Q3 2021 Revolve Group Inc Earnings Call

Yeah.

Good afternoon, My name is Carl and I'll be your conference operator today at this time I would like to welcome everyone to revolt third quarter 2021 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'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.

And if he would like to withdraw your question press the pound key.

Thank you.

And at this time I'd like to turn the conference over to Mr. Erik Randerson, Vice President of Investor Relations at Regal.

You may begin.

Good afternoon, everyone and thanks for joining us to discuss revolves third quarter 2021 results.

Before we begin I'd like to mention that we have posted a presentation containing Q3 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 expectations regarding the continued impact of the COVID-19 pandemic on her business operations and financial results our growth in market opportunities the impact of Kendall generous appointment as forward as creative director our ability to manage through supply chain challenges our outlook for operating expenses for the fourth quarter of 2021 and gross margin for the full year 2020.

And our effective tax rate. These statements are subject to various risks uncertainties and assumptions that could cause our actual results to differ materially from these statements, including the risks mentioned in today'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.

Patients are annual report on Form 10-K for the year ended December 31, 2020, and our subsequent quarterly reports on Form 10-Q, all of which can be found on our website at investors revolve dot com.

We undertake no obligation to revise or update any forward looking statements or information, except as required by law. During our call. Today, We will also reference certain non-GAAP financial information, including adjusted EBITDA and free cash flow.

We use non-GAAP measures in some of our financial discussions as we believe they provide valuable insights on our operational performance and underlying operating results the.

Presentation of this non-GAAP financial information is not intended to be considered in isolation or as the 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 reconcile.

Reconciliations of non-GAAP measures to GAAP measures as well as the definitions of each measure their limitations and 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 carrier, Nikolas, and Michael <unk> as well as Jesse Timberman, our CFO. Following our prepared remarks, we'll open the call for your questions with that I'll turn it over to Mike.

Good afternoon, everybody. We're excited to update you today on the strong momentum in our business that continued to build during what was an incredible third quarter.

There are three key points that I want everyone to walk away with today.

First we delivered record top line results in the third quarter highlighted by 62% year over year growth and 58% growth on a two year basis versus the third quarter of 2019.

This is an acceleration of 17 points compared to the 41% two year growth rate, we reported for the second quarter of 2021.

The strong revenue growth trajectory discussed on last quarter's earnings call improved throughout the quarter and the positive revenue trends have continued through October what's gratifying is that the strength in our topline is broad based with net sales in the revolve segment further accelerating in the third quarter, while our forward segment delivered nearly triple digit growth year over year.

Second our brands are extremely well positioned in the market and the momentum of our brands driven by our strong assortment and innovative marketing is generating increased customer engagement.

Last quarter I discussed our plan to invest heavily in marketing and brand building initiatives during the third quarter.

While we expect these investments to provide long term benefits. We are thrilled with the early returns in true revolve style. We stood out during New York fashion week, delivering impact and awareness innovation and redefining marketing for the modern fashion brand.

I am equally excited to see the clear signs of increased customer engagement traffic in the past few months has accelerated to well above levels before COVID-19.

And we are generating more revenue per traffic session helped by our customer increasingly buying from us at full price as well as the shift in category mix to higher price points. You can see the increased engagement in our results with orders and net sales generated per active customer accelerating in the past two quarters.

Even more exciting is that our active customer growth itself has accelerated in the third quarter, resulting in record levels of quarterly growth in active customers by a wide margin.

It's also compelling to consider the substantial majority of our newly added customers are buying from revolve and forward at full price, which speaks to the longer term opportunity. Our experience tells us that customers acquired at full price generate a higher lifetime value.

Third nowhere in our business as the brand momentum more evident than in our forward segment.

Based on publicly reported data forward has been growing well ahead of the luxury peers and we believe we have just scratched the surface on what we view as a massive long term opportunity to build a curated luxury platform for the next generation consumer.

Setting the stage to continue our strong growth trajectory is our recent announcement of Kendall Jenner is the creative director of forward. We are beyond excited to partner with Kendall, who is the epitome of luxury fashion. She brings incredible creativity and passion to the role that we believe will meaningfully extend the forward brands reach and influence.

We're also very early in cross marketing our forward offerings to the much larger revolve customer base our launch during the second quarter of afford loyalty program that is fully integrated with our revolve loyalty program. Once again provided a powerful contribution to <unk> growth in the third quarter.

I'm encouraged that month after month, we are driving increased overlap between revolve and forward active customers yet with a very low percentage of overlap today, we think we have a compelling growth opportunity resident in our existing customer base.

With that as an introduction I will provide an overview of our third quarter results and recent developments.

Our record growth in active customers and our ability to authentically engage with her through our marketing and merchandising resulted in record net sales of $244 million in the third quarter.

An increase of 62% year over year, and 58% on a two year growth basis compared to the third quarter of 2019.

This is 17 points higher than the 41% two year growth, we reported for the second quarter of 2021.

We also continued to deliver outstanding profitability in the third quarter, while at the same time, making meaningful marketing investments that we believe will pay dividends over the long term.

Net income in Q3 was $17 million or 22 cents per diluted share and while it was down year on year as expected due to our marketing investment net income increased 74% on a two year basis versus the third quarter of 2019.

For the nine months year to date period net income more than doubled versus the 2019 comparable period on a two year basis.

These results benefited from healthy expansion of our gross margin in the past two years as our effective merchandising and inventory management contributed to delivering strong net sales at full price and reduced markdown levels more than offsetting the reduction in owned brand mix as a percentage of net sales.

Shifting gears, our strong results have not come without challenge and there remains uncertainty in the macro environment.

Our sales results in certain regions around the world had been temporarily impacted when Lockdowns had been reimposed, serving as a reminder, that we are not out of the woods yet.

