Q4 2020 Revolve Group Inc Earnings Call

Good afternoon, My name is Chris and I'll be your conference operator today.

At this time I would like to welcome everyone to revolve fourth quarter and full year 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 and answer session.

If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.

If you would like to withdraw your question press the pound key.

At this time I would like to turn the conference over to Erik Randerson, Vice President of Investor Relations at revolve. Thank you you may begin.

Good afternoon, everyone and thanks for joining us to discuss revolves fourth quarter and full year 2020 results.

As we begin I'd like to mention that we have posted a presentation containing Q4 and full year financial highlights to our Investor Relations website located at investors not revolve dot com I would also like to remind you that this conference call will include forward looking statements. These statements include our current expectations regarding the continued impact of the COVID-19 pandemic on our business operations and financial results.

And our outlook for operating expenses and capital expenditures for the first quarter of 2021 DC.

These statements are subject to various risks uncertainties and assumptions that could cause our actual results to differ materially from these statements, including the risk mentioned in this afternoon's press release as well as other risks and uncertainties disclosed under the caption risk factors and elsewhere in our filings with the Securities and Exchange Commission, including without limitation. Our annual report on form 10-K for the year ended December 31.

19, and our subsequent quarterly reports on form 10-Q, 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, adjusted EBITDA margin and free cash flow, we will use non-GAAP measures some of our financial discussions as we believe they more closely represent the true operational performance.

<unk> and underlying results of the business. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to 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.

Conciliations of non-GAAP measures to GAAP measures as well as the definitions of each measure their limitations on our rationale for using them can be found in this afternoon's press release and in our SEC filings.

Joining me on the call today are our co founders and co Ceos, Mike Carroll, Nikolas, and Michael <unk> as well as Jesse <unk>, our CFO. Following our prepared remarks, we'll open the call for your questions with that I will turn the call over to Mike.

Good afternoon, everyone and thanks for joining US today, we delivered another quarter of outstanding results in what remains a challenging and volatile environment.

Our results are highlighted by three points of gross margin expansion that helps drive a more than doubling of earnings per share and a 37% increase in adjusted EBITDA year over year.

The strong fourth quarter capped off a year, unlike any in our 18 year history.

I'm proud of our team for operating with agility discipline and strength to deliver record profitability for both the fourth quarter and the full year.

There are three key themes I want to focus your attention on.

First we are primed and ready for the reopening of the economy.

Millions of people are getting vaccinated against Covid every day across our markets trends are already slightly better in the first quarter year over year.

We see an exciting opportunity per revolve in the months ahead as more people are finally able to get back to enjoying all the social occasions, they've been missing out on for the past year.

Second in 2020, we delivered record profitability and free cash flow that significantly strengthened our balance sheet positioning us well to invest in future growth opportunities such strong performance. During the downturn gives me even more confidence in our long term potential when the wind is at our backs once again.

Third we accelerated plans to expand into adjacent product categories, enabling us to serve more of our customers' needs and touch more aspects of her life.

In 2020, we significantly increased our sales penetration and emerging product categories like beauty activewear in intimates.

Our expanded marketing playbook enabled us to stay connected with our customer and helps drive our early success in the emerging product categories outside of our traditional offerings, which now allows us to target an expanded share of her wallet.

Given our focus on value creation over the long term I'll take just a few minutes to review our performance for the full year 2020 before shifting the focus to our 2021 initiatives.

We begin 2020 with strong momentum delivering better than 20% year over year net sales growth in January and February before our top line was negatively impacted by the escalation of the COVID-19 outbreak in the U S.

I am most proud of how well our teams responded to the crisis as a brand known for the discovery of on trend merchandise centered around aspirational experiences and social interactions. The onset of Covid introduced extraordinary headwinds impacting both consumer demand and our impactful marketing events.

Nonetheless, the team delivered impressive outcomes against what became new priorities brought on by the pandemic.

Amidst all the uncertainty we delivered strong results on our priority of protecting our financial position and optimizing our cash flow, we leveraged our technology platform, our experienced team and our leadership expertise to quickly and aggressively adjust our merchandise buying plans and focused our teams on driving operational efficiencies throughout the organization.

These efforts enabled us to generate $71 million in free cash flow during 2020, an increase of 113% while more than doubling our net cash position to $146 million at year end <unk>.

Significantly improved inventory health in 2020 was a key driver of our cash flow generation and balance sheet efficiency inventory turns increased more than 25% year over year and our core revolve segment.

Our healthy inventory position helped us achieve a high percentage of net sales at full price in 2020, 77% of net sales came at full price well ahead of retail industry benchmarks, our full price selling was particularly strong in the third and fourth quarters, serving as a key contributor to our gross margin expansion in the second half of 2020, we.

Realized significant operating efficiencies in fulfillment during 2020, even with COVID-19 headwinds and our incremental investment to ensure employee safety flow.

Cost per order decreased 11% year over year illustrating that the warehouse investments we made in technology automation in the past two years are driving long term sustainable efficiencies.

These operating efficiencies combined with lower return rates were a key driver of our record profitability net income increased to $57 million an increase of 15, 9%.

Adjusted EBITDA grew to $69 million, an increase of 25% year over year. Despite the modest decrease in net sales, we accelerated plans to expand into adjacent product categories, enabling us to serve more of our customers' needs and touch more aspects of her life.

These efforts accelerated our growth in at home categories like beauty that offer exciting longer term opportunities and position us to expand our share of wallet over the longer term, particularly when demand recovers for our traditional categories like dresses.

We continued to raise the bar for customer experience by staying laser focused on operations and exceeding our customers' expectations. In fact, we achieved record performance in our net promoter scores in 2020 and exceeded our very high target for customer satisfaction rankings from day, one we've been hyper focused on the customer experience. So it is gratifying to hear such a pause.

