Revolve Group, Inc.

Good afternoon. My name is Audra and I will be your conference operator today. At this time, I would like to welcome everyone to Revolve's third quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. At this time, I would like to turn the conference over to Eric Randerson, Vice President of Investor Relations at Revolve.

Good afternoon, everyone, and thanks for joining us to discuss Revolve's third quarter 2022 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, including statements related to economic conditions and their impact on consumer demand in our business, operating results, and financial condition, our costs and inventory management, our growth, including growth in active customers and market opportunities and related macroeconomic and industry trends, our partnership with Muse Collective, our plans to expand, forward, renew, and introduce the Ford Brand Ambassador Program, our future events, and our outlook for net sales, gross margin, operating expenses, and effective tax rate. These statements are subject to various risks, uncertainties, and assumptions that could cause our action 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 Exchange Commission, including without limitation our annual report on Form 10-K for the year ended December 31, 2021, 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 a substitute for or superior to the financial information prepared and presented in accordance with GAAP, and our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliations of non-GAAP measures to GAAP measures, as well as the definitions of each measure, their limitations and our rationale for using them can be found in this afternoon's press release and in our SEC filings. Joining me on the call today are our co-founders and co-CEOs, Mike Karanikolas and Michael Mente, as well as Jesse Timmermans, our CFO. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn it over to Mike.

Thanks, Eric. Hello, everyone. We delivered another quarter of profitable double-digit growth in the third quarter of 2022 that further distinguishes Revolve in the fashion e-commerce landscape despite the increasingly challenged macro environment. Before I get into the details of the third quarter, I want to provide a higher-level view of how Michael and I think about our strategy as both operators and long-term owners of the business. We have a founder-led, investor-first mindset that permeates throughout the organization. With this perspective, we were able to confidently make disciplined investments that we believe position us for continued success over the long term, even during periods of macro challenges. The recent time period is no exception, where we continue to make key marketing investments and launch exciting new initiatives that further elevate our brand and build on the long-term opportunity to capture market share. We have a history of this while delivering growth, profitability, positive cash flow, and a healthy increase in our active customer base. This mindset and focus on investing in the long-term opportunity, even through turbulent times, has been a key contributor to our track record of growth and profitability over the last two decades. and we believe it will continue to drive our performance well into the future. Now, getting into the third quarter results. In the face of many challenges, we grew our top line double digits and delivered meaningful profitability and cash flow. Our net sales increased 10% in the third quarter compared to the prior year period, on top of 62% growth in Q3 2021 compared to Q3 2020. We delivered net income of $12 million and adjusted EBITDA of $18 million in the third quarter. As expected, profitability was lower year-over-year due to reduced gross margins, higher return rates, and other cost pressures discussed in detail on last quarter's conference call. Importantly, net income and adjusted EBITDA increased 25% and 22% respectively compared to the third quarter of 2019, further illustrating our track record of profitable growth. Even more important in such a turbulent environment is that we are generating meaningful cash flow and further strengthening our balance sheet. We generated $9 million in free cash flow in the third quarter, a triple-digit increase year-over-year. Nearly 20 years of experience operating Revolve has shown us that companies capable of generating profitability and cash flow during periods of economic volatility can become even stronger relative to the competition. We aim to be very disciplined in our cost and inventory management to maintain profitability, yet we are not overreacting. For instance, with the abrupt shift in consumer demand that we experienced in the second quarter of 2022, we took swift action to rebalance our inventory in a very strategic way to balance the moderation of our inventory levels with our focus on the customer experience and our long-term margin potential while maintaining our very strong brand partnerships. There's still work to do, yet only a few months in, we are on track with our plan and very pleased with our progress, as our inventory position grew only 2% during the third quarter when compared to the second quarter of 2022. Successful execution of our marketing and merchandising investments led to growth of 84,000 active customers during the third quarter, expanding our active customer base to 2.2 million, an increase of 34% year-over-year. This is on top of the record growth in active customers we reported in our third quarter of 2021. We view our continued healthy growth in active customers as further validation of our large market potential. Incidentally, even with our investments in the new East Coast Fulfillment Center we opened during the third quarter of 2022, we are still investing less than 1% of our annual net sales in capital expenditures. An important driver of our capital efficiency and agility is our ability to leverage our proprietary, internally developed technology instead of relying on capital outlays to purchase expensive and cumbersome technology systems from third-party vendors that is a common approach among e-commerce peers. Our approach is completely and fundamentally different. When we expand our fulfillment center infrastructure, we primarily leverage our internal engineering resources to evolve and customize our own existing proprietary technology systems to meet our specific needs and to support our best-in-class service levels for customers. Shifting gears to net sales performance by geography, our US net sales increased 10% and international net sales grew 12% year-over-year in the third quarter of 2022. The international results are impressive considering the significant appreciation of the US dollar during the third quarter, particularly against the British pound and the Euro. These currency movements present a headwind to demand considering that our pricing in local currencies is tied to the US dollar. In other words, when the dollar strengthens against the British pound, our product becomes relatively more expensive for customers living in the UK. And we can clearly see the negative impact on our monthly sales results in affected regions. Our net sales results in Europe and the UK went from high single-digit year-over-year growth during the month of July to negative year-over-year growth comparisons in net sales for the month of September, coinciding with currency exchange rates becoming much more challenging later in the third quarter. That being said, it's also important to consider the broad macro challenges facing our European customers. provide a framework of the UK and Europe on a combined basis, represented a mid-single-digit percentage of our total net sales for the first three quarters of 2022. Importantly, by comparison, our year-over-year growth in net sales remained healthy in key international regions such as Canada and the Middle East, where the foreign currencies have been much more stable. Finally, our track record of profitable growth also reflects our long-term focus on building trust with our customer. Core to building this trust is operational excellence and exceptional service levels. During the third quarter, we received gratifying recognition for our outstanding service levels in a key international market. Revolve was recognized by and profiled in Singapore's largest English-language daily newspaper, The Straits Times, for having the best customer service in the online women's apparel category. The publication highlighted Revolve's customer-first culture, use of technology in the buying process to stay on trend, fast and free express shipping, and hassle-free local returns in Singapore at no cost. We're very proud of this recognition for our exceptional service levels that are a key competitive advantage and are a direct outcome of our growth strategy. Recall that in January of 2020, we announced service level enhancements in Singapore that were designed to further raise the bar on our international customer experience that led to our recognition. Importantly, this example is part of a broader success we are achieving as an organization. Our customer satisfaction score in the third quarter was the highest level in at least five years, and we intend to continue to set the bar even higher. Like many others, we undoubtedly face challenges in the current environment, and we have much more work to do. We will continue with our swift action to rebalance our inventory growth in a very strategic way. We will continue to be very disciplined in our cost management, and we will continue to make investments for the long term. All told, I believe our third quarter results demonstrate that we are capably navigating through these uncertain times from a position of strength while continuing to prudently invest in our long-term growth opportunities. Thanks again to the entire team for their dedication and invaluable contributions to our continuing success. Now, over to Michael.