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spk07: Good morning and my name is Maria and I'll be your conference operator for today. At this time, I would like to welcome everyone to Revolve's first quarter 2021 earnings 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 would like to withdraw your question, press the pound key. At this time, I would like to turn the conference over to Mr. Eric Randerson, Vice President of the Investor Relations at Revolve. Thank you. You may begin your conference.
spk11: Good afternoon, everyone, and thanks for joining us to discuss Revolve's first quarter results. Before we begin, I'd like to mention that we have posted a presentation containing Q1 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 2021. These statements are subject to various risks, uncertainties, and assumptions that could cause our actual results to differ materially from these forward-looking statements, including the risks mentioned in this afternoon's press release, as well as other risks and uncertainties disclosed under the caption risk factors and 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, 2020, 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'll also reference certain non-GAAP financial information, including adjusted EBITDA, adjusted EBITDA margin, and free cash flow. We use non-GAAP measures in some of our financial discussions as we believe they provide valuable insights on our operational performance and underlying operating results. 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 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 to your questions. With that, I'll turn the call over to Mike.
spk15: Good afternoon, everybody. We're excited to update you today on the momentum in our business and our record Q1 financial results. As we successfully managed through one of the most challenging times in our history, we have been eagerly preparing for the reopening of the economy, which we believe will be extremely positive for Revolve as a brand associated with an active social lifestyle. I am pleased to announce that as the economy began to reopen in the first quarter, we experienced a significant surge in demand which drove the outstanding results for the first quarter. Our top-line trend saw substantial acceleration as we entered March, increasing from the low single-digit growth we experienced in January and February. Then, as vaccines started to roll out, restrictions eased, and additional stimulus payments were made by the federal government, demand increased significantly. The strong close to the quarter continued into April, with growth of over 100% compared to April 2020, and over 30% compared to April 2019. Even more exciting was that the accelerated net sales growth in March and April came from both the revolve and forward segments, as well as the domestic and international businesses. With that as an introduction, I'll go into more detail on the first quarter results and recent developments. Net sales for the first quarter of 2021 were a record $179 million, an increase of 22% from the first quarter of 2020. substantially ahead of the low single-digit growth we experienced for the months of January and February when we spoke during our last conference call. Particularly exciting is that the strong recovery and growth during March came from a return to growth in styles associated with social outings, such as dresses, as well as continued strong growth in at-home-related product categories, including beauty, intimates, and activewear that have rapidly grown throughout the pandemic. These results support our view that we can return to strong growth in our core offerings of occasionware while continuing to drive growth in newer categories to pursue a deeper share of wallet. Also driving our top line acceleration late in the quarter was strong performance and growth of new customers and a significant recovery in traffic during the month of March. In fact, March was the second highest month in our history for attracting new customers and delivered the highest year-over-year growth in traffic in more than a year, despite mobility restrictions in most markets at the time. This gives me a great deal of confidence in our longer-term outlook when the wind is fully at our backs again. It is also very exciting to see the recovery in the US market. On last quarter's conference call, we talked about key international markets like Australia serving as a leading indicator of a potential recovery in the US. The domestic recovery we anticipated took hold in March, which certainly benefited to a degree from government stimulus. Yet, the domestic recovery remained on a healthy pace through the month of April as well, when the U.S. growth outpaced the international business. Our profitability and cash flow in the first quarter were outstanding. Net income was a record $22 million, or 30 cents per diluted share, a more than 400% increase from the first quarter of 2020, and also a more than 300% increase from the first quarter of 2019. Free cash flow was $32 million, a more than 300% increase from the first quarter of 2020. This cash generation further strengthened our balance sheet, positioning us well to invest in future growth opportunities. Turning to operations. Just as we were able to read and react and adapt last year upon the onset of the pandemic when demand was negatively impacted, We've been able to quickly react to the significant increase in demand as economies have begun to reopen and our customers began to socialize in person again and plan for summer travel. Our fulfillment operations were able to scale up quickly and continue to meet our very high standards for customer satisfaction. The increase in demand combined with continued operational efficiencies were key contributors to our record profitability in the first quarter. We have and will continue to invest in technologies and tools to further raise the bar on service for our customers. For instance, in the past few months, we have significantly reduced the average timeframe for our customers to receive credit on their merchandise returns. Our data-driven merchandising function also continues to deliver what our customer needs when she needs it during what has been a very challenging environment of rapidly shifting customer demand and supply chain dynamics. Our inventory levels and assortment have been managed well, as illustrated by our financial results, and a more than 20% increase in inventory turns in our revolve segment. Our inventory health is best illustrated by our gross margin expansion, which reflects significant growth in net sales at full price. We also continue to remain agile on the marketing front, and we are laser focused on capitalizing on the reopening opportunity. While restrictions have eased and we have conducted some smaller-scale brand marketing activations, we still haven't yet been able to fully deploy our optimal marketing investment. This is the right time for us to really invest in marketing. Our brand is squarely and positively positioned for the reopening in the post-COVID world, and we believe marketing investments in both Revolve and Ford this year will deliver strong returns over the long term. We want to take full advantage of the pent-up demand among consumers who are finally going to be able to get out of the house, socialize, and celebrate in person again. When this moment comes, they're going to want to look and feel amazing