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spk06: Good afternoon. My name is Carl and I'll be your conference operator today. At this time, I would like to welcome everyone to Revolve's third quarter 2021 earnings conference call. All lines have been placed on me to prevent any background noise. After the speaker's remarks, there will be 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. And if you would like to withdraw your question, press the pound key. Thank you. And at this time, I'd like to turn the conference over to Mr. Eric Randerson, Vice President of Investor Relations at Revolve. Thank you. You may begin.
spk02: Good afternoon, everyone, and thanks for joining us to discuss Revolve's third quarter 2021 results. Before we begin, I'd like to mention that we have posted a presentation containing Q3 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, our growth and market opportunities, the impact of Kendall Jenner's appointment as Forward's creative director, our ability to manage through supply chain challenges, our outlook for operating expenses for the fourth quarter of 2021, and gross margin for the full year 2021, and our effective tax rate. 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 today'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 will also reference certain non-GAAP financial information, including adjusted EBITDA and free cash flow. We use non-GAAP measures in some of our financial discussions as we believe they 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 the 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 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 it over to Mike.
spk03: Good afternoon, everybody. We're excited to update you today on the strong momentum in our business that continued to build during what was an incredible third quarter. There are three key points that I want everyone to walk away with today. First, we delivered record top-line results in the third quarter, highlighted by 62% year-over-year growth and 58% growth on a two-year basis versus the third quarter of 2019. This is an acceleration of 17 points compared to the 41% two-year growth rate we reported for the second quarter of 2021. The strong revenue growth trajectory discussed on last quarter's earnings call improved throughout the quarter, and the positive revenue trends have continued through October. What's gratifying is that the strength in our top line is broad-based with net sales in the revolved segment further accelerating in the third quarter, while our forward segment delivered nearly triple-digit growth year-over-year. Second, Our brands are extremely well positioned in the market, and the momentum of our brands, driven by our strong assortment and innovative marketing, is generating increased customer engagement. Last quarter, I discussed our plan to invest heavily in marketing and brand building initiatives during the third quarter. While we expect these investments to provide long-term benefits, we are thrilled with the early returns. In true Revolve style, we stood out during New York Fashion Week, delivering impact and awareness, innovation, and redefining marketing for the modern fashion brand. I'm equally excited to see the clear signs of increased customer engagement. Traffic in the past few months has accelerated to well above levels before COVID-19. and we are generating more revenue per traffic session, helped by our customer increasingly buying from us at full price, as well as a shift in category mix to higher price points. You can see the increased engagement in our results with orders and net sales generated per active customer accelerating in the past two quarters. Even more exciting is that our active customer growth itself accelerated in the third quarter, resulting in record levels of quarterly growth in active customers by a wide margin. It's also compelling to consider that the substantial majority of our newly added customers are buying from Revolve and Forward at full price, which speaks to the longer-term opportunity. Our experience tells us that customers acquired at full price generate a higher lifetime value. Third, nowhere in our business is the brand momentum more evident than in our Forward segment. Based on publicly reported data, Ford has been growing well ahead of the luxury peers, and we believe we have just scratched the surface on what we view as a massive long-term opportunity to build a curated luxury platform for the next generation consumer. Setting the stage to continue our strong growth trajectory is our recent announcement of Kendall Jenner as the creative director of Ford. We are beyond excited to partner with Kendall, who is the epitome of luxury fashion. She brings incredible creativity and passion to the role that we believe will meaningfully extend the Ford brand's reach and influence. We're also very early in cross-marketing our Ford offerings to the much larger Revolve customer base. Our launch during the second quarter of a Ford loyalty program that is fully integrated with our Revolve loyalty program once again provided a powerful contribution to Ford's growth in the third quarter. I'm encouraged that month after month, we are driving increased overlap between Revolve and Ford active customers. Yet, with a very low percentage of overlap today, we think we have a compelling growth opportunity resident in our existing customer base. With that as an introduction, I will provide an overview of our third quarter results and recent developments. Our record growth in active customers and our ability to authentically engage with her through our marketing and merchandising resulted in record net sales of $244 million in the third quarter, an increase of 62% year-over-year and 58% on a two-year growth basis compared to the third quarter of 2019. This is 17 points higher than the 41% two-year growth we reported for the second quarter of 2021. We also continued to deliver outstanding profitability in the third quarter, while at the same time making meaningful marketing investments that we believe will pay dividends over the long term. Net income in Q3 was $17 million, or $0.22 per diluted share, and while it was down year on year, as expected due to our marketing investment, net income increased 74% on a two-year basis versus the third quarter of 2019. For the nine-month year-to-date period, net income more than doubled versus the 2019 comparable period on a two-year basis. These results benefited from healthy expansion of our gross margin in the past two years as our effective merchandising and inventory management contributed to delivering strong net sales at full price and reduced markdown levels, more than offsetting the reduction in owned brand mix as a percentage of net sales. Shifting gears, our strong results have not come without challenge, and there remains uncertainty in the macro environment. Our sales results in certain regions around the world have been temporarily impacted when lockdowns have been reimposed, serving as a reminder that we are not out of the woods yet. Equally relevant and very much in focus recently are the industry-wide supply chain challenges, which have had a progressively larger, albeit manageable, impact in the last several months. This came through in yet a further decrease in the percentage of on-time deliveries from our suppliers and in a further increase in our inbound shipping rates in the third quarter. Importantly, with a customer that shops at full price for our premium price point product and with our strong gross margin, we are well positioned to manage through the increased freight costs that could remain in effect for several quarters. Despite the many industry-wide challenges facing us, our operations and merchandising teams have done an outstanding job effectively navigating through this very dynamic environment. Our merchandising and planning team has not only been able to secure sufficient inventory, but more importantly, on-trend product that the customer desires. And our fulfillment, customer service, and support teams haven't skipped a beat, continuing to meet and exceed our very high standards that our customers have come to expect from Revolve. As a company passionately focused on the customer experience, I'm extremely proud that our net promoter scores have further increased this year, even as the organization scaled up to manage through the incredible growth and customer demand. I'll wrap up with a brief discussion of regional performance. I'm excited by the strong domestic growth, which accelerated to 65% year-over-year in the third quarter, an increase of 55% on a two-year basis versus the third quarter of 2019. Our international business also continues to perform very well and represents an exciting opportunity for future growth. International net sales grew 49% year-over-year, an increase of 75% on a two-year basis versus the third quarter of 2019. Every major region contributed to our international growth, illustrating how well our brands are resonating on a global basis. Before I turn it over to Michael, I'd like to thank our team for their incredible efforts day in and day out. I'm proud of how well each and every one of you has taken great care of our customer during this exciting period of rapid growth. We are positioned better than ever and I couldn't be more proud of your efforts that have helped to put us in such a position of strength.