The feedback from our customers during what was the most challenging time in our history to deliver on our high standards and finally, we accelerated our international expansion and further elevated service levels to support our customers in key regions International net sales increased 15% year over year and international growth accelerated to 24% in the fourth quarter as we.

Realize the benefits of investments, we have made to strengthen our value proposition.

Oh, no I'm very proud of how well, we executed and I'm excited about the path forward.

Turning now to our priorities for 2021, our key focus is to ensure we are well positioned to capitalize on the reopening we believe the world is on an exciting path to reopening and our customer can't wait to get back out again and enjoy the active social lifestyle.

She loves and has come to associate with revolve.

As a brand built in centered around the social lifestyle revolve is ideally positioned to benefit as the world reopens.

Our leadership team is aligned on five key priorities to capitalize on the reopening opportunity in the much larger opportunity that we believe lies ahead.

First we will accelerate our brand building investments to take full advantage of the pent up demand, we expect to see when people can socialize and celebrate in person again, we are optimistic and excited for what we believe could be a robust recovery in 2021.

When mobility returns our customers are going to want to look in feel amazing with our latest fashion. So our stepped up marketing investments should help us capitalize on the increased demand. We expect we will further pursue expansion of our product categories into adjacent areas like beauty and activewear to enable us to develop deeper relationships with our customers.

Continued success of newer categories will provide us the opportunity to serve more of their needs potentially capturing a greater share of their discretionary spending over the longer term.

We will invest in further strengthening our own brands portfolio through the launch of exciting new brands collaborations in styles within our existing portfolio brands.

We will build on our momentum in international markets, we see great opportunities to further elevate the customer experience in international markets across both revolve and forward.

We will continue to optimize the customer experience in western markets, where we have already made investments and we will further invest in newer regions, such as China, and the middle East that have been performing very well for us and hold great potential.

Finally, we will continue to raise the bar on the user experience across all regions, we will leverage technology to provide additional website personalization introduced new payment methods provide major feature upgrades to our mobile applications and drive faster refunds for customer returns among other things before I turn it over to Michael I will reiterate how grateful.

Lam for all our dedicated employees, who collectively made our 'twenty 'twenty achievements possible.

Thanks, Mike I'm very excited to be here today to share our thoughts on the business and the opportunities that.

The competitive advantages that drove our success during the first 17 years of building revolve share it.

Through 2020 and enabled us to not just manage through the most challenging year in our history, but also put us in a position of strength as we enter 2021.

With this strong positioning we are excited to play offense and started the vessel again as we look forward to reopening.

That's a great merchandise in area, where we start to reinvest already in the back half of 2020, our strong team centered around our data driven approach and read and react strategy enabled us to react fast to align with the shift in consumer preferences induced by Covid.

Buddy to adapt so quickly helped drive the strong financial results in 2020 and accelerated the diversification of our assortment to address more aspects of our customers.

The success of new product categories opens have been citing opportunities to further expand our collection of styles across both third party and owned brands capturing more share of wallet over the long term.

Owned brands continues to be core to our long term strategy.

Own brands are true brands in the eyes of the consumer day drive traffic attract new customers generally have higher gross margins than comparative third party products and add to the uniqueness of our merchandise offering.

The combination of our own brands and emerging third party brands establishes an assortment with very little overlap with other retailers.

As we shared previously we temporarily dialed back on vans in 2020 after the onset of COVID-19.

Largely to allow us to make shallower inventory buys across a wider range of styles.

We are encouraged by the performance of our own brands in the fourth quarter across the narrow range of styles.

We're excited to build upon this success in coming quarters, as we invest to drive further category expansion through a combination of new styles and collections, including brand sell different sustainable fashion and collaborations with well known personalities.

On brand team and I have never been more excited about our future plans and we are right now.

Shifting to marketing I am excited about the power and expanded marketing playbook that combines unparalleled in person events with the acceleration into content live streaming and emerging social channels over the last year. We have stayed relevant to her lifestyle do meaningful content and live streaming while at the same time accelerating our expansion into emerging social media platforms, such as <unk>.

It ticked up in Instagram wheels, we generated a combined 58 million views in the second half of 2020.

A significant headwind during the past year has been that we have not been able to host our marquee impressive events that are a powerful marketing lever, particularly for generating social media impact and building the brand long term.

We are very excited to get back out there to do in person events again in 2021.

Starting this week actually where we are hosting for in person events in Australia, and Sydney, Brisbane and on the Gulf Coast.

The events are attended by Australia based Influencers, Australia has had a very effective COVID-19 response. So it is further ahead on the reopening pattern in other parts of the world.

Many Australians I'm, making up for lost time enjoying their current summer season like never before.

Our net sales in Australia increased more than 30% year over year in the fourth quarter health indicator into how consumer behavior may evolve in other regions as the virus becomes well controlled.

Lastly, we're excited about the momentum and growth opportunities in our international business and the forward segment, which generates a significant percentage of its sales outside of the U S. International continues to represent a meaningful opportunity over the long term as we optimize our service levels and offerings. In these regions. We also see opportunity to invest more aggressively into forward can we have in years past.

The luxury customer had been very resilient to the pandemic and with the global market for luxury fashion rapidly shifting to digital we see a great opportunity to increase the awareness that forward highly curated selection of iconic in the original luxury brands with a merchandise assortment that is very complementary to that of revolve and with revolve is large and powerful customer base. We are excited to extend our cash.

Promotion efforts between the two segments.

The introduction of any great loyalty program includes both revolve their forward on the same platform will further solidify a meaningful opportunity to cross pollinate the bands.

I am very proud about what we have been able to accomplish to date I truly believe the best is yet to come with that Jesse will close out with some additional detail on the financial results and trends.

Thanks, Michael I am truly encouraged by how well our teams executed throughout 2020, putting us in a position of strength as we look ahead to the post Covid era.

Our fourth quarter results capped off a record performance in 2020 per net income adjusted EBITDA and free cash flow significantly strengthening our balance sheet.