Equally relevant and very much in focus recently are the industry wide supply chain challenges, which have had a progressively larger, albeit manageable impact in the last several months.

This came through and yet a further decrease in the percentage of on time deliveries from our suppliers in a further increase in our inbound shipping rates in the third quarter.

Fortunately with a customer that shops at full price for our premium price point product and with our strong gross margin, we are well positioned to manage through the increased freight costs that could remain in effect for several quarters.

Despite the many industry wide challenges facing us our operations and merchandising teams have done an outstanding job effectively navigating through this very dynamic environment.

Our merchandising and planning team has not only been able to secure sufficient inventory, but more importantly on trend product that the customer desires.

And our fulfillment customer service and support teams haven't skipped a beat continuing to meet and exceed our very high standards that our customers have come to expect from revolve.

As a company passionately focused on the customer experience I'm extremely proud that our net promoter scores have further increased this year, even as the organization scaled up to manage through the incredible growth in customer demand.

I'll wrap up with a brief discussion of regional performance I'm excited by the strong domestic growth, which accelerated to 65% year over year in the third quarter, an increase of 55% on a two year basis versus the third quarter of 2019.

Our international business also continues to perform very well and represents an exciting opportunity for future growth.

International net sales grew 49% year over year, an increase of 75% on a two year basis versus the third quarter of 2019 ever.

Every major region contributed to our international growth illustrating how well our brands are resonating on a global basis.

Before I turn it over to Michael I'd like to thank our team for their incredible efforts day in and day out I'm proud of how well each and every one of you is taking great care of our customer during this exciting period of rapid growth we.

We are positioned better than ever and I couldnt be more proud of your efforts that have helped to put us in such a position of strength.

Thanks, Mike I'm really problem first with our performance during this past quarter after successfully navigating a very challenging pandemic. So far we are gradually transitioning into a post pandemic world and we are thriving.

It is very clear to me that the same strengths we have demonstrated in the most recent quarter all position us for continued success over the long term.

An important driver of our success that our customers love us and deeply connect with the revolve brand.

Our customer with users socially active lifestyle, it's clear to me that our relationship with us is stronger than ever.

She shopped with us where she was stuck at home and she is shopping more than ever actually start to go out and need to refresh your wardrobe.

She also had begun to buy luxury goods from us in a very meaningful way with the trust. We have earned from the customer. We believe we can continue to expand our offering and broaden our range of shopping at.

The opportunity continues to grow.

Acknowledging jevan DNA AI and proprietary algorithms continue to provide a clear competitive advantage.

Integral to our success in this recent period of extreme turbulence with understanding our customers' evolving needs and are key to understanding our customer, it's our data driven mentality and proprietary technology infrastructure.

Leveraging our data driven approach we have thrived in this fluid environment.

Quickly identifying shifts in consumer demand, which has enabled us to continue to gain traction in the white space and deepen our relationship with the customer.

Our operational excellence agility, a key differentiators and are a critical long term competitive advantage that is especially evident today.

Quite the external challenges in the marketplace, we have been able to ensure that deliveries to our customers haven't been at a very high standards. During the time of shipment delays from retailers have become routine.

Our customers remain unsatisfied, etc, creating a strong foundation for this next stage of growth.

Most exciting we are addressing a very large market opportunity that continues to shift in our direction.

Legacy retailers have been continually to cede market share get they still represent tens of billions of dollars of market opportunity. We are primed it a focus and a long runway of opportunity to gain market share and acquire new customers expand our share of wallet and drive outsized growth over the long term.

With that I'm now excited to share with you some of the highlights of the quarter.

We've assumed a brand marketing activities with the bank.

Every quarter is the patient waiting we significantly invested into our brand in Q3 with great success, but.

For the first time ever we participated at New York fashion week and stole the show very successfully competing against the incumbent heavy weight to the fashion World. We hosted a weeklong bandwagon experienced at both revolve and forward and we did it our way, bringing innovation and excitement to our community of band partners Influencers and customers.

The highlight was our immersive and elevated revolve gallery exhibition, we imagine the real experience of fashion week, while engaging with consumers in a new and exciting way the visually stunning and interactive event brought together a curated exclusive assortment of styles from emerging brands and our own brand and uniquely featured a real time shopping component.

While New York fashion week event that typically exclusive affairs, we broke the mold by hosting 6000 people over three days that revolve gallery, bringing together brand partners Influencers customers and journalists and are first of its kind of it in fact EMEA had been one of the largest event ever held in Europe actually.

Our community, we adhere to appropriate safety precautions for the event, which is ironically the performance side of a luxury department store that it closed in bankruptcy proceedings.

It was great to help some of the analysts and investors on the call today at our opening that reception that was attended by an alien cloud, including Kylie Jenner and lean better Koski, Megan thought Paris, Hilton and come out of <unk>.

Just to name a few.

Not surprising that generated massive impact of social media with dynamic and engaging content across social channels.

Actual media posted the highest estimated media value for the entire New York fashion week came from the private reception at our revolve gathering events further illustrating the impact of our event.

Incredibly deep connection we have established with the next generation consumer is evident in the high profile sponsors at the revolve Galleria such as after pay many top brands and personalities seek to partner with <unk>, because they realized being associated with that Ben can further elevate their brand in the eyes of the coveted and powerful millennial and Gen Z consumer.

Another major highlight at New York fashion with hosting our first ever fashion show to introduce a new owned brand collaboration with luxury designer Peter Dundas.

How you anticipated collection Dundas ex revolve is a key milestone for our owned brands, where momentum continues and net sales returned to year over year growth in the third quarter.

Importantly, initial jobs for the collaboration the first of many to come on high praise and reviews from influential fashion outlets attending our event. According to Ww D. I've done this extra evolve runway of that was ranked as the second most talked about fashion show of all New York fashion week based on social media impressed impressions and estimated media value.

