Revolve Group, Inc.

Good afternoon. My name is Paul, and I'll be your conference operator today. At this time, I would like to welcome everyone to Revolve's fourth quarter and full year 2021 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers demarks, 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 in your telephone keypad. If you would like to enjoy a question, press the tab key. Thank you. At this time, I'd like to turn the conference over to Eric Anderson, Vice President of Investor Relations at Revolve. Thank you, and may you begin.

Good afternoon, everyone, and thanks for joining us to discuss Revolve's fourth quarter and full year 2021 results. Before we begin, I'd like to mention that we have posted a presentation containing Q4 and full year financial highlights to our investor relations website located at investors.revolve.com. I would also like to remind you that this conference call will include forward-looking statements. including statements related to our current expectations regarding the continued impact of the COVID-19 pandemic on our business, operations and financial results, our growth and market opportunities, our ability to manage through supply chain challenges, our plans to expand our operations footprint and loyalty programs, our marketing investments and events, our merchandise mix, our seasonality pattern, freight costs, and our outlook for operating expenses, net sales, gross margin, and 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 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 into 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 is 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 Turman, 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, everyone. I'm excited to update you on our exceptional top-line growth and profitability in the fourth quarter. Our extraordinary performance capped off a phenomenal year for us, a year in which we outperformed in the face of macro challenges and supply chain headwinds, demonstrating the strength of our brands and great execution by our team. There are three points that I want everyone to walk away with today. First, our business has experienced incredible momentum as demonstrated by our financial results and key operating metrics. We delivered record results in the fourth quarter, highlighted by net sales of 240 million, an increase of 70% year over year, and 63% growth on a two-year basis versus the fourth quarter of 2019. This is an acceleration of approximately five points compared to the two-year growth rate we reported for the third quarter of 2021. and the outstanding revenue trends have continued through the first seven weeks of the quarter. We also delivered record profitability for a fourth quarter, highlighted by $29 million in net income and $34 million in adjusted EBITDA, with each measure increasing by a strong triple-digit percentage compared to pre-COVID levels in Q4 of 2019. For the full year in 2021, we achieved record net income of $100 million, almost three times higher than the net income of $36 million reported in 2019. An exciting driver of our outstanding results was a record increase in active customers. We added 162,000 active customers in the fourth quarter, outpacing our prior record of 124,000 announced just last quarter. Equally important, our rapidly growing base of active customers are increasingly productive in generating orders and net sales, further illustrating our business momentum and increasing customer engagement across the business. Our customer acquisition and retention efforts were also very efficient in the fourth quarter, with marketing as a percentage of net sales declining year-over-year to 13.5%, evidence that our brands are strong, our marketing investments are effective, and our customer is engaged. Second, we believe our ability to achieve such outstanding results during a challenging operating environment underscores our sustainable, competitive advantages. Emergence of the Omicron variant created new headwinds in logistical challenges, Air freight costs increased to the highest levels we've ever seen, and other supply chain and macro pressures have required us to be extremely agile to maintain our high operating standards. Against this backdrop, I'm proud to share that our operations didn't skip a beat and that we achieved record net promoter scores during the fourth quarter and full year, a powerful indication of customer loyalty. We proved how effectively our organization can scale while maintaining our quality standards by managing the 72% growth in customer orders year-over-year in Q4. Our nearly 20-year history since founding Revolve has taught Michael and I that challenging operating environments create opportunities for the best positioned companies to capitalize on their strengths. thrive, and gain market share. Just as we successfully navigated earlier periods of macro disruption, such as the great financial crisis, our strong team and competitive differentiators have guided our outperformance throughout the pandemic. We believe our technology-driven DNA and proprietary technology infrastructure, operational excellence and agility, and the strength of the Revolve brand positions us very well for 2022 and beyond. Third, above and beyond our strong operating results achieved throughout 2021, we see a long runway for growth ahead. In 2022, we plan to continue to invest in customer acquisition and retention, as well as thoughtfully investing in continuing to build our infrastructure to support our increased scale in pursuit of what we believe is a large market opportunity ahead of us. Key priorities for our investments and focus in 2022 include the following. We will build our brands and brand awareness to capitalize on our current momentum. With our customer engaging with us more than ever following our successful brand marketing investments last fall, we plan to keep the pedal down on our impactful marketing efforts in 2022. We're also excited about the potential of our recently announced brand ambassador program that has performed extremely well early on. Michael will hit on this more. We will capitalize on the long-term opportunity at Ford to build a curated luxury platform for the next generation consumer. After years of investment, our Ford segment is firing on all cylinders. We delivered 83% net sales growth in 2021, outpacing industry benchmarks by a wide margin. We see so much opportunity for growth in luxury, even just within the existing Revolve customer base, that we are going to aggressively invest in Ford in 2022. We will expand our assortment into adjacent product categories where we see exciting opportunity over the long term. Consider that our beauty sales nearly tripled in just the past two years on top of continued growth in our more mature categories. Building on the trust we have earned with our customer, we believe we can expand our offerings to serve more aspects of her life to expand our share of wallet over the longer term. We will expand our international presence and elevate service levels overseas to capitalize on the huge global opportunity outside of the U.S. The successful service level enhancements for our customers in Canada led to a more than doubling of Canadian net sales year-over-year in 2021. In the coming year, we plan to increase service levels in additional markets offering exciting growth potential, continue to refine the assortment for international customers, and increase the level of marketing investments. We will continue to reinforce our own brand capabilities to deliver healthy performance within existing categories and support expansion into additional product categories, which we believe will further differentiate our assortment. As a sign of our early progress, in the fourth quarter, own brand's net sales mix as a percentage of revolve segment net sales increased year over year for the first time in two years. We will further elevate our customer experience by investing in our operations footprint and staying laser focused on providing a best-in-class customer experience. We strive to exceed our customers' expectations each and every day. Of note, later this year, we plan to break ground on a second warehouse in the U.S. that we believe will even further raise the bar on our very high standards for customer service and fulfillment operations. And finally, We will further enhance our technology stack and leverage our rich data, including increased personalization on our websites that contributed to an improved conversion rate in 2021. Our technology, product, and data science teams have done a great job in leveraging our vast data asset to optimize our assortment and provide a personalized experience for our customers and customer segments based on their prior behaviors. We will continue to invest in these and many other applications of our technology stack that serve as the backbone for our data-driven approach to virtually everything we do. I will wrap up by discussing the retention performance of our customer cohorts during 2021, a major improvement compared to 2020 when cohort spending was challenged by COVID-19 headwinds that impacted consumer demand. As economies began to reopen, we were able to reconnect with our customers through our impactful marketing campaigns and on-point assortment. The retention of our prior year customer cohorts achieved higher levels of performance than ever before. This is very encouraging considering that our cohort performance has historically been so consistent and strong to begin with. I would also like to highlight that the vast majority of our newly added customers in 2021 purchased from us at full price, since full price customers generate a higher lifetime value than customers acquired through markdowns. One factor that we believe is contributing to favorable customer retention is the success of our new loyalty programs. We leveraged our proprietary technology to create a loyalty program, first for Revolve in 2020 and later for Ford in 2021. The early results have been really exciting. Among our active customer base, on average, our loyalty members placed almost three times more orders than non-loyalty members during 2021. And during every single month since we launched the Ford loyalty program, we've driven increased overlap between Revolve and Ford active customers that have contributed to Ford's exceptional sales growth throughout 2021. We believe there's still a very long runway for driving further cross-shopping between Revolve and Ford in the future. We plan to further expand the Revolve loyalty program in 2022, rolling it out in select international markets. Before I turn it over to Michael, I'd like to thank our team for their incredible efforts that contributed to our exceptional results throughout 2021. Michael and I are so fortunate to be surrounded by such an outstanding team of talented, dedicated, results-driven, and passionate individuals. We're better positioned than ever before for what lies ahead, and I truly believe the best is yet to come.

