Q1 2020 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the revolves group first quarter conference call.
At this time, all participants are in listen only mode.
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The conference over to your Speaker today, you're Granderson Vice President of Investor Relations. Thank you. Please go ahead Sir.
Good afternoon, everyone. Thanks for joining us this got through both first were 2020 result.
Before we begin I'd like you mentioned that we have posted a presentation contain in Q1 2020 financial highlights to our Investor Relations website located at investors Dot revolved dot com.
Also like to remind you that this conference call will include forward looking statements. These statements include our expectations regarding let's go into the continued impairment of the cobot 19 pandemic in our business operations and financial results demand for our product general economic conditions are fluctuating operating result seasonality in our business our ability to acquire products unreasonable.
Terms, our online business model, our ability to attract customers on a cost effective manner. The strength of our brand competition fraud system interruptions, our ability to fulfill orders financial results in our guidance market opportunities, our own brand mix or inventory position or dilutive share count our investments in customer experiences.
It's a film centers.
These statements, which are subject to various risks uncertainties assumptions could cause our actual results to differ materially from these statements. These risks uncertainties assumptions are detailed in this afternoon's press release, as well done or filings with the FCC, including our registration statement on form S. One that was followed the FCC or form 10-K that was filed with the FCC on goodwill.
26, 2020 in the form 10-Q that will be filed all of which can be found on our website at investors that revolve 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 will also reference certain non-GAAP financial information, including adjusted EBITDA and free cash flow.
Non-GAAP measures and some of our financial discussion as we believe they more accurately represent the true operational performance in underlying results of our business.
The presentation of this non-GAAP financial information does not intend to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with.
And our non-GAAP measures may be different from non-GAAP measures used by other companies.
Reconciliations from GAAP to non-GAAP measures as well the description limitations and rationale for using each measure can be found in this afternoon's press release interestingly filings.
Joining me on the call. They are co founders and co Ceos My current Colin So Michael mentality as well as Jeff determines our CFO.
Following our prepared remarks, we'll 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, we hope each of you and your families are safe and healthy.
Today, we are only going to spend a limited amount of time on full Q1 results. Instead, we'll focus our attention on more recent business trends and how we've taken swift action to respond to the impact on our business from the cobot 19 pandemic.
And our effort to promote understanding of recent business performance, we will make some onetime disclosures to hope everyone follow the most recent trends in our business.
With that I'll start by touching on the first quarter.
We started the quarter with some positive trends looking at January and February 2020 on a combined basis, we achieved net sales growth exceeding 20% year over year, while improving inventory turns by approximately 20% year over year as well.
The strong start to the year, coupled with the successful brand marketing events in January and February including participation in the HBC television program the Bachelor.
He was further confidence that our brand messaging and assortment was resonated well with our customer.
Taking a deeper looked at the top line results for January and February.
Year over year growth in both the revolving port segments. It accelerated through the first two months in Q1 2020 with particular strength in our Ford business in international markets.
Group sales growth for our revolver segment of 17% year over year in the first two months 20, Twond came with an inventory decrease year over year in line with the strategy that we outlined over the last couple quarters to work through our inventory position and improve inventory turns.
These positive trends remain through the first week of March before Cobot 19 became widespread in the U.S. and the related stay at home in these changed the trajectory for us and many other discretionary consumer product companies.
We have been known for our premium product in our exciting aspirational social media marketing focused on an experiential lifestyle.
Overnight especial social occasions that often serve as a catalyst for customers to buy from revolver, particularly in the spring season had been put on hold.
Music festivals travel parties weddings, and dining out among countless other events had all been canceled or postponed.
Our largest and most impactful brand marketing event of the year revolve Festival was all from kids.
This changing consumer behavior combined with the brought this reduction in consumer confidence in demand resulted in our net sales declined by almost 50% year over year in the final weeks of March.
We view the current impact on her business is temporary and a function of the unprecedented environment.
As we continue to engage with our customer through real time adjustments to our merchandise offering in marketing message. We are confidential remain well to the revolt brand She trust for passion inspiration.
Now shifting to the more recent trends in the second quarter to date.
Sales in April declined approximately 40% year over year, improving from a nearly 50% year over year decline in net sales in the latter part of March most importantly, the magnitude of our net sales declines has been reduced every week for the past four weeks through the first 10 days of May our year over year decline in net sales further improved to roughly 25%.
Year over year decline.
Traffic to our sites has improved meaningfully in the recent weeks turning positive year over year after declining year over year beginning in mid March.
I'll caveat is improving numbers by saying these are highly uncertain times. So while we are encouraged by the improving trend it's entirely possible that things could get worse again in the coming days weeks or months.
We believe we improved sales trend reflects broader trends and consumer behavior over the time period as well as the great efforts by our marketing and merchandising teams to adeptly shipped our messaging and products to align with the changing consumer interest in the current environment.
For example, if you've looked at our website lately, you'll see that we are increasingly highlighting categories for the work at home in plate home lifestyle like lounge wear intimates and beauty, including featured shops for work from home Chic Indeed.
This merchandising shift aligns with our customers recent shopping behavior consistent with the realities of sheltering in place.
As you might imagine categories like beauty and lounge wear are performing very well right now, whereas more formal pieces like dresses are not resonating in the current environment.
On one hand, it is a near term headwinds since dresses have historically been by far our top selling category and carry our highest gross margins on the other hand I'm excited about the growth in beauty is it gives us the opportunity to deepen our relationship with customers in a product category the tends to be a frequent purchase.
Sales in the beauty category increased 122% year over year in April and became our fourth largest category by sales volume and in general we saw encouraging trends in other merchandise segments that are customer has historically less associated with recall.
Well the overall business trends remain extremely challenging our hope is that we can exit this period with an expanded relationship with our customer due to the outstanding work of our marketing and merchandising teams.
Now I'll shift to a discussion of how we have responded to the crisis.
First and foremost our number one priority is the health and safety over our employees and customers beginning in mid March we transitioned all of our teams whose role do not require them to physically in the office to work from home.
Those remaining in the workplace, we've completely revamped our operating procedures to implement rigorous health and safety guidelines. These safe guards included Ministry and daily temperature checks, establishing social distancing requirements, providing personal protective equipment, such as masking gloves, creating staggered shifts in the distribution center in frequent deep.
