Revolve Group, Inc. (NYSE:RVLV) Q4 2023 Earnings Call Transcript
Revolve Group, Inc. (NYSE:RVLV) Q4 2023 Earnings Call Transcript February 27, 2024
Revolve Group, Inc. beats earnings expectations. Reported EPS is $0.05, expectations were $0.02. Revolve Group, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Revolve's Fourth Quarter and Full Year 2023 Results Conference Call. [Operator Instructions] 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.
Erik Randerson: Good afternoon, everyone, and thanks for joining us to discuss Revolve's fourth quarter and full-year 2023 results. Before we begin, I'd like to mention that we have posted a presentation containing Q4 and full year 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, including statements related to our future growth, our inventory balance, our key priorities for 2024, including related investments, product category expansion, cost saving measures, international expansion and technology enhancements, our marketing events, our partnerships and our outlook for net sales, gross margin, operating expenses and 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 this afternoon's press release, as well as other risks and uncertainties disclosed under the caption Risk Factors and elsewhere in our filings with the Securities and Exchange Commission, including, without limitation, our quarterly report on Form 10-Q for the quarter ended September 30, 2023, and in our annual report on Form 10-K for the year ended December 31, 2023, which we expect to file with the SEC on February 27, 2024, 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 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 a substitute for or superior to the financial information prepared and presented in accordance with GAAP. And our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliations of non-GAAP measures to GAAP measures as well as the definitions of each measure, their limitations and our rationale for using them can be found in this afternoon's press release and in our SEC filings.
Joining me on the call today are our Co-Founders and Co-CEOs, Mike Karanikolas and Michael Mente; as well as Jesse Timmermans, our CFO. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn it over to Mike.
Michael Karanikolas: Hello, everyone, and thanks for joining us today. We ended a challenging year in 2023 with a solid fourth quarter, highlighted by a return to growth in the Revolve segment, a year-over-year increase in our consolidated gross margin and encouraging early progress in our efforts to drive efficiencies in our global logistics operations. I'll start by briefly discussing highlights for our fourth quarter results before shifting to the full-year 2023 and closing with our key priorities for 2024. Net sales were $258 million in the fourth quarter, a decrease of 1% year-over-year and a slight improvement from the 4% decline in the third quarter of 2023. U.S. net sales decreased 2% and were outpaced by international net sales increasing 7% year-over-year.
Our international gains were highlighted by exceptional growth in Mexico and improved year-over-year growth in Europe and the UK, partially offset by declining sales in China and the Middle East. By segment, REVOLVE net sales increased 1% year-over-year in the fourth quarter, our first year-over-year increase in four quarters. FWRD net sales decreased 10% year-over-year, consistent with external reports from the luxury sector. As a relevant benchmark, Earnest Analytics reported that its credit card data reflects a 10% year-over-year decrease in luxury apparel spending by U.S. consumers during the holiday season. Now, moving below the revenue line. As a testament to our progress in rebalancing our inventory, our gross margin expanded to 52.0% in the fourth quarter, representing our first year-over-year increase in gross margin in six quarters.
And with our inventory dynamics now in a very good place, in early 2024 we are back to year-over-year growth in receipts of new inventory for the REVOLVE Segment. Net income for the fourth quarter was $3.5 million, or $0.05 per diluted share, and adjusted EBITDA was $9 million. As expected, both profitability measures declined year-over-year. I will now shift to a review of our performance and accomplishments for the full-year 2023 before briefly touching on our key areas of focus for the coming year. From day one, Michael and I have approached the business with the customer at the center of everything we do. Even through a very challenging year, we continued to deliver an exceptional experience to our customer base of 2.5 million active customers, increasing our already exceptional customer satisfaction score by more than a full point year-over-year.
