Revolve Group, Inc. Q1 FY2021 Earnings Call

Good morning, my name is Maria, and I’ll be your conference operator for today. I would like to welcome everyone to Revolve’s First Quarter 2021 Earnings Call. I will now turn the conference over to Mr. Erik Randerson, Vice President of Investor Relations at Revolve. Thank you. You may begin your conference.

Good afternoon, everyone, and thanks for joining us to discuss Revolve’s first quarter results. Before we begin, I’d like to mention that we have posted a presentation containing Q1 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 current expectations regarding the continued impact of the COVID-19 pandemic on our business, operations and financial results, and our outlook for operating expenses and capital expenditures for 2021. These statements are subject to various risks, uncertainties and assumptions that could cause our actual results to differ materially from these forward-looking statements, including the risk mentioned in this afternoon’s press release as well as other risks and uncertainties disclosed under the caption Risk Factors and elsewhere in our filings with the Securities and Exchange Commission, including, without limitation, our Annual Report on Form 10-K for the year ended December 31, 2020, and our subsequent quarterly reports on Form 10-Q 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, adjusted EBITDA margin and free cash flow. We will use non-GAAP measures for 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 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 non-GAAP measures to GAAP measures as well as the definitions of each measure, their limitations and our rationale for using them can be found in this afternoon’s press release and in our SEC filings. Joining me on the call today are our Co-Founders and Co-CEOs, Mike 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.