We are starting to tap into our strong balance sheet in the fourth quarter to reinvest in inventory and marketing shifting back into a mode of playing offense with the vaccine distribution moving forward and we will continue to make investments in 2021.

Now starting with the fourth quarter results note that all of the comparisons I will discuss will be on a year over year basis, unless otherwise stated.

Net sales decreased 5% an improvement from the October net sales results, we shared on our Q3 Investor Conference call.

By territory International net sales increased 24% meaningfully outperforming the 10% decline in net sales in the U S. The.

The international strength was broad based with Australia, Canada, Greater China, and the Middle East as key contributors.

Looking at consumer demand very strong growth in at home categories like beauty intimates, and activewear continue to be offset by headwinds in occasion wear categories like dresses and skirts.

We are optimistic about the opportunity for recovery, an occasion, where trends as we anniversary the COVID-19 outbreak in March and even more so as consumers around the world are vaccinated in the coming months and start socializing in person again.

By segment revolve segment net sales decreased 5% and forward segment net sales decreased 2% in the fourth quarter.

Active customers were $1 5 million a decrease of 1% consistent with our commentary last quarter do you expect further deceleration in active customers in the near term keep.

Keep in mind that since this is a trailing 12 month measure Q4 active customer metric captures the larger number of quarterly periods impacted by Covid.

We had 1 million orders placed in the quarter a decrease of 6%.

Average order value was $256 an increase from $232 in the third quarter of 2020, but remains 9% lower year on year.

A year over year decline in <unk> was primarily driven by a shift in net sales mix to at home product categories, such as beauty and intimates with lower average price points and a reduction in average units per order. These headwinds were partially offset by a higher mix of full price sales, our highest full price sales for our fourth quarter and over 10 years.

<unk>.

Partially offsetting the lower number of orders and the lower average order value was a meaningful decrease in merchandize returned for the third consecutive quarter.

We attribute the lower return rates through 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.

The lower return rate also reflects a higher mix of international sales, where return rates have historically been lower than in the U S. Moving to gross profit consolidated gross margin was 56 per cent the highest ever gross margin reported for any quarter and increase of 305 basis points. This performance was stronger than we anticipated.

And is reflective of our healthy inventory across both segments.

Within the revolve segment, we delivered gross margin of 57, 8% up approximately 270 basis points. The revolve segment gross margin benefited from meaningfully improved inventory dynamics that contributed to a healthy inventory balance leading to an increase from the percentage of revolve segment net sales at full price.

And a decrease in the depth of markdown.

Positive contributors to gross margin were partially offset by a decrease in the mix of owned brands as a percentage of revolve segment net sales consistent with the outlook. We shared on recent investor calls.

Within the corporate segment, we delivered gross margin of 46, 2% an increase of approximately 520 basis points the.

The increase is reflective of the health of our inventory and a significantly higher mix of full price sales, resulting from a temporary inventory dynamic that resulted in a limited amount of markdown inventory available for sale in the fourth quarter.

While we are very pleased with this gross margin performance, we caution investors not to model. This level of forward gross margin into the future.

And now moving to the cost structure, starting with fulfillment.

Film costs were two 9% of net sales an improvement of approximately 20 basis points. We continue to realize benefits from a lower return rate as well as lower labor cost as a result of automation and efficiencies coming out of the investments we have made in our fulfillment processes over the last two years.

Selling and distribution costs were 13, 4% of net sales an improvement of approximately 80 basis points.

And lower than we had budgeted I'll call out two factors that help the comparison relative to expectations first our operations team did great work in optimizing our logistics strategically directing packages to our shipping partners to avoid the shipping surcharges and shipping delays that impacted many other companies this holiday season.

Our return rate in Q4 came in lower than we had anticipated as a result, our cost structure benefitted more than expected from reduced shipping packaging and other costs associated with significantly lower merchandize returns year over year.

Marketing costs were 14, 8% of net sales an increase of approximately 20 basis points. This is consistent with our commentary shared last quarter regarding increased marketing investment and the competitive market for digital advertising.

General and administrative costs were lower year on year as expected declining approximately 70 basis points.

With our strong gross margin and well managed cost structure, we achieved net income of $19 million or 26 cents per diluted share for the quarter more than doubling the 12 cents per diluted EPS in the prior year and.

In addition to our strong operating results. Our EPS comparison included tax benefits realized as a result of stock option exercises.

Even when excluding these discrete tax benefit our net income and diluted EPS would have each increased approximately 50%.

We also reported adjusted EBITDA of $18 $7 million, an increase of 37% and a margin of 13, 3% higher than the prior year by 407 basis points in large part due to gross margin expansion.

Moving to the balance sheet and cash flow statement during the fourth quarter, we started to invest back into inventory to position our assortment to support the anticipated recovery and increase in demand in 2021.

This investment resulted in a $22 million sequential increase in inventory or 29% compared to the third quarter.

We ended 2020 with $95 million in inventory a decrease of 9% year over year. This compares favorably to the 3% decrease in net sales for 2020, illustrating our higher inventory turns year on year and improved inventory health.

Our investment in inventory weight on free cash flow for the fourth quarter. Nonetheless for the full year 2020 free cash flow at $71 million, an increase of 113%.

Cash and cash equivalents at year end were $146 million.

An increase of $81 million or 123% from $65 million as of December 31, 2019 during.

During the fourth quarter, we repaid the remaining $50 million on our credit line ending the year debt free.

Now let me update you on some changes in the business since the fourth quarter ended on December 31, given.

Given the continued uncertainty in the macro environment will again deferred on offering any traditional guidance. Instead, we will share some recent trends and assumptions to help in your modeling of the business for 2021.

Starting from the top the improved trends, we experienced as we exited 2020 continued through to 'twenty 'twenty, one with net sales returning to positive territory with a low single digit percentage increase year over year through the first seven weeks of the quarter.

An improvement from the year over year decline in net sales reported for our fourth quarter 2020.