Cleaning and Sanitization.
We've always been known for our exceptional service levels and during this time period, our E Commerce operations haven't skipped a beat.
Our customer satisfaction metrics were at record levels in March and April we are particularly proud of this performance given numerous reports of significant fulfillment delays among other ecommerce apparel companies.
As a way to even better serve our customers and establish even deeper relationships with them in March we launched our revolver loyalty program that we mentioned on the call last quarter. The loyalty program has been very well received in the early going.
I'm proud of our team for how everyone. At revolve is managed through these challenging times, while keeping laser focused on delivering outstanding service to our customers. Thanks to all of our team members for your hard work and sacrifice for stay nimble and for your dedication during this challenging done.
In addition to protecting our employees. We knew we also had to protect our balance sheet and liquidity.
By the end of Q1, it was clear we had to move quickly and decisively to reduce our cost structure given the depth of the reduction to demand and the uncertainty over how long the current treatment last.
In early April we reduced costs across the board starting at the top the first cut we made was Michael and I, reducing our annual salary to one dollar. We've also reduced just about every non essential expense imaginable as well as canceling are deferring all non essential capital expenditures.
The most difficult decisions, where those involving our value team members.
The outcomes ultimately included salary wage and hour reductions furloughs into a much lesser extent layoffs. These were tough decisions and we continue to support our furloughed employees by providing health benefits in educating them on all aspects of the cares Act.
We're also actively managing inventory receipts to preserve our cash and minimize inventory risk in this time, where the level of future demand is uncertain.
Similar to the sales trends, we started off the your great in terms of managing our inventory balances in improving our inventory turns at the end of February our inventory decreased year over year compared to the net sales increase of over 20% year over year and a corresponding increase in our inventory turns.
Upon the shelter in place mandates in mid March we began to immediately reduce our future inventory commitments to better align with reduced consumer demand.
Managing inventory in this environment with rapidly changing demand expectations and shifting customer preferences as a tough task, we have a great buying and planning team to bid with us for many years and have been able to react quickly.
Now I'll pass it to Michael.
Thanks, Mike and Hello, everyone.
So much has changed in just the past eight week.
We're proud of the decisive actions, we've taken across our business to help protect our people and optimize the business for such a dynamic environment.
I will continue with the discussion of navigating through the Kobin 19 challenges and we'll focus my remarks on three key areas.
First our brand marketing initiatives.
Second owned brand and third while confidently evolve as well positioned to navigate through the current challenges in emerging Thats Joe.
First our brand marketing initiatives.
As I'm sure everyone knows revolve is widely recognized for impactful and asked for National brand marketing events at leisure customers through social media and vast network of Influencers.
Normally year right now our benchmarking team and I would object come off another successful revolve festival would be extremely busy pending in executing a series of events during our peak spring and summer season.
The 2020 is anything but a normal year.
To adjust we quickly mobilized the team around the new opportunity of engaging with our customer during the current lifestyle is staying at home.
Customers Love revolver love interacting with our brand. Unfortunately on a daily basis. So we were confident we can adapt well.
In mid March we launched hashtag revolve around the house, creating a tremendous amount of engaging and inspirational live content shows could it daily on Instagram lives that future influencers designers and celebrities.
Revolve around the house increase with some daily workouts expert beauty tips cooking classes and my favorite.
Revolve shopping.
Response has been exciting for example, a recent episode featured Ami Some global lifestyle inputs are also fashion designer collaborating with revolver for the Sun lifestyle owned brand collection.
Last week Ami hooks to live event from warehouse to launch a new lineup shoes and expansion of our son will start collaboration what did 100000 people trained and sales of the collection nothing Sean.
Validating the power of our live content and the strength of our collaboration with on the as well.
And just over five weeks, yes for just over 50 Instagram lives segments that have been if you close to 5 million times on Instagram Library GTV.
One of the most exciting things from is that despite having significantly reduced.
We have actually increased engagement with our core customer independently.
There is more content being created more comments more likes and more shares.
And even though we are not able to host in person events like mobile festival Instagram reach on our revolving handle has increased more than 30% year over year through the first nine days.
We have adjusted our strategy and continue to drive awareness and engagement how into improved traffic growth 12 websites that Mike mentioned.
Now, let's shift to a discussion of owned bank.
Owned brands are quite wide long term strategy and a key part of our value proposition.
However, with the onset of Covidien team, creating a great uncertainty of on demand for the upcoming close.
Significantly reduced inventory receipts overall, and even more aggressively with owned brands.
Such an uncertain environment in the near term, we believe we can more effectively manage our overall inventory levels by shifting more of our purchases to third party inventory, where we can make celebrate initial inventory buys across a broader range of style.
To be clear this does not suggest in any way that our long term strategy change in fact, the pen investments in hone Vince discussed on last quarters conference call, which are focused on broadening our range of capabilities and diversifying our supply chain and become even more relevant with the recent code 900 useful to consumer preferences.
Sheltering in place has resulted in significant demand growth for such categories that denim downgrade and Thats leisure.
Moving quickly to affect these changes in our merchandise assortment across both owned bad in third party brands. We are developing owned brand capabilities in these underpenetrated categories.
Before I turn it over to Jeff on excess my confidence level, you have evolved is well positioned to navigate through the challenges of cover 19 and emerge even stronger.
First our experience in ownership stake, we founded revolve that division to own it forever and the decisions we make our view to this long term beds.
While coated 19 is truly unprecedented Mike and I have deep experience navigating surviving through challenging market cycle.
Mike and I logical evolve in 2003 in the aftermath of recession that took place after the dot com crash and later, we successfully navigated through the great financial crisis at a tangled still hadn't taken outside capital.
With this all really I mean, the two largest shareholder even after going public in fact, we increased the ownership stake in recent months.
Next our business model, we're very fortunate to have a business model that is incredibly capital efficient and inherently resilient.
Over the past four years capital expenditures have is just 1% of net sales.
Equally important for the majority of our cost structure, we can pull levers very quickly to adjusted changing macroeconomic environment.
For example, our largest operating expenses marketing.
Which is highly discretionary the significant majority of our Mike will spend in 2020 continues to be digital AD spend that we can adjust in real time since we have no long term commitments.