Good afternoon everybody. We’re excited to update you today on the momentum in our business and our record Q1 financial results. As we successfully managed through one of the most challenging times in our history, we’ve been eagerly preparing for the reopening of the economy, which we believe will be extremely positive for Revolve as a brand associated with an active social lifestyle. I am pleased to announce that as the economy began to reopen in the first quarter, we experienced a significant surge in demand, which drove the outstanding results for the first quarter. Our top-line trends saw substantial acceleration as we entered March, increasing from the low single-digit growth we experienced in January and February. As vaccines started to roll out, restrictions eased, and additional stimulus payments were made by the federal government, demand increased significantly. The strong close to the quarter continued into April with growth of over 100% compared to April 2020 and over 30% compared to April 2019. Even more exciting was that the accelerated net sales growth in March and April came from both the REVOLVE and FORWARD segments, as well as from our domestic and international businesses. With that, as an introduction, I’ll go into more detail on the first quarter results and recent developments. Net sales for the first quarter of 2021 were a record $179 million, an increase of 22% from the first quarter of 2020, substantially ahead of the low single-digit growth we experienced for the months of January and February when we spoke during our last conference call. Particularly exciting is that the strong recovery and growth during March came from a return to growth in styles associated with social outings, such as dresses, as well as continued strong growth in at-home related product categories including beauty, intimates, and activewear that have rapidly grown throughout the pandemic. These results support our view that we can return to strong growth in our core offerings of occasion wear while continuing to drive growth in newer categories to pursue a deeper share of wallet. Also driving our top-line acceleration late in the quarter was the strong performance and growth of new customers and a significant recovery in traffic during the month of March. In fact, March was the second highest month in our history for attracting new customers and delivered the highest year-over-year growth in traffic in more than a year, despite mobility restrictions in most markets at the time. This gives me a great deal of confidence in our longer-term outlook when the wind is fully at our backs again. It is also very exciting to see the recovery in the U.S. market. On last quarter’s conference call, we talked about key international markets like Australia serving as a leading indicator of a potential recovery in the U.S. The domestic recovery we anticipated due to COVID in March would certainly have benefited to a degree from government stimulus. Yet the domestic recovery remained on a healthy pace through the month of April as well when the U.S. growth outpaced the international business. Our profitability and cash flow in the first quarter were outstanding. Net income was a record $22 million or $0.30 per diluted share, more than a 400% increase from the first quarter of 2020 and also a more than 300% increase from the first quarter of 2019. Free cash flow was $32 million, a more than 300% increase from the first quarter of 2020. This cash generation further strengthened our balance sheet, positioning us well to invest in future growth opportunities. Turning to operations. This is, we are able to react and adapt last year upon the onset of the pandemic, when demand was negatively impacted. We’ve been able to quickly react to the significant increase in demand as economies began to reopen and our customers began to socialize in person again, in planning for summer travel. Our fulfillment operations were able to scale up quickly and continue to meet our very high standards for customer satisfaction. The increase in demand combined with continued operational efficiencies were key contributors to our record profitability in the first quarter. We have, and we’ll continue to invest in technologies and tools to further raise the bar on service for our customers. For instance, in the past few months, we have significantly reduced the average timeframe for our customers to receive credit on their merchandise returns. Our data-driven merchandising function also continues to deliver what our customers need when they need it during what has been a very challenging environment of rapidly shifting consumer demand and supply chain dynamics. Our inventory levels and assortment have been managed well, illustrated by our financial results in a more than 20% increase in inventory turns in our REVOLVE segment. Our inventory health is best illustrated by our gross margin expansion, which reflects significant growth in net sales at full price. We also continue to remain agile on the marketing front, and we are laser-focused on capitalizing on the reopening opportunity. While restrictions have eased, we’ve conducted some smaller scale brand marketing activations, we still haven’t yet been able to fully deploy our optimal marketing investment. This is the right time for us to really invest in marketing. Our brand is squarely and positively positioned for the reopening in the post-COVID world. We believe marketing investments in both REVOLVE and FORWARD this year will deliver strong returns over the long term. We want to take full advantage of the pent-up demand among consumers who are finally going to be able to get out of the house, socialize, and celebrate in-person again. When this moment comes, they’re going to want to look and feel amazing in our latest fashion. It’s also important to note that in the near term, we do expect some headwinds on marketing efficiency, resulting from the recent Apple iOS privacy changes that may reduce our efficiency in targeting users on Apple devices, which are used by a substantial majority of our customers. The increased marketing investment this year will have an impact on short-term profitability measures, particularly relative to 2020, when our profitability benefited from temporary reductions in marketing as a percentage of sales due to COVID-19. In particular, we plan to scale up our brand marketing investments, which pay dividends over longer periods of time, building the brand, increasing awareness, and driving continued long-term customer growth. Lastly, our international business continues to perform very well and represents an exciting opportunity for future growth. International net sales grew 38% in the first quarter of 2021, relative to the prior year, driven by strength in all major regions and illustrating how well our brand is translating across cultures and geographies. Australia and Canada were among the top performing international markets in the quarter. In fact, Canada was our largest international contributor for the REVOLVE segment in the first quarter. A catalyst was our recent launch of all-inclusive pricing in Canada, showing how our international investments can drive growth in customer satisfaction. This successful rollout of the more localized customer experience in Canada is another proof point that our international strategy is working and is particularly exciting since we plan to introduce all-inclusive pricing in many other international markets. In fact, I’m excited to share that earlier this month we launched all-inclusive pricing for customers located in the United Arab Emirates, one of our largest markets in the fast-growing Middle East region. China is another exciting driver of our international success. In the first quarter, we began to see increased momentum in China in the REVOLVE segment due in part to expanding our distribution to include a presence on Tmall Global, the largest cross-border business-to-consumer marketplace in China with nearly 800 million shoppers. The Revolve store on Tmall Global was powered by our differentiated merchandising strategy, which has driven strong organic traffic, particularly from consumers interested in our emerging brands that weren’t previously available on Tmall. It’s early yet, but we are encouraged by the opportunity to capture incremental growth in such an important market. Before I turn it over to Michael, I would just reiterate that while there are still some uncertainties out there, we are very proud of our results. We are ready to invest, and we are excited about what lies ahead.