Growth in regions that are much further along in the Covid recovery like Australia, China, and the middle East have been much stronger than regions like the U S and the U K that are still in a stage of reduced nobility. We believe the recovery in these regions is an early indicator speaking to the broader recovery opportunity that lies ahead of us.

Shifting to gross margin.

From a seasonality standpoint bear in mind that our first quarter has historically been the lowest quarter of the year for gross margin in recent years, our first quarter gross margin has declined by an average of more than three points on a sequential basis compared to the fourth quarter gross margin.

We expect this sequential trend to continue for Q1 2021, while remaining higher than the gross margin of 49% reported in the first quarter of 2020.

Puts and takes driving the first quarter gross margin outlook compared to the prior year first quarter include continued strength in full price sales and shallower markdowns year over year, partially offset by a much lower mix of owned brand sales.

To give you a frame of reference owned brand mix of revolve segment net sales was down 15 points year over year in the fourth quarter.

As we discussed on prior calls we expect the mix of owned brands to continue to compress through at least the first half of the year before starting to rebuild in the back half of 2021.

For fulfillment costs, we expect the first quarter to be in the same range as the two 8% of net sales we achieved for the full year of 2020.

We should continue to benefit from the increased productivity supported by our automation technology and the lower return rate, partially offset by increased wages and benefit costs in 2021.

Keep in mind that we can.

The anticipated recovery, we do expect mix to shift back to our historically strong product categories related to going out.

As for example, generally come with a higher return range.

Which will add sequential pressure to our fulfillment costs.

Selling and distribution costs, we expect the first quarter to be in the same range as the 13, 9% of net sales we achieved for the full year of 2020 importantly, looking further out as we anniversary. The COVID-19 outbreak in the second quarter of 2020, we would expect selling and distribution costs to increase more meaningfully as a percentage of net sales.

The second quarter and for the remainder of 2021.

This assumes that we will see a higher return rate year on year, beginning in the second quarter, which resulted in increased costs for shipping handling packaging and payment processing for returned items shipped.

Shipping and handling costs represent the lion's share of this line item and as a result, we expect selling and distribution as a percentage of net sales for the full year 2021 to return to the 2019 levels of 14, 6% if not trend higher.

Marketing as.

As Michael mentioned, we are back to investment mode, and we will keep the pedal down on marketing investments to capture the pent up consumer demand upon reopening and beyond.

We expect marketing to have the highest dollar increase of any of the expense line items potentially exceeding historical levels at certain points during the year as we remain nimble and optimizing the timing of our investments with the anticipated timing of recovery in consumer demand and increase in social activities.

General and administrative on a year over year basis, we are planning for G&A expense in dollar terms to increase in the first quarter and full year as we reinvest in our owned brand platform and other functions to support future growth.

To recap we believe we have executed well during what has been and is a very challenging environment with a strong balance sheet, a healthy base of inventory featuring an expanded assortment and increased marketing investments. We believe we are primed and ready for what lies ahead now we'll open it up for your questions.

At this time I would like to remind everyone that in order to ask a question Press Star and then the number one on your telephone keypad.

Pause for just a moment to compile the Q&A roster.

Our first question is from Michael Binetti with Credit Suisse. Your line is open.

Hey, guys. Thanks for taking our questions here first off Jessica.

Jesse could you help us at least help about how to think about how how much marketing marketing you could be investing at the index had a fed a reacceleration in the first in the quarters quarter.

Yeah.

Yes, Thanks, Michael.

We commented on in the script.

You know, we Wanna be primed and ready for the reopening. So if you look at the Q4 marketing investment of that 14, 8%.

A good indicator of where we're going.

In the first quarter will continue to invest in and we're just trying to.

Highlight for everybody that we do want to invest ahead and during this reopening so it could exceed historical levels during 2021, and specifically on a quarter by quarter basis. It.

Likely going to be volatile and a good day.

Okay and then.

Mike I know you talked about investing in forward.

I'm curious how.

How are you internally evaluating that business with the strength of the luxury category being very very very strong I know you guys pulled back from some inventory.

But I'm curious.

We set that business a bit a few years ago great growth in 2019, this year very hard to judge what we're what we're seeing from it but.

I'd like to know what you think are the.

Some of the internal metrics that you'd like to see as you reinvest in that in that business for it it seems like a good opportunity, but it's also getting I think a little bit competitive in that category as well.

Yeah definitely so as you mentioned.

It does have kind of more crowded from competitors in our revolve segment, which we feel has a lot of white space around it.

We look forward moving through the great opportunity to drive substantial growth this year and some big opportunities. We're focused on number one I'd say is the overlap with the revolve business in the revolve.

We're really looking to bring those businesses much more closely together, we know the revolve customers from the significant portion of her handbag and accessory and shoe budget on and so.

The foreign carriers, so that's going to be a big initiative for us.

Ana as a second thing that is a big opportunity for US we've had a lot of success in China in recent periods.

That's continuing to trend well and we think thats something that we can really.

Got some exciting marketing initiatives there and then the third thing is from a brand marketing perspective, and kind of a brand building perspective, we historically have not focused as much on building the Ford brand as we evolve brand.

Yet as you know that's one of our core competencies is brand strength and brand building and so that's something that we're excited about potential opportunities to invest there in a bigger weighted this year.

Thanks, a lot.

Our next question is from Aaron Kessler with Raymond James Your line is open.

Great. Thanks, guys couple of questions. Maybe just first you mentioned, how the gross margins that were trying to assume that that rate is not a sustainable here.

I think maybe a headwind as you would call out for 2021 that would take risk margins back down and then maybe on the own brand strategy you talked about that a little bit maybe just where are you. Most optimistic on the owned brands for 'twenty 'twenty, one or 'twenty two outside of the dresses category. Thank you.

Yeah, Hey, Darrin this is Jeff I'll start with the first part of that and then kick it over.