You also have a strong financial position with more than 100 million in cash at the end of Q1.
We have as Sean established track record for generating cash flow in 2019, we generated $46 million in cash flow from operation nearly 8% of net sales for the.
Finally, we are well positioned for accelerated consumer spending on line.
There's no question that the code that 19 pandemic could bring long lasting change its consumer behavior. When change is increased important E. Commerce single increased challenges a physical retail.
Concept of online shopping has never been more relevant than it is today.
What's your competition is bringing with high fixed cost inventory buying requirements that make it harder for them to navigate the current challenges.
Got to consumer demand as a result, we believe there's going to be an acceleration into the shift of consumer spending online benefiting capital efficient companies macro malls that are well positioned to navigate tough economic times.
I'll close with something I'm Super proud of.
We go after this and that allows us to leverage our supply chain expertise, our Influencer network and our brand partners to give back to the community in support of our frontline workers, we applied to donate more than 200000 medical grade math to healthcare workers to help you funerals in their time.
To date, we've distributed more than 90000, math hospitals and clinics across country with an additional 140000 in transit today to over 74 hospitals.
Now lets turn it over to Jeff you for more detail on the financial results and trends.
Thanks, Michael given all the moving parts in the current environment I'm going to do unless detailed review of our first quarter results today as they are not representative of our current business trends.
As a result and in the spirit of transparency I will spend some additional time, providing color on business trends since the end of the first quarter and some updated assumptions for the balance of 2020.
I will also discuss our cost structure capital spending plan and our balance sheet.
Starting with the first quarter results.
For Q1, we reported 6% year over year growth in net sales continued GAAP and adjusted EBITDA profitability, and we generated strong free cash flow of $8 million.
Given the unprecedented change in the consumer demand environment late in the quarter due to the coded 19 pandemic, it's important to look beyond the headline numbers.
As Mike mentioned, we came out of the gate strong for the first nine weeks of the quarter net sales growth exceeded 20% for January and February on a combined basis. The first week of March remains strong and year over year growth and traffic to our sites and mobile apps with outstanding during this nine week period.
Our growth rate than any quarter in 2019.
During the second week of March we experienced a significant negative change in trend on both net sales and traffic to our sites coincident with the escalation of the Kogan 19 endemic in the U.S.
As a result by the time, we exited the first quarter weekly net sales were nearly 50% less than the corresponding weak in the prior year. These.
Precedented change in our trajectory shows how much the stay at home mandates have impacted consumer spending.
Drilling into the topline revolve segment net sales in Q1 increased 1% year over year for the full quarter, but again, it's important to look beyond the headline numbers before the negative impacts in March revolves segment net sales increased 17% year over year in January and February combined an improvement from the 13% year.
Every year growth in Q4 2019.
Meanwhile, the forward segment performance was exceptional in the first quarter forward net sales increased to 47% year on year its highest growth rate in several quarters. Despite the covert 19 headwind late in the quarter.
Active customers continue to increase surpassing the 1.5 million Mark for the first time orders placed increased 3% year over year, Despite a negative impact in March.
Average order value was flat year over year at $259. Despite headwinds in late March resulting from a material shift in net sales mix to at home product categories, such as beauty and loungewear with lower average price points.
International with the bright spot for the quarter with international net sales, increasing 17% year over year, despite being impacted in March looking at the month of January and February and combined basis International net sales were higher by more than 30% year over year, just like in the U.S. the international net sales today.
What are you changing materially and became negative in late March due to covert 19 impacts.
With that being said similar to the last few quarters in the first six weeks of this quarter. The international business has continued to perform better than the U.S. business in part because the international businesses diversified across many different regions and also because of the outsized impact of Kogut 19 on the us consumer.
Moving to gross profit.
Consolidated gross margin with 48.6% for the first quarter, a decrease of 290 basis points over the prior year.
As indicated last quarter, we had expected a lower consolidated gross margin due to a higher mix of net sales from the forward segment, which carries a lower gross margin as well as the revolve segment gross margin being lower year over year.
Within the revolve segment, we delivered gross margin of 50.1% in Q1 down 310 basis points year over year.
As we discussed in the prior quarters. The revolve segment margin was negatively impacted by lower percentage of revolve segment net sales at full price.
Deeper markdowns within the markdown product and a lower mix of owned brands.
The Kogan 19 pandemic brought additional gross margin headwinds as a result of the decreased demand as well as a more promotional external environment.
In addition to a shift in net sales mix to product categories that carry lower gross margins.
Within the forward segment, not only did we deliver an acceleration of topline growth. We also delivered strong gross margin forward segment gross margin was 39.7% an increase of 230 basis points over the prior year as a result at the merchandising and marketing initiatives that we've put in place after repositioning this business.
Fulfillment, which reflects the costs incurred to staff and operate our distribution center totaled $4.5 million or 3.1% of net sales as compared to 3.3% in the first quarter of 2019.
As a reminder, fulfillment is primarily comprised of variable cost that we can efficiently flex up and down with demand.
We're very pleased with our ability to deliver continued year over year efficiencies and fulfillment as a percentage of net sales for the second consecutive quarter.
In the normal course of business, we would expect further efficiency gains as we had previously communicated however, going forward. During this period of reduced demand. We now expect fulfillment costs as a percentage of net sales to be less efficient year over year for three reasons.
First there is a decrease in efficiency as a result of the important process changes we have implemented in our warehouse to ensure worker safety, including social distancing and providing personal protective equipment.
Second the shift in product categories. We discussed will result in a decrease in average order value, which is a headwind to fulfillment efficiency measured as a percentage of net sales.
And third the lower volume and the current environment means there is less efficient utilization of our expanded warehouse capacity.
Selling and distribution costs, which consists primarily of shipping merchant processing fees and customer service were $21.8 million were 14.9% of net sales.
Slight decrease from 15% of net sales in the first quarter of 2019.
As a reminder, selling and distribution costs are almost entirely variable primarily tied to the number of quarters processed.
During Q1, we were able to offset general price increases with greater efficiencies to maintain the overall level of selling and distribution costs as a percentage of net sales.
Looking forward during this period of reduced demand and similar to fulfillment costs. We expect the lower average order values, resulting from the category mix shift and Mark Downs will put pressure on this line item when expressed as a percentage of net sales.
