Revolve Group, Inc. Q1 FY2020 Earnings Call

Good afternoon, everyone, and thanks for joining us to discuss REVOLVE’s first quarter 2020 results. Before we begin, I would like to mention that we have posted a presentation containing Q1 2020 financial highlights to our Investor Relations website located at investors.revolve.com. I would also like to remind you that this conference call will include forward-looking statements. These statements include our expectations regarding risks related to the continued impact of the COVID-19 pandemic on our business, operations, and financial results, demand for our products, general economic conditions, our fluctuating operating results, seasonality in our business, our ability to acquire products on reasonable terms, our online business model, our ability to attract customers in a cost-effective manner, the strength of our brand, competition, fraud, system interruptions, our ability to fulfill orders, financial results in our guidance, market opportunities, our owned brand mix, our inventory position, our dilutive share count, our investments in customer experiences and fulfillment centers. These statements, which are subject to various risks, uncertainties, and assumptions, could cause our actual results to differ materially from these statements. These risks, uncertainties, and assumptions are detailed in this afternoon’s press release as well as in our filings with the SEC, including our registration statement on Form S-1 that was filed with the SEC, our Form 10-K that was filed with the SEC on February 26, 2020, and the Form 10-Q that will be filed, all of which can be found on our website at investors.revolve.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 more accurately represent the true operational performance and underlying results of our 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, the financial information prepared and presented in accordance with GAAP, and our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliations of GAAP to non-GAAP measures as well as the description, limitations, and rationale for using each measure 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 Karanikolas and Michael Mente, as well as Jesse Timmermans, our CFO. Following our prepared remarks, we’ll open the call for your questions. With that, I’ll turn the call over to Mike.

Thanks Erik. Good afternoon, everyone. Thanks for joining us today. We hope each of you and your families are safe and healthy. Today we’re only going to spend a limited amount of time on full Q1 results. Instead we’ll focus our attention on more recent business trends and how we’ve taken swift action to respond to the impact on our business from the COVID-19 pandemic. In our effort to promote understanding of recent business performance, we will make some one-time disclosures to help everyone follow the most recent trends in our business. With that I’ll start by touching on the first quarter. We started the quarter with some positive trends looking at January and February 2020 on a combined basis. We achieved net sales growth exceeding 20% year-over-year while improving inventory turns by approximately 20% year-over-year as well. The strong start to the year coupled with successful brand marketing events in January and February, including participation in the ABC television program, The Bachelor, gave us further confidence that our brand, messaging, and assortment were resonating well with our customers. Taking a deeper look at the top line results for January and February, year-over-year growth in both the REVOLVE and FORWARD segments accelerated through the first two months of Q1 2020, with particular strength in our FORWARD business in the international markets. The improved sales growth for our REVOLVE segment of 17% year-over-year in the first two months of 2020 came with an inventory decrease year-over-year in line with the strategy that we outlined over the last couple of quarters to work through our inventory position and improve inventory turns. These positive trends remained through the first week of March before COVID-19 became widespread in the US and related stay-at-home mandates changed the trajectory for us and many other discretionary consumer product companies. We are known for our premium and exciting aspirational social media marketing focused on an experiential lifestyle. Overnight, the special social occasions that often serve as a catalyst for customers to buy from REVOLVE, particularly in the spring season, were put on hold. Music festivals, travel, parties, weddings, and dining out among countless other events had all been canceled or postponed. Our largest and most impactful brand marketing event of the year, REVOLVE Festival, was also canceled. This change in consumer behavior combined with the broad-based reduction in consumer confidence and demand resulted in our net sales declining by almost 50% year-over-year in the final weeks of March. We view the current impact on our businesses as temporary and a function of the unprecedented environment, as we continue to engage with our customers through real-time adjustments to our merchandise offering and marketing message. We’re confident we remain well-positioned as the REVOLVE brand they trust for fashion inspiration. Now shifting to the more recent trends in the second quarter to-date. Net sales in April declined approximately 40% year-over-year, improving from a nearly 50% year-over-year decline in net sales in the latter part of March. Most importantly, the magnitude of our net sales declines has been reduced every week for the past four weeks. Through the first 10 days of May, our year-over-year decline in net sales further improved to roughly a 25% decline. Traffic to our sites has improved meaningfully in the recent weeks turning positive year-over-year after declining year-over-year beginning in mid-March. I’ll caveat these improving numbers by saying these are highly uncertain times, so while we’re encouraged by the improving trend, it’s entirely possible that things could get worse again in the coming days, weeks or months. We believe the improved sales trend reflects broader trends in consumer behavior over the time period as well as the great efforts by our marketing and merchandise teams to adeptly shift our messaging and product to align with the change in consumer interest in the current environment. For example, if you look at our website lately, you’ll see that we’re increasingly highlighting categories for the work-at-home and play-at-home lifestyle like loungewear, intimates, and beauty including featured shops work-from-home chic and date-night-in. This merchandising shift aligns with our customers' recent shopping behavior consistent with the realities of sheltered-in-place. As you might imagine, categories like beauty and loungewear are performing very well right now, while more formal pieces like dresses are not resonating in the current environment. On one hand, it is a near-term headwind since dresses have historically been by far our top-selling category and carry our highest gross margins. On the other hand, I’m excited about the growth in beauty as it gives us the opportunity to deepen our relationship with customers in a product category that tends to be a frequent purchase. Sales in the beauty category increased 122% year-over-year in April and became our fourth largest category by sales volume. In general, we saw encouraging trends in other merchandise segments that our customers historically associated with REVOLVE. While the overall business trends remain extremely challenging, our hope is that we can exit this period with an expanded relationship with our customers due to the outstanding work of our marketing and merchandising teams. Now I’ll shift to a discussion of how we’ve responded to the crisis. First and foremost, our number one priority is the health and safety of our employees and customers. Beginning in mid-March, we transitioned all of our teams who do not require them to be physically in the office to work from home. For those remaining in the workplace, we’ve completely revamped our operating procedures to implement rigorous health and safety guidelines. These safeguards include administering daily temperature checks, establishing social distancing requirements, providing personal protective equipment such as masks and gloves, creating staggered shifts in the distribution center, and frequent deep cleaning and sanitization. We’ve always been known for our exceptional service levels, and during this time period our e-commerce operations haven’t skipped a beat. Our customer satisfaction metrics were at record levels in March and April. We are particularly proud of this performance given numerous reports of significant fulfillment delays among other e-commerce apparel companies. As a way to even better serve our customers and establish even deeper relationships with them, in March, we launched our REVOLVE Loyalty program that we mentioned on the call last quarter. The loyalty program has been very well received in the early going. I’m proud of our team for how everyone at REVOLVE has managed through these challenging times while keeping laser-focused on delivering outstanding service to our customers. Thanks to all of our team members for your hard work and sacrifice, for staying nimble and for your dedication during this challenging time. In addition to protecting our employees, we knew we also had to protect our balance sheet and liquidity. By the end of Q1, it was clear we had to move quickly and decisively to reduce our cost structure given the depth of the reduction in demand and the uncertainty over how long the current trade might last. In early April, we reduced costs across the board starting at the top. The first cut we made was Michael and I reducing our annual salary to $1. We’ve also reduced almost every non-essential expense imaginable as well as canceled or deferred all non-essential capital expenditures. The most difficult decisions were those involving our valued team members. The outcomes ultimately included salary, wage, and hour reductions, furloughs, and to a much lesser extent layoffs. These were tough decisions, and we continue to support our furloughed employees by providing health benefits and educating them on all aspects of the CARES Act. We’re also actively managing inventory receipts to preserve our cash and minimize inventory risk in this time where the level of future demand is uncertain. Similar to the sales trend, we started off the year great in terms of managing our inventory balances and improving our inventory turns. At the end of February, our inventory had decreased year-over-year compared to the net sales increase of over 20% year-over-year and corresponding increase in our inventory turns. Upon the shelter-in-place mandates in mid-March, we began to immediately reduce our future inventory commitments to better align with the reduced consumer demand. Managing inventory in this environment with rapidly changing demand expectations and shifting customer preferences is a tough task, but we have a great line and planning team who have been with us for many years and have been able to react quickly.

