Q4 2019 Earnings Call
Today's call is being recorded we've allocated one hour for prepared remarks acuity.
At the time I'd like to turn the conference over to Eric Randerson, Vice President of Investor Relations at resolved that keeps you may begin.
Good afternoon, everyone. Thanks for joining us this Gulf revolved fourth quarter and full year 2019 result, before we begin I'd like to mentioned that we have posted a presentation contain Q4 and full year 2019 financial highlights to our Investor Relations website located at Investor stopped revolved dot com I'd also like to remind you that this conference call will include forward looking.
These statements. These statements include our expectations regarding financial results and guidance market opportunities, our growth and increased efficiencies our own brand.
Our inventory position or diluted share count our investments in customer experiences and fulfillment centers the impact of tariffs and our tariff mitigation efforts the potential impact of Corona virus on our supply chain and operating results in a lower price point offerings. These statements, which are subject to various risks uncertainties assumptions could cause our actual results.
For materially from these statements.
These risks uncertainties assumptions are detailed in this afternoon's press release as well as in our filings with the FCC, including our registration statement on form F. One that was follow the FCC or form 10-Q for the third quarter 2019, let's follow the FCC on November seven to 2019 in the form 10-K for the full year 2019, they will be filed or.
All of which can be found on our website at investor itself revolved dot 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 free cash flow in adjusted diluted EPS.
We use non-GAAP measures and some of our financial discussion as we believe they more accurately represent the true operational performance and underlying results of our business. The presentation to this non-GAAP financial information is not intended to be considered in isolation worth up to four or superior to the financial information prepared and presented in accordance with gap in our non-GAAP.
Measures may be different from non-GAAP measures used by other companies.
Reconciliations of GAAP to non-GAAP measures as well as the description limitations and rationale for using these measures can be found in this afternoon's press release in are actually see filings.
Joining me on the call there are co founders and co Ceos, My Kinda Colas, and my commentary as well as Jeff determines our CFO.
Following our prepared remarks, well open the call for your questions with that I'll turn the call over to Mike.
Thanks, Eric Good afternoon, everyone. Thanks for joining us today I'll start with highlights for the full year 2019, followed by our key priorities for 2020 next up Michael will grow a level deeper in discussing our 2020 priorities in initiatives, particularly in owned brands Board in marketing.
And finally, Jesse will wrap up with a review of our fourth quarter results in our guidance for 2020.
That's entrepreneurs and founders Micronized as well as the management team are focused on delivering long term value for our shareholders.
With that lends in mind, it's important for us to take a step back and evaluate our performance for the full year 2019.
2019 was a record year with a number of significant accomplishments.
We are proud of our team for delivering such powerful results.
Net sales increased 21% year over year in 2019.
The revolver segment net sales grew 22% in the Ford segment returned to double digit growth after a successful inventory repositioning.
International net sales growth accelerated during the second half of 2019, driven by the continued improvement of service levels that further strengthened our value proposition in overseas markets.
Gross margin expanded 40 basis points year over year as we continued to build on the momentum of our own brands.
79% of our net sales came at full price equaling a record performance in 2018, and well ahead of retail industry benchmarks.
Net income grew 16% in adjusted EBITDA grew 20% despite incremental costs, we incurred to operate as a public company.
Free cash flow increased 42%, a 34 million nearly equaling our net income for the year.
We did this while investing approximately 10 million in our new fulfillment center, expanding our warehouse capacity to beyond 2023.
We implemented automation that is driving operational efficiencies and even further improvements in our customer experience.
As of year end, our warehouse employees head count was flat year over year, well the number of orders increased 27% in 2019, and even more important or investments continue to raise the bar for our customer experience in 2019, we were able to ship 98% of orders in the same day, if received by noon Pacific time.
Our marketing initiatives remained efficient and impactful, enabling us to build on our brand that is increasingly admired by customers Influencers and our brand partners.
Many top brands and personality seek to partner with revolver develop exclusive products with us because they realize revolve partnership can further elevate their brand.
Back in 2019, we generated approximately $4 million in marketing sponsorship dollars from leading brands participating in our impactful marketing events.
Active customers grew 27% year over year in 2019 in their propensity to spend remains strong with an average order value of $275 for the year.
We continue to innovate to the benefit of these customers encouraging and enabling greater trial and passion discovery and offering more flexibility in how they interact with US we launched site. This visual navigation features became a launch partner for Instagram checkout.
Introduced an option to try and a second size of certain styles at no additional cost.
True faster shipping times and introduced more convenient return auctions.
We also have some opportunities for improvement there will be key areas of focus in the coming here.
As part of working through our inventory position that we discussed on the Q3 investor call. We slowed the receipt of new inventory in the fourth quarter, which we believe impacted conversion and revenue growth.
It's important to note that we believe consumer interest as measured by traffic growth was strong with Q4, representing the highest year over year traffic growth quarter of the year.
Inventory in particularly new fresh inventory is a key driver for maximizing net sales growth.
We are confident in the long term growth algorithm as we work through our current inventory position.
Continuing with inventory, we made great progress with year over year growth rate in inventory decreasing to 15% has it we ended the fourth quarter when normalized for accounting adjustments as compared to 30% year on year growth in the third quarter and around 40% year on year growth in inventory in the second quarter of 2019.
New inventory receipts were essentially flat year over year versus an over 30% increase year over year in Q4 of last year.
Nonetheless, as we said on last quarters conference call. It would take a few quarters to fully cycled through and while our overall inventory position is in a good place, we still have a higher than normal mix of markdown inventory.
We feel good about the level and quality of new inventory receipts, but as we work through the existing inventory to slightly higher levels of markdowns, we experienced in the second half of 2019 are likely to continue into the first half of 2020.