with our latest fashion. It's also important to note that in the near term, we do expect some headwinds on marketing efficiency, resulting from the recent Apple iOS privacy changes that may reduce our efficiency in targeting users on Apple devices, which are used by a substantial majority of our customers. The increased marketing investment this year will have an impact on short-term profitability measures, particularly relative to 2020, when our profitability benefited from temporary reductions in marketing as a percentage of sales due to COVID-19. In particular, we plan to scale up our brand marketing investments, which pay dividends over longer periods of time, building the brand, increasing awareness, and driving continued long-term customer growth. Lastly, our international business continues to perform very well and represents an exciting opportunity for future growth. International net sales grew 38% in the first quarter of 2021 relative to the prior year, driven by strength in all major regions and illustrating how well our brand is translating across cultures and geographies. Australia and Canada were among the top performing international markets in the quarter. In fact, Canada was our largest international contributor for the revolve segment in the first quarter. A catalyst was our recent launch of all-inclusive pricing in Canada, showing how our international investments can drive growth and customer satisfaction. The successful rollout of the more localized customer experience in Canada is another proof point that our international strategy is working, and it's particularly exciting since we plan to introduce all-inclusive pricing in many other international markets. In fact, I'm excited to share that earlier this month, we launched all-inclusive pricing for customers located in the United Arab Emirates, one of our largest markets in the fast-growing Middle East region. China is another exciting driver of our international success. In the first quarter, we began to see increased momentum in China in the revolve segment due in part to expanding our distribution to include a presence on Tmall Global, the largest cross-border business-to-consumer marketplace in China with nearly 800 million shoppers. The Revolve store on Tmall Global is powered by our differentiated merchandising strategy, which has driven strong organic traffic, particularly from consumers interested in our emerging brands that weren't previously available on Tmall. It's early, yet we are encouraged by the opportunity to capture incremental growth in such an important market. Before I turn it over to Michael, I will just reiterate that while there are still some uncertainties out there, we are very proud of our results, we are ready to invest, and we are excited about what lies ahead.
spk01: Thanks, Mike. It's incredible to see the surge in traffic and demand as our customers get back out and start enjoying the social life they love and have grown to associate with Revolve. After such a challenging past year, this return to robust growth is gratifying, particularly considering that we are now just gearing up for some of their very exciting and impactful marketing events. We are primed for the opportunity to capture demand during this unique moment in time, and our events are a critical part of our demand creation. I am thrilled to share that we have continued to scale up our in-person marketing events that are such a powerful marketing lever for building the brand long-term. Remember that in-person events have unfortunately been on hold for most of 2020, creating a headwind to traffic and new customer acquisition last year. In March of this year, we hosted an in-person marketing event in Los Angeles attended by more than 100 influencers over three days. To protect our community, we adhered to safety protocols that included COVID testing for all participants. One of the takeaways from this event was that the influencer community can't wait to get back to doing in-person events. The desire to participate in this event was incredible, amounting to way more interest than we could accommodate, forcing us to unfortunately turn away a number of influencers. This is just the beginning for restarting our event calendar. We plan to meaningfully increase the frequency and scale of events to capitalize on this moment in time, expand our marketing reach, and drive long-term returns. We are excited to get out there again in a more meaningful way as economies continue to open up. We have several activations with top influencers and aspirational lifestyle locations that will help us to further expand our marketing reach and brand marketing impact, starting with an event in Turks and Caicos next week. Moving forward, I am excited about the powerful combination of our aspirational in-person marketing events along with continued growth and diversification of our content on emerging digital channels, creating an expanded marketing playbook. Our data-driven approach to merchandising has also been efficient as well to capitalize on the reopening, ensuring we have the right products for our customers. We have the flexibility to efficiently scale up, reading and reacting to data signals to quickly address shifts in consumer preference, assorting to emerging trends, expand our style count, and doubling down on successful styles through product reorders. Our merchandising agility helped drive a year-over-year growth rate that expanded from the low single digits in January and February to over 100% year-over-year growth in April, all with strong inventory turns and full-price mix of net sales. This successful inventory ramp and shift in assortment is particularly impressive when considering that just a year ago, our merchandise focus shifted away from products associated with social outings and travel, such as dresses. And now we are again, we are sorting back into those historical strong product categories while still driving rapid growth in our newer at-home categories like beauty, which more than doubled in the first quarter. We have succeeded in providing her with the right product at the right time. Products that fit her current lifestyle, whether it's socializing, traveling, or even being locked down at home. She recognizes this and is coming to us for more aspects of her life, allowing us to expand our share of wallet over time. Our merchandising and marketing work hand in hand. We are continuing to innovate on our marketing and merchandising efforts to deepen relationships with our community. For instance, in the first quarter, we launched a new revolve active handle on Instagram to create an intimate community of fitness consumers, fans, and influencers. It's in perfect alignment with the daily workouts we have hosted on Instagram Live for the past year to engage our community. These workouts have generated 10 million views since the pandemic began. As I mentioned, beauty continues to perform very well, and I'm excited to share that we recently beta launched our Reputation Save program for our beauty customers who buy beauty products regularly. This enables us to automatically ship a customer's favorite products to them at regularly scheduled interviews, promoting convenience, customer loyalty, and repeat purchases. Our own brand remains core to our long-term strategy of driving traffic, maintaining a unique assortment, and expanding gross margin over the long term. Decapitalizing the growing consumer interest in