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Edited Transcript of RVLV.N earnings conference call or presentation 25-Feb-20 9:30pm GMT

Q4 2019 Revolve Group Inc Earnings Call

Mar 5, 2020 (Thomson StreetEvents) -- Edited Transcript of Revolve Group Inc earnings conference call or presentation Tuesday, February 25, 2020 at 9:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Erik Randerson

Revolve Group, Inc. - VP of IR

* Jesse Timmermans

Revolve Group, Inc. - CFO

* Michael Karanikolas

Revolve Group, Inc. - Co-CEO & Director

* Michael Mente

Revolve Group, Inc. - Co-CEO & Director

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Conference Call Participants

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* Abigail Zvejnieks

KeyBanc Capital Markets Inc., Research Division - Associate

* Alexandra Ann Straton

Morgan Stanley, Research Division - Research Associate

* Justin Post

BofA Merrill Lynch, Research Division - MD

* Kristina Casey Katten

Crédit Suisse AG, Research Division - Research Analyst

* Mark R. Altschwager

Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst

* Oliver Chen

Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst

* Ralph Edward Schackart

William Blair & Company L.L.C., Research Division - Partner & Technology Analyst

* Robert Scott Drbul

Guggenheim Securities, LLC, Research Division - Senior MD

* Ross Adam Sandler

Barclays Bank PLC, Research Division - MD of Americas Equity Research & Senior Internet Analyst

* Susan Kay Anderson

B. Riley FBR, Inc., Research Division - Analyst

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Presentation

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Operator [1]

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Good afternoon and welcome to Revolve Group's Fourth Quarter and Full Year 2019 Earnings Conference Call. Today's call is being recorded and we have allocated 1 hour for prepared remarks and Q&A.

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

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Erik Randerson, Revolve Group, Inc. - VP of IR [2]

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Good afternoon, everyone, and thanks for joining us to discuss Revolve's fourth quarter and full year 2019 results. Before we begin, I'd like to mention that we have posted the presentation containing Q4 and full year 2019 financial highlights to our Investor Relations website located at investors.revolve.com.

I would also like to remind you that this conference call will include forward-looking statements. These statements include our expectations regarding financial results and guidance, market opportunities, our growth and increased efficiencies, our owned brand mix, our inventory position, our diluted share count, our investments in customer experience and fulfillment centers, the impact of tariffs and our tariff mitigation efforts, the potential impact of coronavirus on our supply chain and operating results and our lower price point offerings.

These statements, which are subject to various risks, uncertainties and assumptions, could cause our actual results to differ materially from these statements. These risks, uncertainties and assumptions are detailed in this afternoon's press release as well as in our filings with the SEC, including our registration statement on Form S-1 that was filed with the SEC, our Form 10-Q for the third quarter of 2019 that was filed with the SEC on November 7, 2019, and the Form 10-K for the full year 2019 that will be filed, all of which can be found on our website at investors.revolve.com. We undertake no obligation to revise or update any forward-looking statements or information except as required by law.

During our call today, we'll also reference certain non-GAAP financial information, including adjusted EBITDA, free cash flow and adjusted diluted EPS. We use non-GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP. And our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliations of GAAP to non-GAAP measures as well as the description, limitations and rationale for using each measure can be found in this afternoon's press release and in our SEC filings.

Joining me on the call today are 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.

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Michael Karanikolas, Revolve Group, Inc. - Co-CEO & Director [3]

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Thanks, Erik. Good afternoon, everyone. Thanks for joining us today. I'll start with highlights for the full year 2019, followed by our key priorities for 2020. Next up, Michael will drill a level deeper in discussing our 2020 priorities and initiatives, particularly in owned brands FORWARD and marketing. And finally, Jesse will wrap up with a review of our fourth quarter results and our guidance for 2020.

As entrepreneurs and founders, Michael and I, as well as the management team, are focused on delivering long-term value for our shareholders. With that lens in mind, it's important for us to take a step back and evaluate our performance for the full year 2019.

2019 was a record year with a number of significant accomplishments. We are proud of our team for delivering such powerful results. Net sales increased 21% year-over-year in 2019. The REVOLVE segment net sales grew 22% and the FORWARD segment returned to double-digit growth after successful inventory repositioning. International net sales growth accelerated during the second half of 2019, driven by the continued improvement of service levels that further strengthened our value proposition in overseas markets.

Gross margin expanded 40 basis points year-over-year as we continue to build on the momentum of our Owned Brands. 79% of our net sales came at full price, equaling our record performance in 2018 and well ahead of retail industry benchmarks. Net income grew 16% and adjusted EBITDA grew 20%, despite incremental costs we incurred to operate as a public company. Free cash flow increased 42% to $34 million, nearly equaling our net income for the year. We did this while investing approximately $10 million in our new fulfillment center, expanding our warehouse capacity to beyond 2023.

We implemented automation that is driving operational efficiencies and even further improvements in our customer experience. As of year-end, our warehouse employees headcount was flat year-over-year, while the number of orders increased 27% in 2019. And even more important, our investments continue to raise the bar for our customer experience. In 2019, we were able to ship 98% of orders in the same day if received by noon Pacific Time.

Our marketing initiatives remained efficient and impactful, enabling us to build on our brand that is increasingly admired by customers, influencers and our brand partners. Many top brands and personalities seek to partner with Revolve or develop exclusive products with us because they realize a Revolve partnership can further elevate their brand. In fact, in 2019, we generated approximately $4 million in marketing sponsorship dollars from leading brands participating in our impactful marketing events.

Active customers grew 27% year-over-year in 2019 and their propensity to spend remains strong, with an average order value of $275 for the year. We continue to innovate for the benefit of these customers, encouraging and enabling greater trial and fashion discovery and offering more flexibility in how they interact with us. We launched site-based digital navigation features, became a launch partner of Instagram Checkout, introduced an option to try in a second size of certain styles at no additional cost, drove faster shipping times and introduced more convenient return options.

We also have some opportunities for improvement that will be key areas of focus in the coming year. As part of working through our inventory position that we discussed on the Q3 investor call, we slowed the receipt of new inventory in the fourth quarter, which we believe impacted conversion and revenue growth. It's important to note that we believe consumer interest, as measured by traffic growth, was strong, with Q4 representing the highest year-over-year traffic growth quarter of the year. Inventory, and particularly new, fresh inventory, is a key driver for maximizing net sales growth. We are confident in the long-term growth algorithm as we work through our current inventory position.

Continuing with inventory, we made great progress with year-over-year growth rate in inventory decreasing to 15% as of the end of the fourth quarter when normalized for accounting adjustments as compared to 30% year-on-year growth in the third quarter and around 40% year-on-year growth in inventory in the second quarter of 2019.

