Revolve Group, Inc.

Good afternoon and welcome to Revolve Group's second quarter 2020 earnings conference call. Today's call is being recorded and we have allocated one hour for prepared remarks and Q&A. At this time, I'd like to turn the conference over to Erik Randerson, Vice President of Investor Relations at Revolve. Thank you. You may begin.

Erik Randerson Good afternoon, everyone, and thanks for joining us to discuss Revolve's second quarter 2020 results. Before we begin, I would like to mention that we have posted a presentation containing Q2 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 current expectations regarding the continued impact of the COVID-19 pandemic on our business, operations, and financial results, and our outlook for net sales, gross margin, operating expenses, diluted share count, and capital expenditures for the second half of this year. These statements are subject to various risks Thank you for joining us today. We undertake no obligation to revise or update any forward-looking statements or information except as required by law. During our call today, we will also reference certain non-GAAP financial information, including adjusted EBITDA, free cash flow, and adjusted diluted earnings per share. 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, and thanks for joining us today. We hope each of you and your families are in good health. I look forward to the day when we can see many of you in person again. So much has changed in just the past three months. On our Q1 conference call, we discussed the negative impacts of the COVID-19 pandemic that led to a year-over-year decline in net sales of nearly 50% in the final weeks of March. Almost overnight, the shelter-in-place mandates put an abrupt pause on the special social occasions that often serve as a catalyst for customers to buy from Revolve. We took swift and aggressive action to protect our people and to adjust our cost structure for what quickly became a highly uncertain demand environment. I am extremely proud of how well our team has executed against our priorities despite the continuing, unprecedented headwinds brought on by COVID-19. As we prepared for the worst, the teams re-engineered our entire approach to brand marketing and merchandising to position Revolve for success amidst significant changes in consumer buying behavior. There are three key highlights of our second quarter results that I hope each of you will take away from my remarks. First, we delivered record EPS of 20 cents per share and record adjusted EBITDA of $21 million in the second quarter. Each of these measures grew double digits year over year during the worst economic climate in decades. Second, we delivered record free cash flow of $53 million in the second quarter alone. That's more cash flow than we generated for the entire year of 2019. A key contributor to the exceptional free cash flow generation was our meaningfully higher inventory turns in the second quarter. Inventory turns in our revolve segment increased approximately 30% year-over-year, reaching our highest level in six years. Impressive collaboration and agility by our team drove the strong financial and operational results. Despite the very difficult macro environment and with most of our teams continuing to work from home, we nonetheless realized efficiencies throughout the business while maintaining exceptional service levels for our customers. With that, I'll continue with the discussion of our second quarter results. Our monthly net sales in Q2 improved throughout the quarter. In fact, June was our first month of positive year-on-year growth in net sales since the pandemic began. We believe the net sales improvement in the past few months reflects a better overall consumer spending environment combined with our effective marketing and merchandising strategies to capitalize on at-home categories like beauty, loungewear, intimates, and accessories. That said, we did experience some pockets of softness late in the quarter as states reopened and COVID cases increased, especially in those states with higher COVID numbers. Shifting to the balance sheet and cash flows, Recall that when we began to feel the severe impacts of COVID-19 in March, we immediately adjusted our inventory buys for a scenario that assumed no sales recovery in the remainder of 2020. As a result, our reduced inventory buys combined with the better than expected net sales led to a 37% decrease in our inventory balance year over year in the second quarter. The significant decline in inventory, coupled with a better than expected 12% decline in net sales, translated to a significant increase in inventory turns year over year. Working through our inventory position and improving inventory turns has been a key goal we have outlined for the past several quarters, so we're very pleased with our progress. The higher inventory turns had a very positive impact on our cash flows for the quarter. As mentioned, we generated $53 million in free cash flow during the second quarter, up from 2 million the prior year. We now have 151 million in cash on the balance sheet, which we believe positions us to navigate through this uncertain time, reinvest in inventory to support future demand, and further invest in the business to drive long-term growth. The strong results and significantly improved cash position led us to quickly unwind many of the reductions to our cost structure that we discussed on last quarter's conference call. During the peak of COVID-19 uncertainty, We made the very difficult decision to adjust personnel costs, primarily through furloughs and reductions in salary, wages, and hours, as