sustainable fashion, we recently introduced the Trulorosa Green Collection. Trulorosa Green styles are made with all-natural and chemical-free dyes with 100% organic cotton. The production uses a technology that draws 40% less water and uses the water to reduce its impact on the environment. This is just the beginning to a more sustainable production process we are pursuing within our own band. Another exciting product launch in recent weeks is our latest collection from Girlfriend, available on both Evolve and Soulwork. Our new girlfriend line aligns with the current fashion trend towards a more comfortable and looser-fitting denim silhouette that many customers are seeking today. We started reinvesting in own brands in late 2020 after a significant pullback early in the year, and we will continue to invest heavily throughout 2021 to maximize our long-term opportunity. We've brought in some great talent, and while it's still early in the rebuild, we are very optimistic about the underlying metrics we are seeing in this area. I'll close out with a discussion of our luxury segment, Forward, where our momentum has been quietly building for some time. Forward had an extended quarter, growing net sales 24% in the first quarter of 2021 relative to the prior year. This is on top of a very strong prior year comparison in the first quarter of 2020 when Forward net sales grew 47%. If you do the math, that means that for the first quarter, Forward has shown 82% since the first quarter of 2019. Ford also delivered record gross margins that increased 7% year-over-year on a full-price sales mix that was also an all-time high. We believe Ford holds a differentiated position in the market and serves as a destination for the next-generation luxury consumer, keeping curation and a strong edit. Brands recognize our momentum and value our product curation, impactful marketing engine, customer base, and best-in-class catalog and editorial photography. During the first quarter, we enlarged two coveted luxury brands with only limited wholesale distribution, The Row and Alaya. Additionally, supermodel and actress Rosie Hunting-Whitley recently debuted her new shoe collection with Gia exclusively on Fold, shooting a special video to promote her line on our site. With the great product curation, the key lever in further expanding Forward is leveraging the Revolve customer base and platform to cross-market and increase Forward's share among our existing customers. Even though the Revolve and Forward merchandise is complementary with Forward over-indexing and handbags and shoes, only a low single-digit percentage of Revolve customers are also Forward customers. This speaks to the huge opportunity ahead of us that we continue to pursue, as illustrated by the launch of our Forward loyalty program earlier this month. The Forward program is fully integrated with the Revolve loyalty program, rewarding and incentivizing cross-shopping on both of our sites. We believe the program will create a great deal of customer excitement and engagement in the months ahead. Like Revolve, Forward is a global brand, and China has been a key contributor to Forward's exceptional growth over the past two years, where Forward has attracted a large following of more than 250,000 followers on Weibo, a leading social media platform in China. We view the global e-commerce market for luxury as a massive opportunity, and with the reopening of economies around the world, we think there is more opportunity to come. We will be making some exciting investments in Forward in the near term, the details of which are an excited show on FuturePulse. All told, the recent momentum in our business across both the Revolve and Forward segments has been incredible. With our brand positioning, on-point assignment, and a strong financial position, we are primed and ready for the reopening and beyond. I'll turn it over to Jeff now for a review of the financials.
spk12: Thanks, Michael, and hello, everyone. As you can tell, we are very pleased with the first quarter results and even more excited about the recent top-line trends. With that, let's start with the results for the quarter. Note that all of the comparisons I will discuss will be on a year-over-year basis unless otherwise stated. In certain cases, I'll speak to our growth compared to 2019, since the comparison to 2020 is skewed by the impacts of COVID. Net sales were $179 million, an increase of 22% compared to the first quarter of 2020, which is a significant improvement from the low single-digit net sales growth trend we had been experiencing for the first seven weeks of the quarter that we disclosed during our last earnings call. Compared to the first quarter of 2019, net sales grew 30% for the first quarter and at an even higher rate for the month of March, when our net sales growth meaningfully accelerated. During January and February, growth was primarily coming from categories and products like beauty, intimates, and activewear, which more than offset the headwinds in products that are more focused on going out, like dresses. This shifted in March, when we experienced a meaningful increase in demand for products related to going out. This increase in demand combined with the continued strength in at-home products, helped drive the strong overall top-line results as we exited the quarter. By territory, both the U.S. and international markets contributed to the strong top-line results for the quarter, with domestic and international growth of 19% and 38% respectively. Both regions also contributed to the growth acceleration in March. The international strength was broad-based, with Australia, Canada, Greater China, and the Middle East as key contributors. By segment, revolved segment net sales increased 22% and forward segment net sales increased 24% in the first quarter. The forward sales increase is particularly notable considering that forward grew net sales 47% in the prior year comparable quarter. Active customers were 1.5 million, a decrease of 3%, consistent with our commentary on our last earnings call to expect further deceleration since active customers is a trailing 12-month measure. Importantly, active customers grew on a sequential basis compared to the fourth quarter of 2020, marking our first sequential quarterly growth in active customers in almost a year. Our customers placed 1.3 million orders in the quarter, an increase of 9%, the highest year-over-year growth rate in five quarters. Average order value was $256, flat with the fourth quarter and down 1% year-over-year. Moving to gross profit, consolidated gross margin was 54%, the highest ever gross margin reported for a first quarter, and an increase of 546 basis points year over year. This performance reflects the healthy inventory across both segments, particularly compared to the prior year, leading to an increase in the percentage of net sales at full price and a decrease in the depth of markdowns. These positive contributors to gross margin were partially offset by a decrease in the mix of own brands as a percentage of revolved segment net sales, consistent with the outlook we shared on recent investor conference calls. Our operating expenses, expressed as a percentage of net sales, were lower year on year across all line items in the first quarter. Our fulfillment and selling and distribution expenses continued to realize a meaningful short-term benefit from a lower return rate year over year. We do not expect