spk10: Thanks, Mike. I'm really proud and impressed with our performance during this past quarter. After successfully navigating a very challenging pandemic so far, we are gradually transitioning into a post-pandemic world and we are thriving. It is very clear to me that the same strengths we have demonstrated in the most recent quarter are positioning us to thrive for continued success over the long term. An important travel of our success is that our customers love us and deeply connect with the Revolve brand. As our customer resumes her socially active lifestyle, it's clear to me that her relationship with us is stronger than ever. She shopped with us when she was stuck at home, and she is shopping more than ever as she starts to go out and needs to refresh her wardrobe. She also has begun to buy her luxury goods from us in a very meaningful way. With the trust we have earned from the customer, we believe we can continue to expand our offering and broaden her range of shopping at Revolve. The opportunity continues to grow. Our technology-driven DNA, AI, and proprietary algorithms continue to provide a clear competitive advantage. Integral to our success in this recent period of extreme turbulence was understanding our customers' evolving needs, and a key to understanding our customers is our data-driven mentality and proprietary technology infrastructure. Leveraging our data-driven approach, we have thrived on the fluid environment by quickly identifying shifts in consumer demand, which has enabled us to continue to gain traction in the marketplace and deepen our relationship with the customer. Our operational excellence and agility are key differentiators and are a critical long-term competitive advantage that is especially evident today. Despite the external challenges in the marketplace, we have been able to ensure that deliveries to our customers have remained at our very high standards during a time of shipping delays from retailers that become routine. Our customers remain as satisfied as ever, creating a strong foundation for this next stage of growth. Most exciting, we are addressing a very large market opportunity that continues to shift in our direction. Legacy retailers have been continuing to seed market share, yet they still represent tens of billions of dollars of market opportunity. We are primed and focused on a long runway opportunity to gain market share, acquire new customers, expand our share of wallet, and drive outsized growth over the long term. With that, I'm now excited to share with you some of the highlights of the quarter. We resumed our brand marketing activities with a bang. After several quarters of patient waiting, we significantly invested into our brand in Q3 with great success. For the first time ever, we participated in New York Fashion Week and stole the show, very successfully competing against the incumbent heavyweights of the fashion world. We hosted a week-long brand marketing experience for both Revolve and Fulbright, and we did it our way, bringing innovation and excitement to our community of brand partners, influencers, and customers. A highlight was our immersive and elevated Revolve Gallery exhibition that reimagined the front row experience of Fashion Week while engaging with consumers in a new and exciting way. The visually stunning and interactive event brought together a curated and exclusive assortment of styles from emerging brands and our own brands and uniquely featured a real-time shopping component. While New York Fashion Week events are typically exclusive affairs, we built the mold by hosting 6,000 people over three days at Laval Gallery, bringing together brands, partners, influencers, customers, and journalists in our first-of-its-kind event. In fact, Emmy had been one of the largest events ever held at New York Fashion Week. To protect our community, we adhered to appropriate safety precautions for the event, which was ironically held at the former site of a luxury department store that had closed in bankruptcy proceedings. It was great to host some of the analysts and investors on the call today at our opening night reception that was attended by an A-list crowd, including Kylie Jenner, Emily Ratajkowski, Megan Fox, Paris Hilton, and Carmela Coelho, just to name a few. Not surprising, the event generated massive impact on social media with dynamic and engaging content across social channels. The social media posts with the highest estimated media value for the entire New York Fashion Week came from the private reception at our Revolve Gallery event. further illustrating the impact of our event. The incredibly deep connection we have established with the next-generation consumer is evident in the high-profile sponsors of the Revolve Gallery event, such as Afterpay. Many top brands and personalities seek to partner with Revolve because they realize being associated with our brand can further elevate their brand in the eyes of the coveted and powerful millennial and Gen Z consumer. Another major highlight of New York Fashion Week was hosting our first ever fashion show to introduce our new own brand collaboration with the revered luxury designer, Peter Dundas. The highly anticipated collection, Dundas X Revolve, is a key milestone for our own brand, where momentum continues and net sales return to year-over-year growth in the third quarter. Importantly, initial jobs for the collaboration, the first of many to come, earned high praise and reviews from the influential fashion outlets attending our event. According to WWD, our Dundas X Revolve runway event was ranked as the second most talked about fashion show of all New York Fashion Week, based on social media and press impressions and estimated media value. As a further sign of our brand momentum, we kept up the week by participating in the Met Gala, an uber-exclusive and incredibly high-profile event that is the Oscars of the fashion industry, bringing more fantastic exposure for our brand. Revolve being included in the Met Gala for the first time is significant and demonstrates the level of admiration we have gained from the broader fashion community. I'll wrap up with a discussion on Forward and why we continue to be excited about the long-term growth opportunity here. Forward's financial results for the third quarter were exceptional, with net sales increasing 95% year-over-year and 112% on a two-year growth basis compared to the third quarter of 2019. Forward also delivered nearly six-point increase in gross margins year-over-year this third quarter. Even more exciting is having Kendall Jenner as part of the team as creative director for Forward, extending our reach and appeal to a broader audience of next-generation luxury consumers than ever before. We have always had an extreme admiration for Kendall's style, creativity, and overall exquisite taste. We believe her multifaceted experience in the fashion industry and the vision she has outlined for Forward has the potential to transform our business. Only a few months into the role, Kendall has been extremely active. She hosted and participated in several New York Fashion Week events, including an exclusive Forward dinner and visits to emerging luxury designers she recommended, including one new brand that we are already in the process of bringing onto the Forward site. You may have noticed her