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

All right. We'll get started. Thanks, everybody, for coming. We're happy to have Jesse Timmermans, CFO of Revolve, here for a fireside chat today. Jesse, thanks for coming. Glad to have you this year.

Yes. Thanks for having me. Good to be here.

I wanted to start out by just asking about Revolve's differentiation. It's been a really tough environment. But I think the influencer-led technology-driven strategy really stand out versus competitors? And how do you see that leading you through a more challenging backdrop?

Yes. Yes. No, I think we are definitely differentiated on that front. One, the technology-driven infrastructure. From day 1, Mike and Michael, founding the company on data not being fashioned guys and really listening to the data and building the culture in the organization around that. Two, is the influencer-led social media marketing and just the brand that has been built over time. And I think the main differentiation comes through in the results, growing over 20% last year, consistent growth over time, and not just growth, but profitability and cash flow generation. And again, that goes back to Mike and Michael, very entrepreneurial, founder-led, very efficient. If you look at our revenue per employee of almost $800,000 that's increased, I think, over 3x over the past few years. So I think it comes through in the results.

Maybe explain a little for the audience, the data-led strategy. Because I think that's something that not everybody is familiar with a lot of retail, they guess 6 to 9 months in advance, what might be InStyle. And so maybe talk a little bit about how REVOLVE plans and orders inventory differently.

Yes. It is definitely data-driven, and we read the data across the very kind of vast selection of products. We'll cycle through a couple of hundred thousand different styles over the course of the year. Each style has up to 60 different attributes that we're reading. So -- and it's very, very low depth on that breadth that we have. And it's also 20 years of data. So it's not just 1 year, it's 20 years of reading the customer, reading the data, what works, what's checking and then reordering into the product that does work, that leads to a really high full price mix. Last year was 85%, even pre-COVID was 79% full price mix, which leads to a really strong gross margin -- and it's not just on the merchandising front, it feeds into marketing and reading which influencer is working, which product is working, feeding that back into the merchandise and the buying and the planning. The ambassador program is a great example of that, where we're reading exactly which influencer is selling what piece of clothing, what piece of clothing is working, and again, feeding that back into the buying and planning process. About 20% of our product mix is owned brands. So we're leveraging that data across the, call it, 1,000 different brands and several -- or call it 100,000 different styles on the site to feed into what to develop on our own brand platform, which consists of around 20 different brands, each with their own kind of unique aesthetic and true brand, not a private label, but a true brand.

Great. And then how would you characterize the health of your target consumer right now?

Yes. It's a tough time. I would say she's not where we wanted to be. She's not where she wants to be, whether that's via inflation or the consumer confidence out there. And especially if you look on a year-over-year comp where last year, money was falling from the sky, she was feeling great. We're getting back out there for the first time in several years. So we've got a year-over-year comp dynamic, and then we just also have a macro dynamic. That's it. She's still getting out. She's engaged. She wants to look great, festivals coming up. We've got a lot of good things planned over the course of this year, and just really optimistic for the longer term.

And during a more cost-conscious time for the consumer where money is not falling out of the sky, what have you seen with respect to basket size or customer retention, like her willingness to keep coming back? What are you seeing in trends there?

Yes. Our basket size has increased pretty meaningfully over the past couple of years. Part of that is just due to her getting back out again and getting back into the dress category and not just dresses, but more kind of within dresses, the more going out dresses. That we expect to -- we're kind of back at our historical mix on that front. So we don't expect to see a significant mix shift in the near term there. Retention has been really strong. We had 97% revenue retention in 2022. That's up from 89% pre-COVID. So really strong retention from that core customer base, and we see that consistent over time, and we have 20 years of cohorts to read. She's coming back more frequently when she does stick. She's buying at higher average price points when she does stick. Over the long term, we're optimistic that we can speak to even more aspects of her life outside of just that occasion. Historically, it was a compliment where when you run into somebody on the street, you said, have a prom or occasion or something, and I'd love to go to Revolve. Now it's almost a critique where we want her to think of us not just for that occasion, but for the workwear, for active, for beauty is a great example. So a lot of opportunity to increase the reasons for her to come back. One of those ways is FORWARD, cross-marketing the FORWARD platform to her FORWARD skews more handbags and shoes versus [ revolved ] over indexes on dresses and apparel. So a really complementary product mix on revolving forward. And we know that if she's buying a $200 dress that she's going to wear a few times. She's complementing that with a multi-thousand-dollar handbag or a statement pair of shoes.