As a further sign of our brand momentum we capped off the week by participating in the met gala.

Exclusive of an incredibly high profile of that that is the Oscars of the fashion industry became more fantastic exposure for our brand.

Well, if all else being included in the met Gala for this first time significant and demonstrates the level of aberration, we have gained from that broader fashion community.

I'll wrap up with a discussion on forward and why we continue to be excited about the long term growth opportunity here.

Financial results for the third quarter were exceptional with net sales, increasing 95% year over year and 112% on a two year growth basis compared to the third quarter of 2019 forward also delivered nearly six point increase in gross margins year over year. This third quarter.

Even more exciting is having Kendall Jenner, that's part of the team that's creative director foot forward.

Pending our reach and appeal to a broader audience of next generation luxury consumers than ever before.

We have always had an extreme admiration for Kendall style creativity and overall exquisite taste. We believe her multifaceted experience in the fashion industry and division as she had outlet for forward has the potential to transform our business.

Only a few months into the role candidly that's been extremely active she hosted or participated in several new York fashion week event, including exclusive for dinner and visit to emerging luxury designer shoe recommended including one new brand that we are already in the process of bringing onto the forward site.

You may have noticed circulation of candles edits suffer davids Thunder forward site.

She also.

Under the affordable go further elevating the look to connect with the next generation consumer.

Kendall has created a compelling range of video and social content, including both features that followed her about New York I'm, sorry, Dana new role as far as creative director. The video has been viewed more than 5 million times.

Our brand customers and fans could not be more excited immediately following the new chapter to the forward website and mobile App increased significantly and several weeks later traffic has remained at higher levels than before the announcement.

The forward at more than doubled year over year in the month of September and growth in followers increase by more than 10 X versus the prior monthly run rate.

Another key driver of the success in the quarter and huge long term opportunity for forward is the continued expansion of the cross shopping by revolve loyalty members are forward.

As more of our revolve customers become aware of the incredible offering and benefits of shopping on forward.

We have only recently started to invest to fully leverage our broader platform and customer base to cross market, the revolve and forward offerings to maximize the long term opportunity.

These early results of our efforts are very encouraging highlighted by our stendal forward by volatility club members continue to increase sequentially.

And the steady increase in the percentage of all customers, who also shop. Our forward every single month since we launched the forward loyalty program.

You can talk about fashion without talking about revolve and forward. We believe we have what it takes to be the destination for the next generation consumer sequel query of premium and luxury product and we are just getting started.

A competitive differentiator as I outlined earlier give me great confidence in our opportunity for growth in the global ecommerce market for years to come we are clearly taking market and wallet share from legacy players with our scale and brand built over the past 18 years. We are also well positioned against newer engine. We couldnt be more excited about the next phase of growth ahead of US now I'll turn it over to Jesse.

Our discussion of the financials.

Thanks, Michael and Hello, everyone. We are very pleased with our third quarter results highlighted by accelerating top line growth incredible brand momentum and strong customer engagement. We believe our results for the past few quarters demonstrate that not only have we navigated the pandemic challenges with agility, we are well positioned for our exciting next phase of growth in.

New retail landscape.

With that I'll start by recapping the third quarter.

Net sales were $244 million a year over year increase of 62% and reflect the two year growth rate of 58% compared to the third quarter of 2019.

This two year growth rate is 17 points higher than the 41% to your growth rate that we reported for the second quarter of 2021.

By territory, both domestic and international markets contributed to the strong top line results with domestic and international net sales growth of 65% and 49% year over year, respectively.

By segment revolve segment net sales increased 56% and forward segment net sales were again exceptional increasing by 95% year over year in the third quarter.

A highlight of Q3 with active customers, increasing by 124000 compared to the second quarter of this year, our highest ever sequential quarterly increase by a wide margin. This.

This expanded our active customer count to $1 7 million, an increase of 12% year over year.

Our customers placed a record $1 8 million orders in the quarter, an increase of 60% year over year.

Average order value or <unk> was $276, an increase of 19% year over year and an increase of 8% sequentially from just the second quarter.

Key driver of the growth in <unk> year over year and sequentially was a further shift in mix back to higher price point merchandize.

Such as dresses handbags and shoes as.

As well as the continued strength coming from the forward segment.

Shifting to gross profit consolidated gross margin was 55, 1% a decrease of just 16 basis points against the very strong prior year comparison gross margin increased 148 basis points on a two year basis compared to the third quarter of 2019.

Our gross margin was ahead of the gross margin outlook, we provided last quarter as healthy inventory and consumer demand dynamics across both segments led to another strong percentage of net sales at full price in the third quarter.

And a year over year decrease in the depth of markdown.

These 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 our recent Investor Conference call.

Moving onto operating expenses consistent with the outlook, we shared last quarter marketing expense as a percentage of net sales came in at 19, 2% of net sales in the third quarter well above our historical trend line.

Couldn't be more excited about the early results of our investments in brand marketing that paid dividends over the long term the level of marketing investment has since returned to historical levels in the current fourth quarter selling.

Selling and distribution as a percentage of net sales increased year over year and on a sequential basis consistent with our prior commentary to expect deleverage with it normalizing product mix, leading to a further increase in return rates in the third quarter of 2021, the other two line items.

<unk> and G&A expense leveraged year over year, resulting in part from automation and efficiencies in our fulfillment center. In fact, we have lower fulfillment head count today than we did two years ago.

During the quarter, we also realized benefits from capacity utilization and scale efficiencies, resulting from our robust 62% growth in net sales during the quarter.

Net income and adjusted EBITDA decreased year over year due to the increased brand marketing investment. However, net income and adjusted EBITDA each increased meaningfully versus the pre COVID-19 levels in the third quarter of 2019.

