Revolve Group, Inc.

Good afternoon. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Revolve's fourth quarter and full year 2023 results 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, again, press the star one. Thank you. At this time, I'd like to turn the conference over to 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 fourth quarter and full year 2023 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 future growth, our inventory balance, our key priorities for 2024, including related investments, product category expansion, cost-saving measures, international expansion and technology enhancements, our marketing events, our partnerships, 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 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 quarterly report on Form 10Q for the quarter ended September 30, 2023, and our annual report on Form 10K for the year ended December 31, 2023, which we expect to file with the SEC on February 27, 2024, all of which can be found at 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'll 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 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.

Hello, everyone, and thanks for joining us today. We ended a challenging year in 2023 with a solid fourth quarter, highlighted by a return to growth in the revolved segment, a year-over-year increase in our consolidated gross margin, and encouraging early progress in our efforts to drive efficiencies in our global logistics operations. I'll start by briefly discussing highlights from our fourth quarter results before shifting to the full year 2023 and closing with our key priorities for 2024. Net sales were 258 million in the fourth quarter, a decrease of 1% year-over-year, and a slight improvement from the 4% decline in the third quarter of 2023. U.S. net sales decreased 2% and were outpaced by international net sales, increasing 7% year-over-year. Our international gains were highlighted by exceptional growth in Mexico and improved year-over-year growth in Europe and the U.K., partially offset by declining sales in China and the Middle East. By segment, revolved net sales increased 1% year-over-year in the fourth quarter, our first year-over-year increase in four quarters. Forward net sales decreased 10% year-over-year, consistent with external reports from the luxury sector. As a relevant benchmark, Earnest Analytics reported that its credit card data reflects a 10% year-over-year decrease in luxury apparel spending by U.S. consumers during the holiday seasons. Now, moving below the revenue line. As a testament to our progress in rebalancing our inventory, our gross margin expanded to 52% in the fourth quarter, representing our first year-over-year increase in gross margin in six quarters. And with our inventory dynamics now in a very good place, in early 2024, we are back to year-over-year growth in receipts of new inventory for the revolve segment. Net income for the fourth quarter was $3.5 million, or $0.05 per diluted share, and adjusted EBITDA was $9 million. As expected, both profitability measures declined year over year. I will now shift to a review of our performance and accomplishments for the full year 2023 before briefly touching on our key areas of focus for the coming year. From day one, Michael and I have approached the business with the customer at the center of everything we do. Even through a very challenging year, we continued to deliver an exceptional experience to our customer base of 2.5 million active customers, increasing our already exceptional customer satisfaction scores by more than a full point year over year. Our active customers grew 9% year over year, and we see a huge opportunity for further expansion in the U.S. and overseas. And importantly, we drove a year-over-year decrease in our average cost to acquire customers in 2023. We believe the reduced CAC illustrates the strength of our brand and execution by our team in optimizing spend across channels and audiences within a competitive environment. Now, shifting to our top-line results. Net sales in 2023 were $1.1 billion, a decline of 3% year-over-year, despite the healthy growth in active customers. Our customer demographic faced increased macro pressures in 2023, which we believe contributed to the normalization of spending levels from the significant apparel spending in 2021 and 2022 coming out of the COVID lockdowns. The normalization of purchases by our customers in 2023 is also evident in a key net sales retention metric. Recall that once a year we disclose the revenue retention from our prior year cohorts, defined as the revenue retention rate from the previous year for all existing customers who had purchased from us in a prior year. Since this retention metric has experienced significant variability in the past four years for obvious reasons, we believe it's important to look past the peaks and valleys. In 2023, active customers placed an average of 3.42 orders, which is 8% higher than in 2019. Also importantly, the average of our cohort net sales retention rates reported over the past four years is 92%, which is higher than our 89% net sales retention rate reported in 2019. Looking at the category performance, While the net sales of