Thanks Mike. It’s incredible to see the certain traffic and demand of the customers getting back out and starting to join the social life they love and associate with Revolve. After such a challenging past year this return is robust and gratifying, particularly considering that we are now just joining up for some of the very exciting and impactful marketing events. We are primed for the opportunity to capture demand during this unique moment in time, and our events are a critical part of demand creation. I am thrilled to share that we have continued to scale up our in-person marketing events, which are a powerful marketing lever for building the brand long-term. Remember that in-person events have unfortunately been on hold for most of 2020, creating a headwind to traffic and new customer acquisition last year. In March of this year, we hosted an in-person marketing event in Los Angeles attended by more than 100 influencers over three days. To protect the community, we adhered to strict protocols that included COVID testing for all participants. One of the takeaways from this event was that the influencer community can’t wait to get back to doing in-person events. The desire to participate in this event was incredible, amounting to way more interest than we could accommodate, forcing us to unfortunately turn away a number of influencers. This is just the beginning for restarting our events calendar. We plan to meaningfully increase the frequency and scale of events to capitalize on this moment in time, expand our market reach, and drive long-term returns. We are excited to get out there again in a more meaningful way as economies continue to open up. We have several activations, ten of the top influencers, and aspirational lifestyle locations that will help us to further expand our marketing reach and brand. In fact, starting with an event in Turks and Caicos next week. Moving forward, I’m excited about the powerful combination of our aspirational in-person marketing events along with continued growth and diversification of our content on emerging digital channels, creating an expanded marketing playbook. Our data-driven approach to merchandising has also allowed us to capitalize on the reopening, ensuring we have the right products for our customer. We have the flexibility to efficiently scale up by reading and reacting to data signals to quickly address shifts in consumer preference, enhance our assortment, expand our style count, and double down on successful styles through product reorders. Our merchandising agility is driving a year-over-year growth rate that expanded from the low single-digits in January and February to over a 100% year-over-year growth in April, all with strong inventory turns in a full-price mix of net sales. This successful inventory management and shifting assortment is particularly impressive when considering that just a year ago, our merchandise focus shifted away from products associated with social outings and travel, such as dresses. And now we are starting back into those historically strong product categories while still driving back growth in our newer at-home categories like beauty, which more than doubled in the quarter. We have succeeded in providing our customers with the right product at the right time. Products that fit her current lifestyle, whether it’s socializing, traveling, or even being locked down at home. She recognizes this and is coming to us for more elements of her life, allowing us to expand our share of wallet over time. Our merchandising and marketing work hand-in-hand. We are continuing to innovate on our marketing and merchandising efforts to deepen relationships with our community. For instance, in the first quarter, we launched a new Revolve active handle on Instagram to create an intimate community of fitness consumers, fans, and influencers. It’s in perfect alignment with the daily workouts we have hosted on Instagram Live for the past year to engage our community. These workouts have generated 10 million views since the pandemic began. As I mentioned, beauty continues to perform very well and I’m excited to share that we recently launched a subscription program for our beauty customers who buy beauty products regularly. This enabled us to automatically ship a customer’s favorite products to them at regularly scheduled intervals, promoting convenient customer loyalty and repeat purchases. Our own brand remains core to our long-term strategy of driving traffic, maintaining a unique assortment, and expanding gross margin over the long-term. To capitalize on the growing consumer interest in sustainable fashion, we recently introduced Tularosa Green. Tularosa Green styles are made with all-natural and chemical-free dye with 100% organic cotton. The production uses a technology that jobs 40% less water, thereby reducing the impact on the environment. This is just the beginning of a more sustainable production process we are pursuing within our own brand. Another exciting product launch in recent weeks is our latest collection from GRLFRND available on both REVOLVE and FORWARD. Our new GRLFRND line aligns with the current fashion trend towards a more comfortable and looser fitting denim silhouette, which many customers are seeking today. We started reinvesting in our own brands in late 2020 after a significant pullback early in the year. We will continue to invest heavily throughout 2021 to maximize our long-term opportunity. We attracted some great talent, and while it’s still early in the rebuild, we are very optimistic about the underlying budgets at our disposal. I’ll close out the discussion with our luxury segment in FORWARD. While momentum has been quietly building for some time, FORWARD had an excellent quarter, growing net sales 24% in the first quarter of 2021 relative to the prior year. This is on top of a very strong prior-year comparison in the first quarter of 2020 when FORWARD net sales grew 47%. If you do the math, that means that for the first quarter, FORWARD is up 82% in the first quarter of 2019. FORWARD also delivered record gross margins to increase 7% year-over-year on a full-price sell-through that was also an all-time high. We believe FORWARD is in a differentiated position in the market and serves as a destination for the next generation luxury consumer, in curation and its strong edit. Brands recognize our momentum and value our product curation and platform, marketing engine, customer relations, and best-in-class catalog and editorial photography. During the first quarter, we launched two coveted luxury brands with limited wholesale distribution. Additionally, supermodel and actress Winnie Harlow recently debuted a new shoe collection with JIA, exclusively on FORWARD. With great product curation being the key lever in further expanding FORWARD, we are leveraging the REVOLVE customer base and platform to class market and increase FORWARD's share among existing customers. Even though REVOLVE and FORWARD merchandise compliment each other, given that we over-index in handbags and shoes, only a low single-digit percentage of REVOLVE customers are also FORWARD customers. This illustrates the huge opportunity ahead of us that we are continuing to pursue, as illustrated by the launch of our FORWARD loyalty program earlier this year. The FORWARD program, which is fully integrated with the REVOLVE loyalty program, rewards and incentivizes cross-shopping on both of our sites. We believe the program will create a great deal of customer excitement and engagement among our existing customers. Like REVOLVE, FORWARD is a global brand and has been a key contributor to FORWARD's exceptional growth over the past three years. FORWARD has also attracted a large following of more than 250,000 followers on Weibo, our leading social media platform in China. We view the global e-commerce market for luxury as a massive opportunity, and with the reopening of economies around the world, we think there is more opportunity to come. We will be making some exciting investments in FORWARD in the near term, the details of which I’m excited to share on future calls. Also, the recent momentum in our business across both REVOLVE and FORWARD segments has been incredible with our brand positioning on point. With a strong financial position, we are ready for the reopening and beyond. I’ll turn it over to Jesse now for a review of the financials.