Thanks, Mike. I couldn't be more proud of the team and our performance for the fourth quarter. Our results were nothing short of incredible across the board. Net sales growth in the global segment accelerated for the fourth consecutive quarter to a 68% increase year-over-year, forward delivered and even stronger, 83% growth in net sales year-over-year in the fourth quarter. informed as well while facing serious challenges, including a COVID spike, inflation concerns, supply chain delays, labor shortages, and major changes in digital advertising is astounding. Also exciting is that for the full year in 2021, 87% of our total net sales were at full price. That is 10 points higher than in 2020 and represents the first time the full price list of net sales exceeded 80% for a full year. Our team deserves a lot of credit for these results, being so agile and decisive during a fluid environment. The competitive differentiators Mike alluded to are built into our DNA, have guided us through the pandemic, and have positioned us for continued success over the long term. It starts with our proprietary technology, data-driven culture, and exceptional teams. Our accelerated growth through 2021 benefited significantly from having access to the right type of inventory during a time when supply chains were in an industry-wide challenge. Our proprietary technology and data-driven approach have been a huge differentiator in the time of disruptions. Since we have automated so many aspects of the decision-making process, we can leverage data much faster than others to identify trends and make marginalized decisions in a very quick and accurate and efficient way. Reading and reacting quickly to have the right inventory for our needs at the right time has been core to our success over the years and was key to our success in the most recent quarters. In addition to meeting our shopping needs and desires, having the right inventory allows us to be more aggressive and efficient in a marketing approach, having full confidence that we can support the increasing consumer demand consulting from our impactful marketing campaign. Our proprietary technology infrastructure is also integrated in a way that enables us to operate efficiently and consistently exceeds the expectations of our customers. We have also leveraged our technology stack to develop loyalty programs that have proven highly successful in deepening the connection with our valuable customers and in providing us with massive amounts of additional data insights. Last November, we announced a further extension of our in-house technology with the launch of our new Brand Ambassador program. The program is a community-driven extension of our pioneering influencer marketing strategy and is already generating a meaningful amount of incremental traffic and incremental revenue. We had almost 10,000 sign-ups within the first 24 hours alone, with a significant portion of them being micro-influencers that comprise an exciting area of opportunity. And since the Brand Ambassador program has broken our technology stack, we captured more data and insights than ever before. Aside from enabling our passionate customers to start to engage with our brand in a new and fun way, top-performing ambassadors can gain access to our future events, adding more excitement and powerful incentives to drive further engagement with our brand. The strength of our brand is another key differentiator that's integral to our success. We believe the strength of our brand is the diversity of our marketing channels to help us navigate through the marketing hazards resulting from Apple's recent iOS privacy update. In fact, during the fourth quarter, we realized more than a full point of marketing efficiency as a percentage of net sales were compared to Q4 of 2020. As our current bandwidth and customer engagement suggests, early indications are that the New York Fashion Week investments I discussed last quarter were highly beneficial. And to keep up the momentum, we are planning to maintain an elevated level of marketing investment in 2022. We have an exciting slate of marketing events and activations planned for the year. Earlier this month, coinciding with the Super Bowl being hosted in Los Angeles, we hosted an exclusive two-day homecoming event that was one of the hottest parties in the planet during the biggest entertainment weekend of the year. Co-hosts with the Agewood Group are featuring headliner entertainers from Justin Bieber and Drake to invite all the fans to fly together as some of the most influential celebrities, athletes, musicians, and CEOs in the world, further reinforcing the strength of our aspirational lifestyle brand. Attendance by A-listers who was off the charts included Kendall Jenner, Hailey Bieber, Khloe Kardashian, Heidi Klum, Nicole Scherzinger, Adele, Lizzo, Ciara, Cardi B, Offset, Leonardo DiCaprio, Lil Wayne, Jamie Foxx, Russell Wilson, Garrett Tenley, Paul Pierce, Mike Tyson, Jack Dorsey, and Jeff Bezos. As we look ahead to relapse the Revolt Social Club, a pop-up retail concept opening in Los Angeles this week and extending throughout the end of April. Revolve Social Club will feature exclusive experiences and special events for our loyal customers, fans, brand ambassadors, and VIP friends of the brand. Then in April, after a two-year hiatus, we have plans to bring back our showcase Revolve Festival. Revolve Festival has historically been our most impactful event of the year, and we are going bigger and better than ever. We're also excited for the continued expansion of our marketing playbook across both Revolve and Fuller with some very special forward applications in the books with our creative director, Kendall Jenner, later this year. With the strength of our brand and trust, we have earned from our core customers through our authentic and aspirational marketing and lifestyle events. Combined with our exceptional service levels, we believe we continue to expand our offerings and broaden our range of shopping at Revolver forward. We believe the opportunity continues to grow and is a key building block of our growth plan in 2022 and over the long term. And finally, our operational excellence and our agility are key differentiators and are a critical long-term competitive advantage that is especially evident today. Consider that during 2021, our average cost of fill-in orders decreased by 12% year-over-year, despite rising inflation pressures and the headwind of increasing return rate year-over-year. And throughout all the chaos during the pandemic, we have continued to maintain our very high standards in an environment where shipping delays have become widespread. As our numbers attest, we are leveraging our competitive advantages to divide our customers and gain market share in a challenging operating environment that has adversely impacted the results of many other companies in our industry. I'm excited and proud as I am of our recent performance. I'm even more excited about what lies ahead. With our positioning at the intersection of the digital shift and the rise of the next generation consumer, we believe there remains a large opportunity to gain further market share from mega TV carriers and competitors. The pace of the digital shift has accelerated over the last two years, and we believe there is even more opportunity in the years to come. Our brands are truly connecting with the next generation consumer, a demographic expected to become the dominant generation in the coming years and with a further increase in purchasing power. With these favorable industry trends, combined with our technology-driven DNA, the strength of our brand, our operational excellence, and our focus on the customer, we believe we are positioned to win the hearts and the wallets of the consumer. Now I'll turn it over to Jesse for a discussion on the financials.