creation of Kendall's edits of her favorite styles on the Forward site. She also led the redesign of the Forward logo, further elevating the look to connect with the next-generation consumer. And Kendall has created a compelling range of video and social content, including a full feature that followed her around New York for a day in her new role as Forward's creative director. The video has been viewed more than 5 million times. Our brands, customers, and fans could not be more excited. Immediately following the news, traffic to the forward website and mobile app increased significantly, and several weeks later, traffic has remained at higher levels than before the announcement. Downloads of the forward app more than doubled year-over-year in the month of September, and growth of followers increased by more than 10x versus the prior monthly run rate. Another key driver of the success in the quarter and huge long-term opportunities for Forward is the continued expansion of cross-shopping by Revolve loyalty members on Forward. As more of our Revolve customers become aware of the incredible offering and benefits of shopping on Forward, we have only recently started to invest to fully leverage our broader platform and customer base to cross-market the Revolve and Forward offerings to maximize our long-term opportunities. These early results of our efforts are very encouraging, highlighted by our spend on Ford by Revolve Loyalty Club members continuing to increase sequentially and a steady increase in the percentage of all customers who also shop on Ford every single month since we launched the Forward Loyalty Program. You can't talk about fashion without talking about Revolve and Forward. We believe we have what it takes to be the destination for the next generation of consumers seeking curious premium and luxury products, and we are just getting started. The competitive differentiators I outlined earlier give me great confidence in our opportunity for growth in the global e-commerce market for years to come. We are clearly taking market and wallet share from legacy players, and with our scale and brand built over the past 18 years, we are also well positioned against newer entrants. We couldn't be more excited about the next phase of growth ahead of us. Now I'll turn it over to Jesse for our discussion of the financials.
spk12: Thanks, Michael, and hello, everyone. We are very pleased with our third quarter results, highlighted by accelerating top-line growth incredible brand momentum and strong customer engagement. We believe our results for the past few quarters demonstrate that not only have we navigated the pandemic challenges with agility, we are well positioned for our exciting next phase of growth in the new retail landscape. With that, I'll start by recapping the third quarter. Net sales were $244 million, a year-over-year increase of 62% and reflected two-year growth rate of 58% compared to the third quarter of 2019. This two-year growth rate is 17 points higher than the 41% two-year growth rate that we reported for the second quarter of 2021. By territory, both domestic and international markets contributed to the strong top-line results with domestic and international net sales growth of 65% and 49% year-over-year, respectively. By segment, revolved segment net sales increased 56%, and forward segment net sales were again exceptional, increasing by 95% year-over-year in the third quarter. A highlight of Q3 was active customers increasing by 124,000 compared to the second quarter of this year, our highest ever sequential quarterly increase by a wide margin. This expanded our active customer count to 1.7 million, an increase of 12% year-over-year. our customers placed a record 1.8 million orders in the quarter, an increase of 60% year-over-year. Average order value, or AOV, was $276, an increase of 19% year-over-year, and an increase of 8% sequentially from just the second quarter. A key driver of the growth in AOV year-over-year and sequentially was a further shift in mix back to higher price point merchandise, such as dresses, handbags, and shoes, as well as the continued strength coming from the forward segment. Shifting to gross profit, consolidated gross margin was 55.1%, a decrease of just 16 basis points against a very strong prior year comparison. Yet gross margin increased 148 basis points on a two-year basis compared to the third quarter of 2019. Importantly, our gross margin was ahead of the gross margin outlook we provided last quarter. as healthy inventory and consumer demand dynamics across both segments led to another strong percentage of net sales at full price in the third quarter and the year-over-year decrease in the depth of markdown. 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 the recent investor conference calls. Moving on to operating expenses. Consistent with the outlook we shared last quarter, marketing expense as a percentage of net sales came in at 19.2% of net sales in the third quarter, well above our historical trend line. I couldn't be more excited about the early results of our investments in brand marketing that paid dividends over the long term. The level of marketing investment has since returned to historical levels in the current fourth quarter. Selling and distribution as a percentage of net sales increased year over year and on a sequential basis. consistent with our prior commentary to expect deleverage with a normalizing product mix, leading to a further increase in return rate in the third quarter of 2021. The other two line items, fulfillment and G&A expense, leveraged year-over-year, resulting in part from automation efficiencies in our fulfillment center. In fact, we have a lower fulfillment headcount today than we did two years ago. During the quarter, we also realized benefits from capacity utilization and scale efficiencies resulting from our robust 62% growth in net sales during the quarter. Net income and adjusted EBITDA decreased year-over-year due to the increased brand marketing investment. However, net income and adjusted EBITDA each increased meaningfully versus the pre-COVID levels in the third quarter of 2019. Also, looking at the nine months year-to-date, net income and adjusted EBITDA increased by 86% and 59% year-over-year, respectively. Moving to the balance sheet and cash flow statement. During the third quarter, we continue to invest in inventory to position our assortment to support very strong consumer demand and to ensure we have adequate available inventory considering the current supply chain challenges. As a result, inventory increased by $23 million during the quarter to $142 million. Even with the investment in inventory, we generated $1 million in free cash flow in the third quarter and $67 million for the first nine months of 2021. The decrease of 10% year-over-year in free cash flow for the nine-month period reflects the much larger inventory investment this year compared to the first nine months of 2020 when we significantly reduced inventory to preserve liquidity. Cash and cash equivalents net of borrowings at September 30th were $222 million. an increase of $78 million, or 54%, from $144 million as of September 30, 2020. And our balance sheet remains debt-free. I'm especially proud of our incredible results considering the challenging and uncertain macro environment. It