Thanks, Michael, and hello everyone. As you can tell, we are very pleased with the first quarter results and even more excited about the recent top-line trends. With that, let’s start with the results for the quarter. Note that all of the comparisons I will discuss will be on a year-over-year basis, unless otherwise stated. In certain cases, I’ll speak to our growth compared to 2019 since the comparison to 2020 is skewed by the impacts of COVID. Net sales were $179 million, an increase of 22% compared to the first quarter of 2020, which is a significant improvement from the low single-digit net sales growth trend we had been experiencing for the first seven weeks of the quarter that we disclosed during our last earnings call. Compared to the first quarter of 2019, net sales grew 30%, and at an even higher rate for the month of March when our net sales growth meaningfully accelerated. During January and February, growth was primarily coming from categories and products like beauty, intimates, and activewear, which more than offset the headwinds in products that are more focused on going out like dresses. We shifted in March when we experienced a meaningful increase in demand for products related to going out. This increase in demand combined with the continued strength in at-home products helped drive the strong overall top-line results as we exited the quarter. By territory, both the U.S. and international markets contributed to the strong top-line results for the quarter with domestic and international growth of 19% and 38% respectively. Both regions also contributed to the growth acceleration in March. The international strength was broad-based with Australia, Canada, greater China, and the Middle East as key contributors. By segment, REVOLVE segment net sales increased 22% and FORWARD segment net sales increased 24% in the first quarter. The FORWARD sales increase is particularly notable considering that FORWARD grew net sales 47% in the prior year comparable quarter. Active customers totalled 1.5 million, a decrease of 3%, consistent with our commentary on our last earnings call to expect further deceleration since active customers is a trailing 12-month measure. Importantly, active customers grew on a sequential basis compared to the fourth quarter of 2020, marking our first sequential quarterly growth in active customers in almost a year. Our customers placed 1.3 million orders in the quarter, an increase of 9%, the highest year-over-year growth rate in five quarters. Average order value is $256, flat with the fourth quarter and down 1% year-over-year. Moving to gross profit, consolidated gross margin was 54%, the highest gross margin reported for a first quarter, and an increase of 546 basis points year-over-year. This performance reflects healthy inventory across both segments, particularly compared to the prior year, leading to an increase in the percentage of net sales at full price and a decrease in the depth of markdowns. These positive contributors to gross margin were partially offset by a decrease in the mix of own brands as a percentage of REVOLVE segment net sales, consistent with the outlook we shared on recent investor conference calls. Our operating expenses expressed as a percentage of net sales were lower year-on-year across all line items in the first quarter. Our fulfillment and selling and distribution expenses continued to realize a meaningful short-term benefit from a lower return rate year-over-year. We do not expect this benefit to repeat in upcoming quarters as the product mix shifts back towards going out categories. Additionally, we realized marketing efficiency in the first quarter, as we have not yet fully re-engaged on the marketing front. It is important to note that we intend on aggressively ramping our marketing investment for the balance of the year for both REVOLVE and FORWARD. The strong top-line results, gross margin expansion, and operating efficiencies resulted in record net income of $22.3 million or $0.30 per diluted share for the quarter—five times higher than the $0.06 of diluted EPS in the prior year. Net income was also four times greater than the first quarter of 2019. We reported adjusted EBITDA of $23.3 million and increased of 316% with a margin of 13%. Adjusted EBITDA was nearly three times greater than the first quarter of 2019. Moving to the balance sheet and cash flow statement. During the first quarter, we continued to invest in inventory to position our assortment for an anticipated increase in consumer demand. As a result, inventory increased by $5 million from year-end to $100 million, a decrease of 1% year-over-year. This compares favorably to the 22% increase in net sales for the first quarter of 2021, illustrating our higher inventory turns year-on-year and improved inventory health. Even with the investment in inventory, we generated $32 million in free cash flow in the first quarter, a more than fourfold increase from the prior year. Cash and cash equivalents, net of borrowings, at March 31 were $183 million, an increase of $109 million or 149% from $74 million as of March 31, 2020. Now looking ahead with the return to growth in Q1 and very strong trends in March and April, we are confident that we can continue to deliver net sales