We're confident that after we work through our relatively high levels of markdown inventory will be well positioned for margin maximization over the long term.
Finally after years of driving very rapid growth of our own brands, we've intentionally slowed down the expansion of our in house brands heading into 2020.
Our intent is to recalibrate and invest in the capabilities of this platform to support its next leg of growth.
This will impact our gross margin in 2020 due to product mix since third party brands come at lower gross margin.
Yes, we believe the investments in owned brands will position us for long term success, we view the owned brand platform as a key part of our value proposition and we remain confident in our ability to increase penetration over time.
Turning now to our operating priorities for 2020.
We look ahead and think about our focus areas. Our leadership team is aligned on four priorities to capitalize on the large market opportunity ahead of us.
First we will continue to build the revolve brand through the Trailblazing, an impactful marketing programs that have been a cornerstone of our success.
You may have already seen the highly visible collaboration with the Bachelor that aired in January for millions of television viewers on the APC network.
That is just the beginning and Michael will talk about some of our exciting initiatives planned for the rest of the year.
Second we're going to invest in the owned brands business to support our growth ambitions for the long term. This is a business that has grown rapidly from zero to nearly 200 million a net sales in a five year period. This year, we will take our foot off of the growth accelerator for owned brands, while we prioritize investing in the owned brands team and capabilities.
These efforts will help us capitalize on the significant opportunity for growth and margin expansion over the long term.
Third we plan to build on the momentum we have established with forward in the international business net sales growth per forward in the international each accelerated in the second half of 2019 illustrating the success of our growth strategies, we're seeing the impact of the initiatives. We set in motion such as elevating service levels for international markets refined.
The board product assortment and expanding the marketing strategy Michael will discuss these in further detail.
Fourth we remain committed to deploying technology and embracing innovation to further enhance our value proposition for customers drive continued growth in new customers and further engage our existing customers.
Philosophically, we're constantly testing new initiatives monitoring improvement in the relevant Cpis and then rolling out our advancements more broadly once they proved to be successful.
Starting with technology innovations, we recently launched a progressive web application to a portion of our revolve customers ahead of a broader rollout.
This technology mix, the mobile web experience much more engaging for customers on mobile devices, who have not installed or mobile app.
We plan to launch the steam application on forward later in the year.
Another technology initiative designed to increase conversion rates is our hands launch of further personalization on our revolver site experience based on our customers style preferences prior purchases and browsing history separately to encourage customers to purchase more products per order, we will launch in innovative platform that will generate up and recommendations.
Moving onto loyalty and customer service to further and encourage purchase activity and increased customer retention, we will launch a loyalty program offering unique benefits to customers, including access to some of our exclusive events for top spenders the loyalty programs, which were built on our proprietary technology platform will be made available for revolve customers.
Ahead of our revolver Festival will then in early Q2 and preferred customers later in the year.
We have a tremendous opportunity in front of us in true to our entrepreneurial founder led spirit, we will continue to be relentless in building a growing in profitable business for the long term.
Confident that by executing on these 2020 initiatives will be stronger than ever and well positioned for our next phase of growth now I'll pass it to Michael.
Thanks, Mike.
2019, with an incredibly good for us not only because of our much anticipated IPO in June but more importantly, because of laid the foundation for our next phase of growth.
We are still underpenetrated in our quite domestic market with incredible long term potential to build evolve into a massive global business.
Starting with building the brand customers, who know evolve love it and we'll continue to invest in our pioneering waste increased our brand awareness and elevate the will fall brand.
As Mike mentioned, we're excited about the Bachelor collaboration that aired in January for more than 5 million viewers top surveys to Jonah and Gilman very for securing this incredible opportunity for brand exposure in front of a large audience of our core customer demographic.
We generated significant exposure and favorable pets and then just one proof point of the success, we drove a meaningful increase in mobile app downloads in the days that followed.
Gearing up for another study influence or event globally admired company that we believe could similarly, elevate and amplify the revolve band I can't get into the specific steps yet of Elisha that it is unlike anything we've done today.
Also plan to even further expand the ways in which we engage with that customer by leveraging emerging and existing social platforms, such as tick tock and due to.
Lastly, we will drive additional excitement for our brand and product offering through continued collaboration with celebrities and global Influencers.
All of this is a focus on driving awareness and continuing to build the revolve band.
Shifting to owned brands, a core pillar of our long term strategy.
Building on bad platform and expanding our offering of owned brand has been incredibly successful going to nearly 200 million a net sales in 2019 on the delivery of over 14000 styles nearly at three X increase since thousand three years.
While the focus on this strategy has transformed our business in order to estimate the lots of opportunity ahead of US we must first and invest in additional capabilities.
Our systems and processes identify trends installs that align with customer demand and we have developed owned brand product aggressively where our supply chain infrastructure and internal capabilities have been a propylene develop.
This has led to some great successes highlighted by our own brand mix glancing nearly 70% of evolve segment net sales in key segments, such as justice within the 115 to $20 price point.
This is a zone, we have a strong design in sourcing competency.
Comparison, we have less than 20% penetration across a number of key categories, including denim swimming shoes.
It's clearly we have a compelling opportunity to expand their own brand penetration by diversifying our mix of categories and price points overtime.
When exciting opportunity for category in price point expansions that we have begun to pursue dresses and tops the elevated price point.
The successful launch of evolution revolving forward with an ASP of approximately $800 validates opportunity at the higher end.
We're excited developed the additional capabilities and should we optimize their own brand assortment across categories enterprise plant, which will require us to further investor I supply chain, if a chip design capabilities, our processes and most important in our team.
These investments will help to ensure that we continue to capitalize on a significant opportunity for growth and margin expansion over the long term, while providing even more opportunity to delight our customers premium on 10 fashionable product.
