Q3 2020 Revolve Group Inc Earnings Call
Good afternoon, My name is Chris and I'll be your conference operator today at.
At this time I would like to welcome everyone to the results third quarter. Two 2020 earnings conference call. All lines have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question.
Turning to answer session if.
I would like to ask a question. During this time so the press star followed by the number one on your telephone keypad.
If youd like to withdraw your question press the pound Keith Thank you.
At this time I would like to turn the conference over to Erik Randerson, Vice President of Investor Relations at evolve. Thank you you may begin.
Good afternoon.
The one and thanks for joining us to discuss revolve third quarter 2020 result, before we begin I'd like to mention that we have posted a presentation containing Q3 2020 financial highlights to our Investor Relations website located at investors not revolve dot com I'd also like to remind you that this conference call will include forward looking statements. These statements include our current expectation.
Patients regarding the continued impact of the COVID-19 pandemic on our business operations and financial results and our outlook for net sales product mix gross margin operating expenses and capital expenditures for the fourth quarter. These statements are subject to various risks uncertainties and assumptions that could cause our actual results to differ materially from these statements include.
The risks mentioned in this afternoons press release as well as other risks and uncertainties disclosed under the caption risk factors and elsewhere in our filings with the Securities and Exchange Commission, including without limitation. Our annual report on form 10-K for the year ended December 31, 2019, and subsequent quarterly reports on form 10-Q, all of which can be found on our website at <unk>.
Cutera start 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 included adjusted EBITDA and free cash flow, we use non-GAAP measures and some of our financial discussions as we believe they more closely represent.
Investor operational performance and underlying results of our business.
The presentation of these non-GAAP financial information is not intended to be considered in isolation or a substitute for or superior to the financial information prepared and presented in accordance with GAAP and our non-GAAP measures may be different from non-GAAP measures used by other companies reconciliations of GAAP to non-GAAP measures.
But as well as the description limitations and rationale for using each measure can be found in this afternoons press release and in our SEC filings.
Joining me on the call today are co founders and co Ceos, Mike Carona, Colas, and Michael mentality as well as Jeff you, Tim Robbins, our CFO following our prepared remarks, we'll open the call for your questions with that I will turn the.
Call over to Mike.
Thanks, Eric Good afternoon, everyone and thanks for joining us today before we get into the details of the quarter ill provide some high level thoughts on our longer term vision, we founded revolve 17 years ago with the goal of becoming the fashion destination for the next generation consumer.
From the beginning our focus was on the coast.
Customer experience the utilization of data to drive decisions in the creation of an authentic connection with our customer through our merchandise offering and marketing message. These areas of focus are still at the core of what we do today and what differentiates us.
And what we believe will continue to drive growth into the future.
As a brand known.
And for the discovery of on trend merchandise centered around aspirational experiences and lifestyle content, including social gatherings travel and special occasions. The current environment impacted by cobalt has resulted in revenue pressure in what we believe is a temporary deviation from our historical growth pattern. Despite.
Despite these pressures we have been able to.
Rich the investments in our platform overtime to produce notable increases in margin and profitability that we are excited to share with you today.
We believe the revenue pressures are temporary as people will eventually socialize in person again in travel will return until then we will continue to invest in our brand and platform to set ourselves up to take it.
Advantage of what we believe post co bid will be a strong rebound as a result of prolonged pent up demand.
With that longer term framework as a backdrop there are three key financial highlights of our third quarter that I want to call out.
First we delivered record EPS of 27 cents per share record net.
11 income of 19 million and record adjusted EBITDA of 24 million adjusted EBITDA grew 66% year over year and EPS grew at an even faster rate.
Second we achieved our highest ever gross margin in the third quarter of 55.3% nearly five point increase from the second quarter and up almost.
Landing points year over year.
The higher gross margin year over year was a key driver of our significant growth and profitability and reflects a high percentage of net sales at full price in the third quarter and improved inventory dynamics.
Third we generated $14 million of operating cash flow in 14 million in free cash flow, which was up.
Up 86% year over year on the heels of generating 54 million in operating cash flow in the second quarter, we now have $159 million in cash on the balance sheet.
Our strong balance sheet, not only provides us with the capital necessary to navigate through this uncertain time, but more importantly allows us to reinvest in the business to drive long.
Long term growth.
I am extremely thankful for all of our dedicated employees, who have shown impressive collaboration and agility day in and day out.
Even with most of our teams continuing to work from home. The organization has remained laser focused on ensuring the safety of our employees in maintaining exceptional service levels for our cost.
Customers, while continuing to drive efficiencies throughout the business.
Now getting into the specifics of our third quarter results.
Recall that on our second quarter Investor call in August we talked about the strong pace of recovery for much of the second quarter before net sales leveled off in mid to late June.
As previously share.
Our net sales in July in early August remained very slightly positive increasing year over year in the low single digits, but.
The modest growth trend in net sales remain consistent through the end of August the trend is changed in September with a modest growth in July and August turned into a year over year decline in net sales in September the first year.
Share your decline since may of this year.
For the third quarter is a whole net sales declined 2% year over year, which is a 10 point improvement on a sequential basis compared to the 12 point decline in net sales reported for the second quarter.
While we are pleased with the 10 point sequential improvement for the quarter as a whole we would have liked to see us.
A stronger close to the quarter.
As we look at the recent trends there are few things that we believe are contributing to the top line deceleration.
First the impact of COVID-19 in more specifically social distancing continues to have a significant impact on our business our inability to host large scale in person events has a lagging and growing negative.
Every impact the longer we're in October 19 sheltered state.
While the brand marketing team has done an incredible job pivoting into live streaming content and other avenues of engagement is very difficult to make up for the millions of engagement points in billions of impressions that come with our in person events. We are excited to reverse both of these trends and what we believe.
We will be a strong and healthy post cobot world.
Second competition for key words, and other forms of digital advertising increased in the third quarter, particularly on a sequential basis compared to the second quarter when online advertising rates were still recovering from the March lows we.
We attribute the significant increase in online advertising investment in our.
Product categories industrywide to traditional brick and mortar retailers shifting their focus online given the unprecedented increase in E commerce penetration driven by COVID-19.
Third and looking at the net sales trends from the second quarter to the third quarter. It's important to note that net sales contributions from markdowns were very strong in the second quarter.