Thanks Mike and hello, everyone. So much has changed in just the past eight weeks. We’re proud of the decisive actions we’ve taken across our business to help protect our people and optimize the business for such a dynamic environment. I’ll continue with the discussion of navigating through the COVID-19 challenges and will focus my remarks on three core areas: first our brand marketing initiative. Second, owned brands, and third, while confident REVOLVE is well positioned to navigate through the current challenges and emerge even stronger. First, our brand marketing initiative. As I’m sure everyone knows, REVOLVE is widely recognized for our impactful and aspirational brand marketing events that reach our customers through social media and our vast network of influencers. In a normal year, right now our brand marketing team and I would have just come off another successful REVOLVE festival and would be extremely busy planning and executing a series of events during our peak spring-summer season. 2020 is anything but a normal year. We quickly mobilized the team around the new opportunity of engaging with our customers during the current lifestyle of staying at home. Our customers love REVOLVE and love interacting with our brand on social media on a daily basis. So, we’re confident we can adapt well. In mid-March we launched hashtag REVOLVE AROUND THE HOUSE creating a tremendous amount of engaging and inspirational live content shows produced daily on Instagram Live that feature influencers, designers and celebrities. REVOLVE AROUND THE HOUSE includes some daily workouts, expert beauty tips, cooking classes, and my favorite, the REVOLVE shopping network. The response has been exciting. For example, a recent episode featured a global lifestyle influencer who is also a fashion designer collaborating with REVOLVE for her own brand collection. Last week, Ami hosted a live event from her house to launch a new line of shoes as an expansion of her line with our collaboration, and more than 100,000 people tuned in, and sales through the collection have been strong, validating the power of our live content and the strength of our collaboration as well. In just over five weeks, we have produced over 50 Instagram Live segments that have been viewed close to five million times on Instagram Live or IGTV. One of the most exciting things is that despite having significantly reduced our marketing spend, we’ve actually increased engagement with our core customers through the pandemic. There is more content being created, more comments, more likes, and more shares. Even though we’re not able to host in-person events like REVOLVE Festival, our Instagram reach on our REVOLVE handle has increased more than 30% year-over-year through the first nine days of May. We have adjusted our strategy and continue to drive awareness and engagement powering the foot traffic towards our websites as Mike mentioned. Now let’s shift to a discussion of owned brands. Owned brands are core to our long-term strategy and are a key part of our value proposition. However, with the onset of COVID-19 creating a great deal of uncertainty around demands in upcoming quarters, we have significantly reduced planned inventory receipts overall and even more aggressively with owned brands. In such an uncertain environment in the near term we believe we can more effectively manage our overall inventory levels by shifting more of our purchases through third-party inventory where we can make shallower initial inventory buys at a broader range of styles. To be clear, this does not suggest in any way that our long-term strategy has changed. In fact, the planned investments in owned brands discussed on last quarter’s conference call, which are focused on broadening our range of capabilities and diversifying our supply chain, have become even more relevant with the recent COVID-19-induced changes to consumer preferences. Sheltering-in-place has resulted in significant demand growth in categories such as denim, loungewear, and athleisure. We are moving quickly to affect these changes in our merchandise assortment across both owned and third-party brands. We’re developing owned brand capabilities in these underpenetrated categories. Before I turn it over to Jesse, I want to express my confidence in why I believe REVOLVE is well positioned to navigate through the challenges of COVID-19 and emerge even stronger. First, our experience in ownership stake. We founded REVOLVE with the vision to own it forever and the decisions we make are viewed through this long-term lens. While COVID-19 is truly unprecedented, Mike and I have deep experience navigating and surviving through challenging market cycles. Mike and I launched REVOLVE in 2003 in the aftermath of a recession that took place after the dot-com crash, and later we successfully navigated through the great financial crisis at a time when we still hadn’t taken outside capital. Through this all, we remain the two largest shareholders even after going public. In fact, we increased our ownership stake in recent months. Next, our business model. We’re very fortunate to have a business model that is incredibly capital efficient and inherently resilient. Over the past four years, capital expenditures have averaged just 1% of net sales. Equally important, for the majority of our cost structure, we can pull leverage very quickly to adjust to changing macroeconomic environments. For example, our largest operating business marketing is highly discretionary. The significant majority of our marketing spend in 2020 continues to be digital ad spend that we can adjust in real-time since we have no long-term commitment. We also have a strong financial position with more than $100 million in cash at the end of Q1. We have a strong established track record for generating cash flow. In 2019, we generated $46 million in cash flow from operations, nearly 8% of net sales for the year. Finally, we’re well positioned for accelerated consumer spending online. There’s no question that the COVID-19 pandemic could bring long-lasting changes in consumer behavior. We believe there’s going to be a shift in consumer spending online, benefiting capital efficient companies like REVOLVE that are well positioned to navigate through these tough economic times. I’ll close with something I’m super proud of. We are in a position that allows us to leverage our supply chain expertise, our influencer network, and our brand partners to give back to the community in support of our frontline workers. We’ve pledged to donate more than 200,000 medical-grade masks to healthcare workers to help these heroes in their time of need. To date we’ve distributed more than 90,000 masks to hospitals and clinics across the country with an additional 140,000 in transit to donate to over 74 hospitals. Now I’ll turn it over to Jesse to give you some more details on the financial results and trends.