Great. And then where do you see trends heading through 2023? That feels like an unfair question given the volatility, but how do you think sort of big picture about how to plan inventories and expenses?

Yes. I think maybe going back to our most recent earnings call and kind of what we do know is that first 7 weeks of the year grew at kind of mid-single digits. That said, we're up against some really tough comps in the back half of Q1. If you think back to last year, again, she was getting out for the first time. We kicked off with an amazing Super Bowl weekend. That led into Social Club that we had opened for about 6 weeks where we had 20-plus events at the Social Club over that 6 weeks, which led into festival and again, getting out for the first time in several years, she was really excited. So this year, with the macro with inflation, with consumer confidence, pulling back on that marketing in Q1 somewhat, gearing up for festival in Q2. So I think tough comps coming up. That said, it does get easier in the back half of the year. We are planning conservatively on the inventory buys. Those will be down year-on-year. If things pick up, we can always chase. Marketing will look more kind of closer to historical norms where you see that Q2 and Q3 being the peaks with Festival and Fashion Week in the fall. And then we just have to wait and see what happens in the world. But definitely planning considerably. That said, we have a strong balance sheet. So we're able to be more offensive than maybe others out there, and look for opportunities in the market. And again, with Mike and Michael being founders and being here 20 years, we're thinking about the next 5, 10, 20 years, not just for the next quarter.

Great. And then can you talk a little bit about categories, recent performance? And then what categories do you think will be strong in '23?

Yes. I think as I mentioned, jerseys is back to our, call it, historical norms in terms of mix. Handbags and shoes have been doing really well in the last couple of quarters. And part of that comes from the cross-marketing of that FORWARD platform to that strong Revolve customer base. Looking ahead, I think continued strength in dresses as she continues to go out, continued strength in handbags in the shoes with continuing to cross-market that FORWARD platform. The loyalty program has been really successful for us. And the customer being able to use her loyalty points across the REVOLVE and FORWARD platforms. I think longer term, excited about adjacent categories and again, looking for more ways to tap into her life, whether that's beauty, starting to make more investments in beauty. That's historically been around 3% of the mix. We think it could be much greater than that. In men's, we've started to make some investments in men's. And then even those close to adjacent categories like active. We know she's buying your yoga pant somewhere and why not Revolve.

And then you expect modest average order value growth this year. Is that a mix thing? Is that a unit thing? How do you think about modeling that?

Yes. There is -- I think the message we're trying to get across there is not to expect the significant growth in AOV that we've been seeing the last couple of years as her mix has shifted from those lower price point categories like beauty and sweats and the COVID era in to the dresses and not just dresses, but going out dress is at higher price point. So I think looking ahead, it will be modest AOV increases via some mix, some inflation as prices continue to go up. And then again, cross-marketing to different aspects of her life. The other piece is full-price mix that, of course, drives a higher average order value. It will be pressured for the next couple of quarters as we work through inventory. But over the long term, as we have expanded the breadth even more, we're able to chase into those reorders, which drives the higher full-price mix, which drives the higher average order value.

Okay. And then for your private-label products, specifically, are you planning any price increases or you just passing through the price increases you're seeing from the branded vendors?

Yes. Mostly just a pass-through. 80% of the mix is third party on Revolve. That's purely a pass-through. So then the pricing on the own brands kind of follows in making sure we're pricing accordingly, but not looking to raise prices just to drive AOV.

Okay. And then I wanted to ask about the long-term opportunity around international, how you're marketing -- are you doing that on a localized basis? And then what the margin implications of the international expansion are?