Were helping the topline comp while we were able to successfully work through our markdown inventory and rebalance our overall inventory levels. The significant reduction in markdown inventory entering the third quarter led to incremental topline pressure.
At the same time, a lower mix of markdown sales and shallower markdowns helped drive the very strong margins and profit.
Stability in the quarter.
Aside from the strong Q3 financial results I am encouraged by the positive impacts from continued operational enhancements on our platform and the customer experience initiatives that we continue to rollout in our international markets.
Our operations team delivered phenomenal results as we saw the impact of lower return.
Turn rates as well as efficiency gains from automation and other investments we've made over the last 18 months continue to provide benefits.
Consider that fulfillment cost per order decreased 15% year over year, all the while maintaining best in class service levels with a record 99% of customer orders received by noon Pacific time.
Shipping out the very same day we.
We believe this level of performance benchmarks very favorably compared to most other ecommerce companies.
Shifting to a discussion of our international business, we had a strong third quarter in our international markets financially and operationally, Australia, Canada and Western Europe, each delivered strong.
Double digit growth in net sales year over year, partially offset by a decline in Asia.
One of the most important strategies, we can employ in international markets is to localize the country to provide the same great experience offered in the U.S.
We recently announced that for the first time revolve customers in Canada, one of our top five in international markets.
Have access to hassle free returns at no cost, including refunds of all applicable duties and taxes.
Our launch of all inclusive pricing for Canadian customers is very important because by including duties within the price of the product up front, we eliminate the sticker shock at checkout in significantly streamline the process for merchandise returns.
Now shifting to the more recent trends in the fourth quarter to date.
The softer year over year net sales trends in September carried through to October with a high single digit decline in net sales on a year over year basis.
Similar to what we experienced in September we continue to experience strength in the at home categories that is more than offset by the ongoing pressure.
It's an occasion driven categories.
By geography in October International net sales continued to remain stronger than net sales in the US. However, we are very cautious due to the resurgence of COVID-19 cases in the corresponding social distancing restrictions in some of our largest international regions, including the UK in Western Europe.
Before I turn it over to Michael I want to reiterate how pleased I am with our ability to navigate through these challenging times.
So again, thanks to all of our team members for your hard work and resilience for staying nimble and for your dedication to exceeding our customers' expectations.
Thanks, Mike and Hello, everyone.
Business the power of our brand and most importantly, the incredible execution of our team enable us to deliver our most profitable quarter ever.
Even surpassing our record profitability last quarter.
Truly proud how much our team has accomplished during this extremely challenging period that's.
Thats phenomenal execution has further strengthened our financial profile and position.
Well to capitalize on the long term opportunity ahead.
To expand on Mike's opening remarks, we are focused on building the fashion destination for the next generation consumer.
Customer comes to us for discovery and look towards for inspiration even during this unique and challenging time these shopping behaviors and remain.
We continue to provide a brief.
Hi, good curated assortment of the most on trend merchandise that provides us with the ability to discover products that suit her lifestyle, whether it's travel in social occasions. Most recently, a more stay at home and active lifestyle.
Complement our merchandise offering we provider with constant inspiration through authentic an aspirational lifestyle content.
Important to this.
Tested he is providing content that connects with platforms, she's engaging with and speak to what's happening in our life.
The team has done a great job of expanding into emerging social platforms and providing content centered around our current lifestyle.
I'm excited about the progress we continue to make on the merchandising and marketing and final assembly of that despite the challenges that the last.
A couple of quarters, we will emerge much stronger and better positioned for the long term.
Starting with our merchandise the ongoing reality of a more stay at home lifestyle has allowed us to further deepen the relationship with our customer by highlighting our offering of incredible fashion and design in areas that were not top of mind until very recently.
Our emerging categories such as.
Qt intermittent loungewear all strongly resonating.
Additionally, more than ever our customers, demonstrating a healthy and active lifestyle, meaning try greater opportunity an active wear it somewhere.
Adults for the past two quarters demonstrate our ability to serve a customer in new ways and broaden how customers perceive a false product selection.
In the third quarter sales.
But at home and active categories of beauty accessories, intimates sweaters knit swimwear increased approximately 50% year over year on a combined basis.
By further enhancing our merchandising strategy, we believe we can expand our sharper while it over the long term.
Is incredibly important to us that whatever our customer needs. So you can always come to evolve as a trusted.
I'm, sorry, but style.
An exciting example of one of the more prominent shifts in our mix is the beauty category with net sales increasing more than 100% year over year for the second straight quarter as COVID-19 has been a catalyst for shifting beauty sales online.
Beauty as a category, where the majority of customers and our demographic, but to influencers for do.
The new product inspiration a great fit with our global network of Influencers. In fact this month, we are launching a beauty gift box with Mega Influencer actress model Shave Mitchell, who has nearly 30 million Instagram followers.
An important component within our long term merchandising strategy is the expansion of our own brands.
As we discuss.
Do you think this calls we temporarily pulled back our own brand offering as a response to that certainty and demand pressures introduced by club and linking the.
The result was that shop, and the number of new styles delivered in the quarter we.
We already started making investments necessary to increase our stopped production at assortment with a targeted 50% increase in the number on branched out deliberate as we exit.
The year as compared to the third quarter.
Additionally, we had discussed making investments into the owned van division to increase the diversity and quality of our product offering.
Please to report that the early results are extremely encouraging with a significant improvement in productivity for style as compared to the same period last year.
While we are optimistic on the trajectory of.
Some brands bearing in mind that despite the increased new styles delivered in the coming months due to inventory dynamics, we still expect a sequential decline of our own brand penetration in the fourth quarter of 2020 before beginning to increase some time in mid 2021.
Shifting to a discussion of our brand marketing strategy.
We continued with the successful digital playbook in the third.
Our third quarter hosting several valid tend to virtual events similar to the shifts in merchandising focus and that's covered period. We have also brought into our marketing message to address more aspects of our lives.
This was the concept behind revolve you an event, we had been developing even before covet.
Posted late September revolve you with a week long virtual activation that included seven keynote speakers.
Third quarter 300 influences this.
This unique event increased our reach and followers across multiple social channels and the featured content focused on topics such as the business and social media building, a brand clear journeys mental and physical health and entrepreneurship.