Lastly, im excited to talk about forward forward is performing extremely well after the repositioning we conducted last year hired by the net sales growth accelerating 33% in the fourth quarter.
During the IPO process, we outlined our plan to reposition the Ford business for long term success. The initiatives. We described on prior calls are working well and delivering results as intended.
We have optimized assortment across emerging iconic luxury brands, while the same time, creating a more actuated point of view on the assortment within our existing bands.
Refine positioning includes the addition of high caliber luxury brands, such as Gucci advance Yaga as well as Tegra Veneta ahead of an impressive as surgeons, who have the potential of branded the second half between 19.
As mentioned earlier the will to launch our first owned brand collection on forward in the fourth quarter revenue reach the early success of the branded leading us to develop additional that we styles for the upcoming season.
I'm also encouraged by the early success of our cross marketing programs between revolving forward during the fourth quarter, we actively link between the revolving forward sites for the first time generating meaningful referral traffic to forward.
We will continue to expand across marketing efforts in 2020.
We will also expand the level afford band mucking activity to further build its been drive traffic and acquire customers.
Lastly, later this year, we'll be adding forward to our loyalty program further leveraging the combined power of the revolving Ford customer base to further strengthen our value proposition and enhance our efforts to engage and retain customers.
We will also continue to expand the ways in which our customers are able to transact with us through additional payment methods, it's gratifying to Jeff forward strategy paying out so well.
With that I'll turn it over to Jesse pro use of the financials.
Thanks, Michael since Mike covered the full year highlights I'm going to focus my remarks on the fourth quarter results.
We'll also discuss guidance for the full year 2020 that we announced today, including some key assumptions and drivers.
Starting with the fourth quarter, our Q4 results had some clear positives as well as some challenges on the positive side adjusted EBITDA exceeded the high end of our implied Q4 guidance range free cash flow is exceptional and we made great progress on working through our inventory.
We also drove strong demand to the site with the highest year on year traffic growth of the year in the fourth quarter on the other hand, well within our guidance range net sales came in towards the low end of that range.
Going into the topline total net sales for the fourth quarter were $147.6 million, an increase of 16% year over year.
Revolve segment net sales were $125.2 million, an increase of 13% year over year as mentioned, we generated strong demand to the site, but with the reduction in new fresh inventory our conversion rates decline, resulting in some pressure to the revolve segment topline.
Despite new inventory being relatively flat year over year, we're able to drive 13% sales growth in the revolve segment. In addition, we believe the focus area as Mike discussed will help us improve the revolve segment growth outlook later in 2020, and particularly headed into 2021.
Meanwhile, the forward segment performance was strong in the fourth quarter forward net sales were $22.3 million, an increase of 33% year on year, it's the highest growth rate in more than three years.
When evaluating our segment performance in Q4 keep in mind that the revolves segment faced a difficult comparison against 32% net sales growth in Q4 2018, while forward facing much easier comparison on the 8% net sales declined in Q4 18.
Our topline growth continues to be driven by the combination of new customer additions and continued loyalty from our existing customers.
Our active customers during the trailing 12 month period grew to nearly 1.5 million an increase of 27% year over year and total orders placed in the quarter increased 14% year over year.
Average order value or ASV was $282 in the fourth quarter.
3% year over year.
This was our first year over year increase in HIV and nine quarters and was driven by year over year growth and it will be at bowl revolve and forward in Q4.
International was another bright spot in the quarter with net sales for the quarter of $24.4 million a year over year increase of 22% a sequential improvement from the 15% growth in the third quarter.
All major regions contributed to our growth once again, we delivered strong results in markets like the UK in Australia, where you have previously localize the customer experience through service enhancement.
Moving to gross profit consolidated gross margin was 52.9% for the fourth quarter, a decrease of 120 basis points over the prior year.
Signaled last quarter. The decrease in consolidated gross margin is attributable to the revolved segment gross margin being lower year over year, primarily due to a slightly lower mix of revolve segment net sales at full price and increased markdowns.
Revolves segment gross margin was 55.1% in Q4 down 140 basis points year over year again. This is a function of the short term inventory challenges that we outlined last quarter and that we are in the process of working through.
Corporate segment gross margin was 41% an increase of 260 basis points year over year, and the segment highest ever fourth quarter gross margin as a result at the successful repositioning of this business.
Now I'll move down the Pinedale and give you some color on the expense line item.
Fulfillment, which reflects the costs incurred to staff and operate our distribution center totaled $4.5 million or 3% of net sales.
Decreased from 3.1% a year ago.
This was the first time, we have shown leverage and fulfillment expenses in the past eight quarters.
This is an outcome of the slight increase in ASV and our 2019 investments to consolidate warehouses implement automation technology.
And create more efficient workflow.
Selling and distribution cost, which consist primarily of shipping merchant processing fees and customer service were $20.9 million or 14.2% of net sales an increase of 30 basis points year over year due to cost increases in these line items.
Marketing costs were $21.6 million or 14.6% of net sales a decrease of 20 basis points year over year due to efficiency gains in our digital performance marketing efforts.
General and administrative costs, which primarily consist of salaries and wages were $20.5 million.
DNA costs expressed as a percentage of net sales were 13.9% in the fourth quarter down slightly from 14% of net sales in the prior year as we continue to gain leverage and manage the cost structure. While also continuing to invest in a team and infrastructure and absorb the cost of operating as a public company.
The combination of topline growth Andy will manage cost structure, resulting in strong bottom line results. In Q4 net income was $8.4 million, an increase of 9% year over year and adjusted EBITDA grew to $13.7 million, an increase of 15% adjusted EBITDA margin was nine point.
3% consistent with the prior year.