Also looking at the nine months year to date net income and adjusted EBITDA increased by 86% and 59% year over year, respectively.

Moving to the balance sheet and cash flow statement during the third quarter, we continued to invest in inventory to position our assortment to support very strong consumer demand and to ensure we have adequate available inventory considering the current supply chain challenges.

As a result inventory increased by $23 million during the quarter to $142 million.

Even with the investment in inventory, we generated $1 million in free cash flow in the third quarter and $67 million for the first nine months of 2021.

The decrease of 10% year over year in free cash flow for the nine months period reflects the much larger inventory of investment this year compared to the first nine months of 2020, when we significantly reduced inventory to preserve liquidity.

Cash and cash equivalents net of borrowings at September 30th where $222 million, an increase of $78 million or 54% from $144 million as of September 32020.

And our balance sheet remains debt free.

I'm, especially proud of our incredible results, considering the challenging and uncertain macro environment. It appears the supply chain issues are not going away anytime soon.

And right when we think we're turning the corner on Covid, new challenges emerge around the world. So.

So we feel very good about our ability to navigate the challenges as demonstrated by our exceptional results. This year. Nonetheless. These headwinds are real risk factors that we have to deal with day in and day out.

Now let me update you on some recent trends in the business since the third quarter ended and provide some direction on our cost structure to help in your modeling of the business.

Starting from the top of the strong topline trends, we experienced in the third quarter continued through the month of October with a growth rate that is broadly in the range of our third quarter growth rate.

While we are very excited about the recent topline trends, we would not count on the same incredible growth rates that we've experienced in recent months to continue in the balance of the fourth quarter.

During a time when the space is flooded with marketing and promotional activity.

Shifting to gross margin we are extremely pleased with our gross margin performance with gross margin higher by approximately 350 basis points year to date versus the comparable period in 2020.

And the 120 basis points higher year to date on a two year basis versus the comparable year to date period in 2019.

As a result, we are again raising the outlook for gross margin this year versus what we have shared previously.

We now expect our full year gross margin in 2021 to be approximately 54, 5% above the already upwardly revised full year gross margin outlook of 54% I shared last quarter.

Fulfillment.

With a very efficient film performance in recent quarters, we expect fulfillment cost to be approximately two 5% of net sales for the fourth quarter, which is approximately 40 basis points lower year on year, and showing even more efficiency when compared to 2019.

The slight anticipated uptick compared to the third quarter of 2021 reflects normal seasonality.

Its fulfillment costs have increased as a percentage of net sales on a sequential basis from the third quarter to the fourth quarter and for the last five years.

For the fourth quarter, we expect selling and distribution costs to be around 16% of net sales, which is slightly higher than the 15, 7% of net sales in the third quarter and up significantly from 13, 4% of net sales in the fourth quarter of 2020.

You may recall that shipping costs comprised the majority of the selling and distribution line item and consistent with our prior commentary we are seeing pressure on this line from increased churn rates year over year as our product mix normalizes and from continued cost pressures that are impacting the industry overall.

We expect this pressure to continue through 2022 at rates similar to that of our expectation for Q4 2021.

Moving on to marketing after a very busy and exciting third quarter. We continue to expect marketing expense to revert to its historical level of approximately 15% of net sales in the fourth quarter consistent with our commentary on last quarter's earnings call.

General and administrative we expect G&A expense to be around $26 million in the fourth quarter nearly $2 million higher than in the third quarter of 2021, as we continue to invest in the team to support our rapid growth and expansion.

Lastly, let me touch on our tax rate our effective tax rate in the third quarters of 2021, and 2020 reflect tax benefits realized as a result of the exercise of nonqualified stock options.

Absent such tax benefits in future quarters, we expect our effective tax rate to be around 24% to 26%.

To recap we are incredibly excited about our recent results with record growth in active customers and strength across all segments and major geographies in the third quarter.

While mindful of continuing uncertainties and potential headwinds in the current environment. We are focused on the long term and investing in the business to capitalize on the incredible growth opportunity ahead now.

Now, we'll open it up for your questions.

Thank you Sir at this time I would like to remind everyone in order to ask a question.

Star then the number one on your telephone keypad, well pause for just a moment to compile the Q&A roster.

Your first question comes from the line of Erinn Murphy of Piper Sandler. Please ask your question.

Great. Thank you. Good afternoon. My first question is on the forward business. The strategy is really starting to pay off I love. How you could maybe help us think through how big this business could be over time, and if you could share a little bit more about what kendall's relationship with the brand is bringing brand relationship for vendor relationship perspective.

And then just a second follow up on the holiday season can you just share your perspective on the promotional environment into holiday. Thank you so much.

Good to hear guys and I think the forward opportunities just met.

We're competing against many many old school.

That still have billions and billions of revenue as well as competing against large online players struggling we've seen competitive.

Hey, Michael.

Your audio is cutting out.

You want to go ahead, you want to go down I don't know.

Sure I can take that yeah, as Michael was saying, we think it's a really large opportunity as you know the luxury market is huge and forward is still a relatively small player but it is positioned with the elements that we think are going to set it up for huge long term success. Certainly you look at just the trajectory momentum compared to the other.

Players in the market.

It's really on fire right now and then you combine it with having Kendall Jenner as creative director.

Thank you.

No.

Any person in the World honestly, you did that we'd want for that position more than her.

And then you also combine it with the revolve customer base, which is quite large and the opportunity to transition that customer base to forward.

Okay.

[noise]. Your next question comes from the line of lore Lorraine Hutchinson.

Bank of America. Your line is open.

Thank you good afternoon I wanted to follow up on some of the comments he made around the supply chain and just get a sense for how comfortable you are that you'll have the product you need for holiday and then also what you're hearing from your brand partners about deliveries for the first half. Thank you.