growth in excess of our long-term growth target of 20%, just as we were prior to the onset of COVID-19. However, considering the recent acceleration in net sales growth represents a small sample size and that there are still many moving parts and uncertainties in the short term, we will hold off on providing formal guidance at this time. Instead, let me update you on some recent trends in the business since the first quarter ended and provide some direction on our cost structure for the balance of the year, to help in your modeling of the business for 2021. Starting from the top, the significantly improved trends we experienced in the month of March continued through to the month of April. In fact, April net sales grew over 100% year-over-year against a relatively easy comparison in April 2020 when our net sales had declined approximately 40% year-over-year, as we previously disclosed. As compared to April of 2019, net sales grew over 30%. We are very excited about the recent top-line trends and the prospect for a continuation of these trends. But we also want to temper this optimism as we remain aware of some uncertainty related to COVID-19. There are potential headwinds from the recent Apple iOS changes that Mike mentioned, and we would anticipate that the tailwinds from the government stimulus will subside. Shifting to gross margin, we are extremely pleased with our gross margin performance in recent periods. For context, for three quarters in a row, we have generated a full-price mix of greater than 80%, meaningfully exceeding historical ranges. The very high full-price mix of net sales and our inventory health have benefited from our successful inventory rebalancing and response to COVID-19 last year, which significantly skewed the mix of our inventory to full price. However, we want to caution that as we rebuild inventory to support future growth, we expect our full-price mix of net sales and the depth of our markdowns to revert closer to historical norms over time. With this taken into consideration for the full year 2021, we expect gross margin of 53.5% to 54% at the midpoint. This reflects an increase of more than a full percentage point compared to the gross margin of 52.6% for full year 2020, and is also higher than the 53.6% for the full year 2019. Fulfillment, we expect fulfillment costs in the second quarter to increase sequentially as a percentage of net sales, as our return rate moves higher year-over-year due to our sales mix shifting to products and categories related to going out. For the full year 2021, we expect fulfillment to be approximately 2.9% of net sales. This implies a decrease of 30 basis points compared to fulfillment representing 3.2% of net sales in 2019, as a result of the automation efficiencies implemented, which are more than offsetting macro cost increases. For our selling and distribution costs, similar to our fulfillment costs, we expect a sequential increase as a percentage of net sales in the second quarter. For the full year of 2021, we would expect to be in the same range as the 14.6% of net sales we achieved for the full year 2019. This implies a significant year-over-year increase in selling and distribution costs consistent with our prior commentary and driven by two main factors. First, as we have now the anniversary of the COVID-19 outbreak, we expect our return rate to be higher year-over-year in the near term, particularly as we comp the very low return rate in the prior year, and since dresses, which have a much higher return rate than average, have recently returned to growth. A higher return rate results in increased costs for shipping, handling, packaging, and payment processing of returned items with shipping and handling costs representing a majority of this line item. Second, our average shipping costs per package have increased in recent months with the increase in shipping demand industry-wide. Moving to marketing, with our customers coming back in a very powerful way. It’s time to invest. We plan to be more aggressive than ever and anticipate a compelling return on this investment over the long-term. We now expect marketing expenses as a percentage of net sales for the full year 2021 to be at least a full percentage point higher than the 14.8% of net sales reported for the full year 2019. General and administrative. In 2021, we are reinvesting in our own brand platform and other functions to support our next phase of growth and expansion. As a result, we expect G&A to continue to grow sequentially each quarter for the balance of the year. Lastly, let me touch on our tax rate. Our effective tax rate in the first quarter in 2021 and 2020 each reflect the benefit from the excess tax benefits realized as a result of the exercise of non-qualified 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 the amount of progress we’ve made in just the past couple of months since our Q4 earnings call. We delivered record net sales, record net income, and a fourfold increase in free cash flow during the quarter. Consumers are coming to us in a very strong way. And with our balance sheet position, we are investing in this unique moment in time centered around the reopening and the long-term market opportunity ahead. Now we’ll open it up for your questions.