Diluted earnings per share or EPS was 12 cents per share up from 11 cents in the fourth quarter of 2018.
Remind everyone that we are reporting our Q4 earnings per share and EPS going forward on a GAAP basis without any adjustment.
Moving to the cash flow statement.
We operate a highly capital efficient business that positions us to generate positive free cash flow.
In the fourth quarter, we generated $14.2 million and cash flow from operations and $13.2 million in free cash flow more than $15 million higher than the prior year quarter on both measures.
The favorable comparisons resulted from an increase in net income and adjusted EBITDA.
Favorable movements in working capital, particularly related to inventory and to a much lesser extent the timing of capital expenditures related to the expansion and consolidation of our fulfillment center operations.
This healthy cash flow generation has further strengthened our balance sheet as of December 31st we had no debt and cash and cash equivalents of $65 million, an increase of 46% in just the two full quarters since our IPO.
We ended the year with $104 million in inventory as compared to $102 million at the end of the fourth quarter of 2018.
Adjusting for the adoption of the new revenue recognition standard that in 2019 reclassified a portion of our inventory to prepaid and other current assets our inventory balance grew 15% year over year.
Six points lower than our sales growth for 2019.
This is a meaningful sequential improvement from adjusted inventory growth of around 30% year on year in the third quarter and around 40% in the second quarter 2019.
With that I'll turn to our full year 2020 guidance and underlying assumptions.
We expect net sales to be between $679 million and $703 million, which represents growth over fiscal 2019 of between 13% and 17%.
Our expectations factor in an estimated one to three point negative impact to net sales growth as a result of the Corona virus outbreak with the expected negative impacts focused on the first and second quarters.
The negative impact is due primarily to supply constraints on our own brand manufacturers as well as our third party brands that sourced from China. We're also experiencing a negative impact on consumer demand in the greater China region in our revolver segment, but this is a much smaller impact given the relative sales mix from this region.
The situation remains fluid and uncertain. So our estimate of the negative impact from the current virus outbreak is based on our best information as of today and is subject to change.
By segment for the full year 2020, we expect a growth rate in forward net sales to outpace revolve segment growth rate.
Looking at the cadence throughout the year for the revolve segment, we expect to revolve segment growth in net sales to remain challenged in the first half of the year as we reposition inventory and invest in the owned brand platform.
Due to delays in shipments from China, resulting from the current virus outbreak that will impact our new product assortment in the first and second quarters.
We expect to revolve segments net sales growth rate to improve in the back half of the year. After the merchandising initiatives. We are putting in place begin to take hold as shipments from China return to normal and as we benefit from an easier year over year comparison in the fourth quarter.
Looking at the cadence for forward, we're very encouraged by its current growth trajectory. We expect the growth rate for forward to beginning are strong and decelerate somewhat throughout the year as the comparisons get tougher, particularly in the fourth quarter.
Looking at some operating metrics that drive the topline.
In 2020, we expect growth in active customers to be relatively consistent with our growth rate in net sales for the full year.
We expect average order value or ASV to improved slightly from the ASV of $275 reported for the full year in 2019.
Now let me discuss gross margin, we expect the margin pressure that we experienced in the fourth quarter to continue into 2020 with consolidated gross margin in 2020 down in comparison to the 52.9% gross margin achieved in the fourth quarter of 2019.
Alright expectation for lower gross margin in 2020 is driven by a decline in gross margin within the revolve segment.
With a key driver being a lower mix of net sales from owned brands, which generate higher margins than third party brand.
As well as continued pressure on full price sales and increased markdowns in the first half of 2020.
In addition, we expect gross margin in 2020 to be impacted by the higher mix of net sales from forward. Since forward operates at a lower margin than the revolve segment.
Our gross margin expectations assume the China tariffs remained constant at current levels reflected in the recent trade deals signed last month as shared previously we believe our tariff exposure is manageable. So we don't expect much of an impact on gross margin at the current tariff levels.
In terms of operating expenses, we expect to realize continued leverage in general and administrative expenses as we efficiently scale the business, partially offset by increased cost to support operating as a public company as well as investment in the owned brand team and infrastructure.
To a lesser extent, we also expect to really some modest leverage on the fulfillment line as our investments in 2019 provide greater efficiencies in our operations offset by ongoing macro cost pressure within the selling and distribution line item.
We will continue to invest in customer acquisition and retention and expect marketing expense to remain relatively consistent as a percentage of net sales year over year in 2020.
There is variability from quarter to quarter on all of these metrics for a variety of reasons, including increased marketing investment in the second quarter in connection with our marquee revolve festival event.
Adjusted EBITDA is expected to be between $56 million and $61 million, which represents growth of 1% to 10% over fiscal 2019.
This equates to an adjusted EBITDA margin of 8.2% to 8.7% as compared to 9.3% in 2019.
Our expectation for a decline in adjusted EBITDA margin is entirely attributable to the gross margin pressure referenced earlier.
There are few other guidance assumptions I'd like to call out for 2020, we expected tax rate of approximately 25% for the full year, we expect weighted average diluted shares of approximately 72 million.
We expect total capital expenditures of approximately $5 million, a meaningful decrease from capex of $12.5 million in 2019.
Finally, we would like to reiterate our commitment to our long term targets topline growth of 20% or better gross margin of 55% or better and an adjusted EBITDA margin target the 14%.
We strongly believe that the 2020 initiatives that Mike and Michael discussed will position us to achieve these longer term target now I'll turn it back over to Michael.
Cleanly and she was a great year and a testament to our long term focused on growth and profitability. We're excited to be here sharing our story through the public markets and while we've been doing this for 17 years. It truly is just the beginning we cited for the future and the opportunities ahead of us with that I'll turn it over to the operator for your questions.