appears the supply chain issues are not going away anytime soon. And right when we think we're turning the corner on COVID, new challenges emerge around the world. So we feel very good about our ability to navigate the challenges as demonstrated by our exceptional results this year. Nonetheless, these headwinds are real risk factors that we have to deal with day in and day out. Now, let me update you on some recent trends in the business since the third quarter ended and provide some direction on our cost structure to help in your modeling of the business. Starting from the top, the strong top line trends we experienced in the third quarter continued through to the month of October with a growth rate that is broadly in the range of our third quarter growth rate While we are very excited about the recent top-line trends, we would not count on the same incredible growth rate that we've experienced in recent months to continue in the balance of the fourth quarter during a time when the space is flooded with marketing and promotional activity. Shifting to gross margin, we are extremely pleased with our gross margin performance with gross margin higher by approximately 350 basis points year-to-date versus the comparable period in 2020 and 120 basis points higher year-to-date on a two-year basis. versus the comparable year-to-date period in 2019. As a result, we are again raising the outlook for gross margin this year versus what we have shared previously. We now expect our full-year gross margin in 2021 to be approximately 54.5% above the already upwardly revised full-year gross margin outlook of 54% I shared last quarter. With a very efficient fulfillment performance in recent quarters, we expect fulfillment costs to be approximately 2.5% of net sales for the fourth quarter, which is approximately 40 basis points lower year on year and showing even more efficiency when compared to 2019. The slight anticipated uptick compared to the third quarter of 2021 reflects normal seasonality, as fulfillment costs have increased as a percentage of net sales on a sequential basis from the third quarter to the fourth quarter in four out of the last five years. For the fourth quarter, we expect selling and distribution costs to be around 16% of net sales, which is slightly higher than the 15.7% of net sales in the third quarter, and up significantly from 13.4% of net sales in the fourth quarter of 2020. You may recall that shipping costs comprise the majority of the selling and distribution line item, and consistent with our prior commentary, we are seeing pressure on this line from increased return rates year-over-year as our product mix normalizes. and from continued cost pressures that are impacting the industry overall. We expect this pressure to continue through 2022 at rates similar to that of our expectation for Q4 2021. Moving on to marketing. After a very busy and exciting third quarter, we continue to expect marketing expense to revert to its historical level of approximately 15% of net sales in the fourth quarter, consistent with our commentary on last quarter's earnings call. General and Administratives. We expect GMA expense to be around $26 million in the fourth quarter, nearly $2 million higher than in the third quarter of 2021, as we continue to invest in the team to support a rapid growth and expansion. Lastly, let me touch on our tax rate. Our effective tax rate in the third quarters of 2021 and 2020 reflect 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 our recent results, with record growth in active customers and strength across all segments and major geographies in the third quarter. While mindful of continuing uncertainties and potential headwinds in the current environment, we are focused on the long term and investing in the business to capitalize on the incredible growth opportunity ahead. Now we'll open it up for your questions.
spk06: Thank you, sir. At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Erin Murphy of Piper Sandler. Please ask your question.
spk04: Great. Thank you. Good afternoon. My first question is on the forward business. The strategy is really starting to put off. I'd love how you could maybe help us think through how big this business could be over time. And if you could share a little bit more about what Kendall's relationship with the brand is bringing from a brand relationship or vendor relationship perspective. And then just a second follow up on the holiday season. Can you just share your perspective on the promotional environment into holiday? Thank you so much.
spk10: here guys and i think the the forward opportunity is just met we're competing against many many old school uh sellers that still have billions and billions of revenue as well as competing against you know large online players who are struggling with competitive hey michael your audio is cutting out you want to go in you want to go then i don't know what
spk03: Yeah, sure, I can take it. Yeah, as Michael was saying, we think it's a really large opportunity. As you know, the luxury market is huge, and Ford is still a relatively small player, but it's positioned with the elements that we think are going to set it up for huge long-term success. Certainly, you look at just its trajectory momentum compared to the other players in the market. It's really on fire right now, and then you combine it with having Kendall Jenner as creative director. I couldn't think of you know, any person in the world, honestly, that would want that position more than her. And then you also combine it with the Revolve customer base, which is quite large in the opportunity to transition that customer base to forward. And incredibly, every single month we've seen sequentially higher overlap in shopping on the Revolve customer base on forward since we launched the loyalty program. So there's just a lot of ingredients for success. It's a market size that's in the tens of billions. So we feel really good about where that business can go over time.
spk12: Yeah, and then maybe on that second piece, this is Jesse. You know, it's a little bit early to see what's going on in the promotional environment for the holiday season. We are seeing some early promotions, so that's giving us some caution. And then just to back up and kind of set the stage. We're not overly seasonal. We're not a gift-giving destination. So this isn't a period where we're overly active. And we see a lot of activity in the market just in general. And I think, you know, holiday season can be volatile in any season or in any year. And then this year in particular with supply chain and everything else going on, we're just being very cautious on that last couple months of the year to see what happens.
spk10: I just wanted to correct that. Hopefully you guys can hear me, but it's not tens of billions. It's actually several hundred million, a billion. So massive potential here, and we're positioned perfectly.
spk06: Your next question comes from the line of Lorraine Hutchinson of Bank of America. Your line is open.
spk01: Thank you. Good afternoon. I wanted to follow up on some of the comments you made around the supply chain and just get a sense for how comfortable you are that you'll have the product you need for holiday. And then also what you're hearing from your brand partners about deliveries for the first half. Thank you.