this benefit to repeat in upcoming quarters as product mix shifts back towards going out categories. Additionally, we realized marketing efficiency in the first quarter as we have not yet fully reengaged on the marketing front. It is important to note that we intend on aggressively ramping our marketing investment for the balance of the year for both Revolve and Forward. The strong top line results, gross margin expansion, and operating efficiencies resulted in record net income of $22.3 million, or 30 cents per diluted share for the quarter, five times higher than the six cents of diluted EPS in the prior year. Net income was also four times greater than the first quarter of 2019. We reported adjusted EBITDA of $23.3 million, an increase of 316%, with a margin of 13%. Adjusted EBITDA was nearly three times greater than the first quarter of 2019. Moving to the balance sheet and cash flow statement. During the first quarter, we continued to invest in inventory to position our assortment for an anticipated increase in consumer demand. As a result, inventory increased by $5 million from year end to $100 million. That decreased 1% year over year. This compares favorably to the 22% increase in net sales for the first quarter of 2021, illustrating our higher inventory turns year on year and improved inventory health. Even with the investment in inventory, we generated $32 million in free cash flow in the first quarter, a more than four-fold increase from the prior year. Cash and cash equivalents net of borrowings at March 31st were $183 million, an increase of $109 million, or 149%, from $74 million as of March 31st, 2020. Now looking ahead. With a return to growth in Q1 and very strong trends in March and April, we are confident that we can continue to deliver net sales growth in excess of our long-term growth target of 20%, just as we were prior to the onset of COVID-19. However, considering the recent acceleration in net sales growth represents a small sample size and that there are still many moving parts and uncertainties in the short term, we will hold off on providing formal guidance at this time. Instead, let me update you on some recent trends in the business since the first quarter ended and provide some direction on our cost structure for the balance of the year to help in your modeling of the business for 2021. Starting from the top, the significantly improved trends we experienced in the month of March continued through to the month of April. In fact, April net sales grew over 100% year-over-year against a relatively easy comparison in April 2020 when our net sales had declined approximately 40% year-over-year as we previously disclosed. As compared to April of 2019, Net sales grew over 30%. We are very excited about the recent top line trends and the prospect for a continuation of these trends. But we also want to temper this optimism as there remains some uncertainty related to COVID-19. There are potential headwinds from the recent Apple iOS changes that Mike mentioned, and we would anticipate that tailwinds from the government stimulus will subside. Shifting to gross margin, we are extremely pleased with our gross margin performance in recent periods. For context, for three quarters in a row, we have generated a full price mix of greater than 80%, meaningfully exceeding historical ranges. The very high full price mix of net sales and our inventory health have benefited from our successful inventory rebalancing in response to COVID-19 last year, which significantly skewed the mix of our inventory to full price. However, we want to caution that as we rebuild inventory to support future growth, we expect our full price mix of net sales and the depth of our markdowns to revert closer to historical norms over time. With this taken into consideration, for the full year 2021, we expect a gross margin of 53.5% to 54%. At the midpoint, this reflects an increase of more than a full percentage point compared to gross margin of 52.6% for full year 2020, and is also higher than the 53.6% for the full year 2019. Fulfillment. We expect fulfillment costs in the second quarter to increase sequentially as a percentage of net sales as our return rate moves higher year over year due to our sales mix shifting to the products and categories related to going out. For the full year 2021, we expect fulfillment to be approximately 2.9% of net sales. This implies a decrease of 30 basis points compared to fulfillment representing 3.2% of net sales in 2019 as a result of the automation efficiencies implemented, which are more than offsetting macro cost increases. For our selling and distribution costs, similar to our fulfillment costs, we expect a sequential increase as a percentage of net sales in the second quarter. And for the full year 2021, we would expect to be in the same range as the 14.6% of net sales we achieved for the full year 2019. This implies a significant year-over-year increase in selling and distribution costs, consistent with our prior commentary and driven by two main factors. First, as we have now anniversary of the COVID-19 outbreak, we expect our return rate to be higher year-over-year in the near term, particularly as we comp the very low return rate in the prior year and since dresses, which have a much higher return rate than average, have recently returned to growth. A higher return rate results in increased cost for shipping, handling, packaging, and payment processing for returned items, with shipping and handling costs representing a majority of this line item. Second, our average shipping cost per package have increased in recent months with the increase in shipping demand industry-wide. Moving to marketing. With our customer coming back in a very powerful way, it's time to invest. We plan to be more aggressive than ever and anticipate a compelling return on this investment over the long term. We now expect marketing expenses as a percentage of net sales for the full year 2021 to be at least a full percentage point higher than the 14.8% of net sales reported for the full year 2019. General and administrative. In 2021, we are reinvesting in our own brand platform and other functions to support our next phase of growth and expansion. As a result, we expect G&A to continue to grow sequentially each quarter for the balance of the year. Lastly, let me touch on our tax rate. Our effective tax rate in the first quarter in 2021 and 2020 each reflect the benefit from the excess tax benefits realized as a result of the exercise of non-qualified stock options. Absent such tax benefits in future quarters, we expect our effective tax rate to be around 24% to 26%. To recap, we are incredibly excited about the amount of progress we've made in just the past couple months since our Q4 earnings call. We delivered record net sales, record net income, and a four-fold increase in free cash flow during the quarter. Consumers are coming to us in a very strong way, and with our balance sheet position, we are investing in this unique moment in time centered around the reopening and the long-term market opportunity ahead. Now we'll open it up for your questions.
spk07: And at this time, if you would like to ask any questions, you will need to press star 1 on your telephone keypad. Again, that is star 1 on your telephone keypad. We will pause for just a moment to compile the Q&A roster. And your first question comes from the line of Arian Murphy from Piper Center. Your line is open.