Thanks, Michael. Given all the moving parts in the current environment, I’m going to do a less detailed review of our first quarter results today as they’re not representative of our current business trends. As a result and in the spirit of transparency, I’ll spend some additional time providing color on business trends since the end of the first quarter and some updated assumptions for the balance of 2020. I’ll also discuss our cost structure, capital spending plans and our balance sheet. Starting with the first quarter results. For Q1, we reported 6% year-over-year growth in net sales, continued GAAP and adjusted EBITDA profitability, and we generated strong free cash flow of $8 million. Given the unprecedented change in the consumer demand environment late in the quarter due to the COVID-19 pandemic, it’s important to look beyond the headline numbers. As Mike mentioned, we came out of the gate strong for the first nine weeks of the quarter. Net sales growth exceeded 20% for January and February on a combined basis. The first week of March remained strong and year-over-year growth in traffic to our sites and mobile apps was outstanding during this nine-week period, a higher growth rate than any quarter in 2019. During the second week of March, we experienced a significant negative change in trend on both net sales and traffic to our sites, coincidental with the escalation of the COVID-19 pandemic in the US. As a result, by the time we exited the first quarter, weekly net sales were nearly 50% less than in the corresponding week in the prior year. This unprecedented change in our trajectory shows how much the stay-at-home mandates have impacted consumer spending. Turning to the top line, REVOLVE segment net sales in Q1 increased 1% year-over-year for the full quarter, but again it’s important to look beyond the headline numbers. Before the negative impacts in March, REVOLVE segment net sales increased 17% year-over-year in January and February combined, an improvement from the 13% year-over-year growth in Q4 2019. Meanwhile, the FORWARD segment performance was exceptional in the first quarter. FORWARD net sales increased 47% year-over-year, its highest growth rate in several quarters despite the COVID-19 headwind late in the quarter. Active customers continued to increase, surpassing the 1.5 million mark for the first time. Orders placed increased 3% year-over-year despite a negative impact in March, and average order value was flat year-over-year at $259 despite headwinds in late March resulting from a material shift in net sales mix to at-home product categories such as beauty and loungewear with lower average price points. International was a bright spot for the quarter, with international net sales increasing 17% year-over-year despite being impacted in March. Looking at the months of January and February on a combined basis, international net sales were higher by more than 30% year-over-year, just like in the US. The international net sales trajectory changed materially and became negative in late March due to COVID-19 impact. With that being said, similar to the last few quarters in the first six weeks of this quarter, the international business has continued to perform better than the US business, in part because the international business is diversified across many different regions and also because of the outsized impact of COVID-19 on the US consumer. Moving to gross profit. Consolidated gross margin was 48.6% for the first quarter, a decrease of 290 basis points over the prior year. As indicated last quarter, we had expected a lower consolidated gross margin due to a higher mix of net sales from the FORWARD segment, which carries a lower gross margin, as well as the REVOLVE segment gross margin being lower year-over-year. Within the REVOLVE segment, we delivered a gross margin of 50.1% in Q1, down 310 basis points year-over-year. As we discussed in the prior quarters, the REVOLVE segment margin was negatively impacted by a lower percentage of REVOLVE segment net sales at full price, deeper markdowns within the marked-down product, and a lower mix of owned brands. The COVID-19 pandemic brought additional gross margin headwinds as a result of the decreased demand as well as a more promotional external environment. In addition to a shift in the net sales mix to product categories that carry lower gross margins. Within the FORWARD segment, not only did we deliver an acceleration of top-line growth, but we also delivered strong gross margin. FORWARD segment gross margin was 39.7%, an increase of 230 basis points over the prior year as a result of the merchandising and marketing initiatives that we put in place after repositioning this business. Fulfillment, which reflects the cost incurred to staff and operate our distribution center, totaled $4.5 million, or 3.1% of net sales, as compared to 3.3% in the first quarter of 2019. As a reminder, fulfillment is primarily comprised of variable costs that we can efficiently flex up and down with demand. We’re very pleased with our ability to deliver continued year-over-year efficiencies in fulfillment as a percentage of net sales for the second consecutive quarter. In the normal course of business, we would expect further efficiency gains as we have previously communicated. However, going forward during this period of reduced demand, we now expect fulfillment costs as a percentage of net sales to be less efficient year-over-year for three reasons: first, there’s a decrease in efficiency as a result of the important process changes we’ve implemented in our warehouse to ensure workers' safety, including social distancing and providing personal protective equipment. Second, the shift in product categories we discussed will result in a decrease in average order value, which is a headwind to fulfillment efficiency measured as a percentage of net sales. Third, the lower volume in the current environment means there’s less efficient utilization of our expanded warehouse capacity. Selling and distribution costs, which consist primarily of shipping, merchant processing fees, and customer service were $21.8 million, or 14.9% of net sales, a slight decrease from 15% of net sales in the first quarter of 2019. As a reminder, selling and distribution costs are almost entirely variable, primarily tied to the number of orders processed. During Q1, we were able to offset general price increases with greater efficiencies to maintain the overall level of selling and distribution costs as a percentage of net sales. Looking forward, during this period of reduced demand and similar to fulfillment costs, we expect the lower average order value resulting from the category mix shift and markdowns will put pressure on this line item when expressed as a percentage of net sales. Marketing costs were $22 million or 15% of net sales as compared to 14.2% in the first quarter of 2019. As a reminder, historically about 75% of our annual marketing expense relates to performance marketing on digital channels. Within this performance marketing component, we have the ability to flex our investment up and down in almost real time, making this area highly variable depending on sales. Shifting to brand marketing, with the current social