Yes on the supply chain side, we have so you'll see some leaves they're more delays and you'd like I think compared to the rest of of the marketplace, we're positioned pretty well and we feel good about our inventory position heading into the holidays.

You know is is it perfect the same as world with with no challenges nope that that I think compared to others were doing well and I think that reflections resolve this on the third quarter as well as the results were continuing.

Continuing to see in October Yeah, and then heading into the first half of next year. It's it's something that we certainly have our ion again, we expect some challenges, but we expect to be able to manage and navigate those challenges as we typically do.

The next question comes from the line of Oliver Chen of calling and company.

Your line is okay.

Hi, I'm the revenue growth continues to be really impressive and the active customer.

Both as well what should we think about for a longer term in terms of your revenue growth algorithm and also as you start to anniversary some tougher compares in Q1.

Uhm would also loves an update on private label as you're thinking about it near a longer term another opportunity that those divisions.

And then the third question on four congrats on all the momentum there what do you see happening with the assortment overtime as you'd think about breath relative to death then.

Where you Wanna go with the nature of inventory by in pricing. Thank you.

Sure make sure so.

With regards to the the longterm growth algorithm, we we would make any changes to our long term projection.

Experienced the phone one moment several corners.

<unk>.

Maintaining our business.

And more importantly, really good about the long term opportunity, we drink we're positioning better than ever let me think our branch resonated with consumers our ability to manage our inventory versus others. We think is good.

So I'm doing this time and and also our our ability to execute it high service level. So you.

You know, we feel really good about our long term trajectory, but at the same time.

Not the sort of situation, where we would make a change to our.

Long term projections at this time.

I guess the second question was catch the private label, Michael do you want to dive in there.

Yeah. The opportunity is there any remaining great well coffee scaled back and we've begun.

The acceleration you know in this coming year, you'll see a lot more from us across category cause brand across collaboration and you'll begin to see things you need to expand into the forest zone as well, which is completely completely untapped I think that on the customer you know as always from what comes for emerging designers that we've been able to consistently creating setting them originally.

Designer, so you'll see a lot more or less in the same format as you've seen that's in this past New York, So very excited for what's to come.

Okay. Thank you I'm, just gone forward and would love your thoughts there.

Do you want to take the forward inventory or do you want me to my home.

And what was the question again, Oh, you should get one to jump in my.

Yeah, I'll I'll jump in so yeah with regards to afford breast in an in depth. We continue to see that it would be an opportunity to enhance towards inventory assortment. You know that that's one of the things we talk about on past calls it with all the things forward has going for it what's really excited about the future is is it's it's it's.

It's it has a lot of opportunities on your surgeon alright. So we're continuing to increase the breath of inventory as old as adept to arrive at a soda consumers and and that's been a powerful driver of results.

Your next question comes from the line of Mark All Schwager.

Baird.

Your line is open.

Good afternoon, and congrats on the the ongoing momentum I guess first it down the marketing Brian to me it seems like you're seeing tonight's response to the marketing initiatives with the acceleration in incline adds this quarter.

Yes. It is you realize some of the benefits from these brand investments that are ongoing age what do you. What do you think it's appropriate rate of Nat customer adds that we should anticipate in the quarters ahead.

And and then separately on on margins Jessie I it looks like you're on page two.

Close to hold the 2020 margins I think if I got all the numbers correctly, the guy that supplies, maybe something in the neighborhood of 11.5% EBITDA margins. This year just with the performance year to date does that increase your confidence in the ability to sustain or even expand EBITDA margins beyond 2021.

<unk>.

Yeah, Yeah sure on the first one on the active customers you know really excited about the customer behavior. In this last last couple of quarters in the last quarter, especially uhm and it's coming from both new customers. We have the record new customer adds but also that returning customer that returning customer has been more active than ever.

And she came back in a big way in this quarter and not just returning customers, but also lapsed customers we saw that.

Customers, who had gone completely away in 2020 came back in this last couple of quarters and that that uhm ratio of that last customer actually increase from cue to cue three so we feel really good about the Arctic customer growth I think that's one dynamic uhm and the most exciting dynamic the second one is that because that active customer number as a trailing 12 months number we will later on.

New higher performing quarters, as we cycle out of lower performing COVID-19 quarters. So the combination of those two for the next.

You know at least a couple of quarters, we should see that active customer growth rate increase sequentially before it starts to normalise kind of been that in the middle of next year at some point.

And then on the EBITDA margins in longterm, even emergence we feel we feel good you know we made a lot of investments this quarter that we believe will pay off over the long term. There is some cost pressures and supply chain and etcetera that we've talked about that will that will.

Add some near term pressure, but over the long term, we still feel good about that yeah.

14% EBITDA margin target that we put out you know again in the mid to long term so not commenting anything specifically on the next you know quarter, but but feel good about the lunch from opportunity there.

Thank you.

Your next question comes from the line of Michael Binetti of Credit Suisse.

Your line is open.

Thank you hey, everybody, Thanks, and picture, taking our questions and congrats on a great quarter guys.

A couple a couple of <unk> you know Jesse you're the a O V in the quarters above pre COVID-19 levels now I'm very happy to see that I'm curious how much of that is just you know segment mix between the two segments versus.

First as any other headwinds or Tailwinds, you could maybe point to their what what's above what's below pre be covered levels. How how do you think about it from here and then I also I think on the owned brands. He thought that maybe it would crossover into positive year over your territory, perhaps at some point during fourthquarter, maybe just check in on that and see where.

Sure. It is if it moved around at all because of the supply chain and then the product return rates.

They're back in about the low fifties right I know, maybe a point or two below where you are pre COVID-19 I know as we talked about this through Covid you thought that maybe they could stabilize a little lower than where they were pre COVID-19 is that is that still the thinking maybe any anything you could tell us that the behavior, you're seeing there is and maybe that's done going up in the near term or.