spk05: Great. Thank you, and good afternoon. I guess my first question for the team is on the quarter-to-date trend, super encouraging what you're seeing here in April. Can you talk a little bit more about the customer cohorts that you're seeing? Is it more new customers, existing customers, or are you starting to see some lapsed consumers back in the fold? And then I have a follow-up.
spk15: It's really a mix of all of those. April represents a continuation of the trends that we saw in March, and we're continuing to move more volume on a daily basis than ever before. And it's coming from all cohorts. It's coming from You know, existing customers ordering more frequently. It's coming from lapsed customers coming back into the fold. And it's coming from some really nice acceleration on the new customer side.
spk05: Great. And then just on the return rates, Jesse, as you were speaking about kind of expecting that to normalize, are you already seeing that in March and April as dresses and some of the other going out categories have accelerated? Yes. And then I have just a follow-up bigger picture on the fashion cycle. You guys talked a little bit about the denim silhouette change. I'm curious if you're seeing with the denim orders, are you seeing a higher attach rate on other items in the wardrobe as consumers kind of think about that silhouette change from skinny to maybe more of a loose or a straight leg? Thank you.
spk12: Yeah, I'll take the first one here. This is Jesse, and then kick it over to Michael for the more fashion-forward question. On the return rate, we have seen that start to tick up. And if you go back through the quarters, you know, we saw that drop down to the low, very low 40s at the depths of COVID, given the shift in mix. And then that started to tick up even through the back half of last year. And we're in the mid-40s in Q4, and it hung out in that same mid-40 range for Q1. And then in the most recent periods of March and April, we have seen that tick up as dresses did return to growth. And that's some of the commentary we're giving for the forward-looking information as well, is that we do expect dresses to come back in a meaningful way, and that will increase return rate sequentially. That said, the other categories are holding, and we do expect and optimistically hope that return rate will be lower than it been in the past. In the past, it's been in that 50% to 55% zone. So I think with the assortment, we can balance that going forward.
spk01: Yeah, Michael here. How's it going? With the performance across the board really improving, we're seeing categories um you know from going outside clothes you know dresses that were of course uh not as popular you know event dresses we're seeing a lot of strength in terms of like all those you know dependent demand for kind of occasions weddings and graduation type things and whatnot um with specifically regard to denim we're really anticipating this to be you know a nice cycle in the long term trend we see that these type of trends particularly denim are things that you know that you know last years upon years so we're positioning ourselves right now for the beginning of something new i think of course We've seen how skinny jeans were important for our customer for many, many, many years. So we are excited about the beginning of a new cycle with kind of looser fit and denim.
spk07: And your next question comes from the line of Oliver Chen from Cowan. Your line is open.
spk03: Thank you very much. Your inventory positions look really clean today. What are your thoughts on balancing inventory versus sales going forward? And as you invest in more inventory, I mean, your full price selling level is very high right now, but which categories might be the drivers for taking that lower as you balance those investments? And then a second question, Tmall is a huge deal. Do you have parameters or thoughts for how you will approach that on a multi-year basis and also any statistics around your Chinese audience on social media and what you see happening. Thank you.
spk15: Yeah, definitely. So from an inventory position standpoint, we're lighter on the inventory side, but with our model, we're able to react very quickly to consumer trends. So as I think we see more stability in the trends, we should expect to see the inventory levels climb a bit just because that'll be a more optimal position for us to maximize the economics. But we came into the quarter lighter on the inventory side compared to where growth ended up being, but we're able to react quickly and I think leverage the inbound demand that we saw in a really healthy way. In terms of the categories that we're looking at, you know, growth for this year is definitely going to be in those growing out categories, you know, that everyone's been missing out on and that we're seeing a lot of pent-up demand. But I think what's really exciting for us is that we're seeing continued really strong sales in the categories that we made huge headwind in last year during the pandemic. Beauty continues to be strong through the month of April. Active continues to be strong. So those categories that we gain strength in, we're seeing those sales hold up. With the one exception maybe being that on the lounge side, we're seeing loungewear sales taper off a little bit. And then turning to the Tmall question, it's still very early on Tmall, but we've been really encouraged by the trends that we see there. We think long-term in China, it's going to be a very important part of our strategy just because it has such a huge mindshare among consumers. And what's really exciting for us is we've seen actually that new customers that have come in on Tmall have been later converted off of the Revolve website itself. So it serves not only to kind of expose us initially and is really a very low-cost channel for us, but it also converts people to the Revolve platform over the long term. So we're just getting started there, but we're optimistic about a game that we can try and
spk07: And your next question comes from the line of Lorene Hutchinson from Bank of America. Your line is open.
spk06: Thanks. Good afternoon. I encourage you to hear about the meaningful sales acceleration. I just wanted to follow up on the inventory commentary and get your view on the availability of product in both third-party branded product and own brand to meet this demand if it continues to accelerate.
spk15: Yeah, so we feel really good about our ability to meet the increased demand. It's not to say there aren't some hiccups and challenges under the covers, but if you're talking as a whole broad-based, we feel really good about our ability to react to the shifts in demand that we saw, get the right products in for consumers, and continue to do that.
spk07: Thank you. And your next question comes from the line of Michael Benetti from CredSwiss. Your line is open.
spk02: Hey, guys. Congrats on the next quarter. Thanks for taking all our questions here. I guess, you know, as you, Jesse, as you think about where the post-COVID mix of business is going and the legacy categories come back, can you point to any numerical evidence that you're looking at that inform you where gross margins go and also, I guess, return rates, since they're so influential in the P&L, I'd be curious there how much I know you mentioned a few takes there with some of the inflation in shipping rates lately, but I didn't hear much on the East Coast facility that you guys have been contemplating. Is there any help on a per-order basis that could help the economics of returns as we kind of normalize here?