Thanks, Michael. And hello, everyone. We believe our results throughout 2021 demonstrate the exceptional momentum of our brand, our competitive differentiation, and our focus on operational excellence. I'll start by recapping the fourth quarter results, highlighted by continued acceleration in our top-line growth and record growth in active customers. Net sales were $240 million, a year-over-year increase of 70%, and reflected two-year growth rate of 63% compared to the fourth quarter of 2019. This two-year growth rate is five points higher than the 58% two-year growth rate that we reported for the third quarter of 2021. Both segments contributed to our exceptional growth. Revolve segment net sales increased 68%, and forward segment net sales increased 83% year-over-year in the fourth quarter. From a merchandising standpoint, triple-digit growth in dresses was a notable contributor to our accelerated growth in net sales during the fourth quarter. And yet, the net sales mix of dresses remains well below pre-COVID levels, which illustrates how successful we have been in driving rapid growth across a wide range of categories. Also notable is that own brands with a percentage of revolved segment net sales increased year-over-year for the first time in two years. We continue to expect the own brand mix of revolved segment net sales to trend higher in 2022, increasing from the own brand mix of 20% we achieved for the full year of 2021. By territory, both domestic and international markets contributed to strong top-line results. Active customers increased by an exceptional 162,000 compared to the third quarter of 2021, handily outpacing the prior record performance announced just last quarter. This expanded our active customer count to 1.8 million, an increase of 25% year-over-year. This expansion was driven by record new customer additions as well as record retention rates. And our customer was very active, placing a record 1.8 million orders in the quarter, an increase of 72% year-over-year. Average order value for AOV was $292, an increase of 14% year-over-year and an increase of 6% sequentially from the third 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 54.8%, a decrease of 116 basis points against a record prior year comparison, yet gross margin increased 189 basis points on a two-year basis compared to the fourth quarter of 2019. This strong result was ahead of the gross margin outlook provided last quarter, despite the cost of inbound freight in the fourth quarter increasing to a record high level. Moving on to operating expenses. Consistent with the outlook we provided last quarter, fulfillment expense showed efficiency as a percentage of net sales year-over-year, while selling and distribution increased to 15.9% of net sales. After the significant marketing investments in the third quarter, our marketing expense as a percentage of net sales came in at 13.5% in the fourth quarter, due in part to the timing of brand marketing investments, as well as sequential efficiency gains in our performance marketing efforts. General and administrative expense leveraged significantly, primarily due to our robust 70% growth in net sales outpacing the 26% growth in G&A expenses during the fourth quarter. Net income was $29 million, or $0.39 per diluted share, a 50% increase as compared to diluted ETS of $0.26 in the fourth quarter of 2020. This brings the full year diluted earnings per share to $1.34 in 2021. an increase of 70% year-over-year. We reported adjusted EBITDA of $34 million, a record high for a fourth quarter, and a year-over-year increase of 82%. Adjusted EBITDA margin expanded to 14.3% from 13.3% a year ago, an increase of 93 basis points. On a two-year growth basis, when compared to the fourth quarter of 2019, net income and adjusted EBITDA increased by 250%, and 150% respectively. Finally, profitability highlights for the full year 2021 included net income of $100 million and an adjusted EBITDA margin of 12.9%, up from 11.9% in 2020. Moving to the balance sheet and cash flow statement. During the fourth quarter, we continue to invest in inventory to position our assortment to support strong consumer demand and to ensure we have adequate available inventory as we head into 2022. expecting seasonality to return closer to the historical cadence and also considering the current supply chain challenges. As a result, inventory increased by $29 million during the quarter to $171 million. For the full year, 2021, we generated $60 million in free cash flow, representing 7% of net sales. The 16% decrease in free cash flow generation year-over-year reflects the much larger inventory investment in 2021, compared to 2020 when we reduced inventory to preserve liquidity. Our balance sheet remains debt free and cash and cash equivalents at year end 2021 were $218 million, an increase of $72 million or 50% from $146 million as of the end of 2020. We're extremely proud of our incredible results, especially considering the challenging and uncertain macro environment. We faced a myriad of headwinds this quarter. Inflation, the Omicron variant, global supply chain challenges, and other logistical challenges, yet we continue to maintain our world-class customer service and operations while delivering exceptional growth and profitability. We feel great about our success in navigating these challenges so far, yet these are real headwinds that we continue to contend with every day. Now, let me update you on some recent trends in the business since the fourth quarter ended and provide some direction on our cost structure to helping your modeling of the business. Starting from the top, the strong top line trends we experienced in the fourth quarter continued through the first seven weeks of the first quarter of 2022, with a year-over-year