Our active customers grew 9% year-over-year and we see a huge opportunity for further expansion, in the U.S and overseas. And, importantly, we drove a year-over-year decrease in our average cost to acquire customers in 2023. We believe the reduced CAC illustrates the strength of our brand and execution by our team in optimizing spend across channels and audiences within a competitive environment. Now, shifting to our top line results. Net sales in 2023 were $1.1 billion, a decline of 3% year-over-year, despite the healthy growth in active customers. Our customer demographic faced increased macro pressures in 2023, which we believe contributed to the normalization of spending levels from the significant apparel spending in 2021 and 2022 coming out of COVID lockdowns.
The normalization of purchases by our customers in 2023 is also evident in a key net sales retention metric. Recall that once a year we disclose the revenue retention from our prior-year cohorts, defined as the revenue retention rate from the previous year for all existing customers who had purchased from us in a prior year. Since this retention metric has experienced significant variability in the past four years for obvious reasons, we believe it is important to look past the peaks and valleys. In 2023, active customers placed an average of 3.42 orders, which is 8% higher than in 2019. Also importantly, the average of our cohort net sales retention rates reported over the past four years is 92%, which is higher than our 89% net sales retention rate reported in 2019.
Looking at the category performance. While the net sales of dresses, our largest category, was pressured in 2023 after increasing nearly 50% in 2022 and expanding at an even faster rate in 2021. I am excited by our progress in emerging categories. Our emerging areas of beauty, men’s and home collectively increased by more than 20% in 2023, further validating our opportunity to expand our share of wallet and helping to offset the 5% decline in net sales from dresses. We executed very well on a primary goal we set for 2023: to rebalance our inventory for growth and efficiency. Successful execution of this initiative helped to drive a meaningfully higher mix of net sales at full price in the second half of 2023 when compared to how we started the year.
This sets us up well entering 2024. And we continue to operate profitably and generate significant cash flow. While we are not satisfied with our adjusted EBITDA margin in 2023, our profitable and cash generative business remains a key competitive advantage. In 2023, we generated $43 million in operating cash flow and $39 million in free cash flow, an increase of 85% and 114%, respectively. Our consistent cash flow generation gives us the capacity to invest throughout the cycle at a time when many peers have no choice but to significantly reduce investment. Our strong cash flow has further strengthened our balance sheet with $245 million in cash at year end 2023, even while investing $31 million in stock repurchases during the year to enhance shareholder value.
Our cash position has increased by nearly 4x compared to the $65 million in cash on our balance sheet at year end 2019. Finally, we meaningfully advanced our technology and personalization capabilities during 2023, further elevating the customer experience. Leveraging AI, we significantly improved the recommendation of similar items using visual images, expanding conversion opportunities and further elevating our navigation for customers. Driving continuous improvement in personalization and site navigation is particularly important since we offer a broad assortment of more than 100,000 styles at any given time. I will wrap up with a discussion of our key priorities for 2024, which are aligned with our focus on maximizing value over the long term.
First, we will continue to efficiently invest to expand our brand awareness, grow our customer base and strengthen the connection with the next generation consumer. Michael will talk about our brand building initiatives in his remarks. Second, we will continue to build on the successful expansion of our assortment into adjacent product categories. We have earned our customers’ trust through the strength of our brands, platform, product curation and our excellent customer experience. The impressive growth of our beauty and men’s businesses in 2023 validates our ability to tap into this customer loyalty and trust to drive adoption in emerging categories. Third, we remain extremely committed to driving cost efficiencies within our global shipping and logistics operations while maintaining a laser focus on our outstanding customer experience.
In 2023, we successfully ramped our newer east coast fulfillment center that brings us closer to many of our customers, which we believe will enable us to realize further cost savings and elevate service levels through shorter shipping distances. Supported by a new AI technology application that strategically optimizes inventory rebalancing between our fulfillment centers to match consumer demand, among many other initiatives, I am confident that in 2024 we will begin to drive efficiencies in our logistics costs year-over-year. Fourth, we will further expand our international presence, where we see exciting opportunities to invest in our customer acquisition and in further elevating service levels to drive growth. We recently launched a new marketing communications channel in Mexico that has helped us to increase consumer engagement and drive even faster new customer growth in what is now our third largest market outside of the U.S. Finally, we will further enhance our technology stack and leverage AI and other technologies across the business to drive growth and efficiency.