New inventory receipts were essentially flat year-over-year versus an over 30% increase year-over-year in Q4 of last year.

Nonetheless, as we said on last quarter's conference call, it would take a few quarters to fully cycle through. And while our overall inventory position is in a good place, we still have a higher-than-normal mix of markdown inventory.

We feel good about the level and quality of new inventory receipts, but as we work through the existing inventory, the slightly higher levels of markdowns we experienced in the second half of 2019 are likely to continue into the first half of 2020. We're confident that after we work through our relatively higher levels of markdown inventory, we'll be well positioned for margin maximization over the long term.

Finally, after years of driving very rapid growth of our Owned Brands, we have intentionally slowed down the expansion of our in-house brands heading into 2020. Our intent is to recalibrate and invest in the capabilities of this platform to support its next leg of growth. This will impact our gross margin in 2020 due to product mix since third-party brands come at lower gross margin. Yet, we believe the investments in Owned Brands will position us for long-term success. We view the Owned Brand platform as a key part of our value proposition, and we remain confident in our ability to increase penetration over time.

Turning now to our operating priorities for 2020. As we look ahead and think about our focus areas, our leadership team is aligned on 4 priorities to capitalize on the large market opportunity ahead of us.

First, we will continue to build the Revolve brand through the trailblazing and impactful marketing programs that have been a cornerstone of our success. You may have already seen the highly visible collaboration with The Bachelor that aired in January for millions of television viewers on the ABC Network. That is just the beginning, and Michael will talk about some of our exciting initiatives planned for the rest of the year.

Second, we are going to invest in the Owned Brands business to support our growth ambitions for the long term. This is a business that has grown rapidly, from 0 to nearly $200 million in net sales in a 5-year period. This year, we will take our foot off of the growth accelerator for Owned Brands while we prioritize investing in the Owned Brands team and capabilities. These efforts will help us capitalize on the significant opportunity for growth and margin expansion over the long term.

Third, we plan to build on the momentum we have established with FORWARD and in the International business. Net sales growth for FORWARD and International each accelerated in the second half of 2019, illustrating the success of our growth strategies. We are seeing the impact of the initiatives we set in motion, such as elevating service levels for international markets, refining the FORWARD product assortment and expanding the marketing strategy. Michael will discuss these in further detail.

Fourth, we remain committed to deploying technology and embracing innovation to further enhance our value proposition for customers, drive continued growth in new customers and further engage our existing customers. Philosophically, we are constantly testing new initiatives, monitoring improvement in the relevant KPIs and then rolling out our advancements more broadly once they prove to be successful.

Starting with technology innovations, we recently launched a progressive web application to a portion of our REVOLVE customers ahead of a broader rollout. This technology makes the mobile web experience much more engaging for customers on mobile devices who have not installed our mobile app. We plan to launch the same application on FORWARD later in the year.

Another technology initiative designed to increase conversion rates is our planned launch of further personalization on our REVOLVE site experience based on customers' style, preferences, prior purchases and browsing history. Separately, to encourage customers to purchase more products per order, we will launch an innovative platform that will generate outfit recommendations.

Moving on to loyalty and customer service. To further encourage purchase activity and increased customer retention, we will launch a loyalty program offering unique benefits to customers, including access to some of our exclusive events for top spenders. The loyalty programs, which were built on a proprietary technology platform, will be made available for REVOLVE customers ahead of our Revolve Festival event in early Q2 and for FORWARD customers later in the year.

We have a tremendous opportunity in front of us and true to our entrepreneurial, founder-led spirit, we will continue to be relentless in building a growing and profitable business for the long term. I'm confident that by executing on these 2020 initiatives, we will be stronger than ever and well positioned for our next phase of growth. Now I'll pass it to Michael.

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Michael Mente, Revolve Group, Inc. - Co-CEO & Director [4]

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Thanks, Mike. 2019 was an incredible year for us, not only because of our much-anticipated IPO in June, but more importantly, because it laid the foundation for our next phase of growth. We are still under-penetrated in our core domestic market with incredible long-term potential to build Revolve into a massive global business.

Starting with building the brand. Customers who know Revolve love us. But we will continue to invest in our pioneering ways to increase our brand awareness and elevate the Revolve brand. As Mike mentioned, we are excited about The Bachelor collaboration that aired in January for more than 5 million viewers. Props to Raissa Gerona and Gil Manzuri for securing this incredible opportunity for brand exposure in front of a large audience of our core customer demographic.

We generated significant exposure and favorable press, and as just one proof point of the success, we drove a meaningful increase in mobile app downloads in the days that followed. We're gearing up for another exciting influencer event, with a globally-admired company that we believe could similarly elevate and amplify the REVOLVE brand. I can't get into the specific steps yet, although I'll share that it's unlike anything we have done to date. We also plan to even further expand the ways in which we engage with our customer by leveraging emerging and existing social platforms such as TikTok and YouTube.

Lastly, we will drive additional excitement for our brand and product offering through continued collaborations with celebrities and global influencers. All of this is a focus on driving awareness and continuing to build the REVOLVE brand.

Shifting to Owned Brands, a core pillar of our long-term strategy. Building the Owned Brand platform and expanding our offering of Owned Brands has been incredibly successful, growing to nearly $200 million in net sales in 2019 on the delivery of over 14,000 styles, nearly a 3x increase in styles in 3 years. While the focus on this strategy has transformed our business, in order to maximize the long-term opportunity ahead of us, we will first invest in additional capabilities.

Our systems and processes identify trends and styles that align with customer demand. And we have developed Owned Brand product aggressively where our supply chain infrastructure and internal capabilities have been appropriately developed. This has led to some great successes, powered by our Owned Brand mix going to nearly 70% of REVOLVE segment net sales in key segments such as dresses within the $150 to $200 price point. This is a zone where we have a strong design and sourcing competency. By comparison, we have less than 20% penetration across a number of key categories, including denim, swim and shoes.

It's clear we have a compelling opportunity to expand our own brand penetration by diversifying our mix of categories and price points over time. One exciting opportunity for category and price point expansion that we have begun to pursue is dresses and tops at an elevated price point.

The successful launch of Rêve Riche on REVOLVE and FORWARD with an ASP of approximately $800 validates the opportunity at the higher end. We're excited to develop the additional capabilities to truly optimize our Owned Brand assortment across categories and price points, which will require us to further invest in our supply chain infrastructure, design capabilities, our processes and, most important, in our team. These investments will help to ensure that we continue to capitalize on the significant opportunity for growth and margin expansion over the long term, while providing even more opportunity to delight our customers with premium, on-trend, fashionable product.