Marketing costs were $22 million or 15% of net sales as compared to 14.2% in the first quarter of 2019.
As a reminder, historically about 75% of our annual marketing expense relates to performance marketing on digital channels.
Within this performance marketing component, we have the ability to flex our investments up and down in almost drill time, making this area highly variable the sales.
Shifting to brand marketing, but the current social distancing guidelines, we have cancelled or postponed many of our brand marketing events that had been planned for 2020.
Including the revolve festival initially scheduled for April.
As a result, we now expect our investment in performance marketing to represent a larger share of the overall marketing spend in 2020 than the 75% in recent years.
We are targeting a reduction in total marketing spend as a percentage of net sales as a result, the reduced brand marketing investments and to continue balancing of performance marketing spend.
General and administrative costs, which primarily consist of salaries and wages were $18.9 million or 12.9% of net sales in the first quarter as compared to 14% of net sales in the first quarter of 2019.
The year over year reduction in DNA.
Mainly due to nonroutine costs incurred in the first quarter of 2019 as well as efficiencies gained with scale as this line item is largely fixed.
After we recognize the pandemic significant impact on consumer demand, we moved quickly to reduce DNA costs.
As Mike mentioned in early April we announced the outcome, that's very difficult decisions to temporarily reduced personnel related costs.
To give you some context, we expect these actions will temporarily reduce our cash DNA cost by about 40% from the prior run rate.
We'll see the full impact of these actions beginning in May.
For the first quarter of 2020, net income was $4.2 million or six cents per diluted share adjusted EBITDA was $5.6 million for a margin of 3.8%.
Moving to the cash flow statement, we operate a highly capital efficient business as demonstrated by our capital expenditures of just over $500000 in the first quarter less than one half of 1% of net sales.
We generated $8.1 million in cash flow from operations and $7.5 million in free cash flow for the first quarter of 2020.
This cash flow generation further strengthened our balance sheet.
March 31st 2020, we had net cash of $73.6 million.
Since liquidity is especially important in these uncertain times late in Q1, we drew down $30 million from our existing line of credit.
Our first draw on the line in over two years.
Bids we ended the first quarter with total cash and cash equivalent of $103.6 million.
We ended the quarter with $101 million in inventory, an increase of 4% year over year slightly lower than our 6% increase in net sales year over year as Mike mentioned inventory turns improved through the first two months of the quarter before decreasing in March when we felt the impact of covered 19.
To preserve our cash and liquidity going forward, we have been very focused on managing inventory receipts for the balance of the year.
We have reduced our intake of inventory for both third party brands and owned brands with a greater proportion of the reduction coming from owned brands.
Looking ahead, we have modeled several different scenarios to gauge the potential impact of Kogut 19 on our business and balance sheet. It is important to note that while we are certainly hoping for a scenario where consumer demand recovers we are managing our cost structure under the assumption that business conditions remain very challenging for the rest of year.
Most importantly, we believe we have the flexibility built into our cost structure, the financial levers and adequate liquidity to manage through the downturn and being a position of strength when the economy recovers.
Now, let me talk about business trends since the first quarter ended.
Starting with the balance sheet, the combination of our capital efficient model, our active management of working capital and the cost reduction measures. We implemented enabled us to maintain our cash balance through the end of April and into the first 10 days of name.
Moving to the income statement as Mike mentioned net sales in April declined approximately 40% year over year, improving from the nearly 50% year over year decline in net sales in the final weeks of March.
Most important the magnitude of our net sales declines has been reduced every week for the past four weeks.
And through the first 10 days of May our year over year decline in net sales further improved to a roughly 25% decline year over year.
This improvement came despite a very tough comp is our revolve festival event, usually held in April was postponed along with countless travel plans social gatherings and many other events that serve as a catalyst for our customers to buy from evolve.
Average order value in April was $204.
Piece of more than 20% from the ASV reported in the first quarter of Twentytwenty.
Primarily due to the coded 19 and due to mix shift I mentioned previously having an impact on the full month of April.
With that I'll turn to our full year 2020 assumptions.
Without a doubt the pandemic has created significant headwinds for our business the duration and extend to the pandemic is highly uncertain and the economic impact could last much longer.
So while it wouldn't be appropriate to give traditional guidance in such a fluid environment will offer some insights.
Seasonality, although our business is not overly seasonal like traditional retailers with sales concentrated around the gift giving holiday season.
It's worth noting that the timing of the Kogut outbreak coincided with the started what is typically our highest selling period of the year, leading into the summer and festival season as a result for modeling purposes related to the current quarter ending on June Thirtyth, we expect the cobot 19 restrictions to negate the historical pattern of the second quarter typically being our peak period.
For net sales and gross margin.
Average order value, we see average order value shifting meaningfully lower with continued markdown pressure and a continued mix shift towards lower price point categories as demonstrated by the April average order value decreasing more than 20% from the first quarter ASV as I just mentioned.
Gross margin on last quarters conference call, we talked about our expectation for gross margin pressure in 2020, particularly in the first half of the year depends MX brings additional gross margin pressures. So we now expect our gross margin for the rest of the year to come in lower than our previous projections and lower than the 48.6% in.
First quarter of 2020.
We expect this margin pressure to continue during this time of uncertainty for three main reasons first our decision to shift to more of our inventory buys into third party styles with lower unit minimums in the near term, while focusing owned brands on a more limited range of styles.
Second.
The ship to net sales mix away from our highest margin category dresses to comparatively lower margin product categories, such as beauty and third the sharply lower consumer demand and a correspondingly increased promotional environment has put additional pressure on markdowns.
And finally capital expenditures.
We now expect total capital expenditures of approximately $2 million.
Piece of 60% from our prior guidance.
The situation remains very fluid and uncertain. We will continue to monitor trends, we will remain focused and disciplined and we will take the actions that we believe are necessary to manage our financial position through this very challenging time.
Now I'll turn it back over to Mike to close out our prepared remarks.
Thanks Jesse.
I'd like to take this opportunity to once again, thank our great team for their dedication agility hardworking sacrifice demonstrated through this difficult time.
This is one of the most challenging periods, we've experienced in or 17 years of operating the business yet our experience has proven that business is not as straight line.