While we continue to expand and invest in new digital platforms, such as GTV Instagram wheels you.
I haven't kicked Todd. We're also excited to share that we have recently hosted a series of successful in pricing events called capital vault. They included adherence to comprehensive safety precautions dipping our toe back into interest expenses important to build the brand and differentiating ourselves. Furthermore, our impressing events talk to capture more eyeballs garden more press and generate more customer interaction.
Tubing, all of which are important drivers of traffic and new customers.
We are excited about the future that will include hosting regular in person events with the added element of our new digital playbook, which we believe will be a very powerful combination.
We are executing well, while continuing to invest in our key growth initiatives during this challenging period and.
Revolved we're always focused on the long term and I am confident we are well positioned to capture further market share in the years ahead, particularly with what we believe that an accelerating permanent shift to digital commerce with.
With that Jeff you close that with some additional detail on the financial results and trends.
Thanks, Michael as a result, the test we have continued.
Execute well in a very difficult environment for the second straight quarter, we achieved record net income and record adjusted EBITDA, we generated strong free cash flow that strengthen our balance sheet and we drove our highest inventory turn in several years.
Now starting with the third quarter results net sales decreased 2% year over year.
As Mike mentioned, we began the third quarter with low single digit growth in July and August that was offset by a larger single digit decline in September.
Okay isn't where product categories. The most significant headwind since many special occasions remain on pause due to social distancing concern and as we work through our markdown inventory.
Sorry in those categories in the second quarter to provide some context regarding the impact of reduced markdown inventory on net sales in the third quarter. Our largest category addresses is a good example, if year over year growth in markdown sales of dresses alone had remained consistent between the second quarter of 2020, and the third quarter of.
This year, our total net sales would have actually increased year over year in the third quarter.
Drilling further into the topline for the third quarter by segment revolves segment net sales decreased 4% and forwards segment net sales increased 9% year over year.
Active customers were wonderful.
Point $5 million, an increase of 5% year over year.
The trend is consistent with our commentary last quarter that we expected growth in active customers to further decelerate as the trailing 12 month metric captured a larger number of quarterly periods impacted by Covance.
As compared to the high customer growth quarters of last year.
With.
With the continued pressures on traffic and demand we expect to further deceleration in this metric until we start to cycle out of the suppressed kobin period.
Orders placed were $1.1 million, a decrease of 4% year over here.
Average order value was $232 an increase of $204 in the second quarter.
Quarter of 2020, but remained 16% lower compared to Q3 of 2019 the year over year decline in ASV was primarily driven by a shift in net sales mix to at home product categories, such as beauty and lounge wear with lower average price points.
And the decline in net sales of dresses, which carry higher.
Average order values.
It'll be headwinds were partially offset by a higher mix of full price sales our highest full price sales for a third quarter in over 10 years.
As well as a greater sales mix attributable to our higher price point luxury segment forward.
Partially offsetting the lower number of quarters and to the lower.
Average order value with a decrease in merchandise returned to year over year.
We attribute the lower return rate year over year to a combination of more deliberate purchasing behavior by consumers during the COVID-19 pandemic.
As well as the COVID-19, driven shift in mix to product categories with lower price points and lower return rates such as beauty.
And away from occasion, where such as dresses a category with a higher than average return rate that.
Then we did experience a sequential increase in the return rate from the second quarter, but it remains well below the prior year periods.
International net sales increased 18% year over year outperforming the six.
Percent decline in net sales in the U.S.
As Mike mentioned, we experienced strength in western regions, and the emerging markets, partially offset by weakness in Asia.
Moving to gross profit consolidated gross margin was 55.3% the highest ever reported for a third quarter and an increase of approximately 100.
Third 60 basis points over the prior year.
This performance was much better than we anticipated and reflects healthy increases in margin across both segments.
Within the revolves segment, we delivered gross margin of 57.2% up approximately 180 basis points year over year. The revolve segment margin benefited.
Good for meaningfully improved inventory dynamics exiting the second quarter of 2020 that contributed to a healthy inventory balance leading to a year over year increase in the percentage of revolve segment net sales at full price.
And a decrease in the depth of markdowns.
These positive contributors to gross margin were partially offset by year over year.
Decrease in the mix of owned brands as a percentage of revolve segment net sales consistent with the outlook. We shared on recent Investor Conference calls.
Within the forward segment, we delivered gross margin of 42.9% an increase of approximately 190 basis points year over year.
The increase reflects a healthy.
The inventory balance shallower markdowns and a favorable mix of merchandise sold.
We were encouraged to see an easing in promotional activity across the luxury space in Q3.
And now moving to the cost structure, where we delivered highly efficient results for the second straight quarter, we achieved leverage on every major expense line item in the piano.
Starting with fulfillment fulfillment costs were 2.8% of net sales an improvement of about 60 basis points year on year.
The team did an outstanding job driving efficiencies, while maintaining our top priority of protecting the health and safety of our employees and delivering a best in class experience for our customers.
The automation launch.
Launched last year with further expanded during the second quarter and is delivering a compelling return.
We also continued to benefit from cost efficiencies, resulting from a lower return rates year over year.
Selling and distribution costs were 13.8% of net sales an improvement of approximately 80 basis points year over year. Once again, we benefited.
From reduced shipping costs due to lower returns and to a lesser extent efficiencies and payment processing and customer service costs.
Marketing costs were 12.5% of net sales a decrease of approximately 250 basis points year over year.
Marketing efficiency, primarily reflects reduced brand market.
Marketing investments.
Hosting in person revolve events remained on pause.
Our investment in brand marketing decreased by $3.2 million year over year and performance marketing investments decreased by the remaining $1.1 million in Q3.
It is important to note that our brand building investments will remain a key component in our long term.
Term growth algorithm. So we do not expect the total marketing expense as a percentage of net sales to remain at reduced levels. We have reported for the past two quarters.
General and administrative costs were 11.7% of net sales in the third quarter, an improvement of approximately 60 basis points year over year the reduced dziennik.
Cost reflects lower head count and our COVID-19 cost containment efforts that were in place for a portion of the third quarter in.
In addition, as part of the owned brands reset that was accelerated due to coated reduce cost in this area.
As we start to rebuild and designed into new product categories and get ahead of an anticipated returns.
Turn of demand, we will reinvest in this area over the coming quarters.