spk03: Yes, on the supply chain side, we have started to see some delays there, more delays than we'd like. I think compared to the rest of the marketplace, we're positioned pretty well, and we feel good about our inventory position heading into the holidays. You know, is it perfect, the same as it was with no challenges? No, but I think compared to others, we're doing well, and I think that reflects in the results that we saw in the third quarter, as well as the results we're continuing to see in October. And then heading into the first half of next year, it's something that we certainly have our eye on. Again, we expect some challenges, but we expect to be able to manage and navigate those challenges as we typically do.
spk06: The next question comes from the line of Oliver Chen of Collin and Company. Your line is open.
spk12: Hi, Ann. The revenue growth continues to be really impressive and the active customer growth as well. What should we think about for longer term in terms of your revenue growth algorithm and also as you start to anniversary some tougher compares in Q1? Would also love an update on private label as you think about it near and longer term. I know there's opportunities at both positions. And then the third question on Ford, congrats on all the momentum there. What do you see happening with the assortment over time as you think about breadth relative to depth and where you want to go with the nature of inventory buys and pricing? Thank you.
spk03: Sure. Mike here. So with regards to the long-term growth algorithm, we wouldn't make any changes to our long-term projections. Certainly, we've experienced a problem in several quarters in the field of momentum in our business. and more importantly, really good about the long-term opportunity. We think we're positioned better than ever. I think our branch has been in with consumers. Our ability to manage our inventory versus others we think has really shown during this time, and also our ability to execute at high service levels. So, you know, we feel really good about our long-term trajectory, but at the same time, it's not the sort of situation where we would make a change to our long-term projections at this time. I guess the second question starts with the private label. Michael, do you want to dive in there?
spk10: Yeah. The opportunities there remain greater than ever. Of course, we scaled back, and we've begun to make the acceleration. In the coming year, you'll see a lot more from us across categories, across brands, across collaborations. And you'll begin to see things expand into the forward zone as well, which is completely, completely undone. I think that, you know, the customer, you know, as always, a lot comes for emerging designers, and we've been able to consistently create exciting emerging designers. So you'll see a lot more of us in the same format as you've seen us in this past New York. So very excited for what's to come. Okay, thank you. I'm forward and would love your thoughts there.
spk03: Do you want to take the Ford inventory or do you want me to, Michael?
spk10: What was the question again? Or do you want to jump in, Mike?
spk03: Yeah, I'll jump in. So, you know, with regards to Ford breadth and depth, we continue to see there to be an opportunity to enhance Ford's inventory assortment. You know, that's one of the things we've talked about on past calls, that with all the things Ford has going for it, what's really exciting about the future is it's it has a lot of opportunities on the assortment side. So we're continuing to increase the breadth of inventory as well as the depth that we're able to sell to consumers, and that's been a powerful driver of results.
spk06: Your next question comes from the line of Mark Altschweger of Baird. Your line is open.
spk09: Good afternoon and congrats on the ongoing momentum. First, on the marketing front, it seems like you're seeing some nice response to the marketing initiatives with the acceleration in client ads this quarter. As you realize some of the benefits from these brand investments that are ongoing, what do you think is an appropriate rate of net customer ads that we should anticipate in the quarters ahead? And then separately, On margins, Jesse, it looks like you're on pace to close to hold the 2020 margins. I think if I got all the numbers correctly, the guidance implies maybe something in the neighborhood of 11.5% EBITDA margins this year. With the performance year to date, does that increase your confidence in the ability to sustain or even expand EBITDA margins beyond 2021? Thanks.
spk12: yeah yeah sure on the first one on the active customers you know really excited about the uh customer behavior in this last last couple quarters in the last quarter especially um and it's coming from both new customers we had record new customer ads but also that returning customer that returning customer has been more active than ever and she came back in a big way in this quarter and not just returning customers but also lapsed customers we saw that the customers who had gone completely away in 2020 came back in this last couple quarters and that that ratio of that last customer actually increased from Q2 to Q3. So we feel really good about the active customer growth. I think that's one dynamic and the most exciting dynamic. The second one is that because that active customer number is a trailing 12-month number, we will layer on new higher-performing quarters as we cycle out of lower-performing COVID quarters. So the combination of those two for the next, you know, at least a couple quarters, we should see that active customer growth rate increase sequentially before it starts to normalize kind of in the middle of next year at some point. And then on the EBITDA margins and long-term EBITDA margins, we feel good. You know, we made a lot of investments this quarter that we believe will pay off over the long term. There is some cost pressures and supply chain and et cetera that we've talked about that will add some near-term pressure. But over the long term, we still feel good about that 14% EBITDA margin target that we put out. you know, again, in the mid to long term. So not commenting anything specifically on the next, you know, quarter, but feel good about the long-term opportunity there.
spk09: Thank you.
spk06: Your next question comes from the line of Michael Binetti of Credit Suisse. Your line is open.
spk11: Thank you. Hey, everybody. Thanks for taking our questions and congrats on a great quarter, guys. a couple a couple for you you know jesse you're the aov in the quarters above pre-covered levels now very happy to see that i'm curious how much of that is just you know segment mix between the two uh segments versus um versus any other uh headwinds or tailwinds you could maybe point to there what's above what's below pre recovered levels and how do you think about it from here um then i also I think on the owned brands, you thought that maybe it would cross over into positive year-over-year territory, perhaps at some point during fourth quarter. Maybe just check in on that, see where it is, if it's moved around at all because of the supply chain. And then the product return rates. They're back in about the low 50s rate. I know maybe a point or two below where you were pre-COVID, and I know as we talked about this through COVID, you thought that maybe they could stabilize a little lower than where they were pre-COVID. Is that still the thinking? Maybe anything you could tell us about the behavior you're seeing there? Maybe that's done going up in the near term, or do you think it maybe goes back a few more points? Thanks.
