Revolve Group, Inc.

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.

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.

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.