Our successful track record has been established through numerous business cycles, and we are confident in our ability to manage through this can come out stronger on the other side.
With that I'll turn it over to the operator for your questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound or hash key please standby when we compile the Q any roster.
Your first question comes from the line of Oliver Chen from Cowen.
Your line is open.
Hi, Thank you, it's encouraging that trends have been less bad and also the traffic momentum what are your thoughts for going forward in terms of how traffic may manifest and also the step down in ASV when might stabilize and how do you see dresses as a percentage of mix trend.
Being in that context.
I would also love your thoughts on some uncontrollable factors around markdowns and markdown management and how to do that in a brand appropriate way so that the customer.
Loves you for the long term thank you.
Definitely thanks, Oliver Mike Carroll codes here, so a lot of questions. There I mean for good some of them.
With.
So with regards to traffic we've seen some really encouraging traffic trends.
The past.
Six weeks with traffic continues to increase each week and positive year on year traffic trends in the most recent weeks.
So we feel good about that going forward and.
What's really encouraging about that traffic is along the positive trends are being driven by organic traffic.
Our our marketing.
Marketing teams have really done a great job connection.
So we would expect those trends.
I'd say it was reversed the rest of year, it's a highly uncertain environment. So with regards to dresses for example, we're seeing.
Definite recovery there, but at the same time.
Next nine months are going to be very difficult to project and so.
It's difficult for us to say what trust demand is going to look like in the fall and that's a very reason that were shifting our inventory buys a little bit towards products that have shallower minimums.
So we can take on reduced risk there.
Thanks, Mike and on markdowns, what is the best way to manage it in this dynamic environment and.
The gross margin guidance is very helpful.
What are your expectations for how the marketplace may look as a lot of competitors are likely over inventoried.
Yes, definitely so we have seen it being a very promotional environment out there.
It is dynamic and so we're reacting on a weekly basis to see out there I think in the current environment consumers are expecting more promotions and markdowns and they are gravitating towards promotions and markdown. So what kind of trying to straddle a fine line, we make sure we do give consumers with they want and right now, but he has more markdown.
Products, but also be careful about protecting our brand and be very targeted with the markdowns and promotions im trying to make them interesting versus.
More.
Kind of mass type promotions, where anything.
Okay and our last question just about permanent changes from the at home experience Joel.
What are your thoughts on permanent changes in terms of.
How you may approach marketing or not with what you're doing and what may stay for the long term whether that be the live streaming or the shopping network.
And what kind of positive learnings have you had from the crisis. Thank you.
Hey, Oliver Michael mentioned here and have had one hopefully you guys are all.
Safe and healthy when it comes to engage in with the consumer we really just have to you know.
Dance with beer best friends, So when times were.
At different day, she was willing to travel when they're going to music festivals, where there with her when she's at home, we're providing her that experience and we're working out with her giving a complex comfortable close to and whatnot. So it's really going to be unpredictable, it's going to really be a reflection of how the world evolves, but we feel really good that these new methods that were coming in that we're connecting with.
Five and I do TV was too it is that we were investing before things that we will continue to nurture overtime. I think ultimately this is really allowed us to expand our relationship and deepen our relationship across the way we communicate quite similarly to the way across our merchandising categories were able to deepen that relationship by providing her other categories that we weren't particularly.
The non foreign really had the emotional connection for so ultimately this is.
Blessing in disguise, we'll look back despite all of the pain that of course, we're experience in the short term of really having a deeper broader relationship than just the revolve that you knew uptimes past.
Thanks, Thanks, Chubb and all the agility best regards.
Thank you.
Your next question comes from Mark Altschwager from Baird.
Good afternoon. Thanks for taking my question and hope everyone is doing well.
Just hoping you could talk about your strategies on client acquisition and how if at all those strategies are changing in light of the current backdrop and specifically so could you comment on digital marketing and whether the declining cost in some channels is something you may be able to lean into in the months ahead.
Hey, definitely us my kind of course here so.
There hasn't been.
I would say high level changed our strategy, but there's certainly been water tactical changes as we've reacted quickly.
To the situation so we have seen.
The cost of traffic go down substantially.
Since since pandemic started.
At the same time, we've also seem to consumers have been converting less consumers.
I still have time to shop and look at things, but there is little bit more hesitant to pull the trigger pretty different brands like ours, where a lot of the merchandise historically and even current views geared towards merchandise you, where when you are going out in going through an event on time to look your best.
And in consumers just aren't there yet so on the positive side I'd say, we've seen marketing costs stabilize marketing costs were up a little bit year over year.
On the digital side as we.
Is the crisis first hit and then actually in recent weeks, we've seen some efficiencies there. So it's something we're going to take on a week by week basis.
Traffic is cheap, but also consumers our conversion as well so we're trying to be disciplined.
Your next question comes from Ross Sandler from Barclays.
Hey, guys.
Couple of questions. So if you had to segment your revenue between the stumped US working right now kind of at home beauty in Loungewear, you mentioned and everything else kind of your legacy normal stuff.
How big would that first but could be in terms of revenue and can you talk about how quickly given your kind of more nimble supply chain. How quickly can you move that direction. If we're going to stay in this mode for little while and then second question is just see if we back out revolve fast which was I think in late April last year, and we try to compare.
They're kind of underlying growth rate.
Excluding big events.
Down 25 for may might be kind of down a lot less than that.
On a go forward basis once you get passed the.
The peak of your seasonality so is that the right way to think about it could you see potentially like a flat growth rate as we get into Threeq you any any color there just on the impact from.
Revolve fast on on that that down 25, and Matt. Thank you.
Yes sure Thanks, Rob.
So starting with the first one in that category Nixon.
Maybe focusing it on the revolver segment since that is the biggest.
Well pick on dresses dresses has historically done over over a third of the business on revolve and Thats been.
Gary.
More highly penetrated on the owned brands. So they give you some context on the largest category.
And then if you look at some of the smaller ones like beauty, that's been growing triple digits in in the recent periods since coded as you know that's been in the low single digit percentage of total net sales for evolve and with that triple digit fail growth Thats definitely taken share and there's some puts and takes on that.
Benefits in terms of return rate, where addresses the highest return rate category offset then with the benefit of beauty, which is the lowest return that category. You also have the negative impact of HIV than SP shifting from what has historically been.