spk12: Yeah, yeah, for sure. So there's a lot in there in terms of both margin and return rate, but maybe if we start with gross margin here, You know, as we stated in the prepared remarks, margin's been really strong. We've had full-price sales in excess of 80% for three-quarters in a row, which is phenomenal, and we're very pleased with that. But we do expect, as we build an inventory and things normalize over time, that that full-price sales mix will come down slightly, back towards, you know, the historical norms of, you know, in that mid-'70s range. Also, markdown margins have been extremely strong with the lighter markdown inventory, so we've been able to really deliver on the markdown margin side. Again, as we build into inventory, things will normalize over time. So those are two kind of pressure points as we look ahead on gross margin. Also, the own brands, as we talked about over the last couple of calls, own brands have been – compressed as a percentage of the revolved segment that fails, that will continue through the next couple quarters before it starts to reaccelerate. So we'll see some near-term pressure there before it starts to reaccelerate and add some gross margin in late 21 into 2022. So a number of things going on there, but structurally over the long term still feel really good about our gross margin target of that 55% plus. And then on return rate, that's largely a product mix story. where, you know, dresses, you know, fell off a cliff last year around this time in the depths of COVID. And we saw a mixed shift towards beauty, which has a low single-digit return rate. Now we're seeing that dresses come back with that higher return rate. So seeing some pressure there, which will add to the cost structure, especially on a year-over-year basis as we comp those COVID time periods. But we are doing things in the background to help manage that, one. You know, the mix will be more diversified, so that will have some positive impact on the overall return rate. And then, too, just, you know, making it a great experience for the customer, making it easy, but also, you know, trying to manage that return rate to a certain extent. And on the cost front, you know, doing things like you mentioned, the East Coast return facility and bulk shipping over from the East Coast, which will give us, you know, some benefit in the future. So a lot going on there, but, you know, again, we feel good about, you know, balancing return rate to a rate that's not at that peak 55% that we were at in the pre-COVID days. Got it. And then can I just – oh, you might have got cut off.
spk07: And your next question comes from the line of Edward Aruma from KeyBank Capital Markets. Your line is open.
spk00: Hey, guys, thanks for taking the question, and thanks for all the color on the P&L, especially related to marketing expense. I guess two questions on that front. One, I know that you historically do a lot of these events during the summertime. It should be assumed that the cadence of marketing expense shifts from the historical pattern, given the kind of still ongoing reopening. And two, I know you guys are expecting that the iOS changes may have an impact. I guess any early learnings that you're seeing in terms of marketing efficacy, given the changes took place a couple weeks ago? Thanks.
spk15: Yeah, so in terms of the timing of the marketing spend, yeah, you're going to see a different cadence than historical. Historically, April is a very big spend month for us on the brand marketing side. And in this year, we weren't able to do anything comparable to certainly what we did in 2019. But it all goes well and according to plan because it is an uncertain environment out there. You're going to start to see significant brand marketing investments in the coming months through the summer and through the fall. And so there's a little bit different cadence there. And then with regards to the iOS changes, we haven't really seen anything yet, but it's very early. So, you know, we'll just have to see how that all plays out. I think that's a potential headwind that all online e-commerce shops face.
spk07: And our next question comes from the line of Bob Durbel from Guggenheim Securities. Your line is open.
spk08: Hi, guys. Good afternoon. Congratulations on a great quarter. I guess my question is on the categories when you think about dresses or I think there was the vaccine-ready category. When you look sort of pricing around where you were historically, is the customer willing to go to higher price points? Are you seeing a steady price point? I'm just trying to understand how you guys are positioned and And I guess sort of lean that into on the forward side, you know, in terms of the brand offering there as you skew more towards luxury. Are you getting, you know, there was a story around getting better brands and newer brands. Has that been the case? And anything that you're pretty excited about as you look for the rest of the year from that perspective? Thanks.
spk12: Yeah. Hey, Bob. Thanks for the questions. I'll take the first one and then pass it off. You know, I think, you know, you're seeing AOV, you know, call it stable with Q4, and there's a lot going into that AOV, and that's a gross number. On a net AOV basis, we're seeing that increase pretty meaningfully year over year and sequentially. So, you know, I think that's one point. The second point and more to your question is, you know, the customer is willing to spend, you know, call it the same amount as she was before. We're not seeing any significant shifts in, you know, that initial price. And then to your point, you know, seeing Forward perform really well, especially when you look at that two-year stack in Q1 where we grew 47% last year and then 24% on top of that this year. So Luxury is performing well, so we see a lot of opportunity in cross-marketing Forward to that Revolve customer, and we see that already in the numbers that, you know, she is willing to spend up and she's willing to complement her wardrobe with some of those more statement pieces.
spk01: Yeah, when it comes to new brands, I think it's exciting to see that, you know, slower change in the luxury world. But I think everyone's understanding that, you know, the historic players and the historic points of distribution, you know, aren't as strong and aren't what they once were. And ultimately, you know, forward is our preferred partner moving forward. You know, brands, you know, like you mentioned, like the Rowan Elias, these are brands that when we founded Ford were kind of, you know, at the pinnacle of our wishlist, things that we really respected from a design perspective, from a luxury perspective. So very proud that we have that, you know, as part of kind of our state of the brand. And I'm super optimistic that more will be coming. I think that, you know, ultimately there's only a handful of brands that we don't carry. And I think, you know, optimistic that those brands will be coming our way as well.