Last, I'm excited to talk about FORWARD. FORWARD is performing extremely well after the repositioning we conducted last year, highlighted by the net sales growth accelerating to 33% in the fourth quarter.

During the IPO process, we outlined our plan to reposition the FORWARD business for long-term success. The initiatives we described on prior calls are working well and delivering results as intended.

We have optimized the assortment across emerging iconic luxury brands, while at the same time creating a more curated point of view on the assortment within our existing brands. Our refined positioning includes the addition of high-caliber luxury brands such as Gucci and Balenciaga as well as Bottega Veneta, ahead of an impressive resurgence of the Bottega brand in the second half of 2019.

As mentioned earlier, we also launched our first Owned Brand collection on FORWARD in the fourth quarter, Rêve Riche. The early success of the brand is leading us to develop additional Rêve Rich styles for the upcoming season.

I am also encouraged by the early success of our cross-marketing programs between REVOLVE and FORWARD. During the fourth quarter, we actively linked between the REVOLVE and FORWARD sites for the first time, generating meaningful referral traffic to FORWARD. We will continue to expand our cross-marketing efforts in 2020. We will also expand the level of FORWARD brand marketing activity to further build this brand, drive traffic and acquire customers.

Lastly, later this year, we will be adding FORWARD to our loyalty program, further leveraging the combined power of REVOLVE and FORWARD customer base to further strengthen our value proposition and enhance our efforts to engage and retain customers. We will also continue to expand the ways in which our customers are able to transact with us through additional payment methods. It's gratifying to see our FORWARD strategy playing out so well.

With that, I'll turn it over to Jesse for a review of the financials.

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Jesse Timmermans, Revolve Group, Inc. - CFO [5]

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Thanks, Michael. Since Mike covered the full year highlights, I'm going to focus my remarks on the fourth quarter results. I will also discuss guidance for the full year 2020 that we announced today, including some key assumptions and drivers.

Starting with the fourth quarter. Our Q4 results had some clear positives as well as some challenges. On the positive side, adjusted EBITDA exceeded the high end of our implied Q4 guidance range.

Free cash flow is exceptional, and we made great progress on working through our inventory. We also drove strong demand to the site with the highest year-on-year traffic growth of the year in the fourth quarter. On the other hand, while within our guidance range, net sales came in towards the low end of that range.

Drilling into the top line. Total net sales for the fourth quarter were $147.6 million, an increase of 16% year-over-year. REVOLVE segment net sales were $125.2 million, an increase of 13% year-over-year. As mentioned, we generated strong demand to the site. But with the reduction in new, fresh inventory, our conversion rates declined, resulting in some pressure to the REVOLVE segment top line. Despite new inventory being relatively flat year-over-year, we were able to drive 13% sales growth in the REVOLVE segment. In addition, we believe the focus areas Mike discussed will help us improve the REVOLVE segment growth outlook later in 2020 and particularly, headed into 2021.

Meanwhile, the FORWARD segment performance was strong in the fourth quarter. FORWARD net sales were $22.3 million, an increase of 33% year-on-year. It's the highest growth rate in more than 3 years. When evaluating our segment performance in Q4, keep in mind that the REVOLVE segment faced a difficult comparison against 32% net sales growth in Q4 2018, while FORWARD faced a much easier comparison on the 8% net sales decline in Q4 '18.

Our top line growth continues to be driven by the combination of new customer additions and continued loyalty from our existing customers. Our active customers during the trailing 12-month period grew to nearly 1.5 million, an increase of 27% year-over-year. And total orders placed in the quarter increased 14% year-over-year.

Average order value, or AOV, was $282 in the fourth quarter, up 3% year-over-year. This was our first year-over-year increase in AOV in 9 quarters and was driven by year-over-year growth in AOV at both REVOLVE and FORWARD in Q4.

International was another bright spot in the quarter, with net sales for the quarter of $24.4 million, a year-over-year increase of 22%, a sequential improvement from the 15% growth in the third quarter. All major regions contributed to our growth. Once again, we delivered strong results in markets like the U.K. and Australia, where we have previously localized the customer experience through service enhancements.

Moving to gross profit. Consolidated gross margin was 52.9% for the fourth quarter, a decrease of 120 basis points over the prior year. As signaled last quarter, the decrease in consolidated gross margin is attributable to the REVOLVE segment gross margin being lower year-over-year, primarily due to a slightly lower mix of REVOLVE segment net sales at full price and increased markdowns.

REVOLVE segment gross margin was 55.1% in Q4, down 140 basis points year-over-year. Again, this is a function of the short-term inventory challenges that we outlined last quarter and that we are in the process of working through. FORWARD segment gross margin was 41%, an increase of 260 basis points year-over-year and the segment's highest ever fourth quarter gross margin as a result of the successful repositioning of this business.

Now we'll move down the P&L and give you some color on the expense line items. Fulfillment, which reflects the cost incurred to staff and operate our distribution center, totaled $4.5 million or 3% of net sales, a slight decrease from 3.1% a year ago. This was the first time we have shown leverage in fulfillment expenses in the past 8 quarters. This is an outcome of the slight increase in AOV and our 2019 investments to consolidate warehouses, implement automation technology and create more efficient workflow.

Selling and distribution costs, which consists primarily of shipping, merchant processing fees and customer service, were $20.9 million or 14.2% of net sales, an increase of 30 basis points year-over-year due to cost increases in these line items.

Marketing costs were $21.6 million or 14.6% of net sales, a decrease of 20 basis points year-over-year due to efficiency gains in our digital performance marketing efforts.

General and administrative costs, which primarily consist of salaries and wages, were $20.5 million. G&A costs, expressed as a percentage of net sales, were 13.9% in the fourth quarter, down slightly from 14% of net sales in the prior year as we continue to gain leverage and manage the cost structure while also continuing to invest in the team and infrastructure and absorb the cost of operating as a public company.

The combination of top line growth and a well-managed cost structure resulted in strong bottom line results in Q4. Net income was $8.4 million, an increase of 9% year-over-year. And adjusted EBITDA grew to $13.7 million, an increase of 15%. Adjusted EBITDA margin was 9.3%, consistent with the prior year.

Diluted earnings per share, or EPS, was $0.12 per share, up from $0.11 in the fourth quarter of 2018. I'll remind everyone that we are reporting our Q4 earnings per share and EPS going forward on a GAAP basis without any adjustment.

Moving to the cash flow statement. We operate a highly capital-efficient business that positions us to generate positive free cash flow. In the fourth quarter, we generated $14.2 million in cash flow from operations and $13.2 million in free cash flow, more than $15 million higher than the prior year quarter on both measures. The favorable comparisons resulted from an increase in net income and adjusted EBITDA, favorable movements in working capital, particularly related to inventory, and to a much lesser extent, the timing of capital expenditures related to the expansion and consolidation of our fulfillment center operations.

