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.