Thank you if you would like to ask a question. Please press star followed by the number one on your telephone keypad.
First the moment to compile the kuni roster.
Your first question comes from Justin Post from Bank of America. Your line is open great. Thank you definitely saw some progress with inventory growth on the balance sheet, but just wondering what's currently on the balance sheet, that's causing the gross margin pressure, maybe go through new versus old and what's your expectation for full price sales.
Sales in the first half and then and then maybe a bigger picture question I know the owned brand mix was a big long term margin driver that's supposed to help in 2021 and going forward is it a one year reset and then you think you'll start seeing the owned brand really increase as a percentage of sales how you're thinking about that over the next three years. Thank you.
Yes sure Justin this is Jesse so kind of working through your questions in order to your point, we made great progress on the inventory going from plus 40% in Q2 to plus 30% in Q3, and then at the plus 15% at the end of the year all while investing in forward at the same time and so we feel good about.
But there still is a component of that inventory that is markdown and it's higher than we'd like and I don't think it's a little by little work through as we indicated last quarter it'll take a few quarters to do that so thats, where the impact on the gross margin came both in the fourth quarter and as we look ahead for the first half of 2020.
If you combine then in your second question the owned brand mix.
Still a very much a core pillar of the business in a gross margin driver over the long term, but this is a reset period invested heavily it went from.
30% in 2018% to 36% in 2019, so we are reinvesting there.
As we look ahead into 2021 again still at growth driver and we expect that penetration to then re accelerate.
Thank you.
Your next question comes from Oliver Chen from Cowen Your line is open.
Hi regarding the markdowns and the higher than normal mix of markdown inventory, how does that go relative to your expectations and what are the outlook for in terms of the receipts of new inventory going forward and what Youre planning to do with trying to reinstate that over time.
Yes, the markdowns.
Sales were strong at 79% for the year, so as the ratio of markdown in full price full price remained strong but within that markdown category the discounts word deeper.
And Thats what impacted us in Q4.
The other thing in Q4 to think about as Mike mentioned in the prepared remarks as the demand was strong their highest year over year traffic growth quarter of the year. So the demand was there, but the new fresh receipts as we work through this inventory situation were lower which then impacted the conversion and ultimately the net sales.
So again, we'll continue to work through that great progress.
But there is a near term impact in the head into the first half of 2020.
And then I forgot your second question.
Regarding new inventory and new inventory, yes.
Sure.
Yes, yes, and we feel good about the quality of the new inventory coming in.
We're still working through this though there is slightly lower mix of newer pressure inventory, which contributed to that to.
To that demands which are the convergence situation.
Okay, and just see regarding deeper markdowns that you experienced what is your guidance assume in terms of the deepness of the markdowns going forward.
Yes, we don't speak to the specific factors behind the markdown depth or mix and price versus Mark downs, but our margin assumption for the full year 2020 in the EBITDA assumption there does factored in and as we we indicated we expect the 2020 overall gross margin to be lower than that Q4 margin that we post.
Good.
Thank you and follow up is on on brand Recalibration as you spoke to it.
Part of what you mentioned was people and different capabilities can you elaborate on on the timing and what doctors will be important as you build this.
Does it change how you might think about.
Long term gross margin potential it sounded like you were comfortable with long term targets.
Yes, going backwards, where it is Michael here I'm definitely comfortable that long term targets warrant much better than ever I think what we're really seeing as you know our data driven merchandising identifying a wealth of opportunity and thats just printing to catch all those opportunities, but it's clear that additional investments will be necessary with joining those investments will be no teen people and processes.
Next to no cap, that's a really just developing the the in house know how to diversify our offering a cost sale price points and categories and such.
What was on a multi part question there.
Does that everything.
Yes, and DLT, Oliver related that Michael, which which products and categories might have the most opportunity. It seems like out outside of dresses are tops is where there could be opportunity.
You know, it's really quite diverse I think if you looked at the kind of the price.
Category matrix, there's a number of to opportunities outside of the dresses and tops, but if you look at dresses and tops, we feel very exciting opportunity there in the upper chip price points and we've had a great. Congrats progress with the below the average stupid I'd have thought it and that's an important twits running for I know many season is out but looking forward, we do think.
And the higher upper end range is really exciting opportunity. They don't feel a lot of competition. There we have tested product area with revenues recently and it was phenomenally successful, but that was just this last products and we need to invest in terms of good team in the capabilities due to lead you that scale.
Thank you best regards.
Thank you.
Your next question comes from Michael Binetti from Credit Suisse. Your line is open.
Hey, this is Keith cotton on for Michael. Thanks, So much further color so far in for taking your question I.
I guess I wanted to dive in a little bit more on what you're seeing around Corona virus can you talk through what sort of impact you're seeing on the business today, both on the revenue side and supply chain.
I know you talked about one to three percentage point negative impact can you help us understand the assumption behind how that should show up on the piano and whether there's any sort of mitigating factors you see and I guess, even on cadence are you assuming the supply chain impact as more of a second quarter issue relative to first quarter on any color there would be helpful.
Yes, sure. So I guess first of all our Hearts go out to those impacted in our partners in China.
But as we as we get into it and think about that one to three point negative impact you indicated in the in the prepared remarks and apologize if this might be a little bit links, but I think it's important that it's really frame the to now because it is very uncertain. There's a lot of moving pieces right now so if we start with that one to three three point negative impact on the topline in 2020 and.
First of all framing that as a supply impact versus a demand intact.
Our relative sales mix and the greater China region is very small.
So for us, it's primarily a supply impact.
And that supply impact, we're estimating right now to be at three to four week delay in shipments from China.
So if you look at that three to four weeks first of all we have most visibility into our own brand supply chain versus the third party.