This healthy cash flow generation has further strengthened our balance sheet. As of December 31, we had no debt and cash and cash equivalents of $65 million, an increase of 46% in just the 2 full quarters since our IPO. We ended the year with $104 million in inventory as compared to $102 million at the end of the fourth quarter of 2018.

Adjusting for the adoption of the new revenue recognition standard that in 2019 reclassified a portion of our inventory to prepaid and other current assets, our inventory balance grew 15% year-over-year, 6 points lower than our sales growth for 2019. This is a meaningful sequential improvement from adjusted inventory growth of around 30% year-on-year in the third quarter and around 40% in the second quarter of 2019.

With that, I'll turn to our full year 2020 guidance and underlying assumptions. We expect net sales to be between $679 million and $703 million, which represents growth over fiscal 2019 of between 13% and 17%. Our expectations factor in an estimated 1- to 3-point negative impact to net sales growth as a result of the coronavirus outbreak, with the expected negative impacts focused on the first and second quarters. The negative impact is due primarily to supply constraints on our own brand manufacturers as well as our third-party brands that's sourced from China. We are also experiencing a negative impact on consumer demand in the Greater China region in our REVOLVE segment, but this is a much smaller impact given the relative sales mix from this region. The situation remains fluid and uncertain, so our estimate of the negative impact from the coronavirus outbreak is based on our best information as of today and is subject to change.

By segment, for the full year 2020, we expect the growth rate in FORWARD net sales to outpace REVOLVE segment growth rate. Looking at the cadence throughout the year for the REVOLVE segment, we expect the REVOLVE segment growth in net sales to remain challenged in the first half of the year as we reposition inventory and invest in the Owned Brand platform and due to delays in shipments from China resulting from the coronavirus outbreak that will impact our new product assortment in the first and second quarters. We expect the REVOLVE segment's net sales growth rate to improve in the back half of the year after the merchandising initiatives we are putting in place begin to take hold, as shipments from China return to normal and as we benefit from an easier year-over-year comparison in the fourth quarter.

Looking at the cadence for FORWARD. We are very encouraged by its current growth trajectory. We expect the growth rate for FORWARD to begin the year strong and decelerate somewhat throughout the year as the comparisons get tougher, particularly in the fourth quarter.

Looking at some operating metrics that drive the top line. In 2020, we expect growth in active customers to be relatively consistent with our growth rate in net sales for the full year. We expect average order value, or AOV, to improve slightly from the AOV of $275 reported for the full year in 2019.

Now let me discuss gross margin. We expect the margin pressure that we experienced in the fourth quarter to continue into 2020, with consolidated gross margin in 2020 down in comparison to the 52.9% gross margin achieved in the fourth quarter of 2019. Our expectation for a lower gross margin in 2020 is driven by a decline in gross margin within the REVOLVE segment, with the key driver being a lower mix of net sales from Owned Brands, which generate higher margins than third-party brands as well as continued pressure on full price sales and increased markdowns in the first half of 2020.

In addition, we expect gross margin in 2020 to be impacted by the higher mix of net sales from FORWARD since FORWARD operates at a lower margin than the REVOLVE segment.

Our gross margin expectations assume that China tariffs remain constant at current levels, reflected in the recent trade deal signed last month. As shared previously, we believe our tariff exposure is manageable, so we don't expect much of an impact on gross margin at the current tariff levels.

In terms of operating expenses, we expect to realize continued leverage in general and administrative expenses as we efficiently scale the business, partially offset by increased cost to support operating as a public company as well as investments in the Owned Brands team and infrastructure. To a lesser extent, we also expect to realize some modest leverage on the fulfillment line as our investments in 2019 provide greater efficiencies in our operations, offset by ongoing macro cost pressure within the selling and distribution line item.

We will continue to invest in customer acquisition and retention and expect marketing expense to remain relatively consistent as a percentage of net sales year-over-year in 2020. There is variability from quarter-to-quarter on all of these metrics for a variety of reasons, including increased marketing investment in the second quarter in connection with our marquee Revolve Festival event.

Adjusted EBITDA is expected to be between $56 million and $61 million, which represents growth of 1% to 10% over fiscal 2019. This equates to an adjusted EBITDA margin of 8.2% to 8.7% as compared to 9.3% in 2019. Our expectation for a decline in adjusted EBITDA margin is entirely attributable to the gross margin pressure referenced earlier.

There are a few other guidance assumptions I'd like to call out for 2020. We expect a tax rate of approximately 25% for the full year. We expect weighted average diluted shares of approximately 72 million. We expect total capital expenditures of approximately $5 million, a meaningful decrease from CapEx of $12.5 million in 2019.

Finally, we would like to reiterate our commitment to our long-term targets: top line growth of 20% or better; gross margin of 55% or better; and an adjusted EBITDA margin target of 14%.

We strongly believe that the 2020 initiatives that Mike and Michael discussed will position us to achieve these longer-term targets.

Now I'll turn it back over to Michael.

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Michael Mente, Revolve Group, Inc. - Co-CEO & Director [6]

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2019 was a great year and a testament to our long-term focus on growth and profitability. We're excited to be here sharing our story through the public markets. And while we've been doing this for 17 years, it truly is just the beginning. We're excited for the future and the opportunities ahead of us.

With that, I'll turn it over to the operator for your questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from Justin Post from Bank of America.

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Justin Post, BofA Merrill Lynch, Research Division - MD [2]

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Great. Definitely saw some progress with inventory growth on the balance sheet. But just wondering what's currently on the balance sheet that's causing the gross margin pressure? Maybe go through new versus old? And what's your expectation for full price sales in the first half?

And then maybe a bigger picture question, I know the Owned Brand mix was a big long-term margin driver that's supposed to help in 2021 and going forward. Is it a 1-year reset and then you think you'll start seeing the Owned Brand really increase as a percentage of sales? How are you thinking about that over the next 3 years?

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Jesse Timmermans, Revolve Group, Inc. - CFO [3]

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Yes. Sure, Justin. This is Jesse. So kind of working through your questions in order. To your point, we made great progress on the inventory going from plus 40% in Q2 to plus 30% in Q3 and then at a plus 15% at the end of the year, all while investing in FORWARD at the same time. And so we feel good about that, but there still is a component of that inventory that is marked down and it's higher than we'd like. And that will take us a little while to work through, as we indicated last quarter, it will take a few quarters to do that. So that's where the impact on the gross margin came both in the fourth quarter and as we look ahead to the first half of 2020.