well as layoffs. I am very pleased to report that we have now brought back the majority of furloughed employees and that by the end of this week, substantially all active employees, including executives as well as our independent board members, will have their compensation back to the pre-COVID run rate. I again want to thank all of our employees for their sacrifice and agility during this difficult time. With the better than expected sales trends, we have rapidly moved from a mode of trying to reduce inventory receipts at the beginning of the second quarter to now pursuing inventory opportunities to make sure we have the right mix and right level of inventory in the second half of the year and as we enter 2021. Aside from the strong Q2 financial results, I am encouraged by the innovation and positive impacts that are moving our business forward. Our operations team delivered phenomenal results. delivering their most efficient quarter in the past seven quarters as the efficiency gains from the investments we've made over the last 18 months continue to provide benefits. In early 2019, we invested in an expanded and consolidated distribution center, and throughout 2019, we layered in incremental automation. During this past quarter, we automated another key process in the distribution center, which is already having a positive impact on our distribution process. and with capacity in our current facility for over four times our current unit levels, we have more room for improvement over the longer term. Continuing on the topic of running the business as efficiently as possible, our buying and planning team was able to pivot quickly from initially reducing our inventory commitments and then quickly shifting back into investment mode as demand picked up. We have also moved very quickly to merchandise into categories that are more aligned with the sudden change in consumer preference. For example, Within just days after the CDC recommended that consumers wear masks in public, we had masks available on the site for purchase. Today, we have approximately 100 styles of masks across third-party brands and owned brands, and it's grown into a low seven-digit net sales business and attractive margins. Through leveraging our Read and React strategy, technology, and team of data analysts, the buying and planning team was able to drive our merchandise reorders to a record high in July. when expressed as a percentage of total net sales. Product reorders are very important because reorders improve inventory dynamics and reduce inventory risk since we only reorder those products that are selling well. In fact, oftentimes the reordered product is already ordered by customers and reserved for them by the time the merchandise reaches our facility. Arguably most important from my vantage point, we are keeping our customers very happy. Our customer satisfaction levels continue to surpass our high standards, with the warehouse operating safely and efficiently fulfilling orders with the same best-in-class service levels despite everything going on in the world around us. Customer inquiries are handled by customer service agents capably working from their homes without missing a beat, continuing to drive brand loyalty for our valued customers. Making our customers happy is what personally brings me the most joy. Since I firmly believe businesses exist to serve customers and that customer satisfaction is key to long-term success. Having co-founded the company with a customer-centric mindset from day one, to this day, I still read every single piece of customer feedback. Our very strong customer satisfaction metrics are a direct result of this organizational focus on the customer that is built into our DNA. Now, shifting to the more recent trends in the third quarter to date. The positive year-over-year net sales growth in June carried through to July and early August, with the quarter-to-date period showing low single-digit growth on a year-over-year basis. It's important to note that our net sales growth rate remained in the same general range in the last several weeks of July and into August, averaging low single-digit year-over-year growth and remaining in positive growth territory, despite the recent resurgence of COVID-19 cases and the reversal of many cities and states' reopenings. These COVID-19 setbacks led to a decline in U.S. consumer confidence in July that adds uncertainty to the slope and timing of a future recovery. By geography, in July, international net sales continued to remain stronger than net sales in the U.S. This aligns with the trend we have witnessed in the second quarter with international outperforming the U.S. Michael will share a detailed breakdown of our net sales by product category in July, which demonstrates that customer shopping and purchasing behavior continues to be significantly influenced by the global pandemic. A positive outcome of the category mix shift is a reduction in the percentage of merchandise returned, which benefits net sales and reduces certain operational expenses such as shipping and fulfillment costs. I am extremely pleased with our ability to navigate through these challenging times. Time and time again, we have asked a lot of our team, and they have delivered. So thanks to all of our team members for your hard work and sacrifice, for staying nimble, and for your dedication to exceeding our customers' expectations. We're not out of this yet, and there will be challenges ahead, but I'm confident that we have the team in place and the organizational discipline to manage our way through this and come out stronger on the other side. With that, I'll turn it over to Michael.