dresses, our largest category, was pressured in 2023 after increasing nearly 50% in 2022 and expanding at an even faster rate in 2021, I'm excited by our progress in emerging categories. Our emerging areas of beauty, men's, and home collectively increased by more than 20% in 2023, further validating our opportunity to expand our share of wallet and helping to offset the 5% decline in net sales from dresses. We executed very well on a primary goal we set for 2023, to rebalance our inventory for growth and efficiency. Successful execution of this initiative helped drive a meaningfully higher mix of net sales at full price in the second half of 2023 when compared to how we started the year. This sets us up well entering 2024. And we continue to operate profitably and generate significant cash flow. While we are not satisfied with our adjusted EBITDA margin in 2023, Our profitable and cash-generative business remains a key competitive advantage. In 2023, we generated $43 million in operating cash flow and $39 million in free cash flow, an increase of 85% and 114% respectively. Our consistent cash flow generation gives us the capacity to invest throughout the cycle at a time when many peers have no choice but to significantly reduce investment. Our strong cash flow has further strengthened our balance sheet with $245 million in cash at year-end 2023, even while investing $31 million in stock repurchases during the year to enhance shareholder value. Our cash position has increased by nearly 4x compared to the $65 million in cash on our balance sheet at year-end 2019. Finally, we meaningfully advanced our technology and personalization capabilities during 2023, further elevating the customer experience. Leveraging AI, we significantly improved the recommendation of similar items using visual images, expanding conversion opportunities, and further elevating our navigation for customers. Driving continuous improvement in personalization and site navigation is particularly important since we offer a broad assortment of more than 100,000 styles at any given time. I will wrap up with a discussion of our key priorities for 2024, which are aligned with our focus on maximizing value over the long term. First, we will continue to efficiently invest to expand our brand awareness, grow our customer base, and strengthen the connection with the next generation consumer. Michael will talk about our brand building initiatives in his remarks. Second, we will continue to build on the successful expansion of our assortment into adjacent product categories. We have earned our customers' trust through the strength of our brands, platform, product curation, and our excellent customer experience. The impressive growth of our beauty and men's businesses in 2023 validates our ability to tap into this customer loyalty and trust to drive adoption in emerging categories. Third, we remain extremely committed to driving cost efficiencies within our global shipping and logistics operations while maintaining a laser focus on our outstanding customer experience. In 2023, we successfully ramped our newer East Coast fulfillment center that brings us closer to many of our customers which we believe will enable us to realize further cost savings and elevate service levels through shorter shipping distances. Supported by a new AI technology application that strategically optimizes inventory rebalancing between our fulfillment centers to match consumer demand, among many other initiatives, I'm confident in 2024 we will begin to drive efficiencies in our logistics costs year over year. Fourth, we will further expand our international presence. where we see exciting opportunities to invest in our customer acquisition and in further elevating service levels to drive growth. We recently launched a new marketing communications channel in Mexico that has helped to increase consumer engagement and drive even faster new customer growth in what is now our third largest market outside of the U.S. Finally, we will further enhance our technology stack and leverage AI and other technologies across the business to drive growth and efficiency. Michael and I are huge believers in the power of AI. Since day one, we have leveraged our own proprietary technology to run nearly all aspects of our business, delivering capital efficiency that is highlighted by our capital expenditures averaging only 0.6% of our net sales since 2016. We believe our data-driven mindset and culture of technology innovation positions us well to continue to expand the use of AI technology throughout the organization to drive results. To summarize, we have an unwavering focus on driving profitable growth and market share capture in the years ahead. Like many companies, we continue to face a host of challenges in the current environment, and we have a lot of work to do. But in contrast to most fashion e-commerce peers, we have a profitable and cash-generative business, proven financial discipline, and key competitive advantages that together enable us to confidently invest in the large opportunity ahead of us. I would like to thank our talented and passionate team for their incredible efforts, persistence, and innovation that reinforces my confidence in our future. Now, over to Michael.