growth rate in the same zone as our fourth quarter 2021 growth rate. Now, if you think about modeling net sales growth for the full first quarter, it is important to consider that year-over-year comparisons become much more difficult beginning in March. To put a finer point on this, recall from our prior commentary that net sales in the month of January 2021 and February 2021 each grew by a low single-digit percentage year-over-year. By comparison, net sales in March 2021 grew by a much faster rate year-over-year, leading to the 22% growth for the full first quarter of 2021. March was also the largest monthly contributor of net sales in the first quarter of 2021. So, do bear in mind the more difficult monthly comps for the rest of the first quarter. Looking at the potential trajectory for net sales growth over the full year 2022, directionally speaking, we are confident in our ability to meet or exceed our long-term target growth rate of 20% in 2022, even coming off of the year when we delivered net sales growth of 54%. From a linearity standpoint, considering that our growth rate meaningfully accelerated throughout 2021, we expect our growth rate in 2022 to be the highest in the first quarter of 2022, and lowest in the fourth quarter of 2022. On an absolute basis, and barring any macro shifts, we expect our quarterly seasonality to revert closer to historical patterns with a peak in the second quarter as we head into festival season and the warm summer months. Finally, we expect strong net sales growth across both segments and expect that forward growth rate will continue to outpace revolves in 2022. Shifting to growth margins. We are extremely pleased with our growth margin performance that hit our long-term target of 55% for the full year 2021, an increase of 237 basis points versus 2020 and 138 basis points higher on a two-year basis versus 2019. Looking ahead and starting with the outlook for growth margin in the first quarter, we expect growth margin in the first quarter of 2022 to be between 53.5 and 54%. A strong result considering this would represent the lowest sequential quarter decrease compared to the preceding fourth quarter growth margin in seven years. For the full year 2022, we expect growth margin to be flat to slightly down versus our record growth margin of 55% achieved in 2021 due to some offsetting puts and takes. We expect the growth margin benefit from a moderately higher mix of own brand sales in 2022 to be at least offset by three main factors. Number one, a greater mix of forward net sales, where segment growth margins are roughly 10 points lower than the revolved segment growth margins. Importantly, gross profit dollars per forward order are actually higher than at revolved because it's a much higher average order value. So it's a trade-off we're happy to make. Number two, as Michael mentioned, we achieved a record 87% of our net sales at full price in 2021, a 10-point increase compared to 2020, as well as record low deaths of markdowns. While we believe we can continue to deliver outstanding results on full-price sell-through and the depth of markdowns consistent with our prior commentary, we are expecting these metrics to start to move in the direction of historical trends in 2022. And number three, we expect inbound freight costs to remain elevated in 2022. As a reference point, inbound freight costs for our own brand products in the fourth quarter increased 3x versus 2019 levels and have remained elevated thus far in 2022. Fulfillment. Performance in the past two years has been incredible, with fulfillment leveraging by approximately 40 basis points for each of the past two years. In 2022, we believe we can maintain these efficiencies and achieve fulfillment expense of around 2.5% of net sales. We expect further efficiencies resulting from incremental automation and sales maximization in our warehouse and a higher average order value to be offset by increased wages and other import costs. as well as expected pressure from our return rate in 2022 being higher year over year. Selling and distribution. In 2022, we expect selling and distribution costs to be around 16% of net sales, consistent with prior commentary. The anticipated deleverage versus 2021 reflects cost pressures resulting from a return rate that we expect to be higher in 2022, as well as external pressures on shipping costs industry-wide. Recall that shipping and handling costs comprise the majority of the selling and distribution line items. Marketing. We expect our marketing investments to remain approximately flat with the 2021 rate of 15.8% of net sales. We are very excited by the performance of our recent in-person activations and how well our brand is resonating with the next generation consumer, as illustrated by record growth in active customers the past two quarters and the record retention performance of our prior year customer cohorts in 2021. Capitalized on our current momentum, we plan to maintain a slightly higher than historical level of marketing investment in 2022. General and Administrator, we expect GMA expense of approximately $26 million in the first quarter and $105 to $110 million for the full year 2022 as we continue to invest to support our growth and expansion. Lastly, let me touch on our tax rate. Our effective tax rate for the fourth 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, capping off an outstanding year with strength across segments and geography, supported by a very loyal customer. While mindful of continuing short-term uncertainties, challenges, and potential headwinds in the current environment, We remain focused on the customer and on the long term, and we are investing in the business to capitalize on the incredible growth opportunity ahead. Now, we'll open it up for your questions.