Yes, we see a lot of opportunity internationally. If you think about the domestic TAM in the, call it, $300 billion range, international is in the trillions. Phase 1 of International has been localizing the customer experience of getting that experience that she's used to in the U.S. with preshipping, fast shipping, free returns, and also localized pricing, including [ the VAT ] and duty and everything all in one in the price and refunding her that full amount. So that's been Phase 1, which started in the U.K. and Europe and moved to Australia, Canada. We're close there, still some optimization to do. Once we get that, then we can start to really assort region-by-region and make sure we've got the right assortment for her. And then kind of in conjunction is the marketing. So starting to market more directly region-by-region. The great thing is that social media, more or less outside of a couple of regions, has no boundaries. So those influencers work cross-border. A lot of our influencers are international, but still opportunity to market more directly to that customer along with the kind of more curated assortment internationally. And then on the -- kind of on the optimization front, cost efficiencies being able to -- right now, we ship everything out of L.A. We can serve 80% of the international revenue in 2 to 3 business days, which is great, but it costs more to ship internationally and then when somebody returns, we have -- we have to take that all the way back over the ocean back to L.A. and then reship it back to that international customer. So looking for ways to take returns in that local region, hold them in the local region and reship out of that region without shipping back and forth across the ocean. So some growth opportunities and then margin optimization opportunities over time.

Okay. And just to follow up on that, holding the inventory. I mean it seems like a great idea that the return rate has been certainly affected by the movement to international. Do you think that because people don't know the brands as well, so they don't know what to order? Or is it just they have this much longer lead time and hold time?

Yes. I think it's more of the service. So making it easier for her to return, drives that return rate, which we're more than happy to have a higher return rate because it comes with higher net sales. If you look at a region like Canada after launching the localization initiative, Canada grew at triple digits for the next at least several quarters. I mean in general, our return rate is higher than others, given the -- I think, one, it's part of the thesis. The home is the dressing room, give her the opportunity to try on 3 or 4 different dresses to find that right one. The other element is the mix. It's a higher mix of dresses, which has a higher return rate. And then also just the amount of emerging brands. So every brand, every style fits different. It's not just small, medium, large, it's cut and fit and making sure she finds that right piece of clothing. And over the long term, look for ways to optimize the experience, not make it harder for her to return, but make her initial purchase decision smarter. So whether that's personalization on the website, better product recommendations, a lot of kind of AI machine learning developments, especially over the last 6 months that will help drive that return rate low over the long term.

Yes. We've seen some retailers put things like Jessica is [ 510 ] and where -- like any other ways that you're thinking about trying to help that customer really hone in on the right size?

Yes. Yes. I think, -- and we do that right now and have the sizing recommendations. It has to go further in really the customer-specific body and shape, and how that works with the fit. So whether that's via some sort of kind of virtual interface where she can see that piece of clothing on her. The technology is not quite there yet, but over time, we're optimistic that there will be something that can make her initial purchase decision better.

Great. So I wanted to talk a little bit about marketing. How are you planning activation events? You discussed last year, you had a very full slate of events. So as festival season approaches, marketing and activation be similar year-on-year, pull back more efficient. We saw some efficiencies in fashion week. Like how should we think about the number and magnitude of these events?

Yes. Yes. For the full year, as a percentage of net sales, around the same as last year, it ticked lower. Q1, we pulled back in comparison to last year. Last year, again, she was getting out for the first time. We made the decision to invest more in Q1 of last year. This year, not as much. Q2 will be in the same zone planning on Festival, getting excited for that only, I guess, a few weeks away now. So the team is in full planning mode there. Q3 similar with the fashion week activation and some other activations along the way. But I'd say kind of holding the course at least for this year with those 2 kind of tent-pole activations and then a few other things scattered throughout. Over time, I think opportunity for efficiency there, but we want to continue to invest. We think we've -- were really low penetration in this target demographic, so a long ways to go in acquiring those new customers and want to keep the pedal down on marketing.

Okay. And then just switching over to inventory. What is the composition like now by category? And then maybe you could talk between REVOLVE and FORWARD?

Yes. We think the inventory that we do have -- we're working through it. It's on plan. We expect to be rebalanced by the end of Q2. Category-by-category feels healthy. FORWARD over indexes right now on inventory versus the sales mix, given that it takes a little while longer to work through that FORWARD inventory given the lead times that we're working with and limited markdown opportunity as we work with the brands there. So a little ways to go on FORWARD and kind of revolve under indexing versus that platform. But we feel good about the overall quality. We're working through it. Algorithms are doing their thing. The teams are on top of it. So optimistic for -- when we get through this first half of the year.