And your first question comes from the line of Erinn Murphy from Piper Sandler. Your line is open.

Great. Thank you and good afternoon. I guess my first question for the team is on the quarter-to-date trend. Super encouraging what you’re seeing here in April. Can you talk a little bit more about the customer cohorts that you’re seeing? Is it more new customers, existing customers? Are you starting to see some lapsed consumers back in the fold? And then I have a follow-up?

It’s really a mix of all of those. April represents a continuation of the trends that we saw in March. We’re continuing to move more volume on a daily basis than ever before. And it’s coming from all cohorts—existing customers are coming more frequently, lapsed customers are coming back into the fold, and we’re seeing some really nice acceleration on the new investment side.

Great. And then just on the return rates, Jesse, as you were speaking about kind of expecting that to normalize. Are you already seeing that in March and April as dresses and some of the other going out categories have accelerated? And then I have just a follow-up, bigger picture on the fashion cycle. You guys talked a little bit about the denim silhouette change. I’m curious if you’re seeing with the denim orders, are you seeing a higher attach rate on other items in the wardrobe as consumers kind of think about that silhouette change from skinny to maybe more of a looser, straight leg. Thank you.

Yes, I’ll take the first one here. This is Jesse and then kick it over to Michael for the more fashion-forward question. On the return rate, we have seen that start to take up, and if you go back through the quarters, we saw that drop down to the low 40s at the depths of COVID given the shift in mix. That started to tick up even through the back half of last year, and we’re in the mid-40s in Q4 and it hung out in that same mid-40 range for Q1. In the most recent periods of March and April, we have seen that tick up as dresses return to growth. That’s some of the commentary we’re getting for the forward-looking information as well as that we do expect dresses to come back in a meaningful way, which will increase return rates sequentially. That said, the other categories are holding, and we do expect, and optimistically hope that return rates will be lower than they’ve been in the past. In the past, they’ve been in that 50% to 55% zone. So I think with the assortment, we can balance that going forward.

Yes, Michael here, how’s it going? The performance across the board is really improving. We’re seeing strong performance in a number of categories from going out types of clothes, dresses that were not as popular before, of course, but now we’re seeing a lot of strength in terms of the pent-up demand for occasions like weddings and graduations. Specifically regarding denim, we’re really anticipating this to be a nice cycle and a long-term trend. We see these types of trends, particularly with denim, lasting for years. So we’re positioning ourselves right now for the beginning of something new. Of course, skinny jeans were important for our customers for many years, so we are excited about this new cycle with looser denim.

Thank you very much. Your inventory position looks really clean. What are your thoughts on balancing inventory versus sales going forward? And as you invest in more inventory, I mean, your full-price selling level is very high right now, but which category might be the driver for taking that lower, as you balance those investments? And then the second question—Tmall is a huge deal. Do you have parameters or thoughts for how you will approach that on a multi-year basis and also any statistics around your Chinese audience on social media and what you see happening? Thank you.

Yes, definitely. So from an inventory position standpoint, we’re later on the inventory side, but with our model, we’re able to react very quickly to consumer trends. As we see more stability in the trends, we should expect to see inventory levels climb a bit as that will be a more optimal position for us to maximize the economics. But we came into the quarter later on the inventory side compared to where growth means, and we were able to react quickly and leverage inbound demand in a really healthy way. In terms of the categories that we’re looking at, growth for this year is definitely going to be in those going out categories that everyone’s been missing out on. What’s really exciting for us is that we’re seeing continued strong sales in the categories that we gained strength in during last year’s pandemic. Beauty continues to be strong through the month of April and active continues to remain strong. So those categories that we gained strength in, we’re seeing those sales hold up with the one exception maybe being that on the wound side, we’re seeing amounts where sales taper off a little bit. And then turning to the Tmall question. It’s still very early on Tmall, but we’ve been really encouraged by the trends that we see there. We think long-term in China it’s going to be a very important part of our strategy just because it has such a huge mind share among consumers. What’s really exciting for us is we’ve actually seen that new customers who have come in on Tmall have been later converted off of the REVOLVE website itself. So it serves not only to kind of introduce us initially, but it is also really a very low-cost channel for us. We’re just getting started there, but we’re optimistic about the potential we can drive.