On gross margin you feel really good about the gross margin as we exited the year with strong full price sell through and then even on the markdown component, having really strong markdown margin. So we didn't have to go as deep on the markdowns as we historically have and that's a reflection of the healthy inventory balance we expect that to continue through especially in the first part of the year you know we'll start to comp.

Strong gross margin, we had this year and as we get into the back half of 'twenty one but.

Again with the healthy inventory balance at strong full price.

Really good tailwind there now to your question, we do anticipate headwinds on the owned brand from so owned brands typically carry meaningfully higher margin than a third party and that mix of owned brands has meaningfully compressed.

In the fourth quarter net will continue through the first half of 'twenty 'twenty, one before we start to Reaccelerate on the owned brands. So there will be some headwinds from that own brand, but we feel really good about the underlying metrics there on that component of the sales and then again the strong pulp price and the health of the inventory as we head into the year.

Got it yeah and with regard to your owned brand expansion I think it quietly a lot of exciting things going on of course penetration is down without pullback, but would make a lot of investments I mean, none of the capex side, but just time and energy so.

Get out of this kind of.

Social distance world will be seeing a lot of expansion into old bands across you know a lot more categories in times past, our historic strength has been dresses and tops, most notably the woven category are the woven kind of manufacturing technique.

We'll get to the back half of this year into indefinitely.

Early 2022, theres going be a lot of expansion into other categories with continued expansion in denim and active wear there'll be investments shoes jewelry sustainable across the board.

So I think you'll see a lot more robust owned brand offering.

Incrementally quarter after quarter over the long term, so feeling really excited about that.

Our next question is from Erinn Murphy with Piper Sandler Your line is open.

Great. Thanks, Good afternoon, I guess I wanted to expound first on your marketing tool chest I'm curious if you think it looks a little bit different in a post COVID-19 world versus pre Covid, just trying to think if theres any kind of virtual events or learnings that youll continue to execute on or is it just going to go back to kind of both physical and in a post COVID-19 world.

I apologize.

Yeah, I think there is a parallel that with kind of our merchandise as well as our marketing we're going to be able to go back to court.

Dress isn't going outflows things with travel as well as events that go with.

That naturally fit with their kind of like revolve festival in kind of revolve around the world in a couple of things that we have in the works, which were excited to share in upcoming quarters, but also we're definitely going to be able to expand to new zone.

<unk> is an incredible example, where we're expanding into owned brands, where do you think that that huge potential there and of course as we've talked about in the previous two calls.

Our active social media engagement, our livestream ended up being like a big hit so we're going to see even more balanced portfolio.

We're deeper and kind of a broader arsenal in terms of marketing Activations and tactics. So this will allow us to really touch Oliver plates of lifestyle, even more so than kind of what we were historically known for so even though it's been a period of you know.

Awesome profitability over the past few quarters. It has also been a period of a lot of development and investment in totally so coming out of this.

Pandemic, we're going to be more balanced and stronger across the board so very excited.

Great. Thank you and then my follow up is on the beauty business I'd Love. If you could help dimensionalize that for US and then is it helping bring in a new customer or is it building the basket when the customer is on your website and then how is the response been from the vendor community. Thank you.

Yeah overall beauty has been superb and we know that you know that.

Our customer of course.

Spend a lot of beauty and I spent a lot of her budget on beauty and we touch across the whole entire segment, obviously make up a little bit less in times, where youre not going out as much but.

At a time of kind of self care skin care hair care and a lot of that category has been awesome for us So long term wise.

We will continue to invest in Nashville, a fed and also leverages our strength in brand marketing.

Social media kind of engagement has been strong there as well.

We see the introduction of a lot of new customers, but whether they come in at a lower IOP, but then develop into core revolve customers and we're also seeing the core of all customers really expenses adults. So it's really kind of the best of both worlds, attracting new customers that weren't necessarily connecting with us on our kind of fashion kind of marketing like fashion brand, but discovering it that way.

As well as working with our existing customers and expanding and broadening their lifestyle.

A big theme that seems to be coming up a lot not from us.

That we are able to touch.

Customer and a lot of different areas that we werent passed during the day, it's been important for us and covet has really accelerated that.

Yeah.

Our next question is from Rick Patel with Needham. Your line is open your line is open.

Thank you good afternoon.

Are your expectations for <unk> this year.

With the core business doing potentially better as the year goes on assuming that this goes back up but <unk> also made good progress on.

And emerging categories like beauty. So what does this mean for <unk> as we think about the year and just Holistically does it settle below the pre pandemic level and curious if there's anything we should keep in mind as we think about the revolve segment versus forward.

Yes.

Yeah.

There's a few things to unpack there.

Number one you can see the sequential improvement from the where we bottomed out in Q2 at that just over a $200 and then exiting at $256. We see that continuing through 2021 as full price remains strong.

To your point, we do see some pressure from the lower price point units.

And also there's a component of lower units per order and the other thing to keep in mind on this is that it is a growth metrics, so even though the.

The AOE is declining if you look at that on a net basis is that it's actually up year on year and that's due in part to the meaningfully reduced return range. So as mix has shifted from the.

Our largest category historically of dresses into those lower price points those lower price points have much lower return rate. So net net at the end of the day, we're at a at a higher net a L E.

So as we exit into the post pandemic World, we do expect mix to shift back into those historically strong categories like dresses, which will likely come with a higher return rate and a higher <unk>.

And a question on the international markets, where the recovery is a little bit further ahead like Australia are consumers gravitating to the same categories that were strong pre pandemic and as that happens how has the performance been for Covid categories. Like beauty are you still seeing outsize growth there on the smaller base and.

Now what does that inform you about how to approach the U S.

Yes, definitely so we're watching those key markets very closely and what's great to see is that we're seeing continued strength in the categories that we really accelerated during COVID-19, but then we are seeing particularly in Q1 Q1 trends to date.

Some strong recovery in those historical categories.

In Australia in particular.

Q1 to date trends, we're seeing.