spk12: Yeah, sure. So first on the AOV, definitely a positive impact from that forward performance and forward really over-indexing for the last several quarters. And we see continued strength coming out of that segment, which of course carries the higher average order value. That's definitely a contributor. The other piece of that is the record-high full-price sales mix that we've been operating at, and not just the full-price sales mix but also the markdown margin. So, you know, kind of just kind of that full-price customer behavior has been really strong and strong for sure on a year-over-year basis, just given where we were at last year, but then also even higher than back in 2019. You know, and as we've commented on in the past, and that's, you know, kind of coming through in some of the margin gains, know we don't expect that to last forever we do expect that to come off of the highs and it actually came off of the q2 high that we experienced um in this q3 but still feel really good about the long-term full price mix there and full price customers generally behave better over time than a markdown customer so we're really excited about the record new customer additions this quarter that came through in a big way on full price so um that's on aov on own brands um Yeah, I think we troughed out in Q2. So we're seeing a sequential increase in the mix of own branch from Q2 to Q3. And I think in that Q4 zone is probably still in the right range of crossing over from that year over year increase in penetration. And then return rates. Return rates are increasing, as you can see. And that's largely due to the shift in mix back towards those higher return rate categories like dresses and away from the lower return rate categories like beauty that we had experienced last year. And, you know, also as we localize the international experience, that has an impact on return rate, but an overall positive experience and impact just on the overall P&L from a gross demand perspective. So, you know, I think we'll see it increase sequentially from here. You know, we're still optimistic that we can be lower than that peak rate, but it will increase between, you know, kind of where we're at now and that peak rate that we experienced back in 2019. If you look at the dress mix right now, we're at 29% in the third quarter. And at our peak kind of pre-COVID levels, we're in the 32%, 33% zone in those peak Q2 periods where addresses are really high. So just to give some context on kind of, you know, potential movements looking ahead.
spk06: Your next question comes from the line of Edward Uruma of KeyBank Capital Markets. Please ask your question.
spk00: Hey, guys, thanks for making the question. You guys are really early in identifying the influence opportunity, and I've argued you've done a better job than really anybody in the industry. It does seem, though, that a lot of other folks are trying to emulate this kind of micro-influencer strategy. I guess have things changed on the influencer front? Is it harder to get the right influencers and have costs come up? And then just as a quick follow-up to previous calls, any impact that you're observing from IDFA? Thank you.
spk10: Yeah, on the influencer side, things continue to evolve. But it's important to note that, you know, our influencer strategy isn't, you know, one strategy isn't a singular strategy. It's really a multifaceted strategy. So, you know, we work with the biggest influencers in the world, like literally, you know, like a Kendall Jenner, of course. We worked the entire spectrum all the way into micro-influencers with 10,000 followers. So I think it keeps us on our toes. Of course, things that we did years ago aren't as effective as they are now. But we have some new things coming out that we're excited to talk about that are just continued elevation of what we do, more tech-driven ways to work with influencers. And we're as bullish as ever as that this is an important part of our strategy, and we're super clear that it works, and we're super, super confident that we can continue to invest here in very strong ways. Mike, do you want to talk about
spk03: The IDSA, yeah. Yeah, coming into the quarter, we certainly had some reservations about it and noted that it could cause some level of headwind. You know, for the most part, we're pleased with how things played out. We felt like our marketing teams navigated it well. And on balance, you could call it net neutral. So it didn't end up being as big a concern as we thought it might be.
spk06: The next question comes from the line of Camilo Leon of BTIG. Please ask your question.
spk12: Thanks, and my congrats on the great quarter. Two questions for me. Number one, you talked about being happy about the early results and the returns from the investments in the Fashion Week event. I'm curious, can you share some of those early metrics that you're seeing, whether it's a boost in sales or engagement or what have you. And then longer term, is this something that you think can be your fall Coachella from a sales driver perspective? And then my second question is on gross margin, the gross margin guidance for the Q4 period. It looks like you're implying about a 300 basis point decline. I appreciate the cautious stance on
spk03: um the potential for promotions to accelerate but i'm curious are there other what are the other key driving factors that are um behind the uh the implied decline thank you sure so with regards to the marketing event question um we measure the success in several different ways um so you know certainly one of them is that we look at the trajectory of sales momentum and new customer momentum and customer engagement And we saw really nice results for the month of September in the period in which we conducted the marketing activity. And we know based off past events that we've done, we have the ability to correlate the increases that we see there to a longer-term effect that we see in the form of customer awareness and where new customers are first finding out about us and being inspired by us. So the early results looked great. You know, also all the metrics that we look at in terms of just general consumer awareness and impressions among consumers and reaction from consumers to the events that we're doing. We're all quite positive. So we feel great about those events. It was exactly the kind of investment that we wanted to make, and we're really happy with how it performed. And with regards to your question of could it become an institution like Coachella, the answer would be yes, it definitely could be. And, you know, we're still planning the upcoming year, and those plans could change over time. But at this point, we feel very good about the event, and we think it has potential to become an institution like Coachella.
spk10: Yeah, the only other thing I would add is that, you know, of course, with a strong Coachella, you know, a play that works for us in the spring, you know, balancing it out in the fall is great, but this is a play that could be any time of year. This is something that, of course, we did during Fashion Week, but this is an event that we can manufacture on our own. So, you know, it really opens up kind of a flexibility and possibility to, you know, do things whenever we want on a global basis. So super happy with the results. It was, of course, something new, which always, you know, carries a little bit of risk, but it is a huge win for us and something that we'll be able to leverage in a very strong way for many years into the future.