For the third quarter of 2020, we achieved record net income of $19 million or 27 cents per diluted share more than doubling the 13 cents in diluted EPS in the prior year in.
In addition to our strong operating results.
Our EPS comparison benefited from a lower tax rate in 2020, primarily due to excess tax benefits realized as a result of stock option exercises.
Even when excluding these discrete tax benefits, our net income and diluted EPS would have each increased more than 65% year over year.
We also.
Also reported record adjusted EBITDA of $24 million, an increase of 66% year over year for a margin of 15.9%.
Moving to the cash flow statement, we had another outstanding quarter for cash flow generation.
Free cash flow was $14 million a year over year increase.
Of 86%.
For the nine months ended September 32020, free cash flow was $74 million more than doubling our free cash flow reported for all of 2019.
The strong cash flow generation significantly strengthened our balance sheet and liquidity cash and cash equivalents.
As of September 32020 were $159 million, an increase of $8 million during the third quarter. Despite the repayment of $9 million on our revolving line of credit.
As we look ahead and think about capital allocation and the use of cash our number one priority is fortifying our balance sheet and positions.
I want us to invest in growth as we exit the cobot era.
Followed by strategic organic investments to drive long term growth.
Given our capital efficiency, we also have the opportunity to explore other investments, including opportunistic and disciplined M&A.
We are pleased with our inventory levels and the healthy inventory dynamics.
Mixed in the quarter, we ended Q3 with $74 million in inventory on a year over year decrease of 29%, but up $9 million from the second quarter as we started to reinvestability sufficient inventory level and appropriate inventory mix to support demand.
By comparison, our net sales decreased year over year by only 2%.
Which illustrates our significant improvement in inventory turns.
Now, let me talk about the business trends since the third quarter ended on September Thirtyth.
Given the fluid and uncertain environment that we continue to operate in real again skip any traditional guidance instead, we will share some recent trends and assumptions to help in your.
The selling of the fourth quarter.
Starting from the top.
As Mike mentioned net sales in October were down by a high single digit percentage year over year.
In terms of product categories, we continue to see strength in new at home categories that has been offset by continuing headwinds in occasion, where categories such as dresses and skirts.
Model from a macro perspective, we see a great deal of uncertainty affecting our customer demographic COVID-19 cases around the world are reaccelerating, leading to increased restrictions on social outings that has been a key driver for our brand when combined with the high unemployment rates and lack of new use stimulus measures, we see continuing challenges in the current.
Firemen.
Shifting to gross margin. The Q3 gross margin performance was well ahead of our initial expectations benefiting from a higher mix of full price sales and shallower markdowns.
Moving to Q4, we expect gross margin to come in more in line with the prior year fourth quarter gross margin of 53% as a result.
And in both of a lower mix of owned brand sales year over year as well as what we expect to be a prolonged holiday promotional cadence.
For our selling and distribution and fulfillment cost line items, we expect.
The combination of selling and distribution and fulfillment expenses to be flat to slightly higher as a percentage of net sales in the fourth quarter when compared to.
Reason four of 2019.
There are a couple of factors contributing to this assumption first as we've all heard the major shippers are imposing surcharges on packages during the fourth quarter that are likely to drive higher shipping costs in Q4 SEC.
Second fulfillment in selling and distribution have each realized efficiencies from the lower.
Acute turn rate year over year.
In fulfillment, we incur lower labor cost due to less time spent handling the return units to come into the warehouse and in selling and distribution, where the majority of the costs are shipping related fewer returns means reduced shipping packaging and payment processor causes.
Since bottoming out in the second quarter of 2020.
Our return rate has been increasing with each passing month.
So we are planning for a sequential increase in costs as a result, we do however expect our return rate in the fourth quarter of 2023 main lower on a year over year basis.
These cost pressures will be partially offset by continued efficiencies realized as a result of the automation and price.
Each of improvements discussed earlier.
Marketing.
We are planning for marketing as a percentage of net sales in the fourth quarter to remain approximately flat year over year.
After two straight quarters of significantly reduced marketing spend and with our strong balance sheet. We believe it's time to start pushing our marketing investment again to continue to build the brand.
Fossett drive traffic and increase customer activity.
General and administrative on a year over year basis, we are planning for genie expense to be lower in the fourth quarter as compared to the prior year.
Compared to the third quarter of 2020, we expect Egina expense to increase in Q4 since the temporarily reduced.
Or isn't wages have been fully restored to their pre cobot levels for our active employees.
To recap we believe we have executed well during what is a very challenging environment with a focus on safety for our employees efficiency in our operations and building a strong balance sheet.
With a healthy base of inventory and our cash balance we are shifting back into.
Cell investment mode, with an increase in our marketing investments and increasing our inventory levels and assortment and investments into our own brand capabilities now we'll open it up for your questions.
At this time I would like to remind everyone in order to ask a question Press Star and then the number one on your telephone keypad we'll.
Pause for just a moment to compile acuity roster.
Our first question is from Edward Yruma with.
Keybanc capital markets. Your line is open.
Hey, Good afternoon, guys couple of quick ones from me I guess first.
And you think about inventory you talk about mobility, hopefully improving at some point that short to medium term.
Let me start rebuilding inventory in anticipation of improved sales trends and then I guess second as a follow up on the marketing, which can you guys indicated leaning into.
Are there particular categories are going to lean into it just kind of have to.
Hopefully keep top of mind as we head into a proper sales carry kind of what's the direction you up to date.
That into thank you.
Yes, definitely make here so with currency inventories is already begun building up our inventory position certainly from the lows and we think that will have beneficial effects on sales trends of course.
Yes.
A very uncertain environment, we think and until we get to more of a postcode world and it's not just about the overall inventory levels right.
Up those those.
About those categories. So we're placing calculated bets at the appropriate levels that we can balance our revenue goals and our profitability goals and I think you won't really see us put our foot on the accelerator Intel.
Timing is a bit more clear in terms of kind of.
Then the post cold rolled hits.
It's.
But there is definitely going to be some level of.
Of calculated risk taking in advance of that window to make sure that we're poised to take advantage of that world, which we think is going to be a fantastic world for US there is going to have been a year or more a pent up demand from consumers, who haven't been able to do the things that they love the special social occasions that were known for and so.
So we want to make sure we're ready and positioned with our inventory and marketing take advantage of that situation as soon as it comes.