distancing guidelines, we have canceled or postponed many of our brand marketing events that had been planned for 2020, including the REVOLVE Festival initially scheduled for April. As a result, we now expect our investment in performance marketing to represent a larger share of the overall marketing spend in 2020 than the 75% in recent years. We are targeting a reduction in total marketing spend as a percentage of net sales as a result of the reduced brand marketing investment and a continued balancing of performance marketing spend. General and administrative costs, which primarily consist of salaries and wages, were $18.9 million or 12.9% of net sales in the first quarter as compared to 14% of net sales in the first quarter of 2019. The year-over-year reduction in G&A was mainly due to non-recurring costs incurred in the first quarter of 2019, as well as the efficiency gains with scale, as this line item is largely fixed. After we recognized the pandemic's significant impact on consumer demand, we moved quickly to reduce G&A costs. As Mike mentioned in early April, we announced the outcome of very difficult decisions to temporarily reduce personnel-related costs. To give you some context, we expect these actions will temporarily reduce our cash G&A costs by about 40% from the prior run rate. We will see the full impact of these actions beginning in May. For the first quarter of 2020, net income was $4.2 million or $0.06 per diluted share. Adjusted EBITDA was $5.6 million for a margin of 3.8%. Moving to the cash flow statement, we operate a highly capital-efficient business, as demonstrated by our capital expenditures of just over $500,000 in the first quarter, less than one-half of 1% of net sales. We generated $8.1 million in cash flow from operations and $7.5 million in free cash flow for the first quarter of 2020. This cash flow generation further strengthened our balance sheet. As of March 31, 2020, we had net cash of $73.6 million since liquidity is especially important in these uncertain times. Late in Q1, we drew down $30 million from our existing line of credit, our first draw on the line in over two years. With this, we ended the first quarter with total cash and cash equivalents of $103.6 million. We ended the quarter with $101 million in inventory, an increase of 4% year-over-year, slightly lower than our 6% increase in net sales year-over-year. As Mike mentioned, inventory trends improved through the first two months of the quarter before decreasing in March when we felt the impact of COVID-19. To preserve our cash and liquidity going forward, we have been very focused on managing inventory receipts for the balance of the year. We have reduced our intake of inventory for both third-party brands and owned brands, with a greater proportion of the reduction coming from owned brands. Looking ahead, we have modeled several different scenarios to gauge the potential impact of COVID-19 on our business and balance sheet. It is important to note that while we are certainly hoping for a scenario where consumer demand recovers, we’re managing our cost structure under the assumption that business conditions remain very challenging for the rest of the year. Most importantly, we believe we have the flexibility built into our cost structure, the financial levers, and adequate liquidity to manage through the downturn and be in a position of strength when the economy recovers. Now let me talk about business trends since the first quarter ended. Starting with the balance sheet, the combination of our capital-efficient model, our active management of working capital, and cost reduction measures implemented enabled us to maintain our cash balances through the end of April and into the first 10 days of May. Moving to the income statement, as Mike mentioned, net sales in April declined approximately 40% year-over-year, improving from nearly 50% year-over-year decline in net sales in the final weeks of March. Most importantly, the magnitude of our net sales declines has been reduced every week for the past four weeks, and through the first 10 days of May, our year-over-year decline in net sales further improved to a roughly 25% decline year-over-year. This improvement came despite a very tough comp as our REVOLVE Festival event, usually held in April, was postponed along with countless travel plans, social gatherings, and many other events that serve as a catalyst for our customers to buy from REVOLVE. The average order value in April was $204, a decrease of more than 20% from the AOV reported in the first quarter of 2020, primarily due to the COVID-19-induced mix shift I mentioned previously having an impact on the full month of April. With that, I’ll turn to our full year 2020 assumptions. Without a doubt, the pandemic has created significant headwinds for our business. The duration and the extent of the pandemic is highly uncertain, and the economic impact could last much longer. While it wouldn’t be appropriate to give traditional guidance in such a fluid environment, I’ll offer some insights. Seasonality—although our business is not overly seasonal like traditional retailers with sales concentrated around the gift-giving holiday season, it’s worth noting that the timing of the COVID outbreak coincided with the start of what is typically our highest selling period of the year leading into the summer and festival season. As a result, for modeling purposes related to the current quarter ending on June 30, we expect the COVID-19 restrictions to negate the historical patterns of the second quarter typically being our peak period for net sales and gross margin. Average order value—we see average order value drifting meaningfully lower with continued markdown pressure and a continued mix shift toward lower price point categories as demonstrated by the April average order value decreasing more than 20% from the first quarter AOV, as I just mentioned. Gross margin—on last quarter’s conference call, we talked about our expectation for gross margin pressure in 2020, particularly in the first half of the year. The pandemic brings additional gross margin pressures, so we now expect our gross margin for the rest of the year to come in lower than our previous projections and lower than the 48.6% in the first quarter of 2020. We expect this margin pressure to continue during this time of uncertainty for three main reasons: first, our decision to shift more of our inventory buys into third-party styles with lower unit minimums in the near term while focusing owned brands on a more limited range of styles. Second, the shift in net sales makes away from our highest margin category dresses to comparatively lower margin product categories such as beauty. Third, the sharply lower consumer demand and a correspondingly increased promotional environment has put additional pressure on markdowns. Finally, capital expenditures—we now expect total capital expenditures of approximately $2 million, a decrease of 60% from our prior guidance. The situation remains very fluid and uncertain. We will continue to monitor trends. We will remain focused and disciplined, and we will take the actions that we believe are necessary to manage our financial position through this very challenging time.