If you combine them, in your second question, the Owned Brand mix, still very much a core pillar of the business and a gross margin driver over the long term. But this is a reset period. We've invested heavily. It went from 30% in 2018 to 36% in 2019. So we are reinvesting there. But as we look ahead into 2021, again, still a growth driver and we expect that penetration to then reaccelerate.

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Operator [4]

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Your next question comes from Oliver Chen from Cowen.

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Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [5]

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Regarding the markdowns and the higher-than-normal mix of markdown inventory, how did that go relative to your expectations? And what does the outlook look for in terms of the receipts of new inventory going forward and what you'll plan to do with trying to reinstate that over time?

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Jesse Timmermans, Revolve Group, Inc. - CFO [6]

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Yes. The markdowns -- the full price sales were strong at 79% for the year. So as ratio of markdown and full price, full price remains strong. But within that markdown category, the discounts were deeper and that's what impacted us in Q4.

The other thing in Q4 to think about, as Mike mentioned in the prepared remarks, is that demand was strong. It's our highest year-over-year traffic growth quarter of the year. So the demand was there, but the new, fresh receipts, as we work through this inventory situation, were lower, which then impacted the conversion, and ultimately, the net sales.

So again, we'll continue to work through that. Great progress. But there is a near-term impact as we head into the first half of 2020. And then I forgot your second question.

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Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [7]

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Regarding new inventory and -- as far as the future.

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Jesse Timmermans, Revolve Group, Inc. - CFO [8]

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New inventory, yes, yes. And we feel good about the quality of the new inventory coming in. But we are still working through this, so there is slightly lower mix of newer, fresher inventory, which contribute to that demand or the conversion situation.

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Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [9]

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And Jesse, regarding deeper markdowns that you experienced, what does your guidance assume in terms of the deepness of the markdowns going forward?

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Jesse Timmermans, Revolve Group, Inc. - CFO [10]

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Yes. We don't speak to the specific factors behind the markdowns, depth or mix in full price versus markdown. But our margin assumption for the full year 2020 and the EBITDA assumption there does factor this in. And as we indicated, we expect the 2020 overall gross margin to be lower than that Q4 margin that we posted.

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Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [11]

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And a follow-up is on Owned Brand recalibration, as you spoke to it. Part of what you mentioned was people and different capabilities. Can you elaborate on the timing and what factors will be important as you build this, and does it change how you might think about your long-term gross margin potential? It sounded like you were comfortable with long-term targets.

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Michael Mente, Revolve Group, Inc. - Co-CEO & Director [12]

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Yes. Going backwards we're -- this is Michael here, definitely comfortable with the long-term target, more excited than ever. I think what we're really seeing is our data-driven merchandising, identifying a wealth of opportunities and that's just sprinting to capture all those opportunities, but it's clear that additional investments will be necessary.

Majority of those investments will be team, people and processes. Next to no CapEx is really just developing the in-house know-how to diversify our offering across price points and categories and such. What was the other multipart question there?

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Michael Karanikolas, Revolve Group, Inc. - Co-CEO & Director [13]

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I think that was it.

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Michael Mente, Revolve Group, Inc. - Co-CEO & Director [14]

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Is that everything? Anything else, Oliver?

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Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [15]

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Yes. Related to that, Michael, which products and categories might have the most opportunity? It seems like outside of dresses or tops is where there could be opportunity.

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Michael Mente, Revolve Group, Inc. - Co-CEO & Director [16]

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It's really quite diverse. I think if you look at the kind of the price category matrix, there's a number of opportunities outside of dresses and tops. But if you do look at dresses and tops, we see a very exciting opportunity there in the upper-tier price points. We've had great progress with the below-the-average superdown product and that's been important to us for many seasons out.

But looking forward, we do think that in the higher upper end range is a really exciting opportunity. We don't see a lot of competition there. We have tested product there with Rêve Riche recently and it was phenomenally successful. But that was just a small product set. And we really need to invest in terms of like the team and the capabilities to redo that at scale.

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Operator [17]

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Your next question comes from Michael Binetti from Crédit Suisse.

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Kristina Casey Katten, Crédit Suisse AG, Research Division - Research Analyst [18]

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This is KC Katten on for Michael. I guess I wanted to dive in a little bit more on what you're seeing around coronavirus. Can you talk through what sort of impact you're seeing on the business today, both on the revenue side and supply chain side? I know you talked about the 1 to 3 percentage point negative impact. Can you help us understand the assumption behind how that should show up on the P&L and whether there's any sort of mitigating factors you see?

And I guess, even on cadence, are you assuming the supply chain impact is more of a second quarter issue relative the first quarter? Any color there would be helpful.

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Jesse Timmermans, Revolve Group, Inc. - CFO [19]

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Yes, yes, sure. So I guess, first of all, our hearts go out to those impacted and our partners in China. But as we get into it and think about that 1- to 3-point negative impact that we indicated in the prepared remarks -- and I apologize if this might be a little bit lengthy, but I think it's important to really frame this one out because it is very uncertain.

There's a lot of moving pieces right now. So if we start with that, 1- to 3-point negative impact on the top line in 2020. And first of all, framing that as a supply impact versus a demand impact. Our relative sales mix from the Greater China region is very small. So for us, it's primarily a supply impact. And that supply impact we're estimating right now to be a 3- to 4-week delay in shipments from China. So if you look at that 3 to 4 weeks, first of all, we have most visibility into our own brand supply chain versus the third-party supply chain. So if we look at that and if you kind of quantify that, 36% of our sales in 2019 was our Owned Brands and then the remainder was the third party. Within Owned Brands, 75% to 80% of our supply is sourced from China. And then on the third-party side, 35% to 40% is sourced in China.

So if we look at that and then drill just one click deeper on the Owned brand supply chain, generally speaking, and just to back up a little bit, workers were due back to work in the factories around February 10 following the Lunar New Year. But with the delay, of course due to the virus, their return to work was impacted. We've been in pretty close touch with our factories. And not all factories that -- those representing about 80% of the supply.

And of those that we've talked to, 75%, plus or minus again, because it is very fluid, are back to work at some capacity, but important to call out that it's some capacity. For most, it's in that 10% to 50% capacity from what we're hearing. And again, of those we've talked to, they expect to be not at full capacity, but kind of in that 80% range by early to mid-March.

So kind of if you triangulate on that February 10 return date to the early to mid-March near full capacity, that's where we get our 3- to 4-week estimate on the delay in supply chain. So that feeds into your question on first versus second quarter impact. We think it is a first and second quarter impact, but it does depend on that -- how long that delay is.