spk07: And your next question comes from the line of Kimberly Greenberger from Morgan Stanley. Your line is open.
spk06: Oh, great. Thank you so much. I wanted to ask about the in-person marketing events. And if I'm remembering correctly, back in 2019, Michael, I think you held over 100 events that year, if I'm not mistaken. and obviously it's early days for the in-person events, but as you think about the rest of this year, would you expect to get back to the same kind of in-person events by the time we get to the third quarter this year or the fourth quarter this year? I'm just trying to understand how long is the path back to normal when it comes to doing some of these really impactful marketing things?
spk01: Yeah, I think it'll be a steady ramp-up. We'll definitely get a lot more active starting next week with our first revolver on the world trip in about a year and a half, I guess. So that's super exciting. We'll definitely see more and we'll definitely see more. It'll be the same kind, but I think it'll be more exciting and better than ever. I think that team has a lot of time to really think and plan and improve on what we were done. There was a period where what we were doing was working incredibly well. So with this long pause, I think the team's had the opportunity to really iterate and improve. So exciting things coming, similar to times past, improved and better, and some things that we've never done before, which I can't wait for you guys to see coming up.
spk06: Fantastic. And Jesse, just to follow up for you on the higher shipping costs, I think you talked about constraints in last-mile delivery and just capacity overall that were raising shipping costs. Do you view these higher costs as permanent parts of the cost structure, or is it more sort of short-term surge pricing that when the world goes back to normal and the level of in-store shopping returns these extra costs are likely to come out of the P&L.
spk12: Yeah, we don't fully know yet. We have seen these costs increase year over year pretty consistently, but we are seeing a surge just given everything that's going on out there. So I think a piece of it will be temporary, but a large portion will just be cost increases over time. That said, we do have some things in the works, and with the AOV increasing as well, that helps alleviate some of that pressure, but not counting on a significant relief there, at least for the balance of the year.
spk07: And your next question comes from the line of Mark Altshwager from Baird. Your line is open.
spk04: Good afternoon. Thanks for taking that question. Maybe just use another follow-up on the margin, but kind of a bigger picture one. It's, you know, guidance implies a more significant reinvestment this year, which obviously makes sense. But if we were to assume a more normalized kind of low 20s top line, I mean, do you expect the business to leverage or would you plan leverage moving beyond 2021? I guess any big picture thoughts on how you're thinking about the normalized EBITDA margin after all the learnings over the past year?
spk12: Yeah. Over time, we expect to increase EBITDA margin. You know, we're seeing some – we saw some underinvestment last year, which meaningfully added to the EBITDA margin. We're going to reinvest this year, so you're going to see some pressure there. And really on that marketing line item. So if you look longer term, we expect to continue to increase gross margin, which gives us a lot of headroom. And then as the other line items balance out and we get leverage, especially on the more fixed line items like GMA, we expect to see EBITDA margins. expand over time and still targeting those long-term targets of 55% gross margin and 14% EBITDA margin. But this year will be a year of reinvestment. And again, especially, you know, really just doubling down on that marketing and capturing this kind of return to normal and post-COVID world.
spk07: And your next question comes from the line of Camilo Lyon from BTIG. Your line is open.
spk09: Thank you. Good afternoon. I just wanted to dig a little deeper into the nuances around where the demand for occasion, where it's coming from. If there's any regional differences that you're noticing that particular call-outs, for example, are just as doing better in Texas and Florida than in the Northeast, or is there just this pent-up demand across the state that's pretty similar that people are feeling more comfortable in buying that type of apparel?
spk15: Yeah, so from a timing perspective, we certainly saw, you know, some states that reopened earlier ahead of others in terms of, you know, trends in demand, you know, both overall and kind of by category. But as we moved into April, we started to see those trends being largely broad-based across all states. You know, with obviously small sample size, you're going to have differences up and down, but kind of broadly speaking, the strength is – across the U.S. versus just certain states.
spk07: And your next question comes from the line of Roxanne Meyer from AMTM Partners. Your line is open.
spk06: A strong quarter, and thanks for taking my questions. My first question is on marketing. You know, you mentioned that in March you had the second highest month in the company's history for new customer acquisitions. And that occurred without fully stepping your foot on the gas from a marketing spend perspective. So I'm just curious, you know, if you can provide, you know, a breakdown of was that for Revolve and for Forward? And what do you attribute to the strength of a new customer acquisition?
spk15: Yeah, so the new customer acquisition was, again, fairly broad-based, really across all our business segments. We started seeing growth. very broad-based strength, particularly as we enter April. And, you know, we attribute it by and large to the reopening and consumers wanting to get out again and get back to their previous lifestyles. And our hope is that all will continue in a big way throughout the year. And our hope is that as we begin to layer on really impactful marketing investments, that we'll see that accelerate even further. So, you know, we feel good about the trends that we'll see.
spk06: great and then i just wanted to follow up um on a previous question you know on events um you know obviously you're not doing events yet uh like perhaps you have historically but are you able to share you know the the list that you've seen from some of the recent events you've done um you know in the prior quarter maybe quarter to date and give us aside from the revolve around the world any other a preview of some of the events you may have planned in the next quarter or two
spk01: Yes. With our events, we think it's super crucial for our strategy, so super excited about what's to come. And, of course, as we've mentioned many times, I'm sure there'll be more to come. Our marketing team would kill me if I started to blab my mouth about all the exciting things they have working on, but there's going to be a lot of exciting things coming on, things that you've never seen before. revolve around the world coming up, you know, going to, you know, a trusted kind of tried and true approach, you know, next week will be great. But looking at past events and such, you know, the real impact is really in that brand equity and that brand awareness over the long term. We do see, you know, sales bumps and increases, you know, in the very, very short term for sure. But the real meaningful impact is really gaining that awareness, you know, And the increased frequency of events in the upcoming cadence, I think, is really where we see, you know, the value and the investment compound when we're doing things not once in a while, but when we're there and we're, you know, unavoidable when we're really, you know, just a part of your entertainment and a part of your life. So we'll be full swing very, very soon.
