Revolve Group, Inc.

Good afternoon. My name is Chris and I'll be your conference operator today. At this time, I would like to welcome everyone to Revolve's fourth quarter and full year 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. Thank you. At this time, I'd like to turn the conference over to Eric Anderson, Vice President of Investor Relations at Revolve. Thank you. You may begin.

Good afternoon, everyone, and thanks for joining us to discuss Revolve's fourth quarter and full year 2020 results. Before we begin, I'd like to mention that we have posted a presentation containing Q4 and full year 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 operating expenses and capital expenditures for the first quarter of 2021. These statements are subject to various risks, uncertainties, and assumptions that could cause our actual results to differ materially from these statements, including the risks mentioned in this afternoon's press release, as well as other risks and uncertainties disclosed under the caption, Risk Factors Today Elsewhere, in our filings with the Securities and Exchange Commission. including without limitation our annual report on Form 10-K for the year ended December 31, 2019, and our subsequent quarterly reports on Form 10-Q, all of which can be found on our website at investors.revolve.com. 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, adjusted EBITDA margin, and free cash flow. We will use non-GAAP measures in some of our financial discussions, and we believe they more closely represent the true operational performance and underlying results of the 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 non-GAAP measures to GAAP measures, as well as the definitions of each measure, their limitations, and our rationale for using them can be found in this afternoon's press release and in our FCC filings. Joining me on the call today are our co-founders and co-CEOs, Mike Karanikoulis 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.

Good afternoon, everyone, and thanks for joining us today. We delivered another quarter of outstanding results in what remains a challenging and volatile environment. Our results are highlighted by three points of gross margin expansion that helped drive a more than doubling of earnings per share and a 37% increase in adjusted EBITDA year over year. The strong fourth quarter capped off a year unlike any in our 18-year history. I'm proud of our team for operating with agility, discipline, and strength to deliver record profitability for both a fourth quarter and a full year. There are three key themes I want to focus your attention on. First, we are primed and ready for the reopening of the economy. As millions of people are getting vaccinated against COVID every day across our markets, trends are already slightly better than the first quarter year over year. We see an exciting opportunity for revolve in the months ahead as more people are finally able to get back to enjoying all the social occasions they've been missing out on for the past year. Second, in 2020, we delivered record profitability and free cash flow that significantly strengthened our balance sheet, positioning us well to invest in future growth opportunities. Such strong performance during a downturn gives me even more confidence in our long-term potential when the wind is at our backs once again. Third, we accelerated plans to expand into adjacent product categories, enabling us to serve more of our customers' needs and touch more aspects of her life. In 2020, we significantly increased our sales penetration in emerging product categories like beauty, activewear, and intimates. Our expanded marketing playbook enabled us to stay connected with our customer and helps drive our early success in the emerging product categories outside of our traditional offerings, which now allows us to target an expanded share of our wallet. Given our focus on value creation over the long term, I'll take just a few minutes to review our performance for the full year, 2020, before shifting the focus to our 2021 initiatives. We began 2020 with strong momentum, delivering better than 20% year-over-year net sales growth in January and February, before our top line was negatively impacted by the escalation of the COVID-19 outbreak in the U.S., I'm most proud of how well our teams responded to the crisis. As a brand known for the discovery of on-trend merchandise centered around aspirational experiences and social interactions, the onset of COVID introduced extraordinary headwinds impacting both consumer demand and our impactful marketing events. Nonetheless, the team delivered impressive outcomes against what became new priorities brought on by the pandemic. Amidst all the uncertainty, we delivered strong results on our priority of protecting our financial position and optimizing our cash flow. We leveraged our technology platform, our experienced team, and our leadership expertise to quickly and aggressively adjust our merchandise buying plans and focused our teams on driving operational efficiencies throughout the organization. These efforts enabled us to generate $71 million in free cash flow during 2020, an increase of 113%, while more than doubling our net cash position to $146 million a year end. Significantly improved inventory health in 2020 was a key driver of our cash flow generation and balance sheet efficiency. Inventory turns increased more than 25% year-over-year in our core revolve segment. Our healthy inventory position helped us achieve a high percentage of net sales at full price in 2020. 77% of net sales came at full price, well ahead of retail industry benchmarks. Our full price selling was particularly strong in the third and fourth quarters, serving as a key contributor to our gross margin expansion in the second half of 2020. We realized significant operating efficiencies in fulfillment during 2020, even with COVID-19 headwinds in our incremental investment to ensure employee safety. Fulfillment cost per order decreased 11% year-over-year, illustrating that the warehouse investments we made in technology automation in the past two years are driving long-term sustainable efficiencies. These operating efficiencies, combined with lower return rate, were a key driver of our record profitability. Net income increased to $57 million, an increase of 59%, and adjusted EBITDA grew to $69 million, an increase of 25% year-over-year, despite the modest decrease in net sales. We accelerated plans to expand into adjacent product categories, enabling us to serve more of our customers' needs and touch more aspects of our life. These efforts accelerated our growth in at-home categories like beauty that offer exciting longer-term opportunities and position us to expand our share of wallet over the longer term, particularly when demand recovers for our traditional categories like dresses. We continued to raise the bar for customer experience by staying laser-focused on operations and exceeding our customers' expectations. In fact, we achieved record performance in our net promoter scores in 2020 and exceeded our very high target for customer satisfaction rankings. From day one, we've been hyper-focused on the customer experience, so it is gratifying to hear such positive feedback from our customers during what was the most challenging time in our history to deliver on our high standards. And finally, we accelerated our international expansion and further elevated service levels to support our customers in key regions. International net sales increased 15% year-over-year, and international growth accelerated to 24% in the fourth quarter as we realized the benefits of investments we have made to strengthen our value proposition. All in all, I am very proud of how well we executed, and I'm excited about the path forward. Turning now to our priorities for 2021. Our key focus is to ensure we are well positioned to capitalize on the reopening. We believe the world is on an exciting path to reopening, and our customer can't wait to get back out again and enjoy the active social lifestyle that she loves and has come to associate with Revolve. As a brand built and centered around this social lifestyle, Revolve is ideally positioned to benefit as the world reopens. Our leadership team is aligned on five key priorities to capitalize on the reopening opportunity and the much larger opportunity that we believe lies ahead. First, we will accelerate our brand building investments to take full advantage of the pent-up demand we expect to see when people can socialize and celebrate in person again. We are optimistic and excited for what we believe could be a robust recovery in 2021. When mobility returns, our customers are going to want to look and feel amazing with our latest fashion, so our stepped-up marketing investments should help us capitalize on the increased demand we expect. We will further pursue expansion of our product categories into adjacent areas like beauty and activewear to enable us to develop deeper relationships with our customers. Continued success of newer categories will provide us the opportunity to serve more of their needs, potentially capturing a greater share of their discretionary spending over the longer term. We will invest in further strengthening our own brand's portfolio through the launch of exciting new brands, collaborations, and styles within our existing portfolio brands. We will build on our momentum in international markets. We see great opportunities to further elevate the customer experience in international markets across both Revolve and Forward. We will continue to optimize the customer experience in Western markets where we have already made investments, and we will further invest in newer regions such as China and the Middle East that have been performing very well for us and hold great potential. Finally, we will continue to raise the bar on the user experience across all regions. We will leverage technology to provide additional website personalization, introduce new payment methods, provide major feature upgrades to our mobile applications, and drive faster refunds for customer returns, among other things. Before I turn it over to Michael, I will reiterate how grateful I am for all our dedicated employees who collectively made our 2020 achievements possible.