Very high price point for us the dresses in that 100 3000 $40 per change down to beauty product thats in that 40.
Thats come some color on the on the product mix.
And then in terms of.
Seasonality and revolve tested by you know there definitely is impacted their.
Historically April April may have been two of our strongest month of the year.
And without those those big events like an revolve festival, you're losing out on a lot of female likes a lot of impressions and a lot of just exposure.
So if you take what we've been growing at in the recent period, especially April and compare that to non April month of last year that could give you some indication of what that might look like I think.
Pretty aggressive.
So to say, we'd get to flat if you do that comparison, but there definitely is an impact there.
Your next question.
I can go a touch a little bit on I think there was a middle question. There in terms of supply chain and I think that we feel quite excited and quite proud of how the team has responded and I think when it comes to Q3, we view what we have.
A much more balanced on which were well rounded and adjusted.
Merchandising mix in relation to this new period that we all are experiencing together.
We have again I'll just add this crisis has accelerated things such as E commerce and a lot of the way our lives Justin it's accelerated some of our internal initiatives as well so.
Yes next month, we'll be seeing.
Some of the loungewear product coming from local supply chain, which were very except in very proud off you know both the packed up you have coming as well as the way. The team has responded so going into the back half a year next quarter will be.
Activated and adjusted to the new life in a customer's needs.
Okay.
Your next question comes from Kimberly Greenberger from Morgan Stanley.
Great. Thank you so much and thanks for all of that great detail and transparency.
You've provided on the call it's going extremely helpful.
To start I'm, just what the forward segment, if I could looking back to the first quarter, yet 47% growth forward.
And you gave some of the January and February four revolver as opposed to March did you see a similar pattern.
In the forward segment with growth in January February and then a decline in March or where they were the three months more similar on the forward segment and then just reflecting on the April and May months today color that you gave a are you seeing a different trend between the revolve segment and the.
For rich segment here in the second quarter or are the trends relatively similar to one another.
Yeah, Yeah. Thanks Kimberly.
Yes, it was a pretty extreme impact there starting in the second part of March. So there definitely is an impact on both segments.
We did see strong growth, especially in the first few months from both segments and then we saw.
Significant hit in March that extended through April.
Forward is.
Smaller part of the business and a little bit more skewed internationally and a little bit more skewed on the markdown side. So on the week to week, there is a little bit of noise on forward rates, Ethan pluses and minuses.
And that comes through especially on international where we saw international perform.
Better relative to the domestic business.
You know again on forward, probably a little bit better than the revolve segment just based on those dynamics plus the comps in the prior year.
Okay, Great Jesse and then just a follow up question on the gross margin.
You indicated that you're expecting.
Gross margin this year to be below.
The 48.6% level, which obviously suggest some more severe pressure throughout the year. Even then you experienced I think in Q1.
And I'm wondering if you think that's or you expect the greatest pressure in the second quarter or do you think we're likely to see sort of a similar rates of pressure in the second quarter through the fourth quarter.
Yes, yes.
It's a really tough line and because it is so uncertain, it's hard to say really what the back half of the Irrs going to do we have more visibility into the recent periods. We've locked in April and the first couple of weeks of May here. So.
That's the known and what we've seen is greater compression on that margin.
And and also keeps you have historically been a highest margin period of the year.
So I think we'll definitely see more pressure.
The guidance that we've given that the rest of your will be below that 48.6 that we saw on Q1.
And it's hard to say, how that's going to play out quarter to quarter.
Okay. Thank you so much and hope everyone stay safe.
Thanks, Tim.
Your next question comes from Edward Yruma from Keybanc capital markets.
Hey, good evening guys. Thanks for taking my question I guess first that I'm not sure. If this is no more desirable, but any sense as to how much of the lift you may have gotten some stimulus did you see an outsized bump that week or the weeks, but thats starting to hit and any sense kind of on how consumer behavior is trending post that and then as a follow up I know you guys are very carefully managing risk.
Pete how successful have you been able in particular kind of the fall and winter season from a curbing the state's perspective. Thank you.
Indefinitely, so with regards the impact of the stimulus.
We did see us a sizable bumps the week the stimulus hit what's really encouraging is that in general the progressive weeks. Since then have continued on an upward trend.
So for that reason, we think the stimulus did have a big impact, but it's not the major driver improving trend that we're seeing here and I think the other thing also is that we've seen a similar improving trend in international markets. We're actually on the international side, the past four weeks evolve and positive in terms of revenue year over year.
So we think it had an impact but we don't think if the dominant player.
And then with regards to the inventory receipts.
For the for the fall we.
We've been very successful and make an adjustment there.
Okay.
Our partner than very gracious, and working with us side by side to get the right levels of inventory.
The bringing in those seasons I think the only thing I'd caution is that it is a very highly uncertain environment and we've seen an improving trend here, but we're also preparing for the possibility that the trend could shift in the other direction because of very fluid situation.
Thank you.
Your next question comes from Justin Post from Bank of America.
Great maybe to two questions one follow up first on forward. The acceleration you saw in the first two months was that addition of a lot of new customers or were you seeing orders per customer go up just kind of wondering what was working and how the inventory was resonating better and then secondly.
Back to the revolver FES question I know that that hurt in April that comp do you think not having revolve fast also was I was a headwind in the first 10 days of of May and then I have one one follow up thanks.
Hey, definitely.
Regards to forward, we did see a first bonding increase in new customers as well so as it was a terrific first two months to year I would caution with forward, though that.
There were some unique aspect to the first two months that I think resulted in quickly outsize growth.
We're still very happy with the trends that fourq is showing progress weak quarter to quarter, but I think that.
47% number and even higher numbers on the first two months was a bit of an outlier driven in part by some really strong international marketing activity.
That was done on a 100 international team that I think is a bit onetime in nature.
And then I'm sorry, the second half of your question.
Sure. Yeah, you you mentioned revolver test was a headwind in April which we would expect I was wondering if you thought.
The revolver fast not having that also was the impact on on May. The first 10 days of Matt may so that actually depressed that the main number a little bit and then my second question was on the return reserve that's down quite a bit year over year is that all mix or was there other other things going on with the return reserve.
Thank you.
