Revolve Group, Inc. Q3 FY2021 Earnings Call

Good afternoon. My name is Carol, and I'll be your conference operator today. At this time, I would like to welcome everyone to Revolve's Third Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. And at this time, I'd like to turn the conference over to Mr. Erik Randerson, Vice President of Investor Relations at Revolve. Thank you. You may begin.

Good afternoon everyone, and thanks for joining us to discuss Revolve's third quarter 2021 results. Before we begin, I'd like to mention that we have posted a presentation containing Q3 financial highlights to our Investor Relations website located at investors.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; our growth and market opportunities; the impact of Kendall Jenner's appointment as FORWARD's Creative Director; our ability to manage through supply chain challenges; our outlook for operating expenses for the fourth quarter of 2021 and gross margin for the full year 2021 and our effective tax rate. These statements are subject to various risks, uncertainties and assumptions that could cause our actual results to differ materially from these statements, including the risks mentioned in today's press release as well as other risks and uncertainties disclosed under the caption Risk Factors and elsewhere in our filings with the Securities and Exchange Commission, including without 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 and free cash flow. We use non-GAAP measures in some of our financial discussions, as we believe they provide valuable insights on our operational performance and underlying operating results. The presentation of this non-GAAP financial information is not intended to be considered in isolation, or as the substitute for, or superior to the financial information prepared and presented in accordance with GAAP. And our non-GAAP measures may be different from non-GAAP measures used by other companies. 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 it over to Mike.

Good afternoon everybody. We're excited to update you today on the strong momentum in our business that continued to build during what was an incredible third quarter. There are three key points that I want everyone to walk away with today. First, we delivered record top line results in the third quarter, highlighted by 62% year-over-year growth and 58% growth on a two-year basis versus the third quarter of 2019. This is an acceleration of 17 points compared to the 41% two-year growth rate we reported for the second quarter of 2021. The strong revenue growth trajectory discussed on last quarter's earnings call improved throughout the quarter and the positive revenue trends have continued through October. What's gratifying is that the strength in our top line is broad-based with net sales in the REVOLVE segment, further accelerating in the third quarter while our FORWARD segment delivered nearly triple-digit growth year-over-year. Second, our brands are extremely well positioned in the market. And the momentum of our brands driven by our strong assortment in innovative marketing is generating increased customer engagement. Last quarter, I discussed our plan to invest heavily in marketing and brand-building initiatives during the third quarter. While we expect these investments to provide long-term benefits, we are thrilled with the early returns. In true, REVOLVE style, we stood out during New York Fashion Week delivering impact and awareness, innovation and redefining marketing for the modern fashion brand. I'm equally excited to see the clear signs of increased customer engagement. Traffic in the past few months has accelerated to well above levels before COVID-19. And we are generating more revenue per traffic session helped by our customers increasingly buying from us at full price, as well as a shift in category mix to higher price points. You can see the increased engagement in our results with orders and net sales generated per active customer accelerating in the past two quarters. Even more exciting is that our active customer growth itself accelerated in the third quarter, resulting in record levels of quarterly growth in active customers by a wide margin. It's also compelling to consider that the substantial majority of our newly added customers are buying from REVOLVE and FWRD at full price which speaks to the longer-term opportunity. Our experience tells us that customers acquired at full price generate a higher lifetime value. Third, nowhere in our business is the brand momentum more evident than in our FWRD segment. Based on publicly reported data, FWRD has been growing well ahead of the luxury peers. And we believe we have just scratched the surface on what we view as a massive long-term opportunity to build a curated luxury platform for the next-generation consumer. Setting the stage to continue our strong growth trajectory is our recent announcement of Kendall Jenner, as the Creative Director of FWRD. We are beyond excited to partner with Kendall, who is the epitome of luxury fashion. She brings incredible creativity and passion to the role that we believe, will meaningfully extend the FWRD brand's reach and influence. We're also very early in cross-marketing our FWRD offerings to the much larger REVOLVE customer base. Our launch during the second quarter of a FWRD loyalty program that is fully integrated with our REVOLVE loyalty program, once again provided a powerful contribution to FWRD's growth in the third quarter. I'm encouraged that month-after-month we are driving increased overlap between REVOLVE and FWRD active customers. Yet with a very low percentage of overlap today, we think we have a compelling growth opportunity resident in our existing customer base. With that, as an introduction, I will provide an overview of our third quarter results and recent developments. Our record growth in active customers and our ability to authentically engage with her, through our marketing and merchandising resulted in record net sales of $244 million in the third quarter, an increase of 62% year-over-year and 58% on a two-year growth basis compared to the third quarter of 2019. This is 17 points higher than the 41% two-year growth we reported for the second quarter of 2021. We also continued to deliver outstanding profitability in the third quarter, while at the same time making meaningful marketing investments that we believe will pay dividends over the long-term. Net income in Q3 was $17 million or $0.22 per diluted share. And while it was down year-on-year as expected due to our marketing investment net income increased 74% on a two-year basis versus the third quarter of 2019. For the nine-month year-to-date period, net income more than doubled versus the 2019 comparable period on a two-year basis. These results benefited from healthy expansion of our gross margin in the past two years, as our effective merchandising and inventory management contribute to delivering strong net sales at full price and reduced markdown levels more than offsetting the reduction in owned brand mix as a percentage of net sales. Shifting gears, our strong results have not come without challenge and there remains uncertainty in the macro environment. Our sales results in certain regions around the world have been temporarily impacted when lockdowns have been re-imposed, serving as a reminder that we are not out of the woods yet. Equally relevant and very much in focus recently are the industry-wide supply chain challenges which have had a progressively larger albeit manageable impact in the last several months. This came through in yet a further decrease in the percentage of on-time deliveries from our suppliers and in a further increase in our inbound shipping rates in the third quarter. Importantly, with a customer that shops at full price for our premium price point product and with our strong gross margin, we are well positioned to manage through the increased freight costs that could remain in effect, for several quarters. Despite the many industry-wide challenges facing us, our operations and merchandising teams have done an outstanding job, effectively navigating through this very dynamic environment. Our merchandising and planning team has not only been able to secure sufficient inventory, but more importantly, on-trend product that the customer desires. And our fulfillment, customer service and support teams haven't skipped a beat continuing to meet and exceed our very high standards that our customers have come to expect from REVOLVE. As a company passionately focused on the customer experience, I'm extremely proud that our Net Promoter Scores have further increased this year, even as the organization scaled up to manage through the incredible growth in customer demand. I'll wrap-up with a brief discussion of regional performance. I'm excited by the strong domestic growth, which accelerated to 65% year-over-year in the third quarter an increase of 55% on a two-year basis versus the third quarter of 2019. Our international business also continues to perform very well and represents an exciting opportunity for future growth. International net sales grew 49% year-over-year, an increase of 75% on a two-year basis versus the third quarter of 2019. Every major region contributed to our international growth illustrating how well our brands are resonating on a global basis. Before I turn it over to Michael, I'd like to thank our team for their incredible efforts day in and day out. I'm proud of how well each and every one of you has taken great care of our customer during this exciting period of rapid growth. We are positioned better than ever and I couldn't be more proud of your efforts that have helped to put us in such a position of strength.