Thanks, Jesse. We’d like to take this opportunity to once again thank our great team for their dedication, agility, hard work, and sacrifice demonstrated through this difficult time. This is one of the most challenging periods we’ve experienced in our 17 years of operation, yet our experience has proven that business is not a straight line. Our successful track record has been established through numerous business cycles and we’re confident in our ability to manage through this and come out stronger on the other side. With that, I’ll turn it over to the operator for your questions.

Your first question comes from the line of Oliver Chen from Cowen. Your line is open.

It’s encouraging that trends have been less bad and also the traffic momentum. What are your thoughts for going forward in terms of how traffic may manifest and also the step down in AOV? When might AOV stabilize and how do you see dresses as a percentage of mix trending in that context? Would also love your thoughts on some uncontrollable factors around markdowns and markdown management and how to do that in a brand appropriate way so that the customer loves you for the long-term? Thank you.

Definitely, thanks Oliver. Mike Karanikolas here. So a lot of questions there; I may forget some of them. I’ll start with the top. With regards to traffic, we’ve seen some really encouraging traffic trends in the past four to six weeks with traffic continuing to increase each week and positive year-over-year traffic trends in the most recent weeks. So we feel good about that going forward, and what’s really encouraging about that traffic is that a lot of deposit trends are being driven by organic traffic, and our marketing teams have really done a great job connecting with the consumer in the primary, so we would expect those trends to continue. I feel, with regards to the rest of the year, it’s a highly uncertain environment. So, with regards to dresses for example, we’ve seen a definite recovery there, but at the same time the next coming months are going to be very difficult to predict. And so it’s difficult for us to say what dress demand is going to look like in the fall, and the very reason that we’re shifting our inventory buys to a little bit towards products with the lower minimums so we can take our reduced risk there.

Thanks Mike, and on markdowns, what is the best way to manage it in this dynamic environment? The gross margin guidance is very helpful. What are your expectations for how the market plays may look as a lot of competitors are likely over-inventoried?

Yes, definitely. So, we have seen - being in a very promotional environment out there. And it’s dynamic. So, we react on a weekly basis to what we see out there. I think in the current environment consumers are expecting more promotions and markdowns, and they’re gravitating towards promotions and markdowns. So, we’re kind of trying down to straddle a fine line. While we make sure we do give consumers what they want and right now that is more markdown products, but also, be careful about protecting our brand and being very targeted with the markdowns and promotions and trying to make them interesting versus more kind of mass type promotions where anything can go.

Okay, and my last question is about permanent changes from the at-home experiential. What are your thoughts on permanent changes in terms of how you may approach marketing or not? With what you’re doing and what may stay for the long-term, whether that be the live streaming or the shopping network, and what kind of positive learnings have you had from the crisis? Thank you.

Oliver, Michael Mente. Hi, everyone. Hope you guys are all safe and healthy. When it comes to engaging with the consumer, we really just have to dance with - be their best friends. When times were a different day, she was wanting to travel, wanting to go music festivals, we were there with her. When she’s at home, we’re providing her that experience. We’re working out with her. We’re giving her comfortable clothes to wear and whatnot. So, it’s really unpredictable. It’s going to be a reflection of how the world shapes up. REVOLVE is what we feel really good at—these new methods that we’re connecting with on Instagram Live and IGTV are areas that we were investing before, all things that we will continue to nurture over time. We think ultimately this has really allowed us to expand our relationship and deepen our relationship across—the way we communicate is quite similar to the way across our merchandising categories we were able to deepen that relationship by providing her other categories that we weren’t particularly known for. We really had that emotional connection for her. So ultimately, this is a blessing in disguise. We’re looking back despite all of the pain that of course we’re experiencing in the short term, we’re really having a deeper, broader relationship in just the REVOLVE that you knew of in times past.

Thanks job on all the agility, best regards.

Your next question comes from Mark Altschwager from Baird.

And thanks for taking my question and hope everyone is doing well. I was hoping you could talk about your strategies on client acquisition and how, if at all those strategies are changing in light of the current backdrop. Specifically, I was hoping you can comment on digital marketing and whether the decline in cost in some channels is something you may be able to lean into in the months ahead.

Definitely. Mike Karanikolas here. So there hasn’t been – I would say high-level change to our strategy, but we’re assuming a lot of tactical changes as we reacted quickly to the situation. We’ve seen the cost of traffic go down substantially since this pandemic started. At the same time, we’ve also seen the consumers have been converting less. Consumers still have time to shop and look at things, but they’re a little bit more hesitant to pull the trigger, particularly for a brand like ours where a lot of the merchandise historically, and even currently, is geared towards merchandise you wear when you’re going out and you’re going into an event, trying to look your best, and consumers just aren’t there yet. So, on the positive side I’d say we’ve seen marketing costs stabilize. Marketing costs were up a little bit year-over-year on the digital side as we—as the crisis first hit, and then actually in recent weeks, we’ve seen some efficiencies there. So, it’s something we’re going to take on a week-by-week basis. Traffic is cheap, but also consumers aren’t converting as well, so we’re trying to be disciplined there.

And your next question comes from Ross Sandler from Barclays.

Couple questions. If you had to divide your revenue between the stuff that’s working right now at home—beauty and loungewear you mentioned—and everything else, kind of your legacy normal stuff. How big would that first bucket be in terms of revenue? Can you talk about how quickly, given your kind of more nimble supply chain, how quickly can you move that direction if we’re going to stay in this mode for a little while? And then second question is, Jesse, if we back out REVOLVE Fest, which was I think in late April last year, and we try to compare kind of underlying growth rate excluding big events, that down 25 from May might be a lot less than that on a go-forward basis once you get past the peak of your seasonality. So, is that right way to think about it? Because you see potentially like a flat type growth rate as we get into 3Q? Any color there just on the impact from REVOLVE Fest on that down 25 in May? Thank you.