Thanks, good afternoon. Encouraging to hear of the meaningful sales acceleration. I just wanted to follow up on the inventory commentary and get your view on the availability of product in both third-party branded product and own brand to meet this demand if it continues to accelerate?

Yes, so we feel really good about our ability to meet the increased demand. It’s not to say there aren’t some hiccups and challenges under the covers, but if you’re talking to a whole broad base, we feel really good about our ability to react to the shifts in demand that we saw in order to get the right products for consumers and continue to do that.

Hey guys, congrats on a nice quarter. Thanks for taking all our questions here. I guess, Jesse, do you think about where the post-COVID mix of businesses going and then do the legacy categories come back? Can you point to any numerical evidence that you’re looking at to inform you where gross margins go? Also, since return rates are so influential on the P&L, I’d be curious about your thoughts there, how much you mentioned, I know you mentioned a few takes there with some of the inflation in shipping rates lately, but I didn’t hear much on the East Coast facility that you guys have been contemplating. Is there any help on a per order basis that could help the economics of returns as we kind of normalize here?

Yes, for sure. So there’s a lot in there in terms of both margin and return rate, but maybe if we start with gross margin, as we stated in the prepared remarks, margins have been really strong. We had full-price sales in excess of 80% for three quarters in a row, which is phenomenal. We’re very pleased with that, but we do expect as we build inventory and things normalize over time that, that full-price sales mix will come down slightly back towards, the historical norms of, in that mid-70s range. Also, markdown margins have been extremely strong with the lighter markdown inventory. So we’ve been able to really deliver on the markdown margin side again. As we build new inventory, things will normalize over time. Those are two kind of pressure points. Looking ahead on gross margin, also the owned brands, as we’ve talked about over the last couple of calls, owned brands have been compressed as a percentage of REVOLVE segment net sales. That will continue through the next couple of quarters before it starts to reaccelerate. We’ll see some near-term pressure there before it starts to reaccelerate and add some gross margin in late 2021 into 2022. A number of things going on there, but structurally over the long-term, still feel really good about our gross margin target of that 55% plus. On return rate, that’s largely a product mix story where as dresses fell off a cliff last year, around this time in the depths of COVID, we saw a mix shift toward beauty, which has a low single-digit return rate. Now we’re seeing that dresses come back with that higher return rate. So seeing some pressure, which will add to the cost structure, especially on a year-over-year basis as we compare those COVID time periods. We are doing things in the background to help manage that one. The mix will be more diversified, so that will have some positive impact on the overall return rate and then making it a great experience for the customer and making it easy. Also, trying to manage that return rate to a certain extent and on the cost front, we’re doing things like you mentioned the East Coast returns facility and shipping over from the East Coast, which should give us some benefit in the future. A lot going on there, but again, we feel good about balancing return rates to a rate that’s not at that peak 55% that we were at in the pre-COVID days.

Hey guys, thanks for taking the question and thanks for all the color on the P&L, especially regarding marketing expense. I guess two questions on that front—one, I know that you historically do a lot of these events during the summertime. Should it be assumed that the cadence of your marketing spend shifts from the historical pattern, given the ongoing reopening? And two, I know you guys are expecting that the iOS changes may have an impact again. Any early learnings that you’re seeing in terms of marketing efficacy, given the changes took place a couple of weeks ago? Thanks.

Yes. So in terms of the timing of the marketing spend, yes, you’re going to see a different cadence than historical. Historically, April is a very big spend month for us on the brand marketing side. In this year, we weren’t able to do anything comparable to certainly what we did in 2019. But if all goes well and according to plan, because it is an uncertain environment out there, you’re going to start to see significant brand marketing investments in the coming months, through the summer and through the fall. There’s a little bit different cadence there. Regarding the iOS changes, we haven’t really seen anything yet, but it’s very early. We’ll just have to see how that plays out. I think that’s a potential headwind affecting all e-commerce shops.