Thanks, Mike. I'm really proud and impressed with our performance during the past quarter. After successfully navigating a very challenging pandemic so far, we are gradually transitioning into a post-pandemic world and we are thriving. It is very clear to me that the same strengths we have demonstrated in the most recent quarter are positioning us to drive for continued success over the long term. An important driver of our success is that our customers love us and deeply connect with the REVOLVE brand. As our customer resumes her socially active lifestyle, it's clear to me that her relationship with us is stronger than ever. She shopped with us when she was stuck at home and she's shopping more than ever as she starts to go out and needs to refresh her wardrobe. She also has begun to buy luxury goods from us in a very meaningful way. With the trust we have earned from the customer, we believe we can continue to expand our offering and broaden her range of shopping at REVOLVE. The opportunity continues to grow. Our technology-driven DNA, AI and proprietary algorithms continue to provide a clear competitive advantage. Integral to our success in this recent period of extreme turbulence was understanding our customers' evolving needs and the key to understanding our customer is our data-driven mentality and proprietary technology infrastructure. Leveraging our data-driven approach we have thrived in this fluid environment by quickly identifying shifts in consumer demand, which has enabled us to continue to gain traction in the marketplace and deepen our relationship with the customer. Our operational excellence and agility are key differentiators and are our critical long-term competitive advantage that is especially evident today. Despite the external challenges in the marketplace, we have been able to ensure that deliveries to our customers have remained at our very high standards during a time when shipping delays from retailers have become routine. Our customers remain as satisfied as ever creating a strong foundation for this next stage of growth. Most exciting, we are addressing a very large market opportunity that continues to shift in our direction. Legacy retailers have been continuing to cede market share, yet they still represent tens of billions of dollars of market opportunity. We are primed in our focus on a long runway opportunity to gain market share, acquire new customers, expand our share of wallet and drive outsized growth over the long term. With that, I'm now excited to share with you some of the highlights of the quarter. We resumed our brand marketing activities with a bang. After several quarters of patiently waiting, we significantly invested into our brand in Q3 with great success. For the first time ever, we participated in New York Fashion Week and stole the show very successfully competing against the incumbent heavyweights of the fashion world. We all saw the week-long brand marketing experience for both REVOLVE and FWRD and we did it our way bringing innovation and excitement to our community of brand partners influencers and customers. A highlight was our immersive and elevated REVOLVE Gallery exhibition that reimagined the front row experience of fashion week while engaging with consumers in a new and exciting way. The visually stunning and interactive event brought together a curated and exclusive assortment of styles from emerging brands and our owned brands and uniquely featured a real-time shopping component. While New York Fashion Week events are typically exclusive affairs, we broke the mold by hosting 6,000 people over three days at REVOLVE Gallery bringing together brand partners, influencers, customers and journalists in a first-of-its-kind event. In fact, it may have been one of the largest events ever held at New York Fashion Week. To protect our community, we adhered to appropriate safety precautions for the event, which is ironically held at a former site of a luxury department store that had closed due to bankruptcy proceedings. It was great to host some of the analysts and investors on the call today at our opening reception that was attended by an A-list crowd including Kylie Jenner, Emily Ratajkowski, Megan Fox, Paris Hilton and Camila Cabello just to name a few. Not surprising, the event generated massive impact on social media with dynamic and engaging content across social channels. The social media posts with the highest estimated media value for the entire New York Fashion Week came from the private reception at our REVOLVE Gallery event further illustrating the impact of our event. The incredibly deep connection we have established with the next-generation consumer is evident in the high-profile sponsors of the REVOLVE Gallery event such as Afterpay. Many top brands and personalities seek to partner with REVOLVE because