Yes, sure. Thanks Ross. So, starting with the first one in that category mix, and maybe focusing it on the REVOLVE segment since that is the biggest. If we look at dresses, it has historically been over a third of the business on REVOLVE, and that’s been very highly penetrated on the owned brand side. To give you some context, while beauty has been growing in triple digits in the recent period since COVID hit, that’s been in the low single-digit percentage of total net sales for REVOLVE. With that triple-digit sales growth, that’s definitely taking share. There’s some puts and takes on that, benefiting in terms of return rates where dresses is the highest return rate category, offset with the benefit of beauty, which is the lowest return rate category. We also have the negative impact of AOVs and ASPs shifting from historically very high price points for us, dresses at around $130, $140 price range, down to a beauty product that’s in the 40s. So that’s some color on the product mix. And then in terms of seasonality in REVOLVE Festival, there definitely was some impact there. Historically, April and May have been two of our strongest months of the year and without those big events like REVOLVE Festival, we’re losing out on a lot of impressions and exposure. So, if you take what we’ve been trailing out in the recent period, especially in April when compared to non-April months of last year, that could give some indication of what that might look like. I think it’s pretty aggressive to say we’d get to flat if you do that comparison, but there definitely is an impact there.

I can go and touch a little bit—I think there was a middle question there in terms of the supply chain, and I think we still are very excited and quite proud of how the team has responded. When it comes to Q3, we view what we have a much more balanced, a much more well-rounded and adjusted merchandising mix in relation to this new period that we all are experiencing together. This crisis has accelerated things such as e-commerce and a lot of the way our lives have adjusted. As early as next month, we’ll be seeing some of the loungewear product coming from our local supply chain, which we’re very excited about, both the product that we’ve coming as well as the way the team has responded. Going into the back half of the year and next year, we’ll be activated and adjusted to the new life and our customers' new needs.

Your next question comes from Kimberly Greenberger from Morgan Stanley.

Thanks for all the great details and transparency you’ve provided on the call. It’s been extremely helpful. I wanted to start with the FORWARD segment if I could. Looking to the first quarter, you had 47% growth at FORWARD, and you gave some of the January, February figures for REVOLVE as opposed to March. Did you see a similar pattern in the FORWARD segment with growth in January and February and then a decline in March? Or were the three months more similar on the FORWARD segment? Then just reflecting on the April and the May month-to-date color that you gave. Are you seeing a different trend between the REVOLVE segment and the FORWARD segment here in the second quarter, or are the trends relatively similar to one another?

Thanks, Kimberly. It was a pretty extreme impact there starting in the second part of March. Definitely did impact all segments. We did see strong growth, especially in the first two months from both segments, and then we saw that significant hit in March that extended through April. FORWARD is a smaller part of the business, and a little bit more skewed internationally and a little bit more skewed on the markdown side. So, on the week-to-week, there's a little bit of noise on February seasonality, pluses and minuses, and that comes through, especially on international where we saw international perform better relative to the domestic business. Again, on FORWARD, probably a little bit better than the REVOLVE segment just based on those dynamics plus the comps in the prior year.

Okay, great, Jesse. And then just a follow-up question on the gross margin. You indicated that you’re expecting gross margin this year to be below the 48.6% level, which obviously suggests some more severe pressure throughout the year even than you experienced I think in Q1. I’m wondering if you think the greatest pressure is in the second quarter, or do you think you’re more likely to see sort of similar rates of pressure in the second through the fourth quarter?

It’s really tough one, and because it is so uncertain, it’s hard to say really what the back half of the year is going to do. We have more visibility into the recent periods. We’ve locked in April and the first couple of weeks of May here, so that’s the known. What we’ve seen is greater compression on that margin. Q2 has historically been our highest margin period of the year, so I think we’ll definitely see more pressure. That’s the guidance that we’ve given: the rest of the year will be below the 48.6% that we saw in Q1. So, the target is how it’s going to play out quarter-to-quarter.

Okay, thank you so much, and hope everyone stays safe.

Thanks, you too.

Your next question comes from Edward Yruma from KeyBanc Capital Markets.

I guess first I’m not sure this is noble or discernible, but any sense as to how much of a lift you may have gotten from stimulus? Do you see an outsized bump that week or the week then it started to hit? And any sense kind of how consumer behavior is trending post that? And then as a follow-up, I know you guys are very carefully managing receipts. How successful have you been able to curb the states perspective?

With regard to the stimulus, we did see a sizable bump the week the stimulus hit, but what’s really encouraging is that in general the progressive weeks since then have continued on an upward trend. For that reason, we think the stimulus did have a big impact. It’s not the major driver of the improving trend that we’re seeing here. I think the other thing we’ve seen—a similar improving trend in international markets. We’re actually on the international side; the past four weeks have all been positive in terms of revenue year-over-year. So we think it didn’t have any impact, but we don’t think it’s the dominant factor in play. With regard to the inventory receipts for the fall, we’ve been very successful in making adjustments there. Our partners have been very gracious and working with us side-by-side to get the right levels of inventory to bring in those seasons. I think the only thing I’d caution is that it is a very highly uncertain environment and we’ve seen an improving trend here, but we’re also preparing for the possibility that the trend could shift in the other direction because it’s a very fluid situation.

Your next question comes from Justin Post from Bank of America.

Maybe two questions and one follow-up. First on FORWARD, the fee acceleration you saw in the first two months, was that due to a lot of new customers or were you seeing orders per customer go up? I’m just wondering what was working and how the inventory was resonating better? And then secondly, back to the REVOLVE Fest question. I know that hurt in April, that comp, do you think not having REVOLVE Fest was also a headwind in the first 10 days of May and then I have one follow-up?

With regards to FORWARD, we did see a first volume increase in new customers as well. It was a terrific first two months to the year. I’ve cautioned with FORWARD though that there are some unique aspects to the first two months that resulted in particularly outsized growth. We’re still very happy with the trends that FORWARD has shown progressively quarter-to-quarter. I think that 47% number and even higher number we saw in the first two months was a bit of an outlier driven in part by some really strong international marketing activity within our international team that I think was a bit one-time in nature. I’m sorry, what was the second half of your question?