Yes. Okay. And then I think when you look at fulfillment, it's been a pretty tough line item for everybody because of freight costs and shipping. How are you thinking about that potentially becoming a tailwind? And then maybe with that, you could touch on some expected efficiencies from the East Coast distribution center.

Yes. Yes. It has been challenging across the board, both on the selling and distribution, which is primarily freight and then also our fulfillment distribution center network. Not expecting any or at least not modeling in any tailwinds this year, we expect it to remain challenged. Now there is some hope that we'll get some benefits, maybe fuel comes down, not factoring it in yet, some efficiencies from the East Coast distribution center not meaningful. So we're kind of holding the line there in terms of the model with some hope for opportunity, return rate definitely plays into that. And again, not looking to make it harder for her to return, but keeping it easy for her to return and looking for the opportunities on the back end to get the cost efficiencies, which goes into your question on fulfillment center. So we just opened the East Coast distribution center in Q4, started taking returns in just in the last month, started reshipping inventory out of that fulfillment center. So that's phase 2 is to reship that returned inventory. And then phase 3 is to actually stock new inventory there and save on the shipping back and forth across the country and also from a customer service perspective to being able to serve that East Coast customer in 1 day similar to what we do on the West Coast. We'll start to see some benefit towards the tail end of this year, nothing meaningful that we're factoring in, but really into 2024 starting to see some benefits from that. And the next phase is -- beyond the East Coast distribution center is international regions, and opening up smaller distribution centers internationally, where we can take the returns, hold the returns there and not ship back and forth across the ocean.

Do you think you'll run and own those international distribution centers?

TBD, likely more of a 3PL-type model internationally. Right now, everything we do is 1P, we have all of our own fulfillment centers and own inventory management systems, which is crucial to the customer experience and managing that inventory. But at least for the near term, internationally, it would likely be some sort of partnership.

Great. And then when you think about owned brands, can you talk a little bit about why you have it, where you see it going and lessons learned on some past launches, what the outlook is?

Yes. Yes. We're -- so own brands, call it, 20, 25 owned brands right now, and they're true brands, we're careful to call them own brands versus a private label because they are unique. They have their own aesthetic. They have their own Instagram, they have their own marketing behind them. So that's 1 key differentiator, and attribute is that they are true brands. And they are additive to the third parties. We're filling gaps in assortment where we see them and leveraging partnerships where we can, for example, Helsa, which was a recent launch partnering with Helsa [ Hask ] which, was a new and exciting owned brand for us and that it was a higher price point and carried across both REVOLVE and FORWARD. And so I think over time, we expect to increase the penetration there, not at the rate we did in the past. Back in 2019, we were at 36%. We were over-indexed on certain price points within dresses. So I think that's one of the learnings is really refine the assortment and get a quality assortment not over-indexed in any one category and make that a healthy assortment across the board, tap into some of those other categories and price points. And so we anticipate increasing that at a much more moderate pace than in the past. And looking for ways to, again, fill in that assortment and look for different opportunities, whether that's Helsa, like I mentioned, at the higher price point or the [indiscernible] beta launch, which was more size inclusive sustainable brands. We've launched a couple of sustainable brands over the last couple of years, so optimistic but at a cautious kind of moderate pace.

I think a lot of investors just associate owned brands with sort of a lower-priced private label. So can you talk about the price differential, and also the margin differential between the [indiscernible] and the third parties?

Yes. Yes. Yes, great point. Yes. Much higher margin than a third-party brand that we carry. So that will be margin accretive over time. And there are at similar price points as a third party. So we're not trying to undercut their on par. They're not -- again, not like a private label, but a true brand in and of themselves. And from a customer perspective, they don't know that it's an owned brand. It has to really speak to the customer, not from a -- again, from a private-label perspective but more from a brand perspective.

None of them are called Revolve.

Right. Yes.

So maybe just zooming back, over the past several quarters, you have seen higher priced products performing better than lower-priced products within the full-priced assortment. Do you think that continues? And is there any way to capitalize on sort of that higher end bend?