they realize being associated with our brand can further elevate their brand in the eyes of the coveted and powerful millennial and gen Z consumer. Another major highlight of New York Fashion was hosting our first-ever fashion show to introduce our new own brand collaboration with the revered luxury designer Peter Dundas. The highly anticipated collection DUNDAS x REVOLVE is a key milestone for our owned brands where momentum continues and net sales returned to year-over-year growth in the third quarter. Importantly, initial reactions to the collaboration, the first of many to come earned high praise and reviews from the influential fashion elite attending our event. According to WWD, our DUNDAS x REVOLVE runway event was ranked as the second most talked about fashion show of all New York Fashion Week based on social media and press impressions and estimated media value. As a further sign of our brand momentum, we capped off the week by participating in the Met Gala, an uber-exclusive and incredibly high-profile event that is the Oscars of the fashion industry bringing more fantastic exposure for our brand. REVOLVE being included in the Met Gala for this first time is significant and demonstrates the level of admiration we have gained from the broader fashion community. I'll wrap up with a discussion on FORWARD and why we continue to be excited about the long-term growth opportunity here. FORWARD financial results for the third quarter were exceptional with net sales increasing 95% year-over-year and 112% on a two-year growth basis compared to the third quarter of 2019. FORWARD also delivered nearly a 6-point increase in gross margins year-over-year in this third quarter. Even more exciting is having Kendall Jenner as part of the team as Creative Director for FORWARD, extending our reach and appeal to a broader audience of next-generation luxury consumers than ever before. We have always had an extreme admiration for Kendall's style, creativity and overall exquisite taste. We believe her multifaceted experience in the fashion industry and the vision she has since outlined for FORWARD has the potential to transform our business. Only a few months into the role, Kendall has been extremely active. She hosted or participated in several New York Fashion Week events, including the exclusive FORWARD dinner; and visits to emerging luxury designers she recommended including one new brand that we are already in the process of bringing on to the FORWARD site. You may have noticed her curation of Kendall's Edits of her favorite styles on the FORWARD site. She also led the redesign of the FORWARD logo further elevating the look to connect with the next-generation consumer. Kendall has created a compelling range of video and social content including a Vogue feature that followed her around New York for a day in her new role as FORWARD's Creative Director. The video has been viewed more than five million times. Our brands, customers and fans could not be more excited. Immediately following the news traffic to the FORWARD website and mobile app increased significantly. And several weeks later, traffic has remained at higher levels than before the announcement. Downloads of the FORWARD app more than doubled year-over-year in the month of September and gross followers increased by more than 10x versus the prior monthly run rate. Another key driver of the success in the quarter and huge long-term opportunity for FORWARD is the continued expansion of cross-shopping by REVOLVE loyalty members on FORWARD as more of our REVOLVE customers become aware of the incredible offerings and benefits of shopping on FORWARD. We have only recently started to invest to fully leverage our broader platform and customer base to cross-market the REVOLVE and FORWARD offerings to maximize the launch opportunities. These early results of our efforts are very encouraging highlighted by spending on FORWARD by REVOLVE loyalty club members continuing to increase sequentially and a steady increase in the percentage of all customers, who also shop on FORWARD every single month since we launched the FORWARD loyalty program. You can't talk about fashion without talking about REVOLVE and FORWARD. We believe we have what it takes to give a destination for the next-generation consumers seeking curated premium and luxury products and we are just getting started. The competitive differentiators, I outlined earlier, give me great confidence in our opportunity for growth in the global e-commerce market for years to come. We are clearly taking market and wallet share from legacy players. With our scale and brand built over the past 18 years, we are also well positioned against newer entrants. We couldn't be more excited about the next phase of growth ahead of us. Now, I'll turn it over to Jesse for a discussion of the financials.