Sure, yes. You mentioned REVOLVE Fest was a headwind in April, which we would expect. I was wondering if you thought the REVOLVE Fest not having that also was an impact on the first 10 days of May so that actually depressed the May number a little bit. And then my second question was on the return reserve; it was down quite a bit year-over-year. Is that all mix or was there other things going on with the return reserve? Thank you.

With regards to REVOLVE Festival and the impact on May, we do think there’s an additional impact in May as well, but it’s much less than the impact we’ve seen in April. I wouldn’t read too much into layering additional headwinds on top of the trends that we’re seeing. Again, the macro environment has been so uncertain. I think for the May numbers REVOLVE Fest will have a more differentiated impact in those numbers. And then with regards to the return reserve, I’ll let Jesse handle that one.

Thanks Mike. And just to clarify on the return reserve and make sure we’re talking the same terminology here, I think bifurcating that between rate and return reserve. The return rate has decreased, and that’s largely due to the mix of sales, both in terms of the shift towards the lower price point, lower churn rate categories like beauty. Also, the incremental markdowns are a large portion of our final sales, so there are no return rates on those products. I think the return reserve is also an important thing to call out because as this folds into liquidity. When you’re drawing at a constant rate, whatever that is 5%, 10%, 20%, you’re selling that much product, and approximately 50% is coming in. When you have such an abrupt shift like COVID-19 where you go from positive growth to negative growth, you essentially have a cash call on those returns that were sold at the higher rates and you’re not selling at as high of rates going forward. So essentially that 50% return on the higher volume is offsetting the sales that are going out on the lower volume. We’re seeing that on the cash flow statement, and that return reserve is really that cash call on returns coming in. So, from a liquidity standpoint that had a large impact, especially in the back half of March. Given our cash balance holding, we feel good about how that’s played out.

Next question please. Your next question comes from Aaron Kessler from Raymond James.

First, maybe talk about the categories where you’ve had to invest more as a result of the stay-in-place mandate, many thoughts into some of the beauty investments. I mean how does this change your thinking longer term into some of these other categories? And then just also, just to recovery that you referenced in May—was this kind of across all categories, or is it still mostly in kind of denim leisure and athleisure type of categories?

The team has done an incredible job on the beauty side. We’ve had an incredible selection across all the sub-categories that are across beauty. So, when she was looking for a range of products, we had them there for her. The great thing is that a lot of the beauty business is really driven by reorders, so we’ve been able to offer a whole range of skincare, hair care, and self-care across the board, and we’ve been able to replenish and chase into that business. So that beauty is very, very favorable for us in terms of lack of markdowns and also very, very low return rates. I think this has been an awesome opportunity where we really introduced our customers to another aspect of our business. I think a new age next-generation department store is familiar with us for the ready-to-wear floor and the beauty counters. So, we think—also we’ve been able to expand our marketing messaging around beauty. We expect and anticipate a very, very long-term engagement. I think we’ve seen great success and great retention with our beauty business as nations move forward. So, we’re very encouraged. With regard to the other categories again—very similar story. The loungewear aspect of the business is something we’ve had to chase into aggressively, and we’ve done that both for the third-party and for our owned brands. So, there’s going to be a much larger presence there over the long-term. Ultimately, this kind of is not so much of a swing but more of a balance, I would say. Whereas category mixes from the loungewear category to the extreme end of very fancy dresses and event wear gowns—we don’t see it as a shift that has been dramatic in terms of percentage change. But if you look at the type of categories, it’s been a lot more balanced and we are very, very excited about being able to communicate and connect with our consumer across all of our needs.

Got it. Great. And just the recovery in May, was that kind of across all categories, or still mainly in kind of denim leisure and athleisure type categories?

Yes, so that recovery was across all categories; we saw broad-based improvement.

Your next question comes from Michael Binetti from Credit Suisse.

Thanks for taking a shot at the guidance here and helping us understand how you’re thinking about the business during a very tough period. Obviously, the speak about go forward at all. I want to ask about the gross margins a little bit. Jesse, I think the guide post you gave of lower than the first quarter for the year puts us down more than 500, or maybe more than 550 for the year. Is there any—I agree with your comment that the visibility is really low particularly in the second half. I’m assuming—I mean 2Q is down a lot for you to take us that low for the year. Is there any kind of guidepost you can give us on how to think about the magnitude in 2Q just to help us with the model a little bit? And then any thought you could give on maybe some kind of basis point guidance on how much of that is going to come from the mix of owned brand versus compressing margins in the different businesses, first party, third-party versus the category shift you spoke to?

Yes, sure. Like you said, it’s really difficult circumstances to try to provide any guidance. We’re trying to do our best to put those guideposts out there and help out. One, the cadence throughout the year. I think it’s fair that 2Q is going to have a more meaningful year-over-year decline compared to Q1 just based on the comps again. 2Q historically is our highest margin quarter of the year and that’s laid out last year as well. We did over 400 basis points better in Q2 last year than we did in Q1, so I think this year’s Q2 coming in lower than the Q1 we did. There’s an expansion of the year-over-year decrease in 2Q. Some of these events—maybe to try to help a little bit for the rest of the year. It’s important to break it out between the COVID period and non-COVID period. During this COVID period, one impact that accelerated or is having a more meaningful impact, is that shift from owned brand to third-party with lower minimums on third-party where in the near term we can manage both the inventory and reaction better by making that shift. Over the long-term, and hopefully it’s shorter than longer, we can go back to that pre-COVID cadence and target that we can maybe hit it on last quarter’s call. I think from a magnitude perspective, you can think about the combination of full price markdown mix and a lower markdown margin having the largest impact followed by this third-party owned brand mix with more of a shift towards the third-party than anticipated on the previous quarter’s call.

