Revolve Group, Inc.

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.

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.

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.