Thanks Michael, and hello, everyone. We are very pleased with our third quarter results, highlighted by accelerating top line growth, incredible brand momentum and strong customer engagement. We believe our results for the past few quarters demonstrate that not only have we navigated the pandemic challenges with agility, we are well positioned for our exciting next phase of growth in the new retail landscape. With that, I'll start by recapping the third quarter. Net sales were $244 million, a year-over-year increase of 62% and reflect a two-year growth rate of 58% compared to the third quarter of 2019. This two-year growth rate is 17 points higher than the 41% two-year growth rate that we reported for the second quarter of 2021. By territory, both domestic and international markets contributed to the strong top line results with domestic and international net sales growth of 65% and 49% year-over-year respectively. By segment, REVOLVE segment, net sales increased 56%; and FORWARD segment net sales were again exceptional, increasing by 95% year-over-year in the third quarter. A highlight of Q3 was active customers increasing by 124,000 compared to the second quarter of this year, our highest-ever sequential quarterly increase by a wide margin. This expanded our Active Customer count to 1.7 million, an increase of 12% year-over-year. Our customers placed a record 1.8 million orders in the quarter, an increase of 60% year-over-year. Average order value, or AOV, was $276, an increase of 19% year-over-year and an increase of 8% sequentially from just the second quarter. A key driver of the growth in AOV year-over-year, and sequentially, was a further shift in mix back to higher price point merchandise such as dresses, handbags and shoes, as well as the continued strength coming from the FWRD segment. Shifting to gross profit. Consolidated gross margin was 55.1%, a decrease of just 16 basis points against a very strong prior-year comparison, yet gross margin increased 148 basis points on a two-year basis, compared to the third quarter of 2019. Importantly, our gross margin was ahead of the gross margin outlook we provided last quarter, as healthy inventory and consumer demand dynamics across both segments led to another strong percentage of net sales at full price in the third quarter, and a year-over-year decrease in the depth of markdowns. These positive contributors to gross margin were partially offset by a decrease in the mix of owned brands, as a percentage of REVOLVE segment net sales, consistent with the outlook we shared on recent investor conference calls. Moving on to operating expenses. Consistent with the outlook we shared last quarter, marketing expenses as a percentage of net sales came in at 19.2% of net sales in the third quarter, well above our historical trend line. I couldn’t be more excited about the early results of our investments in brand marketing that pay dividends over the long term. The level of marketing investment has since returned to historical levels in the current, fourth quarter. Selling and distribution as a percentage of net sales increased year-over-year and on a sequential basis, consistent with our prior commentary to expect deleverage with a normalizing product mix, leading to a further increase in return rates in the third quarter of 2021. The other two line items, fulfillment and G&A expense, leveraged year-over-year, resulting in part from automation efficiencies in our fulfillment center. In fact, we have lower fulfillment headcount today than we did two years ago. During the quarter, we also realized benefits from capacity utilization and scale efficiencies, resulting from our robust 62% growth in net sales during the quarter. Net income and adjusted EBITDA decreased year-over-year due to the increased brand marketing investment. However, net income and adjusted EBITDA each increased meaningfully versus the pre-COVID levels in the third quarter of 2019. Also, looking at the nine-months year to date, net income and adjusted EBITDA increased by 86% and 59% year-over-year, respectively. Moving to the balance sheet and cash flow statement. During the third quarter, we continued to invest in inventory to position our assortment to support very strong consumer demand and to ensure we have adequate available inventory considering the current supply chain challenges. As a result, inventory increased by $23 million during the quarter to $142 million. Even with the investment in inventory, we generated $1 million in free cash flow in the third quarter and $67 million for the first nine months of 2021. The decrease of 10% year-over-year in free cash flow for the nine-month period reflects the much larger inventory investment this year compared to the first nine months of 2020, when we significantly reduced inventory to preserve liquidity. Cash and cash equivalents, net of borrowings, at September 30 were $222 million, an increase of $78 million, or 54%, from $144 million as of September 30, 2020. And our balance sheet remains debt free. I’m especially proud of our incredible results, considering the challenging and uncertain macro environment. It appears the supply chain issues are not going away any time soon, and right when we think we are turning the corner on COVID, new challenges emerge around the world. So, we feel very good about our ability to navigate the challenges as demonstrated by our exceptional results this year. Nonetheless, these headwinds are real risk factors that we have to deal with, day in and day out. Now, let me update you on some recent trends in the business since the third quarter ended and provide some direction on our cost structure to help in your modeling of the business. Starting from the top, the strong top line trends we experienced in the third quarter continued through to the month of October, with a growth rate that is broadly in the range of our third quarter growth rate. While we are very excited about the recent top line trends, we would not count on the same incredible growth rates that we’ve experienced in recent months to continue in the balance of the fourth quarter, during a time when the space is flooded with marketing and promotional activity. Shifting to gross margin, we are extremely pleased with our gross margin performance with gross margin higher by approximately 350 basis points year-to-date versus the comparable period in 2020 and 120 basis points higher year-to-date on a two-year basis versus the comparable year-to-date period in 2019. As a result, we are again raising the outlook for gross margin this year, versus what we have shared previously. We now expect our full-year gross margin in 2021 to be approximately 54.5% above the already upwardly revised full-year gross margin outlook of 54% I shared last quarter. Fulfillment. With a very efficient fulfillment performance in recent quarters we expect fulfillment costs to be approximately 2.5% of net sales for the fourth quarter, which is approximately 40 basis points lower year-over-year and showing even more efficiency when compared to 2019. The slight anticipated uptick compared to the third quarter of 2021 reflects normal seasonality as fulfillment costs have increased as a percentage of net sales on a sequential basis from the third quarter to the fourth quarter in four out of the last five years. For the fourth quarter, we expect selling and distribution costs to be around 16% of net sales, which is slightly higher than the 15.7% of net sales in the third quarter and up significantly from 13.4% of net sales in the fourth quarter of 2020. You may recall, that shipping costs comprised the majority of the selling and distribution line item. And consistent with our prior commentary, we are seeing pressure on this line from increased return rates year-over-year, as our product mix normalizes and from continued cost pressures that are impacting the industry overall. We expect this pressure to continue through 2022, at rates similar to that of our expectation for Q4 2021. Moving on to marketing. After a very busy and exciting third quarter, we continue to expect marketing expenses to revert to its historical level of approximately 15% of net sales in the fourth quarter consistent, with our commentary on last quarter's earnings call. General and administrative. We expect G&A expenses to be around $26 million in the fourth quarter, nearly $2 million higher than in the third quarter of 2021, as we continue to invest in the team to support our rapid growth and expansion. Lastly, let me touch on our tax rate. Our effective tax rate in the third quarter of 2021 and 2020 reflect 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 our recent results, with record growth in active customers and strength across all segments and major geographies in the third quarter. While mindful of continuing uncertainties and potential headwinds in the current environment, we are focused on the long term and investing in the business to capitalize on the incredible growth opportunity ahead. Now we'll open it up for your questions.