Our next question is from Ross Sandler with Barclays. Your line is open.
Hey, guys just.
Question about active customer accounts without that actually declined quarter on quarter for the first time.
I know thats, a TTM number but can you just walk us through how much of that is from.
Just the overall environment and things like stimulus checks that are out of your control versus the reduction in marketing and.
Take revenue.
Tougher time retaining customers.
And it sounds like you know I'm glad to hear that you guys are going to lean back in starting now.
How are you thinking about balancing these record high EBITDA margins with just growing the top of the funnel and getting back out there with more.
Customer acquisition.
That's the first question and then just any learnings from the live streaming efforts. Thus far how is that in terms of adding to your ability to kind of.
Grow the funnel and attract new customers.
Yes, Hey, Rod.
Jesse.
Ill start with that I would think about it just quick details and then turn it over to Mike talk a little bit more about the acquisition and the lean and yes.
Yes, you are right, we did see active customers declined sequentially and thats largely an impact of the Covanta, where all that we do think there was a benefit from the stimulus check in and the extra unemployment that was happening through July.
You know that started to hit US and then also the second lien until the cases and everything else that you hear out there. So there definitely is an impact there.
We anticipated that active customer number to come down sequentially from the plus fall. This year at the end of last quarter to five now.
It's a combination of both the new and the repeat and Thats, what it tells us it.
It's largely a coded impact.
45% of that active customer base is repeat or an existing customer, but they contribute a much larger share of the revenue. So important that we that we lean on that existing customer.
Yes, and looking at the broader picture Ross.
Yes, we're in a world today, we were in a world in the second quarter than the third quarter as well that doesn't play to our strengths as a brand.
And as a retailer.
Be known for social occasions, and live in your best life, and we're Comping a period, where we are.
Those things were all true so.
You know it's due to the.
Firemen were facing and then certainly with the quarter to quarter dynamics you have.
Let's turn to one number as well as some of the pressures that we acknowledged in the third quarter, where we saw for example.
The digital advertising markets get much more competitive in the third quarter not just on a sequential basis, but also on a year over year basis, where there are.
Good bye players stepping in in a big way that they historically in any of that from a year over year comp perspective that has had an impact, but we feel great about the trajectory there.
And.
As we discussed we are going to start meaning on the marketing as well as the inventory position as we get closer to.
Post Cupid World, which.
It looks like based on the best information available should be sometime Q2, EPS for Q3, and we want to be first there.
So that we can.
Leverage our brand that's really going to work in that world.
Our next question is from Oliver Chen with Cowen.
Your line is open.
Hi. Thank you. This September information is very helpful. On the down high single digit what were some of the levers underneath that with average order value and transaction count I mean, what are some of the the optimistic cases for how that could improve going for.
Forward, We would also just love your take on your commentary on on brands.
And.
It's a dynamic it's such a dynamic environment currently but what are you seeing that really helps inform the innovation that you have plan there and the impact that will have later to your to your prepared remark on own brands.
In Q.
Yes, Hello. This is Jesse I'll take the first one and then kick it over to Michael you know two or <unk>.
As we said in our prepared remarks, we did see September come down in that high single digit range and that continued through October the drivers there really consistent with the remarks, we made on both September.
In October and lower average order value continues driven by those same factors of the shift in mix.
Offset by continued strength in full price that was really strong in the quarter, which drove that margin.
Better margins on the markdown merchandise all all centered around that improved inventory held.
So it's a lot of the.
Same.
As the commentary you made earlier.
And just the overall macro pressure.
And I guess would be booked sorry, one more comment I missed that last part of your question on kind of.
Yeah.
The back half of Q4, you know we're not.
Not commenting on now we're just commenting on what happened through October.
You know in November to date is really volatile with elections in just such a short period of time, so it kind of staying away from comments, there and also kind of prepared for the prolonged promotional cadence in this holiday period.
And back to the comments on March.
We made for the quarter.
Okay, and with up to 10 own brands. Thank you.
Hey, Oliver yeah, but sometimes its own brands I'm sure I'm going to give a call that no pre covered period, we were pulling back owned brand and kind of resetting of regrouping there continue to invest in little bit cobot, we really accelerated.
That because of the dollar commitment per style.
With the owned brand division compared to third party, where we have a lot more flexibility.
As of now we're beginning to ramp up quite aggressively we know what Q3 will probably be R. Chop in terms of style the levered and call. It a ballpark you know at least a 50% increase into Q4 and similar growth rates into.
Q1, and Q2 of next year.
So it will be that March.
March and that reinvestment period has already begun.
On top of that I'm very excited because it's not just get.
Given those numbers up but also the diversity in the quality of the product is going to be you know much much different it in very very exciting for US you know largely in times past, we were loosely you know very very.
Successful with China, based woven and dresses and tops and such and that's been you know where the on Bell divisions really thrived. We've continued to make investments in other aspects of the supply chain.
Again covered it really accelerated this and now that sweaters and its business first is extremely important.
On Ben Division is doing very very well with sweaters and.
Mitch and continued investments in other categories that in 21, we'll be seeing you know continued investments in denim continue investments in activewear actually.
And also sustainable product as well, so we'll be ramping up aggressively in the products that we have coming in you know very very excited to get could be better than ever.
Thank you very much a final question.
So your call out on large scale in person events.
Is that has that been different from how you previously observed.
The impact there and also.
How do you plan on this dynamic environment to be ready and and what are the different risk factors are there's like uncontrollable uncontrollable factors.
I don't know the environment that we're seeing thanks.
Yeah lifes, you know in times past large scale in person events were also synonymous with deploying large amounts of marketing capital in a very very effective way and I think that's been a playbook that we continue to expand to continue to expand that we started with.
And rather offensive, we're able to scale them you know, we'll get more impacted more efficiency here, that's something that for sure we met.
We have things that have been starting to ramp up you know right now where camp revolve, which we had to do instead of doing a large deal up and we just four separate groups instead of having all groups together at once but we are starting to ramp up in person events we have.
A number of options on the menu for Q1, and Q2 well have to be a little patient in terms of committing to anything just to see how the world plays out we're very optimistic as I'm sure. The rest of the world is about the vaccine and depending on how the environment is the events will just get larger and larger in scale has progressed and ultimately when we feel like we're in the the safe World.
