Q3 2019 Earnings Call
That reflects general trends that we've seen to date.
But as well as to your point the shortened holiday season, and the fewer number of shopping days now that said, we're not overly seasonal and as we said in his prepared remarks Q4 is generally been 25%.
The total your mix that said, it's a little bit uncertain on what it does to just the macro kind of consumer spending habits given that shorter.
Holiday shopping season. So you know remaining cautious there and then maybe I'll pass it over to Mike talked about the progressive but.
Yes, thanks, yes, it will start to the progressive web App, we're certainly hopeful that that'll have a positive impact for us it's something we havent done yet.
Don't for sure now with the impact is going to be in so in general that's not something that we take into account win.
Coming up with our forecast it's also important to note that.
While we're getting very close to launch units.
He is going to be certain periods of time like Black Friday, cyber Monday week, where we don't really want to launch something new and so the timing is going to be a little bit tricky just in terms of how many days of the quarter, where we can have this launch to a segment of our customer base in kind of a beta mode. Initially.
Got it okay.
For the second one is.
Just give thanks for the breakdown of.
Segment gross margins and you guys mentioned the revolver gross margins down a bit on.
I think I heard two factors the owned brand mix in the.
Lower full price sell through so which is the bigger contributor and.
On the latter the lower full price sell through was that.
Is that at the lower price points around the Super down launch your core revolver in any additional color on on where that's happening. Thanks.
Yes, sure so maybe again to give some context.
The owned brand mix expanded again this quarter and we hit a record high there as we said in the prepared remarks, and just to kind of frame it up a little bit more we are at 15% mix in 2016. It went up to 30% for full year of 2018, and there was 36% in Q1 of 2019. So it seems an explosive growth there and that in the mid.
So owned brands on the revolver segment and still an increase this quarter again, so if we think about the year over year margin impact on revolve. It was it wasn't due to that owned brand mix given even though it did moderate slightly so it's largely a function of that full price mix that declined year on year, but again its.
Mike mentioned, that's coming off of an all time high so still a really strong number.
But just came off of that all time high and if we think.
It's kind of break that up a little bit more we won't call out specifics regarding which segments. It related to you, but it was Henri evolve.
And just a factor ability to slightly elevated inventory position rather than kind of external macro factors.
Operator next question please.
Your next question comes from Bob Turbo with Guggenheim. Your line is open.
Hey, guys good afternoon.
I guess if on the expectation for the moderation in the owned brands Jesse I guess could you just talk a little bit more around like the testing that you've done and is pricing of factored in terms of what you're seeing from a slowdown and then the other piece of it from our standpoint is can you talk a little bit Bob different cohorts and some of the new.
Customers versus the older customers and out that the different groups are trending thanks.
Yes, sure. So maybe I'll start with a couple of the more tactical items, an pass over to Michael to talk about the longer term owned brands.
So tier owned bank question and I called out the mix movement overtime, and it's really just to factor that we've had really explosive growth in that owned brand mix over the last couple of years. So thats the point, where that is still growing this quarter, but it's just moderating somewhat Angela you should expect to see that for the next few quarters as we.
Kind of moderate that growth.
And then sorry, and then on pricing. So your question on pricing.
Not nothing significant on pricing related to owned brands and then maybe I'll pass stored Michael.
With regard to own benzene, Jeff you mentioned that as I'm sure all our view on the call. Our Superfund layer. The growth has been really is positive.
Through the past many years and now into the exciting position of investment we the last two three lines that we launched have been incredibly successful well continue to build from there and we have a very robust pipeline through 2020 in terms of additional lines. So really in a position of investment to really expand our offering across our entire ill consumer offerings. So it's a very soon.
In time for us.
Sorry that Bob I'll jump in and again, because I forgot about your near last part there on the customers and the economics you know, we don't go down on a quarter to quarter basis, because it is a longer term metric, but those that LTV to CAC dynamic has remained relatively consistent feel good about the kind of the strength of the customer and you can see that and again if you look at the order.
As per active customer overtime, increasing.
Got it and I was just a couple of more quick ones.
In terms of Super down can you talk a little bit about just super down conversion and are you seeing any cannibalization from the revolve business in terms of Super Don.
Thanks.
Yes, so we were seeing healthy increases in a lot of our key metrics on Super now. So we're encouraged by the trends that we see there.
And then from a cannibalization standpoint.