Again, very uncertain, a lot of things moving. Case in point, we just learned late yesterday that market appointments in Paris and Milan are now being canceled or delayed due to the outbreak there. That piece is not factored into our guidance just due to the timing of when we learned that. We're not seeing any impact from that yet, but that could start to have an impact on the higher price point European supply in the FORWARD segment.

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Kristina Casey Katten, Crédit Suisse AG, Research Division - Research Analyst [20]

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Got it. That's really helpful. And then, I guess, maybe switching to AOV. You called out the 3% AOV growth that you saw in fourth quarter as the first kind of positive growth you've seen in 9 quarters, and I think you said trends were positive at both REVOLVE and FORWARD. It's somewhat surprising, I guess, given the elevated markdown you've been working through on the REVOLVE side of the business.

Can you maybe help us unpack the AOV a little bit to understand what drove the strength in 4Q, and I guess, your confidence behind that AOV should continue to improve slightly in 2020?

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Jesse Timmermans, Revolve Group, Inc. - CFO [21]

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Yes, yes, for sure. And the increase in AOV is what we expected. Stepping back into late 2018, into early 2019 is when we really invested in behind the launch of the lower price points, specifically superdown. So we saw over-index of new customers, orders, orders outpacing significantly net sales and, therefore, the decrease in AOV for the past several quarters. We've cycled through that and have seen, to your point, both strength in the REVOLVE segment and the FORWARD segment.

But to your point, and important to call out that, that is despite the higher levels of markdowns within the markdown mix, and also contributing to that is the increase in mix of the FORWARD segment as FORWARD outpaced the REVOLVE segment.

So we feel good about AOV. Looking ahead into 2020, we expect continued slight increases in that number, which will then provide some leverage on the cost structure as well as there's less units moving through the system.

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Operator [22]

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

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Abigail Zvejnieks, KeyBanc Capital Markets Inc., Research Division - Associate [23]

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This is Abi Zvejnieks on for Ed. I have 2 questions. Could you talk about the pacing of the investments in the private label capabilities? And maybe in hindsight, how could the private label issues been prevented by augmented capabilities? And then understanding just that you have less product now given the inventory receipts, how has customer receptions been of these newer products?

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Michael Mente, Revolve Group, Inc. - Co-CEO & Director [24]

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I think the second half of your question cut off. Do you mind repeating it?

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Abigail Zvejnieks, KeyBanc Capital Markets Inc., Research Division - Associate [25]

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Oh, yes. So how has the customer acceptance been of the newer products, given that the inventory receipts have been less?

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Michael Mente, Revolve Group, Inc. - Co-CEO & Director [26]

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Well, starting with -- we don't have a quite private label division but our Owned Brand division is that the investments will be made quite gradual, steady over time, starting with some senior leadership positions and then building up in teams, and it will be a little bit more gradual path over the next few years.

I think kind of -- in line with kind of like our overall growth and profit-oriented philosophy, I think there's always going to be periods where we're pushing and pushing aggressively and we push a little bit too hard. I think that's by design in terms of how we operate the business. So I think this is parallel in other segments of the business.

There's a wealth of opportunities, and I think that ultimately, if we don't have hiccups at times, that means we're moving too slow. So I think this is a typical cadence of the business as you're seeing in other segments like FORWARD right now.

As far as new receipts and such like that, I think we're seeing that across the board. Additionally -- no, a greater quantity that we received in Q4 would have been, with hindsight, a little bit more optimal. But as we're seeing a lot of improvements with our overall inventory position on a year-over-year basis as well as on a term basis, it's quite clear that our shifting inventory strategy is really paying off.

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Operator [27]

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Your next question comes from Kimberly Greenberger from Morgan Stanley.

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Alexandra Ann Straton, Morgan Stanley, Research Division - Research Associate [28]

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This is Alex Straton on for Kimberly Greenberger. You said you still expect to have a few quarters of REVOLVE segment gross margin pressure as you work through that elevated inventory levels.

Could you give us a sense of how much of the inventory backlog you've cleared through and what types of items comprise inventory backlog?

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Jesse Timmermans, Revolve Group, Inc. - CFO [29]

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Yes, yes. So maybe, again, working through the quarter-to-quarter cadence from plus 40 in Q2 to plus 30 in Q3 and then plus 15 at the end of the year. And that plus 15 year-over-year is an overall inventory mix. So that includes the investment in FORWARD. So we actually feel really good about the progress we've made in working through that REVOLVE segment inventory. But as we indicated, there still is a higher-than-desired mix of markdown products within that inventory.

So although the overall inventory levels are healthy with plus 15 being lighter than net sales growth for the quarter and for the year, we've still got some to work through on that markdown component. It's not -- you can go on the site and look at the markdown mix by SKU and call it roughly 50-50. It's not to that level just due to the cost of the inventory. But we still have a couple of quarters to work through that.

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Alexandra Ann Straton, Morgan Stanley, Research Division - Research Associate [30]

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Great. And then maybe just one quick follow-up is just on the REVOLVE segment gross margin being down for the full year. Can you just give us a sense of kind of the cadence throughout the quarter, and what are the components just throughout the year?

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Jesse Timmermans, Revolve Group, Inc. - CFO [31]

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Yes, yes. Maybe starting with the second part first on the full year cadence. We typically see the highest gross margin in Q2, and that's relatively consistent year-to-year with that being our peak season and Revolve Festival and heading into summer and that festival season.

With -- for the Q4 dynamic, there wasn't anything significantly intra-quarter due to seasonality. We followed our same kind of sale and markdown cadence that we have in the past, so we weren't necessarily more promotional than other years. It was just that the depth of markdowns within that markdown inventory and working through this inventory position.

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Operator [32]

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Your next question comes from Mark Altschwager from Baird.

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Mark R. Altschwager, Robert W. Baird & Co. Incorporated, Research Division - Senior Research Analyst [33]

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Great. So as we head into the spring season, I think that's typically when you see some of the greatest social media activity of the year coinciding with your Revolve Festival. I was hoping you could dig into some of the changes you're planning this year, some of the initiatives to drive some greater buzz around that event and brand activations. And I do think you mentioned some plans for increased marketing investment in the second quarter relative to the rest of the year.

And then as a follow-up, I think you indicated that you expect active customer growth to be in line with the revenue growth for the year, which would imply net adds that are maybe in the low to mid-200 range, I think, lower than we've seen in the last couple of years, kind of despite those marketing plans that you had talked about. So hopefully, you could talk a little bit more about your thoughts there as well.

