Revolve Group, Inc.

Thank you for standing by and welcome to the Revolve Group first quarter conference call. At this time, all participants are in listen-only mode after the speaker session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Erik Randerson, Vice President of Investor Relations. Thank you. Please go ahead, sir.

Good afternoon, everyone, and thanks for joining us to discuss Revolve's first quarter 2020 results. Before we begin, I'd like to mention that we have posted a presentation containing Q1 2020 financial highlights to our investor relations website located at investors.revolve.com. I would also like to remind you that this conference call will include forward-looking statements. These statements include our expectations regarding risk related to the continued impact of the COVID-19 pandemic on our business, operations and financial results, demand for our products, General Economic Conditions, our fluctuating operating results, seasonality in our business, our ability to acquire products on reasonable terms, our online business model, our ability to attract customers in a cost-effective manner, the strength of our brand, competition, fraud, system interruptions, our ability to fulfill orders, financial results in our guidance, market opportunities, our own brand mix, our inventory position, our dilutive share count, are investments in customer experiences and fulfillment centers. These statements, which are subject to various risks, are actual results that differ materially from these statements. These risks under pressure release, as well as in our filings of the SEC, including our registration statement on Form S-1 that was filed with the SEC, our Form 10-26-2020, and the Form 10-Q that will be filed. all of which can be found on our website at investors.revolve.com. We undertake no obligations or information except as required by law. During our call today, we will also reference certain non-GAAP financial information, including adjusted EBITDA and free cash flow. We use non-GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP. And our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliations of GAAP to non-GAAP measures, as well as the description, limitations, and rationale for using each measure, can be found in this afternoon's press release and in our SEC filings. Joining me on the call today are our co-founders and co-CEOs, Mike Karanikolas, and Michael Mente, as well as Jesse Timmermans, our CFO. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn the call over to Mike.