We don't think its cannibalistic of revolve there certainly overlap, particularly given that the super down kind of clothing line brand itself launched on revolve initially and was there for for several quarters. So thats kind of where it first built its awareness, but we're seeing that overlap decrease with each passing quarter.
So that we think over time, the overlap will be fairly minimal yes, I think this is something but the cannibalization.
Factor is something we're very very focused on it I think that if done well, it's quite the opposite ends up being a long term customer migration platform, where we ensure that the merchandising mix minimally overlaps but also complement each other so we can.
Back to younger consumer and go if there are many many years from when she is.
No.
College years, two when she has the big Bucks to spend on forward.
Great. Thanks very much.
Your next question comes from Kimberly Greenberger with Morgan Stanley . Your line is open.
Oh, great. Thank you still much I just want to make sure that I understand me the inventory and gross margin dynamic I think you indicated that.
Well full price selling was down year over year could you said it was the third highest third quarter.
Rate of full price selling.
I indicated it was the second highest ever and just to clarify it's the second highest in the past decade at least I have the team pullback at at least that far.
So just to clarify the second highest within it will be for the past decade.
For the third okay, great third quarter.
For that for the third quarter right, sorry, yes for any of their sales are not every quarter.
Okay, and it looks like with the markdowns in the third quarter, you were able to move through some inventory if I.
Adjust your inventory to be apples to apples with the weight was reported last year. It looks like it was about a 31% growth rate here at the end of Q3, and that's down nicely from the low 40% growth that we saw at the end of Q1 in Q2, so it looks like some of that.
Inventory was cleared out I'm wondering it sounds like what you're saying is do you expect a little bit more of this activity in the fourth quarter.
Would you then expect inventory at the end of Q4 to be growing in line with sales.
So is it sort of one more quarter up the inventory clean out or does this continue into early 2020.
Yes, so I think it's going to take a few quarters.
Which.
We'll see more than one.
So yes, we do expect it can do into 2020, but it but at the same time, we feel like it's it's a manageable situation as you mentioned.
The dynamics did close we'll bid in the third quarter. So we feel like it's on the right path.
Great and Mike, where where would you like to see your inventory turn.
Get to over the next year or so what are your kind of medium to long term targets on inventory turnover.
Yes, so I think the medium term target is to be a three year better thats, where we'd like to be now three is kind of on the lower end of the range of where we'd like to be but it's within the range. We're more comfortable and we're a bit below that right. Now so that's kind of our near to midterm goal is to get back to three or better and then longer term I think the mid.
For uses as kind of where we'd like to be.
Okay, Great. My last question looks like international sales accelerated nicely here in the third quarter, if I haven't right, 15% growth versus looks like 4% growth in the second quarter was there something that sort of triggered that acceleration.
And.
What if any if any view do you have for the fourth quarter.
Yeah definitely so I think the acceleration is result of the investments we've been making internationally, but were folks we were dealing with some very tough headwinds in Q2, I mean, some of those headwinds continue into Q3 and beyond with regards to currencies, but they have moderated a little bit so Australia in particular, what was the key success story for us in the third quarter, we've been making.
Investments in the past six months really localizing the experience improving service levels upgrading local payment options, but we're facing a difficult year over year comp issue with a 10% tax increase on foreign internet retailers compared to the prior year and so that comp issue went away in the third quarter. We also saw in a lot of our longer tail countries.
Acceleration is weve.
Invested in increasing the service levels and shipping times in the longer tail country. So.
It's it's a healthy trends that we'd like to see more.
Fantastic. Thank you.
Your next question comes from Justin Post with Bank of America Merrill Lynch. Your line is open.
Hello. This is Joanna now for Justin post Thanks for taking my question.
So just a follow up on the international question.
It's a great job for the Q3.
And.
Just to think about the trend for a 2020 and in terms of the growth in investments.
The Internet International markets anything that you can highlight there and also you mentioned that you've launched this free delivery even for international markets.
And with a quick turn around and how do you foresee that impact margins, especially international segment going forward.
Yes, so I think the.
The majority of our shipping investments.
I don't want to see our complete right because it's it's an ever ongoing thing even in the U.S. right continuing to improve service levels, but I think from a margin standpoint, we've seen fairly minimal impact to margins, we've been able to negotiate some great rates on our ownership in contracts localized returns with something that affects margins a little bit more but we think.
Ultimately helps us build huge businesses internationally.
In markets, where we've rolled out free localized returns, we're seeing some of our highest.
Customer conversion rates and some of our highest retention rates ever so the UK and Australian particular, we saw our highest numbers ever in those regions. So we think investments make sense and we're excited to continue to pursue upgrades around the world.