Supply chain. So if we look at that and if you. If you can quantify that 36% of our sales in 2019 with our own brands and then the remainder was the third party within own brand, 75% to 80% of our.
Supply is sourced from China, and then on the third party side, 35% to 40% sourced in China.
So we look at that and then drill just one click deeper on the owned brand supply chain generally speaking in just the backup a little bit workers were due to work in the factories around February 10, following the lunar new year.
With that delayed of course due to the virus their return to work was impacted we've been in pretty close touch with our factories and not all factories that those representing about 80% of the supply and of those that we've talked to 75% plus or minus again, because it is very fluid are back to work at some point.
Pasadena, but important to call out that had some capacity.
For most it's in that 10% to 50% capacity from what we're hearing.
And again, those we talk to they expect to be not at full capacity that kind of in that 80% range by early to mid March though if you triangulate on that February 10th returned day to day early to mid March.
Near full capacity Thats, where we get our three to four week.
Estimate on the delay in supply chain. So that feeds into your question on first versus second quarter impact. We think it is a first and second quarter impacts that it does depend on that how long that delay is.
Again, very answered a lot of things new being the case in point, we just learned late yesterday that market appointments in Paris in Milan are now being canceled or delayed due to the outbreak they're not pieces not factored into our guidance just due to the timing of when we learned that.
We're not seeing any impact from that yet, but that could start to have an impact on the higher price points European supply in the forward segment.
Got it that's really helpful. And then I guess, maybe switching the ASV you called out those 3% ASV growth that you saw on first quarter. So first kind of positive growth you've seen in nine quarters and I think you said trends are positive.
Going forward.
It was somewhat surprising I guess given the elevated markdown.
Looking through on that revolved side of that business.
Can you maybe help us on talked a little bit to understand what drove the strength in fourq and I guess your confidence behind.
Got you should continue to improve slightly in 2020.
Yes, yes for sure.
And the increasing it'll be is what we expected.
Stepping back into late 2018 into early 2019 is when we really invested in and behind the launch of the lower price point, specifically Super down. So we saw over index to new customers orders orders outpacing significantly net sales and therefore, the decrease in it'll be for the past several quarters.
We've cycled through that and has seen to your point both strength in the revolve segment and the forward segment.
But to your point and important to call out that that is despite the higher levels of markdowns within the markdown mix and also.
Contributing to that is the.
Increase in mix of the fourth segment is Florida. It's the revolves segment. So we feel good about it'll be looking ahead into 2020, we expect continued slight increases in that number which which will then provide some leverage on the cost structure as well as there's less units moving through the system.
Your next question comes from Ed Yruma from Keybanc capital markets. Your line is open.
Hi. This is obviously next on for Ed I have two questions.
Could you talk about the pacing of the investments in the private label capabilities.
Maybe in hindsight, how could that private label as she has been prevented by augmented capabilities and then I.
Understanding just less product now given the inventory receipts on how discretionary Sachin spin of these newer products.
The second half your question.
Mind repeating it.
Yes, so how is the customer acceptance then of the newer products given that the inventory receipts of Ben.
Let's turn it was.
We don't have a quiet side, a little division of our own van Division is that the investments will be made quite a gradual steady over time.
So starting with some senior leadership positions and building wasn't teen and will be a little bit more gradual path.
Over the next few years I think kind of you know.
I would kind of like our our overall growth and profit oriented philosophy, I think there's always going to be periods, where we are pushing and pushing aggressively push a little bit too hard I think thats by design in terms of how we operate the business I think that.
In other segments of the business.
There's lots of opportunities and I think that ultimately if they don't have hiccups at times that moving to slow. So I think this is you know.
Typical cadence of the business as we are seeing another seems like Florida right now.
Hi, Good news Houston, such like that I think we're seeing that across the board.
Additionally, a greater quantity of new receipts in Q4 would have been.
Thats, a little bit more optimal but as we're seeing a lot of improvements with the overall inventory position not only on the year over year bases on as well as I turn based and it's quite clear that are shifting inventory strategies, we came off.
Great. Thank you.
Your next question comes from Kimberly Greenberger from Morgan Stanley. Your line is open.
Hi, This is Alan sorry, not really greenberger.
You said you still expect to have a few quarters overhaul segment gross margin pressure as you work through that elevated inventory levels could you give us a signs that how much of the inventory backlog you've cleared through and what types of items comprise inventory backlog.
Yes, so maybe again working through the quarter to quarter cadence from plus 40 in Q2 to plus 30 in Q3, and then plus 15 at the end of year and that plus 15 year over year is that is an overall inventory mix. So that includes the investment in forward.
So we actually feel really good about the progress we've made and working through that revolve segment inventory.
But as we indicated there still is a higher than desired mix of markdown product within that inventory. So although the overall inventory levels are healthy with plus 15 being lighter than.
Net sales growth for the quarter end for the year.
We've still got some to work through on that markdown component.
It's not you can go on the site nixed the markdown mixed by by skewed call. It roughly 50 50 is not to that level just due to the cost of the inventory.
But we still have a couple or corners to work through that.
Great. Thank you and then maybe just one quick follow up as just one there are all segment gross margin being down for the full year can you just give us a sense of kind of cadence throughout the quarter or then and what are the components.
Just throughout the year.
Yeah, Yeah, maybe.
Starting with the second part first on the full year kids, we typically see the highest gross margin in Q2, and that's that's relatively consistent year to year without being our peak season, and revolve festival in heading into summer and that festival season.
With for the Q4 dynamic there wasnt anything significantly intra quarter due to seasonality, we followed our same.
You kind of sale and markdown cadence that we havent the path.
So we weren't necessarily more promotional.