Michael and I are huge believers in the power of AI. Since day one, we have leveraged our own proprietary technology to run nearly all aspects of our business, delivering capital efficiency that is highlighted by our capital expenditures averaging only 0.6% of our net sales since 2016. We believe our data-driven mindset and culture of technology innovation positions us well to continue to expand the use of AI technology throughout the organization to drive results. To summarize, we have an unwavering focus on driving profitable growth and market share capture in the years ahead. Like many companies, we continue to face a host of challenges in the current environment and we have a lot of work to do. But in contrast to most fashion e-commerce peers, we have a profitable and cash generative business, proven financial discipline, and key competitive advantages that together enable us to confidently invest in the large opportunity ahead of us.
I would like to thank our talented and passionate team for their incredible efforts, persistence and innovation that reinforces my confidence in our future. Now, over to Michael.
Michael Mente: Thanks, Mike, and hello everyone. As I reflect on 2023, I am proud of our team for overcoming a variety of headwinds to deliver profitability and significant cash flow that further strengthened our balance sheet. We continued to build our brands through innovative and impactful marketing strategies, in the U.S. and overseas. These marketing efforts helped us to increase our active customer base by 9% in 2023, while even further raising the bar on our already outstanding service levels. And customer trust in our brands and delight in our shopping experience helped us to successfully expand into emerging product categories, an exciting long-term opportunity. Most important is that we continue to invest and innovate throughout the company to strengthen our foundation for future growth, which we remain very confident in.
I am excited to continue the momentum in these areas this year. Shifting to the industry landscape. Since our third quarter earnings call in November, there has been a lot happening in our space, particularly among luxury e-commerce peers. Two of the larger luxury ecommerce retailers were recently acquired in distressed buyouts and there is another large luxury e-commerce competitor listed as a discontinued operation by its parent company. And as reported by the Wall Street Journal, Business of Fashion and WWD, there have also been reports of luxury retailers not paying their brand partners on time. While these recent industry headlines may worry some investors, we are excited about the opportunity for us to benefit from industry turmoil. For instance, a major luxury brand group has already announced they will no longer sell their products through one of the e-commerce peers I referred to.
As a profitable company with consistent cash flow generation and focused on creating value over the long term, we believe we are well positioned to emerge as an even stronger player. Our 20-year history has taught us that periods of market disruption can be a great time for us to invest when some others in the space are forced to retrench. With that as a backdrop, I will focus my remarks on our strategy to leverage our financial strength and position in the market to invest in our brand, acquire customers and gain market share over the long term. With the large market opportunity that we believe lies ahead of us, continuing to invest in our core domestic customer remains our number one priority. A highlight of our fourth quarter was the opening of our brand elevating REVOLVE and FWRD Pop Up shopping experience in Aspen, just in time for the holidays.
Launched with a private event hosted by our FWRD Creative Director, Kendall Jenner, we have created something truly special in an aspirational town with a high concentration of wealth. Aspen is also a celebrity hotspot and a nightlife fashion playground where everyone dresses to impress. The REVOLVE and FWRD Pop Up was prominently featured in Vogue’s ranking of the top five designer popups to visit this winter, the only multi-brand retailer featured among iconic luxury brands like Louis Vuitton. And people are visiting and spending while they are there. Foot traffic for the first two months of operation has been impressive, highlighted by appearances from A-listers including Rihanna, Mariah Carey, Lori Harvey, Alessandra Ambrosio, Stella Maxwell, brand partner and snowboarder Shaun White, and featuring experiential events co-hosted by coveted brand partners including Miu Mui, Charlotte Tilbury, Jonathan Simkhai, Rhude, Eterne, and Nour Hammour.