Okay, Great. Thanks, and then my next question is around macro factors that.
Going forward in 2020, I'm, just trying to get a sense what what is your thought on the consumer sensitivity to price increase or decrease so if any if macro factors.
For next year.
You know more so on a recessionary scenario what are the the strategies that you have to play.
For the potential the lower.
The the price on your items and so with that percentage at full price items will go down.
Reaction to that.
Yes, yes, maybe I'll start with Alan.
So I guess maybe to start off we're not guiding to 2020 at are providing a lot there.
It's really hard to speculate what could happen in 2020 with respect to a recession or anything else.
Just to call. It a couple a couple of that maybe differentiate us.
You know about 70% of our product is either our owned brands are you can't find anywhere else or any emerging brand, which is really hard to find.
So you know maybe some of that pricing dynamics that you would see and other retailers you wouldn't see here.
So I think we're comfortable with where we're at now and we feel like we have a great great offering to the customer. The you know this millennial customer.
Continue to take the purchasing power and and things are shifting digital so again, we feel like we're well positioned but not commenting much more beyond this quarter.
Okay, Great and then my last question is on the return rate. So it seems that you have a nice to reach a higher slightly high lower return rate relative to last quarter anything you could highlight that maybe have triggered the decline the returns right.
So there is little bit of the seasonality to the return rate from quarter to quarter.
So and as you know, we don't disclose return rates, specifically, but whatever number you're backing into probably reflects just some seasonal trends the typically occur from Q2 to Q3.
Okay.
Thank you.
Your next question comes from Michael Binetti with Credit Suisse. Your line is open.
Hey, guys. Thanks for taking my questions here.
Could you just could you speak too.
I'm just trying to do a little modeling you modeling here to what you see in some of the dynamics and the piano to help us with the modeling for fourth quarter and in particular I think the guidance you gave.
Scenario at the low end or EBITDA would actually be negative year over year in the fourth quarter I'm trying to get my head around what you know what some of the drivers on the piano would look like in that scenario.
Yes, yes.
And.
So I guess maybe to start from the top.
We are seeing some margin pressure on the revolve side, which we called out for Q3, and we expect that to continue into Q4, so that that's a part of it and that's coming off them really healthy margins last year.
And then if you work down through the PML.
Again, where were investing in fulfillment centers. So there's some incremental cost there is still in Q4. This year versus Q4 last year and I will start to see that dissipate.
We head into 2020, and other investments largely behind us So thats probably the other one.
Marketing call it plus minus we're not you know we continue to invest there and not factoring in any significant efficiencies in image and DNA is largely a fixed cost.
And we continue to build on the platform there and gain efficiencies.
Okay, and I know, it's gone through inventory quite a bit I want to ask whether the tariff comments.
I guess the is the read that the inventory that would be impacted by tariffs is still very low percent of the mix. That's that's made to your books.
Now in through year end or are there tariff headwinds.
How did you bring in more inventory after the end of year that could be that can be affected by those tariffs.
And then I guess, just backing up a little but maybe you could speak a little bit more too.
I think the inventory built I mean.
I ask because keep trending well above what we expect on active customers.
So I'm curious what what you think the customer's going to the site and seeing as it maybe some of the low productivity skews any kind of the dynamics that you're seeing there that you think led to the inventory build in the on the demand side. Thanks.
Yeah sure, we'll try to try to capture all of those that jump in again, if we missed anything.
So starting with terrorists.
This is specific to the tariffs that were put into place on September 1st which as of this morning, we'll see what happens there and it sounds like they might be pulled back which would be great, but not not counting on that quite yet so.
The reason, we see a significant impact this quarter is one due to timing they were just put into place in September 1st.
And so there is only a limited amount of receipts that came in with those tariffs applied.
And then second we made a really good progress towards our mitigation efforts there as I mentioned in the prepared remarks and the number one was.
Associating some concessions with our existing suppliers, which we've been really successful with we haven't gone to the last lever, we can pull which is passing some of that cost increased onto the consumer.
So the minimal impact is largely related to timing and just the timing of inventory receipts.
But it into context, a little bit and just kind of a refresher.
The area, we're focused on with terrorists is that own brand to component. So if you think about call. It roughly a third of the businesses owned brands of that 75% plus minus is sourced from China. So that's that's the population we're thinking about there.
And then on inventory.
I think we covered if for the most part if you think about the investments that we've made it thats whats really led to the slightly elevated inventory position.