Hey guys, good afternoon. Congratulations on a great quarter. I guess my question is on the categories. When you think about dresses or—I think there was a vaccinated category. When you look sort of pricing around where you were historically, is the customer willing to go to higher price points? Are you seeing a steady price point? I’m just trying to understand how you guys are positioned, and I guess sort of lean that into on the FORWARD side, in terms of the brand offering there, as you skew more towards luxury. Are you getting—there was a story around getting better brands and newer brands. Has that been the case in anything that you’re pretty excited about as you look for the rest of the year from that perspective? Thanks.

Yes. Hey Bob, thanks for the questions. I’ll take the first one and then pass it off. I think you’re seeing AOV call it stable with Q4 and there’s a lot going into that AOV. On a gross number on a net AOV basis, we’re seeing that increase pretty meaningfully year-over-year and sequentially. I think that’s one point. The second point in more to your question is, the customer is willing to spend the same amount as she was before. We’re not seeing any significant shifts in that initial price. To your point, we’re seeing FORWARD perform really well, especially when you look at that two-year stack in Q1 where we grew 47% last year and then 24% on top of that this year. So luxury is performing well; we see a lot of opportunity and cross-marketing FORWARD to that REVOLVE customer. We already see it in the numbers that she is willing to spend up, and she’s willing to compliment her wardrobe with some of those more statement pieces.

Yes. When it comes to new brands, it’s exciting to see that it’s a slower change in the luxury world, but I think everyone’s understanding that historic players and historic points of distribution aren’t as strong and aren’t what they once were. Ultimately, FORWARD is becoming a preferred partner moving forward. Brands like the ones mentioned are those that when we found them on FORWARD, we’re at the pinnacle of our wishlist—brands that we really respected from a design and luxury perspective. I’m super optimistic that more will be coming. Ultimately, there’s only a handful of brands that we don’t carry, and I think we’re optimistic that they will be coming our way.

Great. Thank you so much. I wanted to ask about the in-person marketing events and if I’m remembering correctly back in 2019, Michael, I think you held over 100 events that year, if I’m not mistaken. And obviously it’s early days for the in-person events, but as you think about the rest of this year, would you expect to get back to the same kind of in-person events by the time we get to the third quarter this year or the fourth quarter this year? I’m just trying to understand how long until we get back to normal when it comes to doing some of these really impactful marketing events?

Yeah, I think it’ll be a steady ramp up. We’ll definitely get a lot more active starting next week with our first REVOLVE Around the World event in nearly a year and a half, so that’s super exciting. We’ll definitely see more events, and they’ll be similar, but I think they’ll be more exciting and better than ever. Our team has had a lot of time to really think and plan and improve upon what we had done. There was a period where what we were doing was working incredibly well, and with this long pause, I think the teams have had the opportunity to iterate and improve. Exciting things are coming, similar to times past but improved with some things that we’ve never done before which you’ll get to see coming up.

Yes, on the higher shipping costs, I think you talked about the constraints in last-mile delivery and just capacity overall that we’re raising shipping costs. Do you view these higher costs as a permanent part of the cost structure, or is it more sort of short-term surge pricing that when the world is back to normal and the level of in-store shopping returns these extra costs are likely to come out of the P&L? Yes, we don’t fully know yet. We have seen these costs increase year-over-year pretty consistently, but we are seeing a surge just given everything that’s going on out there. I think a piece of it will be temporary, but a large portion will just be cost increases over time. That said, we do have some things in the works, and with the AOV increasing as well, that helps alleviate some of that pressure, but we’re not counting on a significant release there at least for the balance of the year.

And we will take our final question from Susan Anderson from B. Riley Securities. Your line is open.

Hi Alec Legg on for Susan. Thanks for taking my question. So kind of piggybacking off of Ross’s question on Instagram, in your own mobile app, are you able to provide any details on the sales penetration through those alternative channels? And then also, just what are the metrics on those platforms relative to your own website, such as AOV, conversion rate, and new customer acquisition? Any details would be helpful. Thanks.

Yes, starting with our own app, our app is a very significant portion of our sales representing roughly a quarter of our sales. With regards to customer shopping through the Instagram app, we have seen some increased momentum there in recent weeks. It’s still a very small portion of the business. The economics there are very favorable, but you’re generally not going to see the same level of order size as on our website. The long-term, it’s a part of the overall suite of options that we have for customers. Thank you everyone for joining us today. We’d also like to thank all of our investors for your continued support over this past year. We look forward to meeting again on our conference call next quarter.

And this concludes today’s conference call. Thank you for participating. You may now disconnect your lines.