Growth overall in excess of 50%.

Other key.

Potentially indicating countries like Israel.

We're also seeing growth in excess of 50% so.

International regions can be volatile individually, but both of those are top.

Five international countries for us on the revolve side and <unk>.

It's really nice to see.

Really nice growth in those regions.

It certainly gives us.

Hope for the months to come.

Our next question is from Oliver Chen with Cowen Your line is open.

Hi, great quarter regarding new customers and what Youre seeing overall and what some of the data telling you about retention of new customers and how your assortment may or may not change with retention and acquisition of new customers and.

And as we think about about the recovery ahead, how are you thinking about inventory plans with the going out slash dresses category.

What you should do there in terms of managing in a dynamic environment, that's getting better as well.

Sure definitely so in terms of the retention trends.

Covid has been a headwind to our business from from a revenue standpoint, all those from the really delivered nicely on the.

Earnings and efficiency side.

But it has been a headwind and that's both on.

The new customer acquisition side with our marketing being really.

In terms of what we can do.

And as well on the existing customer side, where they cant they don't have the need for those.

Dresses and tops, where theyre going out and socializing and looking at growth. So it's been a bit of a headwind there, but we're really excited about is we think that's a really strong opportunity.

That we believe should bounce back as the world gets back to normal as our customers can socialize again as they can live their best life looking feel great and we believe the inroads that we've made in these other categories.

Yes.

<unk>.

Both of those in road should be sticky and we have optimism that it will expand there so.

As the year unfolds, we feel really good about.

How our retention trends should.

Progressing on pack from an inventory standpoint, we definitely want to invest and get ahead of.

The reopening and make sure we're there for our customer when she needs us.

Same time theres going to be a balance to it is there's always a balance to everything that we do where we don't want to overcommit ourselves, but we want to make sure. We're ready to take advantage of what we think could be a tremendous opportunity for our brand customers had been pent.

Pent up for onwards of a year now and not being able to you know to.

Go out and be free and socialize and have fun and party and all the things they love to do and.

We think when that moment unfolds and unpacks it is going to be a perfect moment for our brands.

Our next question is from Mark all trigger with Baird. Your line is open.

Good afternoon, and congrats on the solid performance through a really tough year.

Following up on the inventory topic, there I'm just curious if you could expand on that a little further.

Wondering what the makeup of the inventory it looks like compared to a typical spring season, given some of the continued uncertainties here.

And also just if you could talk about your ability to chase should we see a big acceleration in the coming months, the inventories up nicely sequentially, but still down year over year.

So I'm just trying to think through that.

Yes, our inventory position is definitely swung from one another.

Pendulum right when the crisis started gearing up for the warm weather season, giving up revolve festival and really doing up or.

The old World and the old lifestyle, and then we swung to the complete stay at home lifestyle cold weather loungewear, and such and we're swinging back kind of like just mentioned will be incrementally going back to volume.

More of the categories that we have.

Quickly responded to get away from kind of a going out and dresses, but definitely not all the way back there I think we'll be seeing our current kind of plan expectation is that the recovery the recovery will be steady so sequentially quarter over quarter will be ramping up so right now we're currently.

More dress going out oriented than we were in.

In the depths, but nowhere near where we would've been a year ago and I think that's kind of what it will be effective as things improve.

Our next question is from Camilo Lyon with <unk>. Your line is open.

Thanks, Good afternoon.

I wanted to get your thoughts on how Youre thinking about return range, where they should settle out as buying habits normalize can you maintain some of the gains made or should we expect to return to that.

Teens range pre pandemic.

Yes. Thanks, Great question, that's one thing we really want to highlight.

A lot of other things, but we have received a meaningful benefit from the return rates. During COVID-19 part of that is the mix shift, but there is also a part of that that we believe is due to just the change in consumer buying habits.

So we're optimistic.

Hard to forecast from what it will look like but we're optimistic that with a more diversified inventory assortment and we're optimistic that some of these consumer buying habits will continue on.

Post Covid world that we won't necessarily returned to that 55% at the peak of 2019, but it will go up from where we're at now but again.

He has yet to be seen but we are optimistic that we will pocket. Some of these return rates and then you know the things in our control we continue to optimize for the customer experience and really make it easy for her to return the homeless the dressing room. That's been there since day. One there's also an element of international as we make it easier and easier for international customers to return there will be an increase in return rates there.

But at the end of the day.

Meaningful increase in net sales due to the convenience and the experience for that international customer.

Great and then my follow up.

Is it related to logistics it sounded like your team during the quarter did a very good job of managing some headwinds.

There are many headwinds that a lot of cash.

Have you been facing.

From the supply chain logistics side is there anything that we should contemplate.

In the first half there's a lot of these logjams continued channel.

Exist throughout the supply chain that.

May hinder some of the inventory deliveries or receipts that youre planning.

Yes so.

<unk>.

We think our internal team did a really great job of managing the challenges in the fourth quarter and there were many so I think it's a credit to how nimble and agile with team was they were able to shift volume from carrier to carrier, depending on where we can get the right range without.

The overage surcharges.

While optimizing the experience for the customers. So I think it's a real credit to the execution of the team in the fourth quarter and in the first quarter.

We're certainly still headwinds in the team needs to continue to execute it.

But I'd like to think we're past the worst of things on the logistics side.

And so we feel good about our ability to.

Deliver.

<unk> on the.

Cost side in terms of.

I don't have any fuel surcharges in the first half of the year as well as meeting our historical commitments to the customers as far as giving them some time.

Our next question is from Ed <unk> with Keybanc capital markets. Your line is open.

Good afternoon. Thanks for taking the questions I guess first a housekeeping question could you just give us a little bit of insight into the intra quarter trend back in the first quarter of 'twenty. Just so we can kind of understand how that how the March compare is versus kind of is that what you're seeing quarter to date, and then second kind of a bigger picture question.