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Jesse Timmermans, Revolve Group, Inc. - CFO [34]

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This is Jesse. Maybe I'll start with the second part first and then hand it over to Michael. That new customer addition cadence and the active customer cadence is going back to that launch of lower price points in the back half of '18 and early 2019, where we saw customers and orders over-index the pace of net sales. So now as we comp through that, we expect those to converge as we started to see this quarter. And then kind of linked into that is that AOV dynamic.

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Michael Mente, Revolve Group, Inc. - Co-CEO & Director [35]

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And to take that first part of the question. I think from a consumer perspective, if you look at what we have going over the next few quarters. On the macro level, it's going to appear to be a lot more of the same. Festivals, very, very important for us, and we're deep into the planning process over there, and they will continue to be -- Revolve Around the World trips and such, really highlighting the Revolve lifestyle.

But a little bit behind the covers, a little bit behind the scenes, there's going to be a lot of fine-tuning and tweaking things that, of course, for competitive reasons, we wouldn't want to get too into the details. But as we look into like last year, we've definitely seen, in a competitive marketplace, continued efficiency with the adaptation and evolution of our strategy.

At the same time, there's going to be a lot of continued investments and experimentation and testing a lot of newer things. We see a lot of interesting things going on, new or existing -- newer platforms like TikTok, existing platforms like YouTube and such. We're really in the phase of trying to leverage that and really make it repeatable. And then again training programs where we can scale this in a very, very aggressive way. So these are all things that we should look forward to be seeing in the next few quarters or so.

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Operator [36]

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Your next question comes from Bob Drbul from Guggenheim Securities.

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Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [37]

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Just a couple of questions from me. The first one is just generally on customer acquisition costs, I guess, on the REVOLVE segment also in the FORWARD segment, can you just talk about trends that you're seeing there? How it's running throughout the business?

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Jesse Timmermans, Revolve Group, Inc. - CFO [38]

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Yes, sure. Thanks, Bob. Michael touched on this in the question just prior, but we've been able to remain very efficient on the marketing spend. If you look at that as a percentage of net sales, we gained 10, 20 basis points on both the fourth quarter and the full year. If you also look at marketing per order or per active customer, that's also gained efficiency in the quarter.

So we feel good about the level of efficiency there, continuing to gain efficiencies. But at the same time, we're not going to take our pedal off -- or our foot off the pedal, and we're going to continue to invest there, both in acquisition and retention. On the other side of that, kind of equation is the kind of the behavior of our repeat customers, which continue to be very strong, retained 89% of sales from prior year cohorts in 2019, which was consistent with 2018.

The active -- the portion of active customers made up by existing customers continues to increase. And they continue to order at a greater frequency and at higher AOVs, consistent with the trends that we've seen in past cohorts.

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Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [39]

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Got it. And can you elaborate a little bit more on the international side of the business in terms of what you're seeing there? And I'd be curious, just even into the first quarter, what you're seeing, anything around differences versus the fourth quarter.

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Michael Karanikolas, Revolve Group, Inc. - Co-CEO & Director [40]

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Yes, Mike Karanikolas here. We're seeing some really fantastic momentum on the international side of the business. A lot of it is really the foundational pieces that we've been putting in place in the preceding quarters. But as we talked about in previous calls, we've been experiencing a lot of macro headwinds in the forms of currency, some issues in our Asia region and other things.

And so as we've comped and cycled through these macro headwinds, we're finally starting to see the fruits of our labor and some really nice growth there. Speaking to Q1, we don't talk about kind of intra-quarter dynamics within the quarter. But I can say we're confident on the momentum of the international business, and we feel like the investments are going to continue to pay off over time.

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Robert Scott Drbul, Guggenheim Securities, LLC, Research Division - Senior MD [41]

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Got it. And if I could just sneak in one more. Just on Instagram Checkout, in terms of how that's going and where that stands and sort of what you're learning and what you've learned so far, can you just talk about that? I don't think you guys have talked about that at all.

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Michael Karanikolas, Revolve Group, Inc. - Co-CEO & Director [42]

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Yes, definitely. So Instagram Checkout is a very interesting program to us. And we're really excited that we're one of Instagram's first partners on that program. It continues to be small and nascent. It's something that Instagram's continued to iterate on. We're excited about the long-term opportunity of it. But it remains a work in progress, and at this point, it's not yet a large part of our business.

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Operator [43]

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Your next question comes from Ralph Schackart from William Blair.

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Ralph Edward Schackart, William Blair & Company L.L.C., Research Division - Partner & Technology Analyst [44]

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I just want to circle back on Owned Brand collaborations. Certainly seeing some more advertising around them, and I think, Michael, you talked about a little bit on today's call. Just curious how this fits into the overall long-term strategy, maybe how they're performing relative to the noncollaboration brands.

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Michael Mente, Revolve Group, Inc. - Co-CEO & Director [45]

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Yes. This is our Owned Brands, it's particularly -- influencer collaborations are going quite well. I think quite similar to all of our brands, if we do take some time to really build out the initial launch, I think it's a little bit different than compared to a lot of competitors who will have a flash at a launch period, and then it really is not built for the long term. Whereas for us, it's really about investing and building and creating the true brand that we can continue to grow.

And so all of our existing influencer brand continue to grow well. The most 2 notable ones, the Song of Style and the Camila Coehlo are not even a 1-year deep, so we're still in the process of learning kind of what a -- on a full calendar year, what the collection should be like, what we should entail, and we're seeing great progress there. Still, that would continue to be areas of investment, and there'll also be areas where we will see some new ones coming in the future as well.

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Ralph Edward Schackart, William Blair & Company L.L.C., Research Division - Partner & Technology Analyst [46]

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Good. Maybe if I could add just one more. On the coronavirus situation, I know it's very fluid, but Jesse, you talked about, I think, 75% to 80% being sourced from China. If this continues to persist, what are the opportunities for you to perhaps source from other regions? And what sort of plans do you have in place in case this, unfortunately, continues to trend out?

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Jesse Timmermans, Revolve Group, Inc. - CFO [47]

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Yes, yes. We did start a diversification effort back in, let's call it, back in the 2018 era with the trade wars. So there is some opportunity there. We continue to make progress. It's still not a significant portion of the supply, so we are still over-indexed in China. We're working on various things. We're leveraging third parties, but it is very fluid. So we're kind of taking it day-by-day at this point.

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Operator [48]

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Your next question comes from Ross Sandler from Barclays.

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Ross Adam Sandler, Barclays Bank PLC, Research Division - MD of Americas Equity Research & Senior Internet Analyst [49]

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It's Ross Sandler for Ross Sandler. A couple of questions. Mike, you mentioned traffic was the strongest of the year in the fourth quarter. I guess what channels are driving the traffic acceleration? And your guidance doesn't really factor in that conversion rate that you talked about picking up. So I guess other than fresher inventory, what things are you working on to close that gap? And then I've got a couple of follow-ups.