At this time, I would like to remind everyone, in order to ask a question, press star, then the number one on the sign keypad. We'll pause for just a moment to compile the Q&A roster. Your first question comes from the line of Erin Murphy with Piper Sandler. Your line is open.

Great. Thank you. Good afternoon and congratulations on a great end to 2021. Two questions, if I may. First, just as we think about the category performance going forward following two years of the global pandemic, can you talk a little bit more about what you're expecting between casual denim dresses in the forward business? And then how are you thinking about the return rate into 2022? And then I've got one follow-up. Thank you.

You know, when it comes to category mix right now, we're seeing strong strength across the board in all categories. You know, our going out categories, you know, are particularly strong right now, especially on the year-over-year basis compared to the depth of the pandemic and such. But we're seeing strong growth in some of these categories that were kind of stay-at-home categories like beauty. So across the board, we see great strength and looking to hope to continue the same.

Great. And then keep going.

So, sorry, Mike here with regards to return rate, we've seen that uptick in recent quarters, and we do expect that trend to continue, but we also expected to level off throughout the year. But just as things continue to reopen up and consumer trends get back to where they were pre pandemic, we expect to see further uptakes there. And as well, we continue to invest in our international territories, making it easier and easier to return items, which we think is key to our long term success.

Great. And then my second kind of key question is just on own brands at 20% now. Do you see this going towards prior peak over the next couple of years? And if so, wouldn't your gross margin be structurally higher over time? Thank you.

Yeah, maybe I'll jump in on this one, Mrs. Jeffy. So yeah, you know, great growth in the own brands, especially this last quarter with the first increase that we've seen, you know, in the last couple of years. And we do expect it to move moderately higher in 2022. And we want to use that, you know, moderately carefully. We're trying to do the right thing, you know, focus on quality assortment and the right pace of expansion. So we're not committing to, you know, getting back to that 36% peak at any given time. I think we can get to the you know, comparable economics at a lower mix than we were at before. And then maybe on your last point, structurally, yes, you know, the own brands carry a significantly higher growth margin than a third party. So as own brands increase, we do expect to see higher growth margin over time. That said, and I know you've commented on this in the last couple quarters, we do expect that full price to move down, you know, this year and, you know, approach closer to historical levels. We think we can do better than our previous highs of 79%. But it will come off the highs that we've seen. It already has since Q2. And then that also goes for the depth of markdowns as well. But overall, I feel great about our margin. And hitting that 55% long-term target this year, we're really proud of.

Your next question comes from the line of Oliver Chen with Cowan. Your line is open.

Thanks a lot. Congrats on a great quarter. The guidance was very helpful. You're anniversarying a tougher compare in March. At the same time, you've done a really great job with active customers in the Ford division as well. So will those help offset a potential deceleration? And then a second question. Ford has been remarkable. Would love your thoughts on categories and if you could just help us compare and contrast your approach to marketing at that division and marketing techniques as well as the percentage of sales as we look ahead to that big long-term opportunity. Thank you.

Yeah, definitely. Hi, Oliver. Mike here. So, yeah, with regards to the momentum of the business, you're absolutely right. There's a ton of things we have that are really working well for us. We think the business is really strong, regardless of comps. Active customers are at all-time highs. Active customer ads are at all-time highs. Stronger acceleration from the previous quarter. We feel great about the momentum. The Ford business is strong as well. At the same time, there's such a shift in comps between the first couple months of the year and March and beyond that it would be remiss for us not to remind the analyst community of that as far as how it's going to affect the growth rates going forward. And from a marketing perspective with Ford, we're able to leverage a lot of the same techniques and tactics that we've built on the Revolve side, and that's something that we're continuing to build. It's something that historically has We haven't leveraged it strongly, but we're starting to leverage influencers more strongly on the Ford side. The new brand ambassador program, which has been a huge success for Revolve, we're looking to roll out to Ford in the coming months. And then, of course, Ford just being such an incredible premium position brand just opens up all sorts of avenues to market the brand that we're really excited about. And certainly having Kendall Jenner as our creative director doesn't hurt.

And one thing, you know, to category mix, you know, like forward and revolve. Also, we're seeing strong strength across the board with a very, very strong rebound in event-driven, you know, categories. But the one thing I didn't mention earlier, that board is particularly excelling as the handbag is quite strong. The Laval brand mix doesn't carry quite as many handbags. That kind of mix really does reside under the forward kind of retail brand. So as we continue to migrate the Laval customer over the forward, we expect to see continued strength in the handbag category for many quarters to come.

Your next question comes from the line of Seth Sigmund with Guggenheim. Your line is open.

everybody thanks for taking the question um as you look at the acceleration of the business and the drivers of health performance mike i think you talked about some of the differentiators which i think makes sense but do you think there's anything specific or unique to this period that may be helping you know maybe better in stock levels or any other drivers that are perhaps unique to this period or you just think you know good old execution and you know firing on all cylinders thanks

Definitely. So I think there's some factors, I maybe wouldn't use the word unique to this period, that have contributed to our success in a big way. And I think first off, just broadly speaking, Revolve has historically thrived in times of disruption. We're very agile and nimble as an organization. We have a history of really strong execution. And when the environment is tough, we think it's even easier for us in general to put distance between ourselves and the competition. In terms of factors that we've been able to leverage to continue to increase the strength of our brand and gain distance from the competition, we think from a brand perspective, Second half of last year, really starting in the fall, we put on some incredible brand marketing efforts and certainly some big cues with bringing in Kendall Jenner as creative director, Revolve Fashion Week. We're incredibly excited to be able to get back to Revolve Festival this upcoming year. So just a lot of momentum there from the inventory and technology perspective, as well as the way in which we present products to our customers and how we personalize the website. Very significant major upgrades over the past couple of years that have really contributed to our success. So we view it as more part of a longer-term path and a continuance of what we've done, but we think we are continuing to gain distance between ourselves and the competition. Okay, very helpful.