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

Great. Thank you. Good afternoon. My first question is on the FORWARD business. The strategy is really starting to pay off. I'd love how you could maybe help us think through, how big this business could be over time? And if you could share a little bit more about what Kendall's relationship with the brand is bringing from a brand relationship or a vendor relationship perspective. And then just a second follow-up on the holiday season can you just share your perspective on the promotional environment into holiday? Thank you so much.

Okay, Erinn. I think the FORWARD opportunity is just immense. We're competing against many old-school stores that still have billions and billions in revenue as well as competing against large online players, who are struggling. We've seen competitive momentum compared to other players in the market, it's really on fire right now. And then you combine it with hiring Kendall Jenner, as Creative Director, I couldn't think of anyone in the world, honestly, that we'd want for that position more than her. And then you also combine it with the REVOLVE customer base, which is quite large in the opportunity to transition that customer base to FORWARD. And incredibly, every single month, we've seen sequentially higher overlap in shopping on the REVOLVE customer base of – on FWRD since we launched the loyalty program. So there's just a lot of ingredients for success. It's a market size that's in the tens of billions. So we feel really good about where that business can go over time.

Yeah. And then maybe on the second piece, it's Jesse. It's a little bit early to see, what's going on in the promotional environment for the holiday season. We are seeing some early promotions, so that's giving us some caution. And then just to back up, and kind of set the stage, we're not overly seasonal. We're not a gift-giving destination. So this isn't a period, where we're overly active. And we see a lot of activity in the market, just in general. I think holiday season can be volatile in any season or in any year, this year in particular, with supply chain and everything else going on. We're just being very cautious on that last couple of months of the year to see what happens.

I just wanted to correct that. Hopefully, you guys can hear me. But it's not tens of billions. It's actually several hundred billion – billion. So, massive potential here and we're positioned perfectly.

Yes. On the supply chain side, we have started to see some delays there more delays than we'd like. I think compared to the rest of the marketplace, we're positioned pretty well. And we feel good about our inventory position heading into the holidays. Is it perfect the same as a world with no challenges? No. But I think compared to others, we're doing well. And I think that reflects in the results that we saw in the third quarter, as well as the results we're continuing to see in October. And then heading into the first half of next year, it's something that we certainly have our eye on. Again, we expect some challenges, but we expect to be able to manage and navigate those challenges as we typically do.