With some of these markets that have reopened interesting activity are you seeing signs of an incremental fashion shifts that maybe gives you confidence that you could have kind of at a sustained period of strong demand for apparel. Thank you.

Yeah, maybe I'll take the first one day Ed Thanks for the questions.

I'll pass it over to Mike and Michael.

The inter quarter dynamics.

Last year, we started out really strong 20% across the board for January and February.

We are featuring partnered with the Bachelor in January we.

Tremendous.

Inbound traffic to the site. So it started off really strong.

And then kind of in that mid to late March is when.

Restrictions really started to hit and that's when we saw sales decline almost overnight. So there is definitely an inter quarter dynamics to be aware of in 2021.

And then year to date.

This quarter just to hit on that just really quick.

Coming out of the high single digit decline that we had communicated for October back in Q4, and then closing out the quarter at minus five you can see that sequential improvement and then that continued into the first seven weeks of this quarter with that low single digit in positive territory and letting you know positive territory across the board.

International revolve forward so.

Feel good so far but still very cautious on what the future holds with all the uncertainty.

And then in terms of kind of dissecting trends on the international side, It's definitely an area. We're looking too closely as I mentioned, we feel good about the trends that we're seeing there and those trends make us very optimistic for how things could unfold in the U S. As.

Things continue to recover from Covid, if we look at our top markets, where there's been a lot more recovery in areas like Australia, and Israel, which are growing incredibly quickly.

And also China in the greater China region. We're.

We're seeing some net growth in that region as well on the revolve side.

In China, we're seeing.

Quarter to date some of the best growth we've seen in several years now so it definitely gives us optimism, but at the same time, we want to caution that.

The environment remains uncertain.

We think the world will reopen we think thats going to be a great time for revolve, but the timing of how that unfolds and the exact impact to our business are still to be determined.

Our next question is from Kimberly Greenberger with Morgan Stanley. Your line is open.

Oh I'm on mute sorry about that.

I just wanted to ask you about the marketing spend in the fourth quarter and looking out to 2021.

<unk>.

Are you seeing a higher rate for purchasing the same.

Sort of composition and type of marketing and is that driving the higher marketing or are you actually able to hit more eyeballs with higher marketing spend in other words.

The it's a question I guess on marketing spend productivity and if you can share any kpis or how would you measure that is marketing just simply more expensive because there is greater demand for digital marketing and therefore, the price goes up or is it that youre actually.

Hitting more people and then if you could just sort of step back and look at the.

The competitive environment, and just help us understand.

What youre seeing in.

Competitive.

The competitive landscape and in particular.

If you've noticed a company called Shine I'd be interested in hearing your perspective on that and just how you try to stay differentiated relative to the competition. Thanks. So much.

Yeah definitely so on the marketing side and digital market in particular, we touched on some of the trends that we're seeing in the middle of last quarter.

The thing I'd caution with digital marketing is it can shift and fluctuate a lot from quarter to quarter, certainly there is longer term trends.

Is influenced by a number of factors.

So kind of what we saw specifically on the digital marketing side is the middle of last quarter rates have gotten quite expensive.

Which was put in.

Pressure on us from from our ability to kind of market in the way that we'd like to we did start to see a reversal of those trends.

Towards the back half of the quarter and things are heading in a much more positive direction on that side from what we can see so.

Again things will fluctuate quarter to quarter, there may be some longer term trends going on but what we're seeing right now is kind of a.

Much better rates on the on the digital marketing side and were seeing back in the fourth quarter I think in terms of the broader question why do we expect marketing to go up it's not about that those rates that we're seeing on the digital marketing side much cheaper expenses in general when their expense that we tend to actually back off.

It's more about there.

We think the reopening is going to be really good for the revolve brand and the revolve rate is perfect from your opening and we know that we need to invest ahead of that particularly on the brand marketing side, where those.

The impact of the brand marketing can pay off over over a long term period and so.

We pulled back a little bit in the pandemic. It wasn't quite the right time for the revolve brand to be top of consumers' minds. We think the time is coming up.

We can have a real impact and get real efficiencies from our message as consumers look to get back to socializing and.

And having fun and so.

That's where the commentary on the marketing side goes that we're building for the long term, we'd like to be efficient and disciplined but we think part of the long term build its the right time for our brands to be out there in top of consumers' minds.

And then finally to the last part of your question with regards to.

Chin.

You're talking about the Chinese company right I'm not sure to pronounce it <unk>.

Okay. So assuming you are talking about about that company.

We think we're very differentiated certainly they've had a lot of success in the marketplace. The operating at a much different price point than we do.

Type of product that produces much different from the type of product.

We produce and we're ultimately going off to after we think very different consumers.

Our next question is from Susan Anderson with B Riley Your line is open.

Hi, good evening nice job managing through the year.

I guess I'm curious as we look to the back half and you start to ramp your own brands again, what do you think you are looking at differently. This time with the owned brands versus.

There was a little bit of issue at the end of 2019 with the inventory growth maybe growing too fast there.

Yeah, I think the primary thing that we're seeing we're thinking differently as diversity and I think there is a multi dimension that diversity both from traditional category expanding diversifying out of dresses and tops into all of the other categories and also diversifying and type of manufacturing techniques. We were heavily weighted in woven and I think there is a.

What are other zone Jersey fleece.

Net and beyond that I think will be very very important I think also diversity on price point I think we will.

After a very very focused price point that it was really quite a our customer and exiting out of the pandemic will have diversity across price point as well. So that's been nailed quietly one of the big themes that we've been investing into this year and we're very excited to show you the results from the upcoming quarters in upcoming years.

Great. Thanks, and then if I could just add one follow up on revolve warehouse automation I think you mentioned it is a positive for.

Selling and distribution.

Curious if you could quantify how much that helped that line item and then also do you expect that to continue into 2021.

Yes.

That automation just back up and give some context just as a reminder, we started to invest there in 2019 that was the biggest investment and then we made some additional investments in the first half of 2020 and really started to see those efficiencies come through in 2020, we expect those to continue.