spk06: Great. Thanks a lot and best of luck.
spk01: Thank you.
spk07: And your next question comes from the line of Ross Sandler from Barclays. Your line is open.
spk13: Hey, guys. Just another question on the marketing. So the 200 bps of deleverage this year with all this revenue growth, is that mostly the IDFA thing? How big of an impact is that going to have? does this change in kind of how marketing works on the Internet? Does it change how you think about potentially moving transactions inside of other apps like Instagram or wherever? Or is it more strategic to just keep everything in your own app and have your marketing be less efficient? And then one more on the marketing, is the mix of re-engagement marketing versus new customer acquisition changing in that 200 pips of the leverage. That's it. Thanks a lot, guys.
spk15: Yeah, so I guess to certainly answer your question about the iOS component, we've simply highlighted that as a potential risk factor, and we'll have to see how that plays out. I think if you look at the marketing budget as a whole, the driver there is our strategy that we think it's time to reinvest we think the reopened world is going to be perfect for the revolve brand and we think those investments pay strong dividends over time um but uh but the full impact is over the long term not the short term so we see there just being a great opportunity to invest large amounts of marketing dollars this year and so that's what we would like to do if things continue to play out that we made in the past where we expected the market to be, you know, at least at historical levels. And as we've seen things unfold, we see the opportunity to invest even more.
spk07: And our next question comes from the line of Matt Paranda from Roth Capital. Your line is open.
spk14: Okay, thanks. I had been asked, but just wanted to ask about the interlinking between revolve the loyalty program and forward if you could provide a little bit more color on some of the steps you're taking to kind of convert some of the folks from revolve over to the forward platform would be helpful.
spk15: Yeah, definitely. So we recently launched that forward loyalty program, and we cross-promoted it to our revolved shoppers. And so we're really excited about the potential over the long term to continue to move more and more revolved shoppers to the forward platform. You know, somewhat quiet over the course of the past year or so has been the really strong strength we've seen in the forward platform, where on a two-year basis, it's grown 82%. And so there's a lot of reasons for that. You know, we think it has a lot of momentum there. internationally and has a lot of momentum from a brand standpoint. But also a really big reason for that is our ability to move those revolve customers over to Ford for their luxury purchases. So, you know, we feel great about it. You know, and over the long term, we've heard more and more of those customers and the loyalty program will be a very helpful component.
spk14: Okay, great. And just one more on cash deployment, if I could. It just seems like even though you're you're signaling there's an uptick in marketing expense on a go-forward basis and maybe a little bit of uptick in terms of fulfillment it seems like you more than cover those cash deployment requirements with the existing business and so you're going to continue to kind of stack cash for the foreseeable future Are there any capital investments that you can highlight that would require additional cash on the balance sheet going forward? Or should we start thinking about sort of cash deployment in the form of dividends or other M&A? Just wanted to get your latest thoughts on how you think about deploying cash here.
spk12: Yeah, yeah. No, we've been really happy with the cash flow dynamics over the past year. Now, some of that is due to the inventory shift and, you know, being able to really successfully and aggressively cut inventory in the early days of COVID. So, you know, there is a cash draw as we invest in inventory, you know, now and into the next few months. Also a cash draw on those marketing investments. But to your point, it's still really healthy cash flow dynamics. So, you know, we're going to continue to see a really healthy cash balance. No significant, you know, internal tech projects. We remain very capital efficient in terms of our CapEx. It's, you know, very low single digit as a percentage of net sales, and we expect it to remain there for the foreseeable future. So then kind of to the point of your question, you know, I think it's too early to start talking about dividends and buybacks. You know, probably the next logical place that we'll look is opportunistic M&A, but, you know, emphasizing the opportunistic. We want to make sure it's the right long-term move for us. So, you know, we'll continue to review opportunities. But until then, you know, we'll just maintain that strong balance sheet.
spk07: And we will take our final question from Susan Anderson from B. Riley Securities. Your line is open.
spk10: Hi, Alec Legg. I'm for Susan. Thanks for taking that question. So kind of piggybacking off of Ross's question on Instagram and your own mobile app, are you able to provide any details on the sales penetration through those alternative channels? And then also, just what are the metrics on those platforms relative to your own website, such as AOV, conversion rate, new customer acquisition? Any details would be helpful.
spk15: Yeah, so, you know, starting with our own app, our own app is a very significant portion of our sales. It represents roughly a quarter of our sales. And then with regards to customer shopping through the Instagram app, we have seen some increased momentum there in recent periods. It's still a very small portion of the business. You know, in terms of the economics there, you know, they're very favorable to us. But, you know, you're generally not going to see the same level of order size as you are on their website. But long term, it's a part of the overall suite of options that we have for our customers. Thank you.
spk07: And there are no further questions at this time. I will now turn it back to the management for the closing remarks.
spk15: Thank you, everyone, for joining us today. And we'd also like to thank all of our investors for your continued support over this past year. And we look forward to meeting you again on our conference call next quarter.
spk07: And this concludes today's conference call. Thank you for participating. You may now disconnect your line.
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