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Michael Karanikolas, Revolve Group, Inc. - Co-CEO & Director [50]

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Yes, definitely. So from a traffic standpoint, what's particularly great to see was a lot of it was essentially, call it, unpaid traffic. And I use that term loosely because a lot of the brand activations that we do and brand building that we do, we do spend money on, and that causes a lot of growth there. So that was fantastic to see.

And we made some shifts in our marketing strategy on the brand marketing side that we think paid off well in the fourth quarter and are going to continue to pay off through the upcoming year. So we're really excited about that. And then with regards to expectations for conversion rates, we're going to continue to see light in inventory receipts, particularly through the first half of the year as we just continue to optimize our inventory position.

One great side effect of that is a pretty nice cash flow, and we saw that in the fourth quarter and we should continue to see that through the first half of the year. But that will continue to put some pressure on conversion rates. And certainly, until we kind of fully work our way through the situation, we don't want to assume anything changing too dramatically, kind of, to the higher side until we actually see those results. So I think as we look at the year ahead, the first half of the year is going to be a little bit tougher growth-wise, with coronavirus, with the lighter inventory receipts. And then as we get into the back half of the year, we're hoping to see some nice acceleration.

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Ross Adam Sandler, Barclays Bank PLC, Research Division - MD of Americas Equity Research & Senior Internet Analyst [51]

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Got it. Okay. And then the second question is, other Mike, you mentioned TikTok and YouTube as opportunities. So I guess, can those channels, I guess, collectively, be as big as Instagram for you guys? What would it take for that to happen? And what are the things that you're doing to kind of ramp those channels in 2020? And then I've got one more follow-up.

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Michael Mente, Revolve Group, Inc. - Co-CEO & Director [52]

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Yes, I think in 2020, it's hard to predict -- sort of in the long term it's hard to predict, but I think that's kind of the balance of -- kind of my -- as we're approaching things. If we rewind over time in the past, of course, Instagram's had an incredible -- been a core incredible job for us. But prior to that, we know it was a very, very parallel shift from Facebook to Instagram. So it's something we're monitoring closely.

And the other thing that we're really taking a look at is that in each of these channels kind of works together in cohesion based on their platform, based on their audience, based on their format. They really work complementary.

And I think a lot of times, we're also seeing that a lot of the influencers that we work with will be worked with on a cross-channel platform. So it's really probably not our mindset or our perspective to really view them as the replacement for each other, more as a supplement and a complement.

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Ross Adam Sandler, Barclays Bank PLC, Research Division - MD of Americas Equity Research & Senior Internet Analyst [53]

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Got it. Okay. And then last one. You guys mentioned the loyalty program. And I think this has been live for a little while now, I think, maybe a year or so. So I guess, can you just give us a little history on the loyalty program? And then what kind of frequency do you see from customers that are in the loyalty program versus just the regular customers? And what percent of the business is loyalty today, and where do you think that could get to, long term?

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Michael Karanikolas, Revolve Group, Inc. - Co-CEO & Director [54]

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Yes, definitely. So just to clarify, the loyalty program has been laid to a small set of customers as part of a long-running beta test that we're running for quite some time. We still haven't officially launched the program to our entire set of customers. I think as we noted earlier on the call, we're expecting to do a full launch sometime in advance of Revolve Festival this year. So we're really excited about the impact that can have for the business. What we've seen from the beta test is that there is a significant lift in the group of customers that received the option of access to the loyalty program versus those that didn't. So we're excited to see what a full launch can do.

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Operator [55]

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Your next question comes from Susan Anderson from B. Riley FBR.

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Susan Kay Anderson, B. Riley FBR, Inc., Research Division - Analyst [56]

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I guess I was curious within Revolve between the Owned Brands and the branded product. Did you see any difference, I guess, in sales growth? And then also, did you have to discount the branded product in addition to Owned Brands? Or is this really just an Owned Brand issue?

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Michael Karanikolas, Revolve Group, Inc. - Co-CEO & Director [57]

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Yes, Mike here. So the primary issue is on the Owned Brand side. We really invested heavily in that area. We got a little ahead of ourselves in terms of the magnitude of those investments and so that pressured inventory levels and it has resulted in us having to mark down more than we liked there.

That being said, whenever we have excess inventory in any area of the business, that can pressure the overall business. And so there is some impact on the third-party side, but we think it's mostly kind of a side effect of the positions we built up elsewhere.

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Susan Kay Anderson, B. Riley FBR, Inc., Research Division - Analyst [58]

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Got it. Okay. And then just a follow-up on the gross margin cadence for 2020, so it sounds like you expect first half to be down year-over-year. Should we expect that then to inflect up year-over-year or flattish in the back half? Or is it going to be pressured all year?

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Jesse Timmermans, Revolve Group, Inc. - CFO [59]

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Yes. Pressured all year, over-indexed in the first half of the year as we work through this inventory and then it should return to that normal cadence of seasonality. But looking at the full year, which is what we guided to, you'll see pressure for the full year.

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Susan Kay Anderson, B. Riley FBR, Inc., Research Division - Analyst [60]

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Got it. Okay. But you do expect to clear through the excess product by the first half? Or should it linger into the second half, too?

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Jesse Timmermans, Revolve Group, Inc. - CFO [61]

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That's our current expectation. Yes, it's that -- we started this -- we communicated last quarter that it would take a few quarters. We've made great progress for the first quarter of the few quarters, but it will take a couple more.

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Susan Kay Anderson, B. Riley FBR, Inc., Research Division - Analyst [62]

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Got it. Okay. And then lastly, just on the CapEx, I think you said $5 million for this year versus $12 million last year. Can you maybe just talk about the drivers and difference there?

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Jesse Timmermans, Revolve Group, Inc. - CFO [63]

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Yes. Last year, 2019 being last year, we invested heavily in both the consolidation of our fulfillment centers into 1 fulfillment center with capacity that will put us out past 2023. And then layering on top of that, we invested in automation. So that was roughly $10 million in that project. So we don't expect to do a project of that magnitude in 2020, but we'll continue to invest in the business, both in technology, fulfillment, operations, et cetera.

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Operator [64]

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We are out of questions today. I would now like to turn the call over to management for closing remarks.

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Michael Mente, Revolve Group, Inc. - Co-CEO & Director [65]

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Well, thanks, everyone. It's been an exciting year for us, and we're only, I guess, 6, 7 weeks into the year, but we're really into a lot of the exciting things that we've talked about. We're excited to share updates with you guys soon.

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Operator [66]

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Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.