Sure there with regards to revolve Fest will impact on May we do think there's an additional impact in may as well, but it's much less than the impact from hcg also.
Yes.
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I wouldn't read too much into layering additional headwinds on top of the trends that we're seeing again, particularly because I think the macro environment. So so so uncertain I think.
For the made numbers revolver plus will impact is worth for news of those numbers and then with regards to return reserve outlet Jesse.
Hello.
Yes, thanks, and thanks, Mike.
And just to clarify on the return reserve and make sure. We're talking at the same terminology here I think.
Bifurcated that between return rate and return reserve.
The return rate has decreased and that's largely due to the mix of sales both in terms of shift towards the lower price point lower churn rate categories like beauty also.
The incremental markdowns, which a large portion of our final sale. So there is no return.
Return rates on that product, but then I think the return reserve. It's also an important thing to call out because.
And at fault into liquidity when you're growing at a constant rate whatever that is 510, 20% you're selling not much products and approximately 50% is coming in when you have such an abrupt shift like Colgate 19, where you go from positive growth to negative growth you essentially I cashcall on those returns that were sold at the higher rate.
And you're not selling at as higher other rate going forward, so essentially that 50% return on the higher volume.
Offsetting the sales that are going up from a lower volume so what you're seeing on the cash flow statement and that return reserve is really that cash call on returns coming in.
So from a liquidity standpoint that had a large impact, especially in the back half of March so given our our cash balance holding we feel good.
Especially good about how that's that's played out.
Next question please.
Your next question comes from the line of Aaron Kessler from Raymond James.
Great. Thanks, guys. A couple questions first maybe talk about make categories, where you've had to invest more as a result of kind of stay on place that maybe thoughts into kind of some of the beauty investments and how does this change your thinking longer term into some of these other categories. And then also just the recovery that you referenced that may was kind of across all categories.
Or is it still mostly in the more stay at home categories, including.
The ones you noted.
On the call. Thank you.
It was great that you know the team has done in college I want to beauty said, we've had an incredible selection needle across all the sub categories across beauty. So when she is looking for a range of products. We had them there for her and the great thing is that a lot of the beauty business is really driven by reorders. So we've been able to offer a holds.
Good job skincare hair care.
Self care tanning across the board and we've been able to replenish and takes into that business. So.
That beauty business is very very favorable for us in terms of lack of markdowns and also very very low return rates. So I think this has been an awesome opportunity, where we really introduced our customer to another aspect of our business I think.
The you know if we are a new age next generation Department stores is familiar with us for the ready to wear floors in the such for Neptune numbers out first floor, where you know the beauty counts are so we know this has been a you know are saying really also been able to expand our marketing.
Messaging engaging beauty so.
We expect anticipate this to be very very long term I think we've seen great success and great retention with our beauty business.
As a nation as it was earlier so very very encouraged with regard to the other categories again, it's very little bit similar stories loungewear aspect of the business is something that we've had to chasing too aggressively and we've done that both with third party and owned brand to there's going to be much like.
Much larger presence there over the long term and ultimately this guidance.
Not so much a swing, but more of a balance I would say, whereas the category mixes are you know up from the Loungewear category took extreme end of very fancy dresses and event driven gallons. We don't see it does of course shift has been dramatic in terms of percentage change, but if you look at the type of category self is that a lot more balanced so we're very very.
Added about being able to communicate connect with consumers across all of our needs.
Okay, Great and just the recovery may was that kind of across all categories are still mainly in the kind of a denim leisure athleisure type of categories.
Yes, so that recovery was across all categories, we saw broad based.
Great. Thank you.
Your next question comes from Michael Binetti from Credit Suisse.
Hey, guys. Thanks for taking the shot at the guidance here and helping us understand how you're thinking about the business during a very tough period, obviously to.
Think about the go forward at all.
Well I want to ask about the gross margins a little bit.
Jesse I think yeah the.
The guide post you gave of lower than first quarter for the year puts us down.
More than 500 for the year, maybe more than 550 for the year is there any.
I agree with your comment that the visibility is really low, particularly in the second half I'm, assuming that means to choose down a lot treating take us that low for the year is there any kind of a guide post you can give us on how on how to think about the magnitude in twoq just to help us.
With the model a little bit and then any color you could give on maybe some any kind of basis point guidance on how much of that is going to come from.
Mix of owned brands versus.
Compressing margins in the different businesses first person first party third party versus the category shifts you spoke to.
Yes, yes sure.
Yes, and like you said, it's really difficult time to try to provide any guidance. We're trying to do our best to put those got goes out there and and help out.
On the cadence throughout the year I think it's fair that twoq use going to have a more meaningful year over year decline than Q1 did just based on the comps again QQ historically their highest margin.
Margin quarter of the year in that that played out last year as well, we did over 400 basis points better in Q2 last year than we did in Q1.
Q2, this year coming in lower than the Q1, we did there's a there's an expansion of the year over year decrease in Twoq.
I think then maybe to try to help a little bit.
In it for the rest of the year.
Yeah, and it's important to break it out between the Colgate period, and the non Kobe period. During this current period one impact to that.
Accelerated or is having a more meaningful impact is that shift from third party or from owned brand to third party with a large minimums on third party, where in the near term we can manage both the.
Inventory in reaction better by doing but by making that shift over the long term and hopefully it started on longer.
We can go back to that pretty cold in cadence and target that we communicated on last quarter's call.
I think from that magnitude perspective, I think you can think about.
The combination of full price markdown mix and a lower markdown margin, having the largest impact.
Followed by.
The third party owned brand mix.
With more of a shift towards the third party than anticipated on the previous quarter's call and then we also which I think we mentioned, but just to call out as well as we have to the shift from revolve to forward that lower margin segment forward.
Offset partially and very partially by improved margins on the forward side.
Okay. Thanks for that and then I guess as a follow up how do you look ahead guys. As you think about rebuilding the business posts cobot here.
How much of the of the gross margin change we see now this year do you think remains structurally versus how much you thinking can recapture if you think about the fact that you guys had very very high levels of full price selling relative to the retail peer group.
I don't know.
Along you said longer term you can try to return to the mix of first party third party brands, but may be forward keeps growing faster maybe some of these lower gross margin categories are bigger opportunity in that structural or maybe just the levels of full price.