Just follow the question on the gross margin. If you could perhaps bridge the gross margin upside this quarter, obviously came in well ahead of your expectations, despite some of those inbound freight pressures that you highlighted. Just more color on perhaps the upside drivers there. And then regarding the outlook, it sounds like you are expecting some normalization and promotional activity. Is that something that you're seeing right now or just anticipating that throughout the year? Thanks. Yeah, and this quarter, it was mostly the full price mix, as well as the markdown depth. It continued to perform really well. Now it is down off of the peaks of Q2, but continued to perform, you know, really ahead of our expectations. And then also the own brand acceleration in mix, slightly ahead. So, you know, those are the main contributors on Q4. And then to that earlier point on the full price mix coming down from the peak of Q2. So we are starting to see that, and we do anticipate it. you know, to continue to shift back towards, again, towards the normal historical norms. And again, we think we can do better than that 79% previous peak. We're, you know, really healthy in terms of inventory right now, turns, and then also the mix of reorders. And that's coming, you know, in part from expansion in breadth. We had a lot more breadth on the site and, you know, kind of back to the core, buying broad and shallow, and then hitting on those reorders has been phenomenal the past few quarters.

Your next question comes from the line of Michael Benning with Credit Suisse. Your line is open.

Hey, guys. Congrats on a great quarter. Thanks for all the detail here. I guess, Jesse, could we get a little more help bridging down the P&L in the first quarter here, maybe down to the EBITDA line? I know you helped us kind of think about sales and And we'll call it on gross margin, but maybe some of the other lines, if you wouldn't mind. And then, Jesse, I have to ask. Jesse, so related to the 20-plus revenue guidance for the year, you ended the year with 25% more customers. Mike talked about the cohorts outperforming for the year. You know, you're shipping across – the consumer is shopping across the two different chains now with loyalty working. KOVs are spinning higher with dresses and higher-priced items leading the way. What are we getting back? What are we getting back? That will get us down to a 20% revenue growth rate for the year.

Yeah, yeah. No, thanks for that question, Michael. You know, I think what we're trying to say is that we feel really good about our long-term plan, our long-term target of 20%. Now we hope to do better than that. We do have a lot of tailwinds, to your point. You know, we had great customer ads both on the new customers, record new customers, also on the retention that we didn't touch on yet in the post-call phase. But, you know, retention was a record as well. Full price mix is good. Forward sitting on all cylinders. The customer is strong. But it is still very uncertain. And I think today is no exception, you know, in the market. So, you know, I think it's us just giving caution, you know, to that, you know, upside on the 20%. So, you know, we'll do what we can. We can control what we can control. And then, you know, kind of the rest we'll deal with. And we've managed to do times like this before, so. Just keep our heads down and execute. And then on the kind of full P&L, kind of walking through the line items there, we talked about margin. Fulfillment, you know, maintaining roughly where we're at is reasonable. We get efficiencies with space maximization, continued automation, and other efficiencies there. On the flip side, we do have some cost pressures in terms of wages and other input costs on that line item. Selling and distribution is probably the biggest kind of inflation cost pressure line item to focus on. So we closed out the year at 15.9%, you know, I think, assuming that level or slightly higher for 2022. And again, the biggest piece of this line item is shipping, where we're starting to see, you know, real, real pressure on the shipping side, particularly on the surcharges fuel in particular. So continued pressure on that line of marketing, we've hit on that continuing to invest there. There will be some seasonality shifting back closer to the historical pre-COVID norms. We had some great events this quarter, even more coming up in Q2 that Michael touched on. And in G&A, we just continue to invest in G&A, building the team, building the support to really drive this top-line demand.

Your next question comes from the line of Camila Lyon with BTIG. Your line is open.

Thanks. Good afternoon, and great to see all the continued momentum, particularly here in the first quarter. I wanted to delve into that a little bit first, if I could. By the commentary you gave about January and February and the implied March, it sounds like um you're anticipating or projecting um a flattish sort of march uh result um but then in the same breath we're talking about greater penetration of dresses and going out occasion wear and higher aovs with new customers that have come on so kind of in the same vein as the question that michael asked just a minute ago Is there something that we're not contemplating that suggests that that kind of thinking for that March period is the right way to think about it?

Yeah, I'm not going to comment too much on the specifics of March, maybe just reiterating that continued strength from Q4 into this first seven weeks in the same zone as that Q4 growth. You know, so that momentum continues. Again, the future is uncertain, but we continue, you know, we have a lot of good stuff lined up for Q1. And into Q2, and again, approaching closer to that historical seasonality where we see the build into Q2, the festival season, the summer months. So again, a lot of tailwinds, but again, some uncertainties out there, too, that we're being cautious on.

Got it. And then maybe, Jesse, if we could talk about the free costs that you mentioned and how to think about those. in the 22 outlook and what's really embedded from a perspective of any sort of relief that you are expecting, or are you anticipating that the pressures experienced in Q4 persist at that same rate throughout 2022? And if you could actually tell us what that margin impact in Q4 was, that'd be great too.

Yeah, we are not baking in any relief in 2022. I think, you know, our best guess is that that doesn't happen until 2023. And that freight is hitting on two line items. One is that selling and distribution, and that's the most evident. So again, we think we can manage to around that 16% zone, but probably not a lot of benefit there given the pressures. And then in growth margin as well, there's pressure there on the inbound freight, and it's inbound freight from the 80% that is third party, and then also the 20% that is own brand. And if you look at that own brand specifically where we have the most direct visibility through the full supply chain, we saw freight costs increase 3X from the pre-COVID levels back in 2019. So that has a real impact on the growth margin, which kind of reverting back to our growth margin points, a lot of tailwinds, but we do have some cost pressures there as well. And maybe to your point on demand, you know, the impact on margin and maybe how much this comprises, keeping in mind that we do have the higher price point, that premium product. So freight is increasing, but we are more insulated and can manage it maybe better than some of the others that operate at lower price points. So that premium price point, again, allowing us to absorb more of those freight charges without a significant impact.

Your next question comes from the line of Mark Altschwager with Baird. Your line is open.