spk12: Yeah. And on the second piece, the gross margin there, I think important to keep in mind when looking at the year over year, that the last year was not a typical year. So if you think back to last year, we kind of saw that step function from the first half of the year into the second half of the year. And it was really the tale of two halves where we saw that record full price, everything kind of working on a margin perspective. So Q4 was not a typical Q4 for us last year. So that was abnormally high. So that's one piece on the comp. So I think, you know, probably balancing that with looking at the Q4 2019 and even earlier in you know, 18 and 17 to see the seasonality there. So I think one, a comp dynamic, and then two, a seasonality dynamic. And then three, you know, just as we've commented in the last, you know, couple earnings calls, as we build into inventory, as we work through inventory, that full price mix will come down, the markdown margin will come down. So we're building a little bit of that in as well.
spk06: Your next question comes from the line of Kimberly Greenberger of Morgan Stanley. Your line is open.
spk05: Great, thanks. This is Alex Straighten on for Kimberly Greenberger. I just have a quick question on both segments in terms of which categories within them at Forward and Revolve were doing well. Did you see any sort of certain ones as standouts on the further reopening? I know it sounds like dresses are doing better. And then also just the second question I have is on kind of a sense for how full price selling came in this quarter compared to last year versus even 2019.
spk12: All right, I'll start. Okay, on the merchandise front, you know, I think, as you'd expect, dress is coming back in a really powerful way. So on a year-over-year basis, plus almost 100% in that dress category. I think also important to call out that we do see that significant increase in these going-out categories like dresses, but also beauty pulled out a year-over-year increase, and that was a phenomenal category for us last year in the kind of stay-at-home COVID time. So good to see that category still increasing. On the forward side, you see the the handbags and shoes really continue to check. And that goes back to that. You can kind of link that back to the revolve forward active customer overlap, where forward over indexes on the shoes and handbags, revolve over indexes on the dresses, tops, et cetera. So it's a good complementary assortment on that front. And then I slipped on your second question.
spk05: Just on a sense for full price selling level, like last year versus even 2019.
spk12: Yeah, yeah. Over the prior year, higher than last year. On a sequential basis, though, we came off of that all-time high that we experienced in 2Q of 21. So, you know, we're kind of starting to see that full price ebb. And then also on the markdown margin front, similar dynamic where we saw that record – markdown margin last quarter. We're starting to come off of that record. So that, again, goes into kind of some of that forward-looking guidance that we're getting around gross margin for this next quarter. Versus 2019, we're still higher than that historical really strong full-price sale. So we still feel good about it, but it will come off those all-time highs that we experienced in the second quarter.
spk05: Great. Thank you.
spk06: The next question comes from the line of Tom Nickick of Wedbush. Please ask your question.
spk07: Hey, good afternoon, guys. Thanks for taking my question. I'm going to just follow up on the gross margin commentary. I mean, it kind of sounds like you have a few things that will pressure in Q4, and maybe some normalizing promos, and mix, and things like that. Should we expect that to kind of, you know, persist into 2022? Like, do you think that the 2021 gross margin at 5.5 is maybe, you know, a little bit inflated and maybe there's a little bit of normalization next year? Are there any sort of offsets to some of these pressures? I'm just trying to get a sense of, you know, the longer-term direction of gross margins.
spk12: Yeah, yeah, for sure. And it's a great question. You know, I think maybe stepping back for that full year of even 2021, that's two points higher for the full year on a year-over-year basis compared to 2020 and then a full point higher than 2019. So I think stepping back from the quarter-to-quarter dynamic, feel really good about the margin progression there. And I think to your point on offsets on the full price mix and the markdown margin, own brands. So as we mentioned, we kind of dropped out in Q2 on the own brand mix that has built sequentially into Q3. And we expect that to continue and kind of going back to Michael's remarks earlier and expect that to continue through to 2022 and beyond. know for the full year 2021 we'll see a decrease in the mix of own brands before we see that increase again for the full year in 2022 and you know i think um you know as we've talked about before the own brands carry meaningfully higher margin than a third party and with the own brand reset that we've been working on over the last year we feel you know really good about the the unit dynamics on that front as well
spk06: The next question comes from the line of Bob Burble of Guggenheim Securities. Please ask your question.
spk08: Hey, guys. He's got a couple of questions.
spk09: The first one, I think, for Jesse, the cash balance, can you talk a little bit about just the uses for cash and, like, you know, what you're planning, you know, what keeps building? I know you're going to invest in some inventory, but it just seems like there's a lot of excess cash on the balance sheet. And then I have a follow-up question.
spk12: Yeah, yeah. Yeah, first use of cash, especially this year, and you can see that in inventory balance is the reinvestment in inventory. And you can see the cash balance start to, you know, kind of plateau where we're at now, where we've invested in inventory, the significant demand that we've experienced as to the cash balance, but we're reinvesting that in the working capital. So, you know, I think we're largely through the inventory rebuild. Now it'll start to balance out You know, I think second use of cash goes along with that, but just, you know, working capital, investing in the marketing, investing in the business. We're pretty light on CapEx, as you know, so, you know, not any meaningful CapEx investments planned outside of, you know, historical norms. So then that leads to what else do we do with it? We are, you know, we continue to look at things. We're being very disciplined, but M&A continues to be an opportunity for us. But we're being, you know, very patient on that front as well. Got it. And just a question on the, you know, the Kendall Jenner appointment. In the interview process, which one of you guys played the heavy?
spk11: Like who was the tougher interviewer during that process?
spk10: That's always Mike. He's notorious for these impossible-to-pass programming tests, and I think that he took joy in that. All right. Thanks very much, guys.
spk06: The next question comes from the line of Ross Sandler of Barclays. Please ask your question.
spk08: Hey, just to follow up on the marketing question earlier, so you obviously spent a lot as planned on marketing and you averaged a little bit in the third quarter. Mike, I thought the comment about IDFA being neutral was pretty bullish. given what we've heard from other folks in e-commerce. So, I guess, could you just parse out, you know, influencer marketing versus the Kendall Jenner versus your just classic performance marketing? Like, what was the bigger driver of the record net ads? And... Do you think that now that we're post-pandemic and everybody is just shopping more generally online than they were pre-pandemic and brick and mortar is suffering a little bit more, are you getting better bang for the buck on your influencer and performance than you were two years ago? Thanks a lot.