Selling come down how much how does how should we think about what you think as we look had to 2021 or whatever is recapturable.
Yes. So we don't view this is any kind of long term shift not another maybe some longer term shifts. It's the margins like let's say on some of the category mix shift, but it but I think relative youth business opportunities and ultimately not clean not much into the overall margin with regards to the two major components.
Mark Downs.
A third.
Third party versus on brand mix, we vote.
Those is temporary certainly some more promotional environment right now and.
Everyone has a lot more inventory than than.
Preproduction pandemic and so that's been reflect accordingly in the numbers.
With regards to own brand third parties. This is a temporary shifting strategy because the economics are better for us in this pandemic situation that is highly uncertain in terms of outlook and also where.
Economics are different in terms of.
Okay.
Kind of production minimums Union.
Investments in signing style.
In cost of that nature. So.
The major shift that you're seeing this year is just a function of us maximizing economics of the current period, we're going to be prepared as soon as the pandemic is over to immediately pounds things back.
To a level of more comparable to what we talked about previously which was scheduled to held back a little bit right from a closer to 2000 between 2018 in 2019 mix.
And then from there continue to grow that business.
Your next question comes from Bob tripled from Guggenheim.
Hey, guys.
Good afternoon.
Couple of questions for me I think on the first part on the moved the shift to Threepi.
Is that a lot of that existing brands that you sold before are you getting new brands in terms of that piece of the business and I guess in a situation like this with the balance sheet that you have are you seeing any opportunities from like an emerging brand perspective, where a designer or someone.
Might have some liquidity issues and that would be something consider adding to your own portfolio.
Yes, the majority of the shifted Threepi has been with existing brands with vendors bands that we've had lost any relationship but on the fringes. There's also been the addition of some new vendors and categories that are becoming more important things like loungewear, but.
On the smaller end we work with.
You know 500, plus third party brand so, but there have been from very recent additions to react to the marketplace.
Long term wise in terms of partners our brands I think you know of course.
Serving our customers in the number one in some great product is essential.
So if there are brands that are.
You know need support and helping them and there's an opportunity for partnership that some of them would definitely no love to explore heading.
As of right now it's quite early in this crisis.
But in the future if those opportunities present themselves will be very open.
Got it and just two more quick ones.
First one is in on the international business specifically.
April may can you talked about country by country, what you're seeing or what you've seen in terms of the ramp back up and then the last question is essentially.
You talked a little bit about some of the.
Stimulus check impact are you seeing more customers use the after pay financing vehicle at all just any changes from like Q1 into April may thanks, and that'll be great.
It definitely so with regards to the positive international trends.
I can add some more color I think broadly internationally as well some some sort of regional color.
So in addition to international being positive past four weeks I would say in general we saw in our international regions. They were hit last hard.
Right.
Quickly.
And we've seen positive trends that are fairly broad based internationally now international that represents a lot of countries. So there is there's probably no point in time in our history for every single country is trending in the right direction, but in general I can say, it's very broad based in terms of overseen including.
Heavily to Korea, such as Western Europe, we're seeing some some really positive sales trends.
Your next question comes from Simeon Siegel from BMO capital markets.
Great. Thanks, Good afternoon, guys, how they're all going well through.
Sorry, if I missed it can you speak to your view on the go forward direction of cost for Influencer in performance marketing and then can you guys you've talked to how you're approaching you mentioned conversions. So looking at reflecting on the fact that March April so all those.
Traffic.
Sales trends can you just talk.
What you're seeing what conversion in your approach.
Thanks.
Indefinitely.
So on a go forward basis, I would expect marketing expenses to be generally in line as a percent of sales year over year, So call it flat.
Now that's a broad general guidance, we're going to be tactical and.
Take advantage of opportunities when they are there and pull back when they're not there, but I think is.
The kind of an initial.
I kind of flat gross stuff thats the way.
Good.
And then terms of conversion rate trends, we are seeing some recovery on conversion rate, but it has not been as strong as recovery on the traffic side.
And so.
No.
Thats something that we've yet to see in terms of before recovered.
Yes.
Thanks.
Yes.
And we have time for one more question. Your last question comes from Susan Anderson from B. Riley FBR.
Hi, good afternoon, thanks, Great fitting me in.
Two questions on the cost savings I guess should we think of all of that being in second quarter is there anything also that we should think about for the back half of the year on and then also when you think about the consumer how are you thinking about them getting back to spending on fashion apparel again, our at the low.
Well that they had been spending and then also how are you thinking about competing I guess, what the stores when they open up obviously up a lot of promotions will be going on but just keeping that consumer.
The eyeballs on your website versus.
Going out to the store.
Yeah, Hey, this is Jeff, thanks, and especially on the cost savings initiatives.
Those are really started to take place in mid April.
So april kind of half half month impact there and the second quarter, we won't see the full impact.
You know, we're going to monitor things on a week to week month to month basis.
You determine.
How if we have to go deeper or less deep on those cost reduction initiatives.
Let me.
Attempted to variabilize the businesses as possible. So we can make those adjustments.
In real time is possible but.
But you know we're we're planning for.
Okay.
A much.
You kind of it continued depressed environment in terms of cost structure planning.
So that we can survive in come out stronger in the end of it and maybe I'll pass it on for the discussion on eyeballs and.
With regards to when you know stores opened in such I think ill.
As you know when Shelton pay source data at home guidelines are.
Lifted we think the consumers really going to be excited not to go into physical stores, which are really spend time with their family spend time with friends really do that the joyous activities.
That were lacking in kind of this quarantine locked down type tell you and that's exactly where we thrive so any offset in terms of access to physical so as we really think will be more than compensated in boosted with.
Our resemblance of more than the activities that have been with held in this time period that we thrive in.
Okay.
Great. Thanks, so much.
And I will now turn the call back over to management for final remarks.
Okay.
Thank you guys you know it's been.
Of course, a crazy time period, but most importantly, we'd want to thank our team that's been extremely challenging across the board.
From some of the just the fundamentals of the way, we do things from working from home and of course, all the sacrifice that everyone is making across the board. So.
We are all doing our best than I think ultimately this will show up in the mid to long term results. So we're very proud of everything thats going on that and I look forward to though with the long term future continuing to thrive together.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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