In other years. It was just that the depth of markdowns within that markdown inventory and working through that inventory position.
Great. Thank you.
Your next question comes from Mark Altschwager from Baird. Your line is open.
Great. Good afternoon. Thanks for taking my question. So as we head into the spring season, I think thats typically when you see some of the greatest social media activity of the year coinciding with your revolve festival I was hoping you could dig into some of the changes you're planning this year some of the initiatives to drive some greater buzz around that event and brand Activations and I do think you meant.
Opened some plans for increased marketing investment in the second quarter relative to the rest of the year.
And then as a follow up I think you indicated that you expect active customer growth to be in line with revenue growth for the year, which would imply net adds that or.
Maybe in the low to mid 200 range I think lower than we've seen the last couple of years kind of despite those marketing plans that that you talked about so hopefully you could talk a little bit more about your thoughts there as well.
This Jesse maybe I'll start with that second part first and then handed over to Michael.
That that new customer addition, cadence in the active customer cadence is going back to that.
Launch of lower price mentioned the back half of 18 in early 2019, where we thought customers and orders over index. The pace of net sales to now as we come through that we expect those the convergence we started to see this quarter.
And then kind of linked into that is that it will be dynamic.
Thank you take the first part of the question I think whole consumer perspective, if you look at what we have going over the next few quarters. The micro level is going to appear to be a lot more of the same you know festivals very very important for us and we're deep into the planning process there and they will continue to give you know revolve around the world trips and such.
Really highlighting the revolve lifestyle, but a little bit behind the covers little bit behind the scenes are going to be a lot of.
Fine tuning in tweaking things that I cut off course for competitive reasons, we don't want to get to into the details, but as we look into like last year, we've definitely seen.
In a competitive marketplace continued efficiency with the adaptation evolution of our strategy at the same time is going to be a lot of continued investments experimentations intestine lot of newer things you we see.
A lot of interesting things going on newer existent can you you have happened they take time to existing happens that you've been such we're willing to phase of trying to leverage that and we didnt get repeatable and then again.
Tween programs, where we can scale very very aggressive way so the total bookings that.
We should look forward to beginning in the next few.
Hundreds of though.
Your next question comes from Bob Double from Guggenheim Securities. Your line is open.
Hey, guys. Good evening. The just couple of questions for me. The first one is just generally on customer acquisition costs I guess on the revolver segment also in the forward segment can you just talk about trends that you're seeing there.
How much running throughout the business.
Yes sure Thanks, Bob.
Yeah, Michael touched on this in the question just prior but we've been able to remain very efficient on the marketing spend if you look at that as a percentage of net sales we gained.
10, 20 basis points on both the fourth quarter end the full year. He also look at marketing.
Per order per active customer that's also gain efficiency.
In the quarter. So we feel good about the level of efficiency, they're continuing to gain efficiencies that at the same time, we're not going to take our pedal off or put up the pedal and we're going to continue to invest there both in acquisition and retention.
On the other side of that.
That.
The equation is the kind of the behavior of our repeat customers, which continued to be very strong.
Okay, and 89% of sales from prior year cohorts in 2019, which was consistent with 2018.
The active the portion of active customers made up by existing customers continues to increase.
And they continue to.
Order out of greater frequency into higher it'll be is consistent with the trend that we've seen in past cohort.
Got it and can you elaborate a little bit more on on the international side of the business in terms of what you're seeing there and and I'd be curious just even in the first quarter, what you're seeing.
Anything around differences versus the fourth quarter.
Yes definitely much later in the close here, we're seeing some really fantastic movement among international side of the business a lot of it is really the foundational pieces that we concluded in place in the preceding quarters.
But as we talked on previous calls we've been experiencing a lot of macro headwinds and forms of currency.
Some issues in our Asia region, and other things and so as new Compton cycled through these macro headwinds were finally, starting to see a pretty smart Cleveland, some really nice growth there.
Looking to Q1 year, we don't talk about kind of intra quarter dynamics.
The quarter, but I can say, we're confident that momentum at the international business.
Vestments are going to continue to pay off over time.
And if I could just just sneak in one more just on Instagram checkout in terms of how that's going on where that stands in the short of what you're learning and what you've learned so far can you just talking about that I don't think you guys talked about that at all.
Yes, definitely so we can turn him Chicago, it's very interesting program to us and we're really excited to have that we're one of James first partners on that program. It continues to be small and nascent it's something that is continuing to elaborate on.
We're excited about long term opportunity of it but it remains a work in progress that at this point it not yet large part of our business.
Your next question comes from Ralph Schackart from William Blair. Your line is open.
Good evening.
Wanted to circle back on owned brand collaborations certainly seems more advertising around them and I think Michael you talked about a little bit today's call. Just curious how this fits into the overall long term strategy, maybe how they're performing relative to the non collaboration Brad. Thank you.
Yeah. This is Ryan our owned brands, particularly its luster collaborations are going quite well I think Reno.
Quite to wed to all of our brand.
I think sometimes you really build up the initial launch I think it's a little bit different than compared to a lot of competitors who will.
They have a snapshot of launch period, and then email it really is not built for the long term wear out for us, it's really about investing and building and creating new that shoe bands that we can continue to grow and so all of our existing influence from banks continue to grow well.
The most two notable on the final style and I'll call how are not even on your deep. So we're still in the process of learning kind of what up on a full calendar year, what the collection should be like what we should entailed we're seeing great progress there still.
We continue to be areas of investment and will also be areas, where we will see some new ones coming in in the future as well.
Great. Thanks, David if I could add just one more on the other current virus situation I know, it's very fluid, but just you talked about 70, 580% being sourced from China.
If this continues to persist one of the opportunities for you to perhaps or some other regions and what sort of plans you have in place and cases. Unfortunately all.