I'll call out however that there is also a positive impact from return rate on that fulfillment line item.

Getting kind of a double benefit on fulfillment.

If I had to break it out it's probably a third automation and two thirds return rate, but that one they are definitely continuing on into the future. The other thing to call out as well as that.

We moved into this warehouse in 2019.

With capacity call it for plus or minus five years. So as we grow into that capacity. There's also a natural efficiency to be gained over time.

And then you mentioned selling and distribution automation is really isolated to that fulfillment line item selling and distribution as you know the lion's share of that is the.

Shipping and freight so.

That line item the efficiencies, we get some operational efficiencies and just optimizing carriers, but also a return rate benefit there but.

But not not related to automation.

Our next question is from Simeon Siegel with BMO capital markets. Your line is open.

Thanks, guys nice way to end the year.

Recognizing the 12 month basis, the trailing 12 month basis any way to offer context, or just isolate fourth quarter's impact of the active customer drop in I guess thoughts on trajectory, there and then Jessie and.

I don't know if this is a better offline question, but the net <unk> comment you made was interesting could you elaborate at all there if the product mix impacts the return rates I guess, what do you think that net.

After returns would be more consistent.

So I don't think any color you can help there. Thanks.

Yeah sure on the first one on active customers to your point that is a trailing 12 month number.

You can see the sequential decline we were started off the year Theyre at a plus 20 ish percent and then plus 13 in Q2 plus five in Q3, and then close the year at a minus one so you can kind of back into the impact of the quarterly impact there of what just what COVID-19 is doing on that that metric. So on a quarterly basis, we're definitely seeing pressure there.

And that will continue.

As we.

Roll in more quarters of Covid and it takes a little while to roll out of those COVID-19 quarter. So.

Not expecting growth in that number you know for another several quarters as we cycle out of the Covid Covid era and then the.

The growth versus net <unk>.

<unk>.

There's puts and takes there.

We're definitely seeing an impact from the shift in mix from the higher price point dresses to the lower price point for example, beauty.

Partially offset there if you look at it on a combined basis forward has been strong relative to revolve. So there's been a slight offset and then.

Units per order units per order and return rate kind of go hand in hand.

So fewer units per order on that growth basis because.

She's not going in and buying tier three addresses for that occasion, knowing that she is only going to keep one so those maybe not 100% loss, but there's a kind of an offsetting impact between the units per order and a lower return rate.

Our next question is from Matt Koranda with Roth Capital. Your line is open.

Hey, guys just following up on some of the active customer discussion here any updates on customer acquisition costs, and just thoughts around how that trends as we've leaned into marketing a bit more as we reopen.

Yes, so in the fourth quarter, we did see an increase in customer acquisition costs.

As we mentioned.

There were some headwinds there in terms of competition within the digital marketing.

And then I think as you see the year unfold.

My expectation would be initially you may see those costs go up because a lot of the marketing that we do currently on the brand side is more of a longer term market Union. So you take the expense immediately but the benefits play out over time.

So we would expect to see some increases on that front and then I hope to see those increases moderate and go in.

Positive direction for us.

Things unfold and as consumers really embrace.

Back to normalcy lifestyle and the Union.

Paul.

And we have time for one more question. Our last question is from Ross Sandler with Barclays. Your line is open.

Hey, guys.

Great job this quarter, just going back to the international topic. So now we're just over 20% of revenue is coming from.

A lot of different countries spread widely across the globe. So I guess the first question is I think you're running all the.

Operations still out of California is that is that the case and as that international number gets bigger.

What happens to the backend of your business or even <unk> or.

Are you already doing that in some places.

And then and then Mike I just heard these events, if youre going to be doing in Australia, how does the income.

Influencer marketing travel cross border or did you do an event there with a global influencer to people in the U S C.

<unk> respond and start buying the people in China due to the sale how does the.

These are these events that youre going to start rolling out.

Travel across borders thanks, a lot.

Yes, so starting with the first part of your question on the international side.

We feel really good about our ability to.

Deliver great service levels International market operating out of Los Angeles and California.

More than 80% of our markets, we are able to hit with two to three day shipping it fairly reasonable costs out of Los Angeles.

At the same time it is an area of longer term opportunity as those markets grow.

So it's something that we're certainly starting to think about but I think we're.

A ways off from any substantial on the from an international presence, but we could start to explore.

Some plans for portions of our inventory or kind of certain.

Sub opportunities.

As a way to.

You know kind of test out further expansion.

And then.

<unk>.

As far as the international events.

Unfortunately, well I guess it wasn't different ways, but.

Australia has been a very close so we're working with a large network of Australia and Influencers, we were in Australia, I believe two years ago.

Very important regions, that's been one of our topic for many years. So we kind of deep relationships. There. So there's definitely a big slant towards Australia, but for sure that.

Social media knows no borders except potentially sometimes in China. So we definitely will see a lot of the eyeballs impressions, but a lot of on brand revolve girls that touch customers around the world. So there's definitely a center.

Australia, but we'll definitely see impact within eyeballs and impressions to all of our core customers across the globe.

And this does conclude the Q&A I will now turn the call back over to management for closing remarks.

Yeah.

So I think Mike is actually on mute so.

He is out but I was just jumping around here, but thank you guys for joining us today I know, it's been a challenging year for all of us and we're extremely proud of the results.

Definitely that we were expecting for the year, but all things considered.

Do you have to thank our team for all of the incredible work and everything that had to do to achieve these numbers.

This is really just a little pause in interim year for us and we really think that we've done a lot to bill.

Built for the future and I think we'll definitely excited to demonstrate all of the investments all the work and all the incredible things that the team that started.

Stay safe everybody.

Send our guidance that you have one in Texas, we know that's been a quite challenging situation.

And when you can get your vaccines in commodity with us.

This concludes today's conference call you may now disconnect.

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Sure.

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Yes.

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