Hi. The revenue growth continues to be really impressive and the active customer growth as well. What should we think about for a longer term in terms of your revenue growth algorithm and also as you start to anniversary some tougher compares in Q1? I would also love an update on private label, as you think about it near and longer term. I know, there's opportunities at both divisions? And then the third question, on FWRD congrats on all the momentum there. What do you see happening with the assortment over time as you think about breadth relative to depth and where you want to go with the nature of inventory buys and pricing?

Sure. Mike here. So with regards to the long-term growth algorithm we wouldn't make any changes to our long-term projections. Certainly, we experienced phenomenal several quarters, and we still got enough momentum in our business, and more importantly really good about the long-term opportunity. We think we're positioning better than ever. We think our brands are resonating with consumers. Our ability to manage our inventory versus others we think has been shown during this time, and also our ability to execute at high service levels. So we feel really good about our long-term trajectory, but at the same time, it's not the sort of situation where we would make a change to our long-term projections at this time. I guess the second question with regards to private label, Michael do you want to dive in there?

Yeah. The opportunity is there, remains greater than ever. Of course, we scaled back. And we've begun the acceleration in this coming year you'll see a lot more from us across categories, across brands, across collaborations. And you will begin to see things that expand into the FWRD zone as well, which is completely, completely untapped. I think that the customer as always come for emerging designers, and we've been able to consistently curate exciting emerging designers. So you'll see a lot more of us in the same format as you've seen us in this past New York, so very excited for what's to come.

Okay. Thank you. On FWRD, I'd love your thoughts there.

Do you want to take the FWRD inventory, or do you want me to, Michael?

What was the question, again, or do you want to jump in Mike?

No. I'll jump in. So with regards to FWRD breadth and depth, we continue to see there to be an opportunity to enhance FWRD's inventory assortment. That's one of the things we talked about on past calls that with all the things FWRD has going for it, what's really exciting about the future is it has a lot of opportunities on the assortment side. So, we're continuing to increase the breadth of inventory as well as the depth that we're able to sell to consumers. And then, that's been a powerful driver of results.

Good afternoon and congrats on the ongoing momentum. I guess first just on the marketing front, I mean it seems like you're seeing some nice response to the marketing initiatives with the acceleration in client adds this quarter. I guess, as you realize some of the benefits from these brand investments that are ongoing, what do you think is the appropriate rate of net customer adds that we should anticipate in the quarters ahead? And then, separately, on margins Jesse, I guess, it looks like you're on pace to close to hold the 2020 margins. I think if I got all the numbers correctly, the guidance implies maybe something in the neighborhood of 11.5% EBITDA margin this year. Just with the performance year-to-date does that increase your confidence in the ability to sustain or even expand EBITDA margins beyond 2021? Thanks.

Yeah. Sure. On the first one on the active customers really excited about the customer behavior in these last couple of quarters and the last quarter especially. And it's coming from both new customers we had record new customer adds, but also that returning customer. That returning customer has been more active than ever. And she came back in a big way in this quarter. And not just returning customers, but also lapsed customers. We saw that some customers, who had gone completely away in 2020, came back in these last couple of quarters. And that ratio of that lapsed customer actually increased from Q2 to Q3. So we feel really good about the active customer growth. I think that's one dynamic and the most exciting dynamic. The second one is that because of that active customer number is a trailing 12-month number we will layer on new higher-performing quarters as we cycle out of lower-performing COVID quarters. So the combination of those two for the next at least couple of quarters we should see that active customer growth rate increase sequentially, before it starts to normalize kind of in the middle of next year at some point. And then, on the EBITDA margins and long-term EBITDA margins we feel good. We made a lot of investments this quarter that we believe will pay off over the long-term. There is some cost pressure and supply chain that we've talked about that will add some near-term pressure. But over the long-term we still feel good about that 14% EBITDA margin target that we put out again in the mid-to-long-term, so not commenting anything specifically on the next quarter but feel good about the long-term opportunity there.

Thank you.

Thank you. Hello everyone. I appreciate you taking my questions and congratulations on an excellent quarter. Jesse, I noticed that the average order value for the quarter was above pre-COVID levels, which is great to see. I'm interested in understanding how much of that is due to the mix between your segments versus any other challenges or advantages you could highlight regarding what is above or below pre-COVID levels. What are your thoughts going forward? Additionally, regarding the owned brands, you mentioned that they might enter positive year-over-year growth during the fourth quarter. Could you provide an update on that and whether there's been any impact from the supply chain? Also, the product return rates are back to the low-50s, which is slightly below your pre-COVID levels. You've previously suggested that return rates might stabilize lower than they were before the pandemic. Is that still your stance? Can you share anything about the trends you're observing in this area? Do you expect return rates to increase in the near term, or might they drop a few more points? Thank you.