Do you think it maybe goes back a few more points of thanks.

Yeah sure. So first on the a O V definitely a positive impact from that forward performance and forward really.

Oh over indexing you know for the last several quarters, let me see continued strength coming out of that segment, which of course carries a higher average order value. So uhm, that's definitely a contributor to the other piece of that is the record high full price sales mix that we've been operating at and not just the full price sales makes but also the markdown margin. So you know kind of just kind of that full price.

Customer behaviour has been really strong and strong for sure on a year over year basis, just given where we last year, but then also even higher than back in 2019.

You know and as we come into done in the past and that's you know kind of coming to in some of the margin guns. You know, we don't expect that to last forever. We do expect that to come off of the highs and it actually came off of that the queue to hide that we experienced in this Q3, but still feel really good about the longterm full price mixed there in full price customers generally behave better over time in a markdown customer so I'm really excited about.

The record new customer additions this quarter that came through in a big way on full price. So that's on a O b on one brand yeah.

Yeah, I think we troughed out in queue too. So we're seeing a sequential increase in the mix of one bathroom cute you to Q3 and you know I think in that queue for zone is probably still in the right range of crossing over from that kind of year over year increase in penetration.

And then return rates return rates are increasingly can see and you know that's largely due to the shift in mixed back towards those higher return rate categories like dresses and away from the low return rate categories like <unk>, we had experienced last year.

And you know also as we as we localize the international experienced that has an impact on return right, but an overall positive experience an impact just on the overall piano from a gross demand perspective. So you know I think we'll see it increase sequentially from here you know, we're still optimistic that we can be lower than that T. Great.

But it'll it will increase between you know kind of where we're at now and that that T. Create that we experienced back in in 2019. If you look at the dress makes right now we're at.

29% in the third quarter and at our peak kind of pre Covid levels were in the 32 33 per cent zone in those P Q2 periods or addresses or a really high so just to give some context on kind of you know potential movements looking ahead.

Your next question comes from the line of Edward <unk> up Keybanc capital markets.

Please ask you a question.

Hey, guys. Thanks for taking my question you guys are you know really early and identifying the influence opportunity and I've argued has done a better job they really anybody needed is great.

It does seem though that a lot of other folks are trying to emulate this kind of micro Influencers tried yoga have things change on the ambulance or Friday that are harder to get the right Influencers and of course come off and then just as a quick follow up the previous call any impact that you're observing from idea. Thank thank you.

Yeah, and I'm the influence besides things continue to evolve, but it's important to note that you know influencers strategy isn't you know one jazzy isn't a singular strategy is really a multifaceted strategy. So you know we work with the biggest influencers in the world like literally you know like a candle general course work the entire spectrum all the way into you know.

Micro Influencers, whether you know 10000 followers. So I think it keeps it furnished those of course thing that we did years ago.

N as effective as they are now, but we have some new things coming out that what we're excited to talk about that are you. Just continued elevation of what we do you know more tech driven ways to work with Influencers and where you know as bullshit Debra that this is an important part of our strategy and were Super clear that it works and were Super Super confident that we can continue to invest in a very strong right.

Right you Wanna talk about.

That's the idea of a yeah coming to in the corner, we certainly have some reservations about it and noted that it that it could cause some level of headwind you know for the most part we're pleased with how things played out we felt like our our marketing teams navigator did it well and.

On balance you could call it neutral so <unk> it it didn't end up being his biggest concern is we've got it might be.

The next question comes from the line of Camille only on D. T. I G. Please ask your questions.

Thanks, and all that my congrats on a great quarter.

Uhm two questions for me number one you talked about being happy about the early results and it returns from the investments in the fashion week event I'm curious you know how do you <unk> can you share some of those those early matrix uhm that your scene, whereas a boost in sales or engagement or what have you.

And then what is it give me just hey is this something that you think can be your fall Coachella from our sales have that perspective, and then my my second question is on gross margin the gross margin guidance for the queue for a period uhm it looks like you're in a plane about a 300 basis point decline and I appreciate the cautious stance.

On the potential for promotions to accelerate but I'm curious are there other what are the other key driving factors that are behind the the inside decline. Thank you.

Sure. So <unk> with regards to the Martin event question visit a success in several different ways. So so there's only one of them is that we looked at the treachery of sales momentum and new customer of momentum and customer engagement and we saw really nice results uhm for for the for the month of Sept.

Remember in an atmosphere in which we conducted American activity and we know based off.

Past events that we've done we have the ability to decor loopy increases to receive air to a longer term effect that you see in the form of customer awareness and were new customers. Her first one none of it is <unk>.

So the early results looked great. You know also all the matrix and we look at it in terms of just general consumer awareness and impressions among consumers of reaction from consumers to the events that were doing morale quite positive. So we feel great about those events <unk> was exactly the kind of investment. There then we wanted to make and we're really happy with how it.

Performed and with regards to your question of could it become an institution might Coachella the answer would be yes, it definitely could be and he you know we're we're still planning via come in your in in in in those plans could change over time, but at this point you feel very good about the event and we think it has potential to become an institution like a jealous.

Yeah. The only other thing I would add that you know of course with a strong Coachella a play that works for us in the spring balancing it out in the fall is great. But this is a play that could be anytime would be this is something that of course, we did during fashion week, but this is an event that we can manufacture on our on our own. So it really opens up kind of effect building a possibility too.

Do you know do things whenever we want on a global basis, So super happy with the results. It was of course, something new which always you know carries a little bit of risk, but it is a huge win for us and something that will be able to leverage in a very strong way for many years into the future.

Yeah and on the second piece the gross margin there uhm I think important to keep in mind when looking at the year over year that the last year was not a typical year uhm. So if you think back to last year, we had kind of thought that step function from the first half of the year into the second half of the year and it was really the tale of two halves want me spell that record full price everything kind of working on a.