Summed up.
Yes.
We did start a diversification effort back in let's call. It back into 2018 era with the trade word. So there's some opportunity there continue to make progress it's still not a significant portion of the supply. So we are still over indexed in China.
We're working on various things, we're leveraging third parties.
But it is very very fluid. So we're kind of taking a day by day at this point.
Your next question comes from Ross Sandler from Barclays. Your line is open.
Hey, John It's Ross Sandler for Ross Sandler.
Couple of questions.
Mike You mentioned traffic was the strongest over the year in the fourth quarter I guess, what channels are driving the traffic acceleration in your guidance doesn't really factored in.
That conversion rate that you talked about picking up so I guess other than fresher inventory what things are you working on to close that gap.
Hi, guys a couple of follow ups.
Yes, definitely still from a chronic standpoint, what we could be great to see was a lot of it was essentially.
Called unpaid traffic and I use that your loosely there's a lot of the brand Activations that we do it ran doing that we do we do spend money on it in that causes a lot of growth there.
So that was fantastic to see and we made some shifts in our marketing strategy on the brand marketing side that we being paid off on the fourth quarter and are going to continue to pay off through the year. So we're really excited about that and then with regards to expectations for conversion rate.
We're going to continue to see like inventory receipts, particularly through the first half of the year is we just continue to optimize our inventory position one great side effect of that is pretty nice cash flow. When we saw that in the fourth quarter. We should continue to see that through the first half of the year, but that will continue to put some pressure on conversion rates.
And you know certainly until we kind of fully worker.
We should we don't want to assume anything.
Changing too dramatically.
Kind of TV.
To the higher cited until we actually see those results. So I think as we look at the your head. The first half of your is going to be little bit tougher growth wise with Corona virus with the letter inventory receipts and then as we get into the back half of your we're hoping to see some nice acceleration.
Got it Okay and then the second question is.
Other Mike you mentioned, you're talking you tube is opportunity so I guess.
Those channels I guess collectively be as big as Instagram for you guys what would it take for that to happen and what are the things that are doing to kind of ramp those those channels in 2020, but when I got one more follow up.
Yeah, I think in 2020, it's hard to where they can also in long term, it's hard to predict but I think thats kind of the balance of kind of mindset as we're approaching things.
The line to have time to pass of course, as Jim said in the incredible I've been a core incredible job for us, but prior to that we know there was a very very parallel shift from Facebook too. It's about the tumor monitoring closely and the other thing that we're really taking a look at is that in each of these channel kind of works together and cohesion based on their platform based on the audience based on the format.
The work.
Complimentary and I think a lot of times will also seeing that lot of influencers that we work with will be worth but on a cross channel platform. So it's really no probably not.
Our mindset or our perspective.
View them as a replacement for each other more as a supplement in a compliment.
Okay and then last one are you guys mentioned the loyalty program.
Actually this is Ben Wyatt.
A little while managing.
You are so I guess.
Can you just gives a little his during the loyalty program and then what kind of frequency do you see from customers that are in the loyalty program versus just the regular customers and what percent of the business.
His loyalty today and what do you think that could go to long term. Thank you.
Yeah definitely so just to clarify the loyalty program has been my to a small set of customers as part of long running beta test that we are running for quite some time, we still haven't officially launched a program to our entire set of customers.
Thanks, as we noted.
Earlier on the call we're expecting to do a full launch sometime in advance of resolve festival. This year. So we're really excited about.
The impact back in house for the business offer but we've seen from beta test as there is a significant lift in the group of customers that received.
Option of access to the loyalty program versus those that Didnt. So we're excited to see what full launch.
Your next question comes from Susan Anderson from B. Riley FBR. Your line is open.
Hi, Thanks for taking my question.
I guess I was curious within fall between brands and that branded product could you see any difference I guess.
Sales growth and then also did you have to discount the branded product. In addition to on brands or is this really just to own brand is shale.
Yes, Mike here.
So the primary issues on the owned brand side.
Really invested heavily in that area we are.
Ourselves in terms of the magnitude of those investments in so that pressure and Tory levels and has resulted in us having markdown.
Right there.
That being said whenever you have excess inventory heading or the business that can press release overall business and so there was some impact on the third party side of it we think it's mostly kind of aside effective positions we fulfilled elsewhere.
Got it Okay, and then just a follow up and that gross margin cadence for 2028. So it sounds like you expect first half to be down year over year or should we expect that then to inflect up year over year or flattish in the back half or is that going to be pressured all year.
Yes.
Pressured all year over indexed in the first half the year.
As we work through this inventory and then it should return to that normal cadence of seasonality, but.
Looking at the full year, which is what the guide to you'll see pressure for the full year.
Got it okay.
But you do expect to clear, it's really the excess product by the first half our shouldn't linger into that second half tail.
Our current expectation is that we started this.
Thats first quarter of a few quarters, but it will take a couple more.
Got it Okay and then lastly, just on the Capex I think you said 5 million for this year versus 12 last year can you, maybe just talk about that drivers into France there.
Yes last year 2019 being last year.
We invested heavily in both the consolidation of our fulfillment centers into Len fulfillment center with capacity that will put us out past 2023.
And then layering on top of that we invested in automation. So that was roughly $10 million in that in that project. So we don't expect to do a project that magnitude in 2020, but we'll continue to invest in the business both in technology fulfillment operations et cetera.
Great. Thanks, so much good luck dressier.
Thanks.
We are kind of questions today.
I would now like to turn the call management for closing remarks.
Well, thanks, everyone. It's been setting your for us somewhere I know only I guess six seven weeks into the year, but we're really into a lot of good things that we've talked about we're excited to shifted with you guys soon.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
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