spk03: Yeah, definitely. So with regards to the marketing increases, consistent with our commentary on the past earnings call, As a percentage of sales, nearly all of the increase came on the brand marketing side and came from those really big brand marketing investments that we made in September. Some of the increase, a much smaller portion did come from the performance marketing side, which actually the way we operate usually means that they're seeing good returns, right? Because the better the returns we see, the more we'll invest there. So there was a little bit of an increase on the performance side, but we were seeing phenomenal results throughout the quarter. So we felt really good about those investments. I think in terms of the landscape, you know, it constantly shifts. every quarter, our feeling is that if you have a good offering for consumers, a brand that's resonating, a product that's resonating, that over the long run, you're going to continue to be competitive in the performance marketing space, and that's what we see. Quarter to quarter, there can be shifts up and down as different players kind of do different things for various reasons, and this happened to be a more fruitful quarter for us.
spk06: Your next question comes from the line of Matt Kuranda of Rod Capital. Your line is open.
spk13: Hey, guys. Thank you. Two for me. So first one's on the net sales growth commentary quarter to date. I think you just said broadly in the range of the third quarter growth rate. So just wondering if you could maybe just speak to the key drivers of net sales growth quarter to date in terms of order flow, AOVs, return rates, just kind of relative to what you saw in 3Q. For example, are we up year over quarter on AOVs? What do return rates look like relative to 3Q? If you can get a little color on that, that would be helpful. And then just on the gross margin front, maybe not to beat the question to death here, but just wanted you to put a finer point on what's driving gross margins. Sort of the implied outlook is down quarter over quarter. So is it supply chain related or is it the expectation of less full price selling? And then why should we expect full price selling sort of to decline quarter for quarter? Is that based on actual quarter-to-date results you guys have seen, or is that just kind of a general observation in the overall competitive landscape into the fourth quarter here?
spk12: Yeah, sure. On the first part, October, you know, call it largely in line with the third quarter, both from, you know, kind of across the board from top-line growth, probably in that same range. being driven by continued increase in AOV on a year-over-year basis. So, again, largely in line with the third quarter. You know, return rate in that same zone, maybe a tick higher as dresses continued to perform. You know, but largely I'd say, you know, the customer activity continued on that same, you know, New customer ads, really strong. Returning customer slash existing customer, you know, really active. So, you know, kind of the commentary that we've given on the quarter is very similar if we had more commentary on October. But, again, adding some caution for that November-December time period is that can be a volatile time out there. And then the margin, you know, I'd say it's – It's mostly due to that full price and markdown margin dynamic, less so due to the supply chain. The inventory has been booked. Inbound freight is higher, but given the price point, the premium price point that we operate at, it takes quite a bit to move that from a margin perspective. So it's largely just due to that shift from the record full price that we've been seeing. And then also the markdown margin, markdown margin coming off of the highs that we've experienced in the last couple of quarters. So hopefully that helps.
spk06: We have time for one more question. Your last question comes from the line of Dylan Cardin of William Blair. Please ask your question.
spk12: Really appreciate it. Thank you. And greedily, I might sneak two in here, sorry. But I just want to clarify on the private label, Ed, you kind of ramped that back up. Is it the case that you think by sort of the end of 22, you might get it back to sort of pre-pandemic levels, or given past experience, you're going to be more thoughtful about how you – in the assortment. And then just on the international front, I know the growth there was strong, but just curious if there's any commentary or color. Do you think you're benefiting because there's lockdowns or further restrictions in certain jurisdictions, particularly Asia, or do you think there's sort of a delayed potential benefit as those markets recover? Thanks a lot. Yeah, yeah, sure. Yeah. Sorry, on the first one, I lost your first one after you talked about international. Just the pace of rollout by the labels now that you're kind of getting back into it. Oh, right, right. Yeah, yeah. Yeah, yeah. So, no, we feel really good about the, you know, the improvement or kind of the sequential increase, the first sequential increase that we've seen in the last couple years. You know, I'd say it's aggressive to say that we'll get back to that 36% that we were at in 2019. It's probably closer, you know, there's probably a line, and the line is probably less steep than it was in the past because we are – you know, being, you know, I think measured in our pace of expansion there. But we do expect to see a nice healthy increase in the number of styles delivered sequentially from quarter to quarter. But again, I wouldn't say, you know, 36% at that peak that we're at in 2019 is aggressive, at least for the next year. And then international, it's very region by region. I think A couple of good examples, Australia, which was in lockdown for the bulk of the third quarter, was one of the lower performing, still a growth region for us, but one of the lower performing regions this quarter. And then you compare that with the UK, who came out of lockdown earlier in the quarter that performed really well for us. Canada, China, really healthy regions for us on the international front. I appreciate it. Thanks, guys. Nice work. Thanks. Thanks.
spk06: That's all the time that we have for questions today. I will turn the call back to the management for closing remarks.
spk10: Hey, guys, thanks for joining us. You know, one thing I just really wanted to, you know, thank our team. The financial results, of course, are just incredible and speak for themselves. But, you know, a layer below all the operational metrics and all, you know, the, you know, heart that went into, you know, delivering these results, it really does show. And, you know, to the investor community, you know, thank you for joining. We're super proud of, you know, all that we've done. But also wanted to note that, you know, we're – still at the tail end of the pandemic and it's still not fully open. I think that there's, you know, flatter and better days yet to come. So feeling good and then not just over the near term, but for many, many years of continued dominating performance. So thanks for joining us and excited to chat more.
spk06: This concludes today's conference. You may now disconnect.
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