Being owned brands over the last several years and then of the lower price points Super down in the back half of 2018.
If you try to calibrate that with active customers like you said active customer growth has been really strong, but again important to think about that as a trailing 12 month number so you're still picking up that really robust customer growth in the back half of 2018, So you'll start to see which you have started to see over the last couple of quarters that active customer growth start to converge with net sales growth.
Moderating and things kind of balancing out after that that growth in customers in orders and the decrease in EBITDA last year.
I guess just.
Add on that really quickly.
View with the gross margin pressure you saw involve is the is the read that was there a change in the trend line on the conversion metrics quarter to quarter that feed into it at all.
Yes, I mean, so the third quarter is historically, a little bit of a slower current quarter Frost and then the second quarter and then also there is individual dynamics between different kind of segments in individual products and so the markdowns are actually outgrew driven and so.
To your point all the items are going are going to react to try to optimize margin in so theres a little bit of a shifting dynamics there, but again I think it's important to viewers within the context, but it was still really healthy quarter historically.
You know, it's just just compared to a record full price sales number or a record was in the past decade anyway.
In the third quarter.
Last year.
Okay. Thanks, guys.
Thanks.
Your next question comes from Ralph Schackart with William Blair. Your line is open.
Good afternoon, just first on the call you talked about some updates the apps just in terms of customization and some more functionality just curious sort of the receptiveness of the customer base and engagement trends that you saw on maybe more broadly how you're thinking about mobile on a go forward basis, and then I have follow up.
Good definitely we've seen a really great reaction from our customers is as we rolled out new features in terms of good providing a better user experience for them and that's really we're focused on creating a better experience for customers, what's going to keep them half year and have them ordering more so we're really happy with the relaunch that we've done there progressive webapp as we talked about we're really excited.
About.
The fitting room to that I mentioned.
Right now that's on the App and mobile yes, it's just on the desktop we've already received and it really just launched two about half of our customer base yesterday, and we've already received a number of raves from our customers on swicegood coming in with regards that future I, just got an email 20 minutes ago about that so.
We're really excited about the investments, we're making into your point on mobile right. We're in a mobile first world and so mobile scenario, we're really going to focus on heavily in the upcoming year.
And.
Again, we think the progressive web App is really important step for us to capitalize on that opportunity.
Great well more if I could.
Two days ago, the FCC issued some new rules for disclosures of ads for social media Influencers and I know, it's fairly recent but just curious if you had a chance as sort of digest the news and if there's any potential implications for the business.
Yeah, So it's not something that we fully digested.
Doug.
At this point, but certainly will review.
The latest updates internally and if we talk about any implications on on our business is something that that will chat about.
Great. Thanks, Mike.
And our final question comes from Aaron Kessler with Raymond James Your line is open.
Great. Thank you Miss a couple of questions I know you quickly back to their own inventory was there any specific brands that you would call out or is it more across the board and then just.
In terms of some of the newer verticals as well besides super down a africanist any updates on kind of men's beauty.
Traction as well thank you.
Yeah, you know nothing specific to call out there on the.
Kind of category or brand level.
And to your question on some of the different categories I guess, the one thing we havent talked about here in the Q1 is the forward segment, which had a second quarter of really healthy growth. Those there so confident in our in the reset that we conducted last year and how that's paying off.
Duty and men's is still there really small component the business, but still some healthy growth, but nothing more specific to call out.
Got it maybe just on owned brands is there a good way to think about kind of long term mix that you guys, you're thinking of or is it I mean, obviously I'd like to maximize that given the higher margins, but is there a good framework that you're thinking out in terms of what percentage of the business that could be longer term.
Yeah, no specific target there and weve been careful not to put a number on it because we do optimize for whats right for the customer.
That said, we do see meaningful upside there.
Over the long term, it's just we're careful not to put a specific number on it.
Okay, great. Thank you.
And ladies and gentlemen, this does conclude the Q Napiers I'll now turn it back over to management for any closing remarks.
Hey, guys. Thanks for joining us for our second quarter as a public company, it's been a fun and exciting as always I think you know for us sitting here I know, we're running the bids for many many areas.
The consistent profitable growth continues to be.
Historic theme and we'll continue to be a long term theme for US. We're excited and appreciate all the time energy you guys have spent with us and I'm excited to continue this for many many years to come looking forward to talking in greater detail soon.
Ladies and gentlemen, this concludes todays conference call. Thank you for participation you may now disconnect.