Yes, yes. We'll see what happens this year with the macro environment. But to your point, that higher price point is holding up better, which lends itself to the higher-end consumer holding up better. That said, markdowns -- she did gravitate a little bit more towards markdown in the fourth quarter, which you can see in the margin. I think over time, it's the opportunity on the FORWARD and really cross-marketing that assortment to her as she increases her income, as she kind of progresses through her career, has more wallet to share. There's opportunity for us to capture that. And really kind of a gap in the market for that young luxury consumer in that space where FORWARD is more curated kind of the editorials more West Coast, young luxury than some of the other luxury players out there. So I think we've got a unique assortment, unique curation and kind of messaging to that consumer.

And what's the current overlap between REVOLVE and FORWARD? And maybe talk to some of your efforts to really cross market.

Yes. Yes, it's about 5% now, so which I think speaks to the opportunity over time to really cross-market that FORWARD platform to her loyalty. The loyalty program is a very effective way to do that, where she can earn points on either platform and use them across platforms. I think brand marketing, we haven't done significant brand marketing on the FORWARD platform, yet. So investing more there this year. Kendall Jenner being the Creative Director, brings a lot of I think -- kind of not just brand curation, marketing, but also just kind of that halo for FORWARD. And then the Ambassador program. We just launched the Ambassador program on FORWARD as well, which is a great way to spread the message, acquire new customers, but also read what product is working and feed that back into the buying process on both sides.

Maybe -- we get a lot of questions on how FORWARD differentiates as more luxury companies are building their own online opportunities and offerings. So can you talk a little bit about the curation about the customer lens you're using and why that's a real differentiator and a reason for somebody to come to FORWARD?

Yes. I think it's just about the curation in that, again, the young luxury, the editorial, having that inspiration and she's looking for similar to REVOLVE where it's more -- there's more emerging brands. She wants to look different, not want to look the same as Oliver other friends wants to be unique. And then I think also -- the last I was going to say there. Service. Yes, the service is really second to none, with that fast free shipping and then the free returns and consistency and we get that feedback from customers all the time, and that goes back to the retention of our core customer. And that 97% revenue retention that we had this year, and 20 years of cohorts that speak to that great service from day one.

Great. And then what are the areas for Revolve that you're most excited about for '23?

All of them. I think number one, not just 2023, but beyond. And I think, again, this goes back to the long-term-minded nature of the organization to Mike and Michael. But I think number one is just continuing to capture more of this core customer. We have a long ways to go in just that core market. Number two is addressing more aspects of her life and expanding into those categories like beauty and some of the other adjacent categories like active and -- and like I said, the workwear, and get her to think about Revolve not just for the occasion, but for all aspects of our life. That feeds into the FORWARD overlap as well and getting her to come back more frequently. International is a huge opportunity longer term. So I think we're very early innings of where we can be longer term.

Great. So let's open it up and see if there are any questions from the audience. Yes, maybe while we'll wait. I wanted to ask you to elaborate a little bit on beauty. It's been -- it was such a nice positive surprise during COVID, how that customer really got interested and involved in REVOLVE beauty. How does -- how do you think REVOLVE is different? Because there's a lot of places you can buy beauty. I mean what do you think you bring to the table for partners? And what do you think you bring to the table for customers?

Yes. I think for partners, it is that really powerful next-generation consumer and having access to this next-generation consumer and the power of the REVOLVE brand, and how it speaks to that consumer. I think for the customer, it is the curation and service that always goes back to service. So having that consistent -- a high level of service for her. I think part of it is going to be the curation of brands, her trust and REVOLVE and us bringing the best to her. And it's a great way to get into the REVOLVE ecosystem. It's a very accessible price point and then she comes back. We founded a good new customer acquisition tool and then she comes back for higher price points in the dress or the other categories over time. And again, it's just a way to kind of complete that full offering to her. It's about 3% of the business right now. We think it can be much bigger. If you look at some of the other legacy players out there where it's 10-plus percent of the mix. We think that's very attainable over time. And again, having a one-stop shop for her.

And then the influencer marketing strategy, I think you pioneered it. Many have followed. So how do you think about evolving that into either something different or new or really maintain your leadership position in that marketing structure?