Thank you. Good afternoon.

So you look to be well on your way to eclipse $1 billion in revenue this year. So clearly a lot of momentum on multiple fronts. I was hoping you could talk more about the investments that are needed to sustain the pace of revenue growth that you've been delivering. You know, Mike, I think you mentioned the technology stack and planned expansion on the fulfillment front. Maybe you could expand on that a bit. And Jesse, maybe speak to the margin implications, medium term, as you pursue some of those investments.

Yeah, so from my perspective, Broadly speaking, what we're looking to do is make Revolve the best destination it can be for premium fashion for younger consumers, for next generation consumers. And we think we're the best game in town there. But we want to continue to build on that advantage and get better and better, right? And so it's just continuing to invest. And we've seen the results of our investments over the past couple of years. And we think there's a lot more to invest in, whether it's continuing to invest in the technology stack, right, and make sure we're bringing the best products to customers when they want to see them. on the fulfillment center side you know for us it's pretty exciting because it opens up an opportunity to get even better at service levels we're already two-day shipping everywhere within the U.S., right, in one day to some locations. Opening up that East Coast fulfillment center is going to allow us to start getting more and more customers to next-day shipping. And so just continuing to invest in all the areas across the business that are going to continue to allow us to thrive and provide a better offering for consumers. Your own brand we mentioned. We're really pleased with the momentum we've seen there. uh year-over-year growth for the first time uh in several years in in really excellent metrics across the board indicating that the products resonate with consumers so we're going to continue to build on that we're not going to commit to any specific targets because it's all about delivering great product to the consumer but we feel great about the momentum there so um again just continuing to invest and get better and better and we think that's going to extend our lead on the legacy players that we're taking share from yeah and then maybe bring those investments oh sorry um

to the second part of your question there. The three areas that you're going to see this in is G&A. So this is reflected in our G&A commentary, and this includes own brand, technology, website, everything Mike talked about. The second area is marketing, keeping the pedal down on marketing. So that, you know, call it 15.8% in 2022, a full point higher than the pre-COVID levels of 2019 on a much higher base of revenue, which impacts the brand marketing. So More investments there and then on the capex front related to the fulfillment center, you can go back to 2019 and our capex is generally less than $5 million a year. So very capital efficient. 2019 was $12 million and that's when we moved into our consolidated facility here. The East Coast facility will be smaller than this facility. So, you know, call it roughly a third of this facility. So you can kind of roughly back into it won't have a significant capex impact your efficient.

Your next question comes from the line of Ed Geruma with KeyBank.

Your line is open. Hey, good afternoon. Thanks for taking the question. I was wondering if you could comment a little bit more on the shape of the year as it relates to marketing spend. I know you're keeping it kind of flat year over year, and I know you do have a bill because of the festival season in the second quarter. you're going to lack, I think, tougher or higher marketing spend in third quarter. How should we think about how it spreads through the balance of the year? And then just to click down a little bit, you guys also mentioned some improvements in performance marketing. Can you kind of talk a little bit more about that? Thank you.

Yeah, maybe I'll hit the first one and then kick it over to Mike. On the curve of marketing, closer to the historical norms, where Q1 and Q4 are the lowest, Q2 has historically been the highest. That said, probably the difference this year compared to the pre-COVID levels is just the success of our fall activities back in 2021 with New York Fashion Week. So you might see that curve not quite as steep on either end, but higher in Q2 and Q3 than Q1 and Q4.

Yeah, and on the performance marketing side, as you know, we did see some nice efficiencies there in the fourth quarter. Performance marketing is dynamic. Things shift from month to month, from quarter to quarter. So we're really pleased with the results that we saw in the fourth quarter. But broadly speaking, it's kind of within the normal shifts that we see quarter to quarter and month to month. The one thing I'll maybe comment on more specifically is IDFA, as you know, has been a headwind. And for us, we've been very pleased with how we've been able to navigate it. And we think that the strength of our brand really gives us a diverse way in which we can market, which makes us less reliant on some of the more extreme levels of targeting that come with IDFA. And so we think that was a factor in our success in the recent period.

Your next question comes from the line of Tom Nickich with Redbush Securities. Your line is open.

Hi, Ezra Weiner here. I'm for Tom. Thanks for taking our question. So we were interested. So you said forward mix is going to be a headwind to gross margin for the year. We're just really wondering, within that segment, do we see that gross margin gap narrowing, or do you think that is going to stimulate it?

You know, call it roughly the same. We're in the mid-40s now. I think that's a really healthy place to be. If you look back, you know, two years ago in 2019, we were closer to the 40% zone. So, you know, a five-point expansion in the last couple of years we feel really good about. So, you know, I think it'll be, you know, plus minus in that same 10-point differential.

Your next question comes from the line of Simeon. Teagle with BML Capital Markets. Your line is open.

Thanks a lot. Hey, nice job, guys. Sorry if I missed it. Did you say what you're expecting for active customers in Q1 of the year and then more qualitatively, just as you think about the active customer growth at this point? I guess, where do you think you're getting them from? Where are you on the expanding awareness trajectory? Where do you take share from, et cetera? And then just following up on the point right before, can you just maybe dig in again into how you think about the IDFA, IRS privacy changes, so how it impacts maybe your competitors versus how you guys can navigate through that? Thank you.

Yeah, maybe I'll start with that first part and then kick it over to Mike. On the active customer growth, again, maybe just doubling down on our prepared remarks and that it came from both new customers and that really robust activity from the existing customers. So we feel great about that. Looking into 2022, we're not giving any guidance on new customers or active customers, but given that that active customer number is a trailing 12-month number and we're still kind of being pulled down by, you know, at least a couple months of COVID activity in this most recent 12 months, you could expect the year-over-year growth to increase from the Q4 growth rate, at least in Q1, but then starting to get closer where active customers and net sales growth start to converge around the middle of the year.