Well, we can all get together again and these other hogs is oh, probably see the larger scale event and the best party in the world commitments very very soon will evolve as you know.
Around the world and the Roaring twenties when is with a lot of people really just excited to whether favre clothes and hang out with their friends and not that's the time that we're all looking forward to and I'm sure. Our shareholders are really the quite that as well.
Well.
Our next question is from Mark Altschwager with Baird. Your line is open.
Good afternoon, Thanks for taking my question.
<unk> first more of a short term question, but given the plan to lean back into marketing is it your expectation that you can drive some re accelerate.
Production from the down high single digits over the remainder of the quarter. So neither levers you're pulling from an assortment perspective or otherwise that would give you some more optimism for the holiday season.
And then just one.
Longer term looking into.
2021 in the Spring Festival season, obviously very important period for you it yet.
Where we sit today seems like we can't really plan on you know events being back to normal by then though I sure hope I'm wrong. So just you know maybe just give us some insight as to how you're positioning yourself for the spring season, you know how much more aggressively do you want to lean into some of these stay at home categories. How responses can you be sure consumers shift back into the.
Yeah traditional fashion categories more abruptly than expected and any insight there would be great. Thanks.
It definitely so.
He's gone increasing our marketing expenditures.
At the same time historically the way, we always putting things as we go with the current and so we're not going to.
We're not going to fight a brick wall just.
You bet.
Certain number and put dollars to be.
That is what we do understand that we need to put dollars to work ahead of when we think the rebound will occur, particularly on the brand marketing side, where a lot of the impact of brand marketing is longer term in terms of the messaging in terms of seating awareness. So that's really where we're going to lean in on on starting to ramp up investment.
As is practical given the environment, because there's still a lot of constraints within the environment as far as I was making those investments.
To make sure that we're well positioned as soon as the World turns and then I think in terms of.
Andrew merchandise mix and timing of pre Coburn postcode.
Yes.
Transitionary period.
It's going to be balanced we're willing to take some bets and be wrong there.
Just because we think it's such a huge opportunity to be their first with a great selection as soon as people are able to get out into the things that they love and it's it's just perfectly aligned with what our brand is all about.
So we're going to take a little bit of risk there, but obviously.
I think if you look at our track record we don't take.
Foolish receded theyre calculated manage risks.
Our next question is from Michael Binetti with Credit Suisse. Your line is open.
Hey, guys. Thanks for taking our questions here.
I wanted to ask you a couple of things I guess I'm, saying the sustainability of margin that you saw on third quarter, obviously, we hear Jesse commentary on some of the components for fourth quarter, but maybe just some thoughts on when do you think the mix brand sorry, the mix of owned Brantley Bath higher year over year and when the inventory in total will be back in line.
Sales and then.
I guess do you feel like when you look at the customer active customer trends do you feel like the <unk> you lost a customer that was coming to you for markdowns discounted product only or do you have data that [laughter], that's a customer that mostly lobster. It was a temporary lapse that they'll be back is the markdown levels normally.
And do you want them back if so.
Okay.
Yeah, Hey, Michael I'll take the first one and then kick it over to Mike on the customer component.
As we commented on we're starting to already invest in inventory inventories up $9 million sequentially. So we're starting to make that improvement.
Our investment in inventories still down meaningfully year over year. So we don't expect that line to cross until you know probably mid year next year, you have to of course consider though.
Significant cuts we made this year so there's some comp dynamics.
As you look into 2021.
But you know, we're we're taking as Mike mentioned on the previous question some balance.
Risk as we as we look ahead into a postcode world and then.
On gross margin and owned brand same thing Weve already started to make those investments you know those won't kick in really until mid 2021 before we see that line start to process, just given the timing and inventory dynamics, though.
On the customer front I think there is a couple of dynamics going on certainly there's the decreased level of markdowns, which are really pretty much historical lows in the current quarter and as far as if you look at how we normally do.
During the third quarter.
And so certainly there's some customers that.
Fine now, but would buy it we have markdowns and great is the performance of the quarter wasn't as great as our momentum isn't.
In what we believe is our ability to manage inventories we will headquarters in the future that have more markdowns opinion, so that customer will come back then I think more importantly, we know there.
No.
There is a huge portion of customers now customers out there that know us that love us and haven't forgotten about us that are dying to shop.
But just don't have the right occasions to shop for in the ways that they normally shop.
I actually got to know just this morning from a customer.
There was just talking about how much you love the revolver.
Okay, and how much she was looking forward to shopping with US again as soon as our.
Coburn was overdone or husband could run a business again im sure Theres, many more stories like that out there.
I have another customer that last my last earnings call. You know she saw me on TV in reached out and you talked about how Q.
She loves us she shops has all the times you can only.
For after just pretty much only been Choppiness, we're active wear in the current period, but you can't wait until things are back to normal and she can shop us for all the same things that you normally websites for so the customers there.
She loves us were.
We're really pleased with the results that we've had during this period given.
How opposite is and what our brand has helped.
And we're.
We're going to make sure we make some investments in marketing or inventory position.
And just be operationally nimble so that when the post cold rolled hits in one that pent up demand is unleashed in every one goes back to doing the things they love.
We're going to be there to take advantage of it.
Our next question is from Kimberly Greenberger Morgan Stanley Your line is open.
Great. Thank you so much I wanted to ask a question about Q4 marketing this year if it makes sense, obviously team to start investing back into marketing.
I'm wondering if you did that in the month of October and if so.
So did you see any.
Knock on benefit to revenue in the month of October from that and then just as we look out to next year or should we expect to see marketing.
Normalized back at that kind of 15% level.
Or is there are there any kind of.
Savings that you think you will flow to the bottom line on that marketing line. Thanks, so much.
Yes, so on a sequential basis weve been beginning to to invest.
More and more in marketing with each month I think we kind of briefly discuss some of the revenue trends in in October and how they were similar to what we saw in.
In October so I wouldn't say, we've seen the fruits of those investments just yet but there is a lot we do on the marketing side. The brand marketing, that's really kind of lagging units impact in terms of.
You know, how our marketing funnel works and so you're not mentioned that October is a very unusual month cobot environment and also the election.
Noise going on so I wouldn't read too much into that and then in terms of looking into the future.
We intend to generally to invest just as much in marketing as we ever have.