Yes. I think we were the pioneer. It's where the customer was at. And I think wherever she's at, we will be, we can pivot fast. We can move fast. A great example of that is video over the last, call it, a year to 18 months, where video is -- she's engaging with video more than she used to the static post aren't as engaging as they were in that kind of first phase of social media. Team has been able to pivot really fast, have really good results from the video. And I think over time, it just, again, depends on where she goes, whether that's via video, TikTok, Instagram. She's always looking for something for somebody for inspiration, and that's where we'll be. I think evolution over time in different ways to stay ahead. The Ambassador program is a great example where we've always worked with affiliates, but has been kind of a black box on exactly which influencer is working, which product is working. Now having all that in-house additive to the affiliates, which we still work with, but having the direct data feedback on what product is working, which influencer is working. And then rewarding those Ambassadors, if you look at the Marianna Hewitt collection that we did just recently she was able to curate selection for the customer which resonated really well. So I think it's just, again, looking for new and different ways to work with not only the influencers, but also the customers and make it very authentic and effective.

And maybe for those in the audience who don't spend a lot of time on TikTok, you can talk about how you're marketing on TikTok and how that's different from Instagram or some of the other social platforms.

Yes. It's certainly, more video-based, kind of the short clips, video, more -- I guess, I would say, kind of more interactive content. We just launched on the TikTok shop, which is a way for the customer to buy directly from TikTok. We're one of the first to partner with them there, and small now, but I think it speaks to the power of the brand and us being one of the first that they reached out to experiment with that platform.

Great. And then moving on to -- you mentioned active as a place you're really focused. It's a competitive landscape out there. What do you think differentiates the active offering at Revolve? And then how big do you think that could get?

Yes. No, we think it would be a meaningful size of the business that if you think about the $300 billion TAM, a large piece of that is active. Again, I think it's the power of the brand, the curation, the selection, having the content that will inspire her. And again, a great way to pull people into the REVOLVE ecosystem. But I think the differentiation comes in assortment, curation and just the content and inspiration.

And then maybe the same question on men's. How do you target a male customer? It seems like a pretty different business. How quickly or not are you moving into that channel? And what are your early learnings?

Yes. I'm personally really excited about expanding the assortment. Historically, it's been there. We haven't invested heavily. It's been managed by maybe just a couple of people. We recently hired a leader in the men's department, the Director of men's. So first comes assortment and getting the assortment right and then really starting to market behind it once we have that right. A large portion of the men's product purchases out there come from a female. So we've already got this really engaged female customer where she -- again, in that kind of one-stop shop can buy for her other half, for her brother, for her significant other, whatever it is. And I think there's, again, a gap in the market to serve this kind of next generation male consumer in a more curated way and not having to go to multiple different platforms for the different pieces of that full look. It's across REVOLVE and FORWARD. So we have men's offerings on both, which -- there will be some overlap and then some differentiation. But really excited about that over time. I think if you look at [indiscernible] of 10 years ago versus now where it's over 30% of the mix, it gives us confidence that there's opportunity for that male offering.

Yes. Who's the customer?

Yes. It is similar to the female that we're targeting, that 25- to 44-year-old millennial customer. He's going out. He's professionally he's wanting to look great. He's going to festival with her, but also knows what he likes. So I think having that core offering of basic where he's coming back again and again with also you get kind of those complementary pieces where it's pretty occasion for the festival or something unique.

Yes. And then one more -- I know we spent some time on inventory already, but I just wanted to ask about your ability to chase. You said you're planning conservatively. And if things are better, you'll get it. How is the supply chain? How are your vendors positioned? Are they ready and able if sales trends do start to reaccelerate to be able to provide a lot of product newness?

Yes. Yes. I think, one, we have great relationships with our vendors and with the brands. We're the largest customer of a lot of those brands, given the emerging nature of the product assortment that we have. We think they're in good shape. The supply chain is in much better shape than it was a year ago, 18 months ago, of course. And even today, over half of our -- and consistently over half of our buys are reorders. So we have a really good reorder process, reorder funnel. So we're confident that we can chase. And hopefully, that's the case when things pick up.

Great. Well, we are about out of time. So Jesse, thank you for coming. We appreciate it.

[indiscernible]

And thanks to all of you for attending.