Okay, thanks for that. And then I guess as a follow-up, how do you look ahead as you think about rebuilding the business post-COVID here? How much of a gross margin change we see now this year do you think remains structural versus how much you think you can recapture? If you think about the fact that you guys had very, very high levels of full-price selling relative to the retail peer group. I don’t know; you said longer-term you can try to return to the mix of first-party, third-party brands. But maybe FORWARD keeps growing faster, maybe some of these lower gross margin categories are a bigger opportunity and that’s structural, and maybe just the levels of full-price selling come down. How should we think about when you think as we look at 2021 and whenever is recapturable?

So, we don’t view this as any kind of long-term shift. Now there may be some longer-term shifts at the margins like say on some of the category mix shift. But I think the right way to view this as an opportunity and hopefully not playing that much into the overall margin. With regards to the two major components, the markdowns and the third-party versus owned brand mix, both of those are temporary. Certainly, it’s in a more promotional environment right now, and everyone has a lot more inventory than usually planned pre-pandemic, so that’s going to reflect accordingly in the numbers. With regards to owned brand, third-party, this is a temporary shifting strategy because the economics are better for us in this pandemic situation that is highly uncertain in terms of outlook and also where the economics are different in terms of production minimums and investments and costs of that nature. The major shift we’re receiving this year is just a function of us maximizing economics of the current period. We’re going to be prepared as soon as the pandemic is over to immediately bounce things back to a level more comparable to what we talked about previously, which were still dialed back a little bit right and kind of closer between 2018 and 2019 mix and then from there continue to grow that business.

Your next question comes from Bob Drbul from Guggenheim.

Couple questions from me. I think on the first part, on the move to shift to the third-party, is a lot of that existing brands that you sold before, or are you getting new brands in terms of that piece of the business? And I guess in a situation like this with the balance sheet that you have, are you seeing any opportunities from an emerging brand perspective where a designer or someone might have some liquidity issues and that will be something you consider adding to your own portfolio?

Yes, the majority of shift to third-party has been with existing brands and vendors—brands that we haven’t lost any relationships with. But on the fringes, there have also been the addition of some new vendors in categories that are becoming more important—things like loungewear on the smaller end. We work with 500 plus, third-party brand; there have been some very recent additions to the marketplace. Long-term wise in terms of partners or brands, I think, you know, serving our customers is number one, and great products is essential. So, if there are brands that are in need of support and help and there’s an opportunity for partnership, that’s something we’d definitely like to explore. I think, you know, as of right now, it’s quite early in this crisis, but in the future, those opportunities present themselves, we will be very open.

Got it, and just two more quick ones. On the international business specifically, April, May, can you talk about country-by-country what you’re seeing or what you’re seeing in terms of the ramp back up? And then, the last question is essentially you talked a little bit about some of the stimulus check impact. Are you seeing more customers use the after-pay financing vehicle at all, just any changes from the Q1 into April, May? Thanks. And that will be it from me.

With regards to the positive international trends, I can add some more color. I think broadly internationally as well as some sort of regional color. In addition to international being positive for the past four weeks, I would say, in general, we saw in our international regions—they were hit less hard and more quickly, and we’ve seen positive trends that are fairly broad-based internationally now. International represents a lot of countries, so there’s probably no point in timing our history for every single country. It's turning in the right direction, but in general, I can say it is very broad-based in terms of what we’re seeing, including heavily hit areas such as Western Europe where we’re seeing some really positive sales trends.

Your next question comes from Simeon Siegel from BMO Capital Markets.

I hope you’re all doing well through this. Sorry if I missed it. Can you speak about your view on the go-forward direction of cost per influencer and performance marketing? And then can you guys just talk about how you’re approaching, you mentioned conversion. So just looking at reflecting on the fact that margin in April was both in the recent traffic with buried in the sales trend. Can you just talk to what you’re seeing with conversion in your approach to what’s driving that?

On a go-forward basis, I would expect marketing expenses to be generally in line as a percent of sales year-over-year, so call it flat. Now that’s a broad general guidance. We’re going to be tactical in taking advantage of opportunities when they’re there and pull back when they’re not there. But I think as kind of an initial flag post, that’s the way I would view it. In terms of conversion rate trends, we’re seeing some recovery in conversion rate, but it has not been as strong as the recovery on the traffic side, meaning that’s something we have to see in terms of the full recovery on merchandise sales side.

We have time for one more question. Your last question comes from Susan Anderson from B. Riley FBR.

Thanks for fitting me in. Two questions on the cost savings. Should we think of all of that being in the second quarter? Is there anything also that we should think about for the back half of the year? And then also, when you think about the consumer, how are you thinking about them getting back to spending on fashion apparel again, or at the levels that they have been spending? And then also, how are you thinking about competing, I guess, with the stores when they open up? Obviously, a lot of promotions will be going on, but just keeping that consumer's eyeballs on your website versus going out to the store?

This is Jesse. Thanks for the question. On the cost-saving initiatives, those really started to take place in mid-April. So, April is kind of half-month impact there, and the second quarter we won’t see equal impact. We’re going to monitor things on a week-to-week, month-to-month basis to determine how—if we have to go deeper or less deep on those cost reduction initiatives. We’ve attempted to variable-ize the business as much as possible, so we can make those adjustments as much in real-time as possible. We’re planning for a much continued depressed environment in terms of the cost structure planning so that we can survive and come out stronger in the end of this. Maybe I’ll pass it on for the discussion on eyeballs.

With regards to stores opening and such, I think when shelter-in-place or stay-at-home guidelines are lifted, we think the consumer is really going to be excited not to go into physical stores to really spend time with their family and friends, really do the joyous activities that were lacking in the quarantine lockdown type period. That’s exactly where you thrive, so any offset in terms of access to physical stores we think will be more than compensated and boosted. Operator, I’ll turn it back to you for final remarks. Thank you, guys. It’s been, of course, a crazy time period, but most importantly, we want to thank our team. It’s been extremely challenging across the board from some of the just fundamentals as the way we do things from working from home and of course all the sacrifices that everyone is making across the board. So, we’re all doing our best, and I think ultimately this will show up in the mid-to-long term results. We’re very proud of everything that’s going on. We look forward to the long-term future. We continue to thrive together.

Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.