But we're also not dogmatic about things we play every environment differently. If any information comes out that suggest to us.
So it's better to just our strategy will we'll certainly do that but we've said since we since we went public and it continues to be the case that marketing is very important to us for spreading our brand message preceding awareness that we're in the early innings in terms of.
The customers that we can capture with just over 2% penetration of our target market and so.
No it's going to be a big part of our.
Expenditures and strategy going forward.
Our next question is from Aaron Kessler with Raymond James Your line is open.
Thanks, guys a couple of questions first on the promotional environment any more color around that is it mostly traditional retailers.
Can't based on a content marketing I think you talked about a little bit about last quarter getting some good traction there with some of the video and a bunch of me thoughts on Instagram Reals combat as a platform for you guys as well. Thank you.
Mike do you want to me.
Yeah.
Content marketing side of things.
Yeah, the counterpart definitely.
It has been quite interesting as really kind of a.
It's crazy Super interesting as what I was talking about owned brands earlier, we were making moves in this accelerated moves and the same goes to.
Our in person events in such revolve you with something that we are planning for.
Or I don't know what's going on in the brainstorming sessions for you know maybe over a year or so we thought that this would be the perfect time to execute something like that where in pricing parties and such but no longer no relevant and such so if you will definitely see a combination of these digital events that were doing combined within person events and potentially integrate them. So very excited.
Let it about that we also had been interesting and I think we saw tremendous boost in the outset I think potentially there was a push there where were seeing that you know a lot of eyeballs and we've seen things taper off a little bit so well see how things evolve I think it's.
We are very long term minded and I think Instagram stories is a good example of something that on the outset wasn't particularly.
Impacts.
I hope I really steadily go into something that was very very important for us to continue to invest in reals and hoped.
Hopefully that will that kept the consumer will continue to gain traction there and it will be important part of our come.
Company.
And then with regards to the promotional environment, we've certainly seen an easing of things, particularly.
On the luxury side.
But I think I think if you look at revolve versus the broader market things too.
Used much more sharply in probably uses isn't the right word for our own markdown positions.
Well you know the the consumer demand has shifted to be less markdown focused than it was but at the same time in Europe.
After the discussion during the quarter was that we didn't have enough markdown merchandise to meet the markdown demand from our consumers and that's a good problem to have but it certainly had an impact.
Revenue for the quarter.
Our next question is from Justin Post with Bank of America Merrill Lynch. Your line is open.
Great. Thank you I just wondering you had some real efficiencies on the cost side for the last couple of quarters.
Your guidance and outlook kind of discuss some of those may be dissipating or.
Making more investments, but when you when you think out a year or two what are some of the lasting.
Cost savings that might might continue going.
Going forward. Thank you.
Yes sure.
I think if we just work down through the PML starting from the top fulfillment is an area, where we do the lasting efficiencies combination of two factors, there really overtime and again thinking longer term.
Glenn and we refer to this a lot because it is meeting.
But the efficiency gains as a result of the automation investments that we've made over the last 18 months.
And then also capacity we invested in a new warehouse last year that gives us.
Two to three X the capacity that we're at now so we should just we should see natural leverage on that line item line item overtime as we mentioned there is a return.
Implement a return rate component there. So we do anticipate returns to tick up slightly sequentially.
Hopefully lower than our peak time last year in that 55% range. So we do hope some of that return dynamic does play out post postponed world, but not not banking on that one.
Selling and distribution will continue to be pressured.
Sure there as shipping shipping costs go up year on year pretty consistently we'll look to make.
Improvements overtime with an increasing A.O.V. over the longer term that should give us some.
Some easing their marketing we talked about we'll continue to make investments did not banking on really any leverage on that line item over time and.
And DNA.
Which is largely fixed so.
With scale, we'll get leverage on that line item.
Our next question is from Bob Drbul with Guggenheim Partners. Your line is open.
Hi, guys. Good afternoon, just a couple of quick questions for you I think the.
The first one is when you talk about September trends October trends in in November.
With the performance of International can you maybe give us a little color on what you saw on the international markets. It's my first question and the second question is are.
Are you partnering with any of the top pick talkers as you think about how the world is changing these days.
Versus Instagram there would be helpful. Thanks.
Yes, so with Hearst the international markets.
We saw strength in.
The third quarter, particularly in our western markets.
So in Western Europe and Australia.
Canada, we saw double digit gains in those markets. So we feel very good about our.
It's in trajectory there certainly in the near term with with.
Resurgence in cobot in Europe, and exercise some kind of near term caution to to kind of headwinds in the current quarter, but feel good about the trajectory there and then offset by some weakness in Asia.
Yes, Asia is an area, where we're starting to make I think some more.
Artful investments and have some interesting partnerships that we're working on but but not quite there yet and so hopefully.
As those things come to fruition, we'll see some gains there and then also Hong Kong has always been or has been for for.
While our most important.
Asian market in that region.
Unions as has been.
Very troubled for for a number of quarters now with us.
Yes.
Yes, when it comes to tick Tock, we I would say that we havent.
Worked with a top tick tacos, we have worked with the top fashion tick tock as where we see the top tick tock getting tens of millions of views.
Great and say numbers, but the content really is it's actually focus and really isn't quite.
Along with our brand, but that top fashion tick talkers are very very much in alignment with our brand and we have worked with them and we tend to work with them much much more we see the content to be a little bit more in.
In depth compared to Instagram, where it's really you know numerous kind.
Thanks filing temps, an outfit and a lot richer content to me, it's a little bit more akin to a you tube and Instagram, which I think is.
Right in between is very very exciting and we will continue to do a lot more the one the only disadvantage tick tock being an earlier platform is that the access to data and.
And kind of like our tools are in that.
I looked at the Instagram tools, you know with that we've had for nearly 10 years now so whether it be our entire in house things. So that the numbers that you've talked about the C. In house well. That's you know third party npis have won't be as robust as Instagram for it little bit, but the encouraging numbers that we have are very exciting and no doubt, we'll see a lot more romantic tops.
The next question is from Roxanne Meyer with MKM partners. Your line is open.
Great. Good afternoon, and thanks for taking my questions. My first question is on his Ross's wondering if you could provide a little bit of color about the performance you know obviously, you've got a a quite a number of sub categories. So curious.