Yeah. Sure. So first on the AOV, definitely a positive impact from that FWRD performance and FWRD really over-indexing for the last several quarters. And we see continued strength coming out of that segment, which of course carries a higher average order value. So that's definitely a contributor. The other piece of that is the record high full price sales mix that we've been operating at. And not just the full price sales mix, but also the markdown margin. So kind of just kind of that full price customer behavior has been really strong. And strong for sure on a year-over-year basis just given where we're at last year, but then also even higher than back in 2019. And as we've commented on in the past that's kind of coming through in some of the margin again, we don't expect that to last forever. We do expect that to come off of the highs. And it actually came off of the Q2 high that we experienced in this Q3, but still feel really good about the long-term full price mix there. And full-price customers generally behave better over time than a markdown customer. So we're really excited about the record new customer additions this quarter that came through in a big way on full price. So that's on AOV. On owned brands, yes, I think we troughed out in Q2. So we're seeing a sequential increase in the mix of owned brands from Q2 to Q3. And I think in that Q4 zone is probably still in the right range of crossing over from that kind of year-over-year increase in penetration. And in return rates, return rates are increasing as you can see. And that's largely due to the shift in mix back towards those higher return rate categories like dresses and away from the lower return rate categories like beauty that we had experienced last year. And also as we localize the international experience that has an impact on return rates, but an overall positive experience and impact just on the overall P&L from a gross demand perspective. So, I think, we'll see it increase sequentially from here. We're still optimistic that we can be lower than that the peak rate, but it will increase between kind of where we're at now and that peak rate that we experienced back in 2019. If you look at the dress mix right now, we're at 29% in the third quarter. And at our peak kind of pre-COVID levels, we're in the 32%, 33% zone in those peak Q2 periods where addresses are really high. So, just to give some context on kind of potential movements looking ahead.

Hey, guys. Thanks for taking the question. You guys are really early in identifying the influencer opportunity and I've argued have done a better job than really anybody in the industry. It does seem though that a lot of other folks are trying to emulate this kind of micro influencer strategy. I guess have things changed on the influencer front? Is it harder to get the right influencers? And have costs come up? And then just as a quick follow-up to previous calls any impact that you're observing from IDFA? Thank you.

Yes. On the influencer side things continue to evolve, but it's important to note that our influencer strategy isn't one strategy. It isn't a singular strategy. It's really a multifaceted strategy. So we work with the biggest influencers in the world like literally like a Kendall Jenner, of course. We work with the entire spectrum all the way into micro influencers with 10,000 followers. So I think it keeps us on our toes. Of course, things that we did years ago aren't as effective as they are now. But we have some new things coming out that we're excited to talk about that are just continued elevation of what we do, more tech-driven ways to work with influencers. And we're as bullish as ever as this is an important part of our strategy. And we're super clear that it works and we're super, super confident that we can continue to invest in a very strong way. Mike do you want to talk about.

Yes, coming in the quarter, we certainly had some reservations about it and noted that it could cause some level of headwind. For the most part, we're pleased with how things played out. We feel like our marketing teams navigated it well. And on balance you could call it net neutral, so it didn't end up being the biggest concern as we thought it might be.

Thank you, and congratulations on a great quarter. I have two questions. First, you mentioned being pleased with the early results and returns from the Fashion Week event. Can you share some of those early metrics, such as any increases in sales or engagement? Additionally, do you believe this could become a significant sales driver like your fall Coachella in the long term? My second question pertains to the gross margin guidance for the fourth quarter, which suggests a decline of about 300 basis points. I appreciate your cautious outlook regarding potential promotional acceleration, but what other key factors are contributing to this decline? Thank you.

Sure. So with regards to the marketing event question, we measured the success in several different ways. So certainly one of them is that we looked at the trajectory of sales momentum and new customer momentum and customer engagement. And we saw really nice results for the month of September in the period in which we conducted the marketing activity. And we know based off past events that we've done we have the ability to correlate the increases that we see there to a longer-term effect that we see in the form of customer awareness and where new customers are learn about us being inspired by us. So the early results looked great. And also all the metrics that we look at in terms of just general consumer awareness and impressions among consumers and reaction from consumers to the events that we're doing were all quite positive. So we feel great about those events. It was exactly the kind of investment that we wanted to make and we're really happy with how it performed. And with regards to your question could it become an institution like Coachella? The answer would be yes it definitely could be. And we're still planning the upcoming year and those plans continue over time. But at this point we feel very good about the event and we think it has potential to become an institution like Coachella.

Yes, the only other thing I would add is that of course with the strong Coachella a play that works for us in the spring. Balancing it out in the fall is great, but this is a play that could be any time of the year. This is something that of course we did during Fashion Week, but this is an event that we can manufacture on our own. So it really opens up kind of the flexibility and possibility to do things whenever we want on a global basis. So super happy with the results. It was of course something new which always carries a little bit of risk. But it is a huge win for us and something that we'll be able to leverage in a very strong way for many years into the future.

