday, if we could. Is there anything you can share about Black Friday to Cyber Monday? How did that sort of play out for you relative to your expectations? Seems like maybe promos were pulled earlier. And earlier this year, at least, we certainly saw that from a lot of the traditional retailers, and we're seeing slightly deeper discounts. How are you seeing all of that evolve relative, for example, to your expectations?

Yes, yes. Again, holiday, kind of this Q4 isn't the peak season for us that it is for others. Q2 is kind of our time to shine. I'd say it's kind of the promotional environment, the macro is playing out relatively in line with our expectations, where we are seeing elevated promos compared to last year, closer to 2019 levels. But earlier to your point; we did see earlier and earlier promos happening. So still a few core weeks to go to see how that plays out and how the promos impact everybody's inventory levels, but I think it's largely within what we expected.

Okay. Great. You gave some high-level commentary on the last call. But is there anything more you can share about how we should think about 2023? Obviously, I understand you haven't given guidance for 2023 yet. You mentioned on the last call that first quarter could be one of your tougher quarters of the year as we head into next year. So just any thoughts on like the cadence of business next year or the broader macro as we start the year?

Yes, yes. It's going to be an interesting year for sure. That first quarter, to your point, is going to be a really tough comp for us, and I'm sick of talking about comps. But unfortunately, for at least the next couple of quarters, I have to keep talking about comps. Q1 of 2022 was a phenomenal quarter for us. So until we get through that kind of Q1 and half of Q2 of 2023, we're going to be up against some tough comps. So that will impact top line growth rate, also the active customers. That's a trailing 12-month number. So right now, we have the benefit of having these really robust quarters in that trailing 12 months. When those robust quarters fall off and you start picking up some of these macro challenged quarters, that growth rate, that year-over-year growth rate comes down. We still feel good about the customer base and maintaining that active customer number, just that year-over-year growth rate will start to compress. And then you layer on the inventory challenges. So I think at least through the first half of the year until we work through that, get through the comps, get inventory rightsized, it's going to be challenging. But on the flip side, we get to the back half and we've got easier comps and inventory is rightsized, and we're on our way into some kind of normalization. I think the cost structure, cost dynamic is another thing at play where we -- everyone is challenged right now with inflation, whether that's on the fuel and shipping wages across the board. So to be seen what happens there, but we're factoring in just continued challenge there. Hopefully, some softening. We're starting to see a little bit of it coming out of Q3 or in Q3 a little bit and then into October. But not factoring in kind of step function changes there, just kind of moderate relief and hope for better.

Yes. We all are looking forward to the day when freight and delivery costs can be, I don't know, maybe a tailwind as opposed to a headwind. I've got a couple more questions. Let me just -- before we take some from the audience, one last one. What are you most excited about as you look into 2023?

Yes, yes. A lot to be excited about. And that's -- on our Q3 call, we tried to talk a lot about, yes, it is challenging. There is this macro. But at the core, we are Mike and Michael, founder-led, ownership mentality. We're going to invest through the cycle. We've got a lot of exciting things going on from the ambassador program, a couple of exciting owned brand launches with Remi Bader and Elsa Hosk, launched a kind of a Web3 gaming initiative partnership this quarter. So just a lot of good kind of good energy in the organization and excited to invest through the cycle and come out stronger. I think in 2023, it's more of that, just continue to invest, keep the pedal down on marketing, stay in front of the customer. Unless something dire happens, we're going to keep the momentum going. And I think just that long-term mindset, only 3% penetration in the U.S. We still have a long ways to go, and that's where -- we're not going to sacrifice a couple of quarters just to optimize for those quarters and sacrifice the long-term.

Fantastic. Okay. Good stuff. We've got a couple of microphones in the audience. So if anybody has questions, please raise your hand, and we'll bring a microphone over to you. Don't be shy. Okay. Maybe since we don't have any questions at the ready, you recently did announce a partnership with Muus Collective to create a fashion-focused Web3 mobile game. Can you talk more about the partnership and your vision for the company's role in this space over both the short-term and the long-term?

Yes, yes. Yes, really excited about the partnership. This is a lot of exciting things about it. I think one, female-founded, really great team, really resonates with our customer and kind of our platform. They've done some really great things already in the mobile gaming backed by Griffin Gaming Partners, which is one of the largest gaming VCs. So we've got a really great kind of partnership group. This is, I think, for us, most exciting, another way to engage with the customer. 49% of mobile gamers are female. So it's another way to reach her and engage with her in this virtual world. So it's kind of tying in that physical product into the virtual world via Web3. NFTs will launch at some point next year. So I think in the long-term, revenue/profit driver. But I think more importantly is, again, staying with the customer and engaging with her in new and different ways. And I think true to REVOLVE's style, it's very low capital outlay. So very kind of cost-effective way to, again, engage with her and do new things.

Okay. Super exciting. We have a couple of minutes left if there are any audience questions. Jesse, is there anything I didn't ask you about today that you maybe wish I had asked?

Yes, good question. I think the -- what we're most excited about is probably where I'd go to first. But no, I think we covered a lot. Maybe owned brands we didn't talk about a lot. I mentioned the Remi Bader collection and the Elsa Hosk collection, Helsa. Pretty excited about those launches. We pulled back on own brands during COVID. We're starting to reinvest there, again, at a more moderate pace that really looking for quality in the expansion, quality in terms of assortment and price point. And these 2 examples were really great proof points for us. On the Remi side, she was actually a native TikTok influencer. She tried on our clothes. She would do REVOLVE hauls and comment like Come on, REVOLVE, you got to do better. So we reached out to her and that led to a partnership with her where we created this -- the Remi line with her that's size inclusive. And we had this debate internally because we were pretty excited that 1/3 of the customers that purchased on that brand were new customers, and we were really excited. And we were like, wait, is that better or that 2/3 of the customers were existing? So the brand really resonated with both new and existing customers. And then on the Helsa front, this is a partnership with Elsa Hosk, supermodel, very elevated price point and aesthetics. So this one actually listed on both REVOLVE and FORWARD, one of the first that we've done that with. So I'm getting excited about the product expansion, category expansion opportunities on owned brand over time.

Fantastic. Okay. And with that, I think we will wrap the session. Thank you, everyone, for joining us. And please stick around for the rest of the Morgan Stanley conference. We're back here again tomorrow as well. Thanks so much for your kind attention.

Thank you.