Margin perspective, so Q4 was not a typical queue for for US last year. So that was abnormally high. So that's one piece on the comp. So I think you know probably balancing that with looking at the Q4 2019 and even earlier.

18, and 17 to see the seasonality there. So I think one of comp pumped dynamic and then two of seasonality dynamic and then three you know just as we've come into them Allah you know a couple earnings calls as we that'd be building the inventory as we work through inventory that full price mixed will come down the markdown margin will come down so we're bill.

A little bit of that and as well.

Your next question comes from the line of Kimberly Greenberger of Morgan Stanley. Your line is open.

Great. Thanks. This is Alice straightened on burnt Kimberley greenberger.

I just have a quick question.

Both segments in terms of which categories within them that forward and revolved what do you mean, well did you see any sort of certain ones that stand out on the further reopening I know it sounds like dresses are doing better.

And then also just a second question I have is odd.

Ah cents per household bright selling came in this quarter compared to last year birthdays, even 2019.

Well, starting with yeah sure I think it.

Okay. So I'll go ahead and.

Yeah, Yeah recognize already <unk>, [laughter], alright, well I'll set you up with okay on the on on the merchandise. Fred you know I think as you'd expect dress is coming back in a really powerful way uhm. So on a year over year basis, plus almost 100 per cent in that dress category. I think also important to call out that we.

Do you see that uhm significant increase in he's going out categories like dresses, but also do the pulled out a year over year increase and that was a phenomenal category for us last year and that kind of stay at home Covid time, so good to see that category still increasing on the forward side you see the the handbags and she was really continue to check in that goes back to that he can kind of link that back to the.

<unk> revolved forward active customer overlap or forward overindexes on the shoes and handbags revolve overindexes on the dresses tops et cetera. So it's a good complementary assortment on that front.

And then I slipped on your second question.

Just on a center of full price selling level I thought it was <unk>.

Yeah person, even 20, yeah Yang.

Yep Yep, Yeah is it uhm over the prior year higher than last year on a sequential basis, though he came off of that all time height of experienced in two two of 21. So you know what kind of starting to see that full price M. And then also on the Mark down margin Frank similar dynamic, where we saw that record markdown margin last quarter.

We're starting to come off of that record. So that again goes goes into X kind of some of that forward looking guidance that we're giving around uhm gross margin for this next quarter Uhm versus 2019 were still you know higher than that historical.

Uhm historical really strong full price sale. So we still feel good about it but it will come off those all time high so we experienced in the second quarter.

Great. Thank you.

The next question comes from the lineup Tom Nikki Wedbush. Please ask your questions.

Hey, good afternoon, guys My question.

But I can just follow up on on the gross margin commentary Uhm I mean, so it kind of sounds like you have a few.

Yeah, that'll that'll partially I didn't and two four.

Maybe some normalizing promos.

Mix them and things like that should.

We expect that to kind of you know persisted into 2022 like us to think that.

2021 gross margin message 4.5 is maybe.

Yeah, a little bit insulated and maybe just a little bit of normalization next year are there any sort of all set for you maybe some of these pressures I'm just trying to get a sense of you know maybe the longer term direction and gross margins.

Yeah, Yeah for sure. It's a great question, you know I think maybe stepping back for that full year of even 2021, that's two points higher for the full year on year over year basis compared to 2020, and then a four point higher than 2019, So I think stepping back from the quarter to quarter dynamics feel really good about the margin progression there and I think.

To your point in time offsets on the on the full price makes them the markdown margin Oh and brands. So as we mentioned we can of chopped out in Q2 on the own brand nixed that has built sequentially into Q3, and we expect that to continue and kind of going back to settle micros remarks earlier and expect that to continue through to you know 2022 and beyond so.

You know for the full year 2021 will see a decrease in the mix of one bands before we see that increase again for the for your in 2022 and you know I think you know as we've talked about before the own brands carry meaningfully higher margin than a third party and with your own band reset that we've been working on over the last year, we feel really good about the the unit.

Dynamics on that front as well.

The next question comes from the line of Bob durable.

Guggenheim Securities. Please ask your question.

Hey, guys. He just got a couple of questions I think the first one I think for Jesse Uhm the cash balance.

Can you talk a little bit about just the uses for cash and like you know what you're planning you know what's it keeps building I know you're going to invest in some inventory, but it just seems like there's a lot of excess cash on the balance sheet.

And then I have a follow up question.

Yeah, Yeah, Yeah first use of cash, especially this year and you can see that in inventory balance is the reinvestment in inventory and you can see the cash balance start to you know kind of plateau, where we're at now where we invest in the inventory the significant demand that we've experienced as to the cash balance, but we're reinvesting that in the working capital.

So you know I think were largely through the inventory rebuild now it'll start to balance out you know I think second use of cash goes along with that but just you know working capital investing in the marketing investing in the business.

We're pretty light on Capex is you know so you know not any meaningful capex investments planned outside of you know historical norms.

So then that leads to what else do we do with it we are.

You know we continue to look at things were being very disciplined uhm, but M&A continues to be an opportunity for us, but we're being very patient on that front as well.

Got it and and just a question on the you know the Kendall Jenner appointment uhm.

In the interview process, which one of you guys played the heavy like who's the tougher interview or during that process.

Yeah, that's that's always Mike he.

Targets for these impossible with the path programming test them I think that.

Six six joined that.

Alright, thanks, very much guys.

The next question comes from the line of Raw Sandler up Barclays. Please ask you a question.

[noise] a due to follow up on the marketing question earlier. So you always you spent a lot as planned on on marketing and whoever's, a little bit in the third quarter, Oh, My gosh lots of comments about R. D. F. A bit unusual was pretty bullish give me what we've heard from other folks and E. Commerce. So I guess could you just parse out.