Yes, and on the second piece of the gross margin there I think important to keep in mind when looking at the year-over-year the last year was not a typical year. So if you think back to last year we kind of saw that step function from the first half of the year into the second half of the year. And it was really the tale of two halves where we saw that record full price everything kind of working on a margin perspective. So Q4 was not a typical Q4 for us last year. So that was abnormally high. So that's one piece on the comp. So I think probably balancing that with looking at the Q4 2019 and even earlier in 2018 and 2017 to see the seasonality there. So I think one the comp dynamic; and then two a seasonality dynamic; and then three just as we've commented in the last couple of earnings calls as we build in the inventory as we work through inventory that bulk price/mix will come down. The markdown margin will come down. So we're filling a little bit of that in as well.

Great. Thanks. This is Alex Straton on for Kimberly Greenberger. I just have a quick question on both segments in terms of which categories within them at FWRD and REVOLVE are doing well. Did you see any sort of certain ones that stand out some on further reopening? I know it sounds like dresses are doing better. And then also just the second question I have is on kind of a sense for how full price selling came in this quarter compared to last year versus even 2019.

Well, starting with merchandising. Go ahead, Michael. Merchandising…

Sure. I will address part of it. Regarding merchandise, dresses are making a strong comeback, showing nearly a 100% increase year-over-year in that category. It's also worth noting that we've observed significant growth in going-out items like dresses, while beauty has also seen a year-over-year rise, maintaining its strong performance from last year during the stay-at-home period due to COVID. It's encouraging to see this category continue to grow. On the FWRD side, handbags and shoes are seeing steady demand. There's a connection here, as FWRD tends to excel in shoes and handbags, while REVOLVE is stronger in dresses and tops. This creates a well-rounded product offering. I also overlooked your second question.

Just on a sense for full price selling the level like the compares from last year versus even 2019?

Yeah. Yeah. Yeah, over the prior year higher than last year, on a sequential basis though we came off of that all-time high that we experienced in 2Q of 2021. So we're kind of starting to see that full price ebb. And then also on the markdown margin front similar dynamic where we saw that record markdown margin last quarter, we're starting to come off of that record. So that again, goes into kind of some of that forward-looking guidance that we're giving around gross margin for this next quarter.

Very good afternoon, guys. Thanks for taking my question. Maybe just a follow-up on the gross margin commentary, I mean, it kind of sounds like you have a few – yeah, things that will be pressured in Q4 and maybe some normalizing promos and mix and things like that. Should we expect that to kind of persist into 2022? Like, do you think that the 2021 gross margin that 57.5, is maybe a little bit inflated and maybe there's a little bit of normalization next year? Are there any sort of offsets there to some of these pressures? Just trying to get a sense of the longer-term direction in gross margins.

Yeah, yeah. And that's a great question. I think maybe stepping back for that full year of even 2021 that's two points higher for the full year on a year-over-year basis compared to 2020, and then a full point higher than 2019. So I think stepping back from the quarter-to-quarter dynamics, we feel really good about the margin progression there. And I think to your point on offsets on the full price mix and the markdown margin, owned brands, so as we mentioned we kind of troughed out in Q2 on the owned brand mix. That has built sequentially into Q3. And we expect that to continue and kind of going back to some of Michael's remarks earlier and expect that to continue through to 2022 and beyond. So for the full year 2021, we'll see a decrease in the mix of owned brands before we see that increase again for the full year in 2022. And I think, as we've talked about before the owned brands carry meaningfully higher margin than a third-party. And with the owned brand reset that, we've been working on over the last few years, we feel really good about the unit dynamics on that front as well.

Hey, guys. Just got a couple of questions, I think the first one I think for Jesse. The cash balance jumped. Can you talk a little bit about just the uses for cash and like what you’re planning to keep building? I know, you're going to invest in some inventory but it just seems like there's a lot of excess cash on the balance sheet. And then I have a follow-up question.

Yeah, yeah. Yeah, first use of cash, especially this year and you can see that in the inventory balance is the reinvestment in inventory. And you can see the cash balance start to kind of plateau where we're at now where we've invested in inventory the significant demand that we've experienced as to the cash balance, but we're reinvesting that in the working capital. So I think we're largely through the inventory rebuild now. That will start to balance out. I think second use of cash goes along with that, but just working capital investing in the marketing investing in the business. We're pretty light on CapEx as you know so not any meaningful CapEx investments planned outside of historical norms. So then that leads to what else do we do with it. We are – we continue to look at things. We're being very disciplined. But M&A continues to be an opportunity for us, but we're being very patient on that front as well.

Got it. And just a question on the Kendall Jenner appointment in the interview process, which one of you guys played the heavy? Like, who was the tougher interviewer during that process?

That's always Mike. He's notorious for these impossible-to-pass programming tests. And I think that – to join that.

This concludes today's conference. You may now disconnect.