Yeah, and then in terms of where active customers are coming from, we believe we're still really – have really small penetration in our target market in terms of percent market share. So for us, we just continue to invest in the things that we've been investing for many years. We're really pleased with the momentum we saw in active customer growth this period. And kind of more specifically, right, as far as how we market and how customers first hear about us. you know, we find that where customers are first hearing about us is primarily through social media, brand marketing, and word of mouth. And that's really kind of where they're finding out about us. And then a lot of the performance marketing channels are what kind of take them from that initial awareness to making purchases on our site. I'm sorry. And then with regards to the IDFA, again, Yeah, you know, it certainly, I think, had a big impact on some companies out there, and it was something that we were, you know, had mentioned as having a possible impact on us several quarters ago. And, you know, we're pleased with how things have played out. Certainly there's been some impact on our side in terms of how it's affected our marketing. Many of those impacts have offset one another. And I think if you look at the big picture in terms of what we're able to do to reach customers and how we believe we have a better offering than the legacy players out there, you know, things like IDFA are more kind of blips along the road, you know, versus an important part of our strategy and execution.

Your next question comes from the line of Matt Carando with Rock Capital. Your line is open.

Hey, guys. Thanks. Just wondered on AOVs if you could unpack the key drivers of growth on a year-over-year basis in Q4. It looks like my assumption would be mostly mixed, but anything on AERs you can say would be helpful. And then just in terms of approaching that prior peak where you guys were at in 2017 around $300, it feels like we could eclipse that just with a better mix of forward revenue. So just anything you can say there on the trajectory of AOVs throughout the year would be helpful.

yeah yeah um so on the current quarter to your point number one mix um or forward um you know continue to outperform so there's some mix shift there number two is mixed by category um so within revolve seeing that dress mix pick up um as the year progressed and into q4 you know more people going out and then even within dresses and within categories just more um kind of more going out kind of end use um products within each of those categories. So it's coming from a number of different places. And then again, that full price mix continued to be strong, you know, coming down from the Q2 peak, but still very strong on a year-over-year basis. So as we're looking to 2022, we do expect AOV to continue to increase for the same reasons, really. You know, number one, that forward mix and forward continuing to perform. Number two, for the full year of 2021, The dress mix was 25%, so still not at that kind of 30% pre-COVID level that we were at. So continued mix to dresses, higher price point items. And then, again, continued shifts within categories as well. So, you know, I think we feel good about the AOV growth coming from AOV, but more importantly from customers, customer activity, and just, you know, core growth in the business.

Your next question comes from the line of Roxanne Meyer with MKM Partners. Your line is open.

Great, thanks. Thanks for taking my question and congrats on an amazing fourth quarter. My question is looking at the relationship between growth and active customers and orders placed. You know, if you look pre-COVID, you know, the growth rates were somewhat aligned. You look at fourth quarter, growth in orders placed was three times that of active customers and for the full year was double. So I guess what's driving the growth in orders in an outsized way and how should we think about that going forward?

Yeah, this gets back to that trailing 12-month aspect of the active customers. That's one reason where You know, for this full year, we had those couple months early on in the year still being dragged down, and the customer growth really accelerated through the year. And then you have this quarterly number of orders that was just phenomenal at, you know, plus 70%. So you have kind of an outsized order within a quarter compared to a blended active customer number over the course of the year. So that's one reason. And then, you know, I think our customers, given going back to that retention rate and you know, breaking records on retention, our existing customers tend to place orders more frequently and at higher average order value. So you do see some kind of order frequency element as the customers came back after being quiet there during COVID. So, you know, expecting that to continue into 2022 as well. Acquiring these customers at full price, full price customers for us have historically performed much better than a markdown customer. So feeling good as we head into the year.

As we are at the end of the call, your last question is from the line of Susan Anderson with B. Riley. Your line is open.

Hi, Alec Legg. I'm for Susan. Thanks for squeezing us in. My question was just related to the strong balance sheet and the cash balance that you built up. What are your thoughts on what to use that excess cash for, how much is earmarked for current investments such as the DC, increased working capital usage, thoughts on M&A, any guidance would be pretty helpful. Yeah, yeah, thanks for that question. And to your point, feel really good about the balance sheet, the strength of the balance sheet, especially after coming out of a year like 2020 during COVID, so to see that build is just phenomenal. And, you know, we have been investing in inventory, so to have that cash balance on top of the significant investment in inventory to support this most recent demand we also feel good about. So where does that cash go from here forward? Not a significant draw in cash due to CapEx. We've been historically very capital efficient. I touched on the kind of fulfillment center expansion later this year and that, you know, that should be a very minor CapEx outlay. Working capital and the significant needs there, so that gets back to your third point of M&A. We continue to look at potential M&A opportunities. We're very selective and disciplined and, you know, just continue to look at it more opportunistically over the long term and do what's right for the business. Thanks. And just to follow up on the D.C., do you have an estimate of potential cost savings with that instead of shipping everything out of West Coast? You know, you have an East Coast D.C. Is there a potential number on that? Not a specific number. I would say that, you know, there's going to be, you know, some minor disruption anytime you get a facility up and running. So some, you know, call it duplicate costs, very short term. And then over the very, you know, quickly thereafter, having some offsetting efficiencies that's baked into that fulfillment line item. So, you know, I think this is one way of battling some of those cost pressures that we're seeing. And then, you know, more importantly,

mike can double down on this just the customer experience and continuing that speed of delivery that's all the time we have for questions today i will now turn a call back to the management for closing remarks all right thanks guys for joining us uh blowout quarter

Of course, a special thank you to our team who needs to get better at everything that we do, continue to improve, continue to innovate. And I look forward to a certain future. There's going to be challenges, no doubt, but it is a challenge like billions of dollars of opportunities for us. So we're ready and excited to see you guys next quarter.

This concludes today's conference call. You may now disconnect.