You know influencer marketing versus the Kendall Jenner versus you just classic performance marketing like what was the bigger driver on the record that ads and do you think that now that we're post pandemic and everybody's just shopping more generally online than they were prepandemic in brick and mortar suffering a little bit more.

Are you getting better Bang for the Buck on on your Influencer in performance then.

Then then you were two years ago. Thanks, a lot.

Yeah definitely so with regard to the marketing increases consistent with our commentary on on the.

In the past earnings call.

As a percentage of sales nearly all be increase came on the brand marketing side and came from those those really big Grand market investments that we made in September some of the increase of a much smaller portion did come from the curriculum marketing side, which I.

I actually the the way we offer it usually means and there's some good returns right because the better than returns we see that the more wanted us there. So there was a little bit of an increase on the performance side, but we received phenomenal results throughout the quarter Uhm. So we felt really good about those investments no I think in terms of the landscape you know it constantly shifts every <unk>.

Quarter, you're feeling is that if you have a good offerings for consumers on Brandon that's resonating product with that's resonating that over the long run you are going to continue to be competitive in the performance marketing space and that's what we see quarter to quarter can be shifts up and down is different players just kind of do different things for various reasons.

<unk> and this happened to be a more.

Fruitful quarter horse.

Your next question comes from the line of Mad Koranda, a fraud carpet capital.

Your line is open.

Hey, guys. Thank you too for me so first ones on the net sales grow commentary quarter today that if you guys I'd probably in the range of the third quarter growth rate. So I'm. Just wondering if you could maybe just speak to the key drivers of net sales growth.

<unk> the date in terms of order flow a of his return right just kind of relative to what you saw on three Q.

For example are we up here for her to order of a quarter on <unk>, what a return right flipped like relative to three Q. If if you can get a little color on that that'd be helpful. And then just when the gross margin Frank maybe not to beat the question of the death here, but just wanted to put a finer point on what's driving gross margin sort of implied outlook is down quarter over quarter. So it was a supply chain related.

Or is it the expectation of less full price selling and then why should we expect full price selling sort of to decline quarter over quarter is that based on actual quote of the day. It was altogether I've seen or is that just kind of a general observation and the overall competitive landscape into the fourth quarter.

Yeah sure on the on the first part October you know tall it largely in line with Uhm the third quarter. Both from you know kind of across the board from top line growth probably in that same range being driven by continue to increase in a O V on a year over year basis, So I'm kind of thinking largely in line with the third quarter.

You know return right in that same zone, maybe a tech higher as dresses continued to perform you know, but largely I'd say you know the customer activity continued on that same you know new customer adds really strong returning customer slash existing customer.

You know really active so you know kind of the commentary that we've given on the corner is very similar if we idea of more commentary on October but again, adding some caution for that November December time period does that can be a volatile time out there.

And then the margin should I I'd say, it's it's mostly due to that full price and markdown margin dynamic less though due to the supply chain you know the inventories been booked freight inbound freight is higher but given the price point the premium price point that we offer you that it it takes quite a bit to move that uhm from them or.

As in perspective, so as long as you would just do that shipped from the record full price that we've been seeing uhm and then also the markdown margin markdown margin coming off of the hives that we've experienced in the last couple of quarters.

So hopefully hopefully that helps.

We have time for one more question.

Your last question comes from the line of dealing carton of William There. Please ask your question.

Really appreciate it thank you.

And greedily I might sneak two in here, sorry, but I just wanted to clarify in the private label and you kind of ramp that back is it is it the case that you think by towards the end of 22, you might get it back to sort of prepandemic levels or given past experience you're gonna be more thoughtful about how you layered in these <unk>.

And then just on the international front I know the growth there was strong.

I'm just curious at any kind of cherrier color you do you think you're benefiting because there's locked down here for the restrictions in certain jurisdictions, particularly Asia. What do you think there's sort of a delayed potential benefit at those markets are covered thanks a lot.

Yeah, Yeah sure.

Sorry, I'm the first one I lost your first one after you talk to that international.

Just the pace of roll out of the probably the labels now they're kind of getting back alright, right. Yeah. Yeah. Yeah. Yeah. So now we feel really good about the you know the improvement are kind of the sequential increase the first sequential increase that we've seen in the last couple of years, you know I'd say, it's aggressive to say that will get back to that 36% that we were at in 2019, It's probably closer you know there's probably.

A line then the line is probably less deep than it was in the past as we are you know being you know I think measured in our pace of expansion there, but we do expect to see a nice healthy increase in the number of styles delivered sequentially from quarter to quarter, but again I wouldn't say you know 36% at that piece that we were out in 2019.

As aggressive uhm at least for the next year.

And then international it's very region by region. I think you know a couple of good examples Uhm, Australia, which was in lockdown for the bulk of the third quarter Uhm was one of the lower performing still a growth reason for us, but one of the lower performing regions. This quarter and then you compare that with the U K, who came out of Lockdowns earlier in the corner they performed really well for us.

Canada, China really healthy reasons for us on the international front.

I appreciate it thanks, guys my sport.

Okay.

That's all the time that we have for questions today, I will turn to call back to the management for closing remarks.

Hey, guys. Thanks for joining US you know one thing I just really wanted to you know think our team. The financial results of course are just incredible and speak for themselves, but you know a layer below all the operational metrics and all you know the the you know heart that went into you know until different as a result is it really does show and you know to the Investor community now Thank you for <unk>.

Anywhere superpower to have you know all that we've done but also wanted to note that you know where.

Still at the tail end of the pandemic and it's still not fully open I think that there's you know better and better days you have to come to a feeling good and you're not just over the near term, but for many many years of continued dominating performance, though thanks for joining us and instead of the <unk>.

This concludes today's conference you may now disconnect.

[music] [noise].