If they it's all been weak or are there have been pockets of strength in some of them.
Also curious you know what percent of four acute dresses typically represent and perhaps how they're positioned this year given your investment in other categories.
Yeah it.
Yes, the categorization some categorization it becomes like a very very complex situation because.
When we look at categories as you know multi dimensional you know of course overall, we see dresses no down quite a bit compared to our other categories, but within dresses or subcategories and Theres end uses.
That are doing very very well, so we kind of look sometimes show.
First of all you know a category data to kind of know what should we tell a you know the story of how the business is performing but as you deepen deep there's strong pockets of access across the board you know I think one thing is that you know this is an interesting fun one to me that you know we saw the active wear justice was extremely strong it's kind of like the squared cross pollination of activewear, which of course.
Hi loves it and then what time period would do extremely well with the traditional email rip off category. So that's something that's very exciting to us, but albeit small but Jesse do you want to talk about you know Q4 dynamics in terms of categorization and such it's you know definitely going out just isn't there are certain categories. We have various degrees of going out dresses that I'm sure it will suffer.
There is also other categories that are very holiday oriented that will be you know, we'll we'll do segment, which we anticipate such as you know sweaters and knits and such.
Yes, Sir.
Yeah, and just to give some more context, maybe even beyond Q4 on the dress mix historically, its been at or slightly greater than a third of our business.
But then in Q2, you saw that drop off mainly to closer to 20%. We did see some recovery into Q3, so dresses did improve.
Improved sequentially and I think you know the most exciting part about that sequential improvement as that came from full price sales as we commented on the prepared remarks with us.
Nitpicking decrease in the amount of markdowns dress sales from Q2 to Q3, so exciting to see that dresses come back in a full price way you know in into Q fours can use either slightly higher on dresses.
Compared to other quarters of the year, just given that occasion, where dynamic.
But not meaningfully so you know well continue to see similar pressure on dresses as we have in the last quarter or two until we get into a a real post covered world.
Our next question is from Matt Koranda with Roth Capital. Your line is open.
Hey, guys. Thanks, two for me.
First one is just overall orders per active customer look a little lower on a like for like basis year over year and sequentially. So it's understandable that you guys you know certain existing customers that may pull back in this period, but any detail you can provide on sort of order frequency between older and newer cohorts and what you're seeing in terms of differences between those would be helpful.
Yes, sure I get that a short order.
Oh, sorry go ahead do you have more sorry, yeah. The the other one was on return rates and just I guess, they're headed higher and in the short term it depends on mix, but is there anything you guys can do structurally to bring those levels down and take advantage of kind of the lower rates that you've enjoyed over the last quarter or two here independently.
Yeah, Yeah I'll take the first one then and Mike can comment on longer term return dynamics.
No, we didnt see that order frequency come down, but keep in mind that sequentially. It did tick up very slightly from Q2 to Q3. So we're encouraged about that.
And you know, we're still running higher than our historical averages if you.
If you look back you know pre 2019 late 2018 so.
So still a very active customer and it came from both the new and the repeat side, you know really the customer Didnt dynamics.
A large extent near the results on our financials, where you see her.
Looking at lower AOCI.
The shifting.
Shifting from dresses into beauty you saw.
You know as we discussed earlier, a large kind of markdown component in.
In Q2 that shifted to a large full price component in Q3 also agree that we're seeing you know beauty represent the percentage of beauty products from.
New customers doubled this quarter compared to the prior year.
You saw an offset there and dresses that kind of largely the customers still behaves relatively consistently with how she has in the past and you know just some quarter to quarter dynamics the shift in merchandising mix and ASV.
And then in terms of the longer term.
Trajectory with return rates.
It's very difficult even for us to reduce aggregate the impact of both.
And some of the longer term things, we're working on but we're certainly hopeful that some of the things we've been working on.
Hopefully hold up.
Hi.
Most co but not to the same level certainly were proceed here on return rate, but that that we're hoping we'll get some.
On the return rate dynamics.
The various.
Various factors, including some category mix shifts that should.
Interest april's coded due to investments we've been making.
On our side in terms of.
Product quality and presenting the product in inaccurately ism and kind of other things we've been working on internally as well as some other I guess more proprietary levers.
Levers that took hold.
There were.
It will have an impact will have an impact it just so happens a lot of those things came to fruition at the same time as cobot hit so.
We'll have to see post co bid.
To what extent those initiatives holdup, and then and then and then long long term, we're very bullish on return rate improvements. We think there is a lot that can be done in the online world too.
Better communicate to customers.
Products are the.
She's going to love not.
Not just on the site for once you get some in person and when she tries the money and so that's always an area that we're investing.
We have time for one more question. Our last question is from Ralph Schackart with William Blair. Your line is open.
Great. Thanks for squeezing me in two quick.
And if I could just you talked about so September declines in the high single digit range.
Give some perspective on the linearity of the declines in September and then this really change that or the trajectory change in October you know just see more deceleration celebration was it fairly steady and then just in terms of when a vaccine rolls out in.
Additional starts to open again, what's the lead time, you need to plan your larger person and.
Person events. Thank you.
Yeah on the September October dynamic it was pretty consistent across the two months of course, Theres day to day and week to week dynamics fit for September and October.
The largely similar.
With a lot a lot of dynamics that play in those couple of months that covidien.
Cove in Nevada.
You know just macro pressures and external pressure.
And then on the large scale events. The team can react very quickly and you saw that as we headed into coven and their ability to quickly pulled back on Vince.
And restructure and recreate kind of and move into this live streaming and content.
We're optimistic and they can move really fast too.
To get into events when the time is right.
Yeah, Michael here just the additional commentary is that there's a number of events that are really on the shelf ready to go it's really.
Really about a matter of which one do we pull landing kind of you know I.
Buying that.
Through maybe the next couple of months into the early next year, we are very ready to go into very looking forward to it and I think it'll continue as you know the vaccine or is that maybe you pre vaccine. It will have some activities going post vaccine, we are locked and loaded with the capital and with the sand that desire to go.
So very excited.
And there are no further questions at this time I'll now turn the call back to management for closing remarks.
Well. Thank you everyone for joining us today, thanks again to our team and on this veterans day in a very special thanks to those that have served or.
Thank you for your sacrifice.
This concludes today's conference call and you may now disconnect.
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