Thanks, Erik. Good afternoon, everyone. Thanks for joining us today. We hope each of you and your families are safe and healthy. Today, we are only going to spend a limited amount of time on full Q1 results. Instead, we'll focus our attention on more recent business trends. and how we have taken swift action to respond to the impact on our business from the COVID-19 pandemic. In our effort to promote understanding of recent business performance, we will make some one-time disclosures to help everyone follow the most recent trends in our business. With that, I'll start by touching on the first quarter. We started the quarter with some positive trends. Looking at January and February 2020 on a combined basis, we achieved net sales growth exceeding 20% year-over-year while improving inventory returns by approximately 20% year-over-year as well. The strong start to the year, coupled with successful brand marketing events in January and February, including participation in the ABC television program The Bachelor, gave us further confidence that our brand, messaging, and assortment was resonating well with our customer. Taking a deeper look at the top-line results for January and February, Year-over-year growth in both the Revolve and Ford segments had accelerated through the first two months of Q1 2020, with particular strength in our Ford business and international markets. The improved sales growth for our Revolve segment of 17% year-over-year in the first two months of 2020 came with an inventory decrease year-over-year, in line with the strategy that we outlined over the last couple quarters to work through our inventory position and improve inventory turns. These positive trends remained through the first week of March before COVID-19 became widespread in the U.S., and the related stay-at-home mandates changed the trajectory for us and many other discretionary consumer product companies. We have been known for our premium product and our exciting and aspirational social media marketing focused on an experiential lifestyle. Overnight, the special social occasions that often serve as a catalyst for customers to buy from Revolve, particularly in the spring season, had been put on hold. Music festivals, travel, parties, weddings, and dining out, among countless other events, had all been canceled or postponed. Our largest and most impactful brand marketing event of the year, Revolve Festival, was also canceled. This change in consumer behavior, combined with the broad-based reduction in consumer confidence and demand, resulted in our net sales declining by almost 50% year-over-year in the final weeks of March. We view the current impact on our business as temporary and a function of the unprecedented environment. As we continue to engage with our customer through real-time adjustments to our merchandise offering and marketing message, we are confident she'll remain loyal to the Revolve brand she trusts for fashion inspiration. Now, shifting to the more recent trends in the second quarter to date. Net sales in April declined approximately 40% year-over-year, improving from the nearly 50% year-over-year decline in net sales in the latter part of March. Most importantly, the magnitude of our net sales declines has been reduced every week for the past four weeks. Through the first 10 days of May, our year-over-year decline in net sales further improved to roughly 25% year-over-year decline. Traffic to our sites has improved meaningfully in the recent weeks, turning positive year-over-year after declining year-over-year beginning in mid-March. I'll copy at these improving numbers by saying these are highly uncertain times, so while we are encouraged by the improving trend, it's entirely possible that things could get worse again in the coming days, weeks, or months. We believe the improved sales trend reflects broader trends in consumer behavior over the time period, as well as the great efforts by our marketing and merchandise teams to adeptly shift our messaging and product to align with the changing consumer interest in the current environment. For example, if you've looked at our website lately, you'll see that we are increasingly highlighting categories for the work-at-home and play-at-home lifestyle like loungewear, intimates, and beauty, including featured shops for work-from-home chic and date night in. This merchandising shift aligns with our customers' recent shopping behavior, consistent with the realities of sheltering in place. As you might imagine, categories like beauty and loungewear are performing very well right now, whereas more formal pieces like dresses are not resonating in the current environment. On one hand, it is a near-term headwind since dresses have historically been, by far, our top-selling category and carry our highest gross margins. On the other hand, I'm excited about the growth in beauty as it gives us the opportunity to deepen our relationship with customers in a product category that tends to be a frequent purchase. Sales in the beauty category increased 122% year-over-year in April and became our fourth-largest category by sales volume. and in general, we saw encouraging trends in other merchandise segments that our customer has historically less associated with Revolve. While the overall business trends remain extremely challenging, our hope is that we can exit this period with an expanded relationship with our customer due to the outstanding work of our marketing and merchandising teams. Now, I'll shift to a discussion of how we have responded to the crisis. First and foremost, our number one priority is the health and safety of our employees and customers. Beginning in mid-March, we transitioned all of our teams whose roles do not require them to physically be in the office to work from home. For those remaining in the workplace, we've completely revamped our operating procedures to implement rigorous health and safety guidelines. These safeguards include administering daily temperature checks, establishing social distancing requirements, providing personal protective equipment such as masks and gloves, creating staggered shifts in the distribution center, and frequent deep cleaning and sanitization. We've always been known for our exceptional service levels, and during this time period our e-commerce operations haven't skipped a beat. Our customer satisfaction metrics were at record levels in March and April. We are particularly proud of this performance, given numerous reports of significant fulfillment delays among other e-commerce apparel companies. As a way to even better serve our customers and establish even deeper relationships with them, in March we launched our Revolve loyalty program that we mentioned on the call last quarter. The loyalty program has been very well received in the early going. I am proud of our team for how well everyone at Revolve has managed through these challenging times while keeping laser focused on delivering outstanding service to our customers. Thanks to all of our team members for your hard work and sacrifice, for staying nimble, and for your dedication during this challenging time. In addition to protecting our employees, we knew we also had to protect our balance sheet and liquidity. By the end of Q1, it was clear we had to move quickly and decisively to reduce our cost structure, given the depth of the reduction to demand and the uncertainty over how long the current period might last. In early April, we reduced costs across the board, starting at the top. The first cut we made was Michael and I reducing our annual salary to $1. We have also reduced just about every nonessential expense imaginable, as well as canceling or deferring all nonessential capital expenditures. The most difficult decisions were those involving our valued team members. The outcomes ultimately included salary, wage, and hour reductions, furloughs, and to a much lesser extent, layoffs. These were tough decisions, and we continue to support our furloughed employees by providing health benefits and educating them on all aspects of the CARES Act. We are also actively managing inventory receipts to preserve our cash and minimize inventory risk in this time where the level of future demand is uncertain. Similar to the sales trends, we started off the year great in terms of managing our inventory balances and improving our inventory turns. At the end of February, our inventory had decreased year-over-year compared to the net sales increase of over 20% year-over-year and a corresponding increase in our inventory turns. Upon the shelter-in-place mandates in mid-March, we began to immediately reduce our future inventory commitments to better align with the reduced consumer demand. Managing inventory in this environment with rapidly changing demand expectations and shifting customer preferences is a tough task, but we have a great buying and planning team who have been with us for many years and have been able to react quickly. Now, I'll pass it to Michael.