Also exciting is that the Pop Up is our first true integration of our highly complementary segments, REVOLVE and FWRD, under the same roof. In addition to the brand integration that is consistent with our growth strategy, consumer demand at the Pop Up is highlighting our opportunity to further expand into adjacent seasonal categories where our brands are not top-of-mind, such as outerwear, and across a broader range of price points, from beauty products at $25 to handbags of nearly $100,000. Most compelling is the customer engagement in our Aspen Pop Up. More than half of all customers at the pop up are entirely new customers to our brands, reinforcing our opportunity to grow our customer base. And our existing customers and fans have been thrilled to experience and interact with our brands in real life.
Customers are spending significantly more per transaction in the Aspen pop-up than they typically do online, while returning products at a very small fraction of our typical return rate for products purchased online. So, we are very pleased with the learnings from the pop-up so far. If you are in Aspen in the coming weeks, please stop by and see us. As we look ahead, we have some very exciting plans for further investment in our brands in 2024, including a fresh take on our experiential marketing events that we are known for as well as some impactful partnerships in the works that we will be able to share more details on in the coming months. In addition to the large domestic opportunity, we continue to see a very large opportunity to further expand our share in international markets.
In recent months, we have been incredibly active in elevating our brands with aspirational lifestyle events around the globe in key regions including Tokyo, Singapore and the Netherlands, creating brand heat and excitement on social media and press channels coinciding with a solid quarter for international net sales growth in Q4. One reason we chose to activate in Asia during the fourth quarter is that Asia has our largest social media following outside of the U.S. It’s a true testament to the strength of our brands globally, especially considering that we have not yet made significant investments in the region. Drilling into the details by country, China has our second largest social media following after the U.S., underscoring our opportunity for future growth in Asia.
For our recent marketing events in Singapore and Tokyo, content creators were beyond excited to work with us in international markets, collectively delivering more content than we expected of them and contributing to the success of our largest-ever marketing event in Asia. Influencers enthusiastically traveled from China, Taiwan, India, Korea, Australia, Vietnam, Malaysia, Philippines, Europe, Canada and the U.S. to participate in our events. Their collective social following exceeds 100 million followers on Instagram on a combined basis. Of note, nearly half of the hundreds of millions of social media impressions generated by our Singapore marketing event were on native Chinese social media platforms including Douyin, Red, Weibo and WeChat.
In fact, three of the top Chinese influencers generated 30 million views on Douyin alone. It has become a very important part of our international strategy to expand our presence and awareness on these Chinese social media and e-commerce platforms that have a very powerful influence on Asian consumers. I couldn’t be more pleased with how well our Singapore event delivered against this objective. I’ll close with a discussion of our investment in emerging product categories, an area where we see a great deal of opportunity to both acquire new customers and capture more share of our existing customers’ wallet. Beauty net sales increased 49% year-over-year in the fourth quarter, expanding to 5% of net sales from 3% in the fourth quarter of 2022.
Even with such gains year-over-year, 5% of net sales remains well below the double-digit penetration for Beauty net sales that is typical among premium department stores. Contributing to our incredible beauty results was very effective merchandising with the addition of several high impact new beauty brands. Our beauty momentum has remained strong with recent launches of beauty brands including Tarte Cosmetics, Off-White Beauty and Dundas Beauty. I am also excited about our fast-growing Men’s business, supported by an increased marketing focus and merchandise assortment. Men’s has performed extremely well in some key international markets, contributing to our impressive growth in Mexico throughout 2023. While relatively small today, the scale of these areas of business are growing at an attractive rate.
Beauty generated $42 million in net sales in 2023, up from just $11 million in 2019. We are targeting for the emerging offerings of Beauty, Men’s and Home to contribute more than $100 million in 2024 on a combined basis. And this expectation does not include contributions from our plan to expand into additional apparel categories this year to further solidify us as the destination for more aspects of our customers’ lives, supported by marketing initiatives to increasingly emphasize newer categories where we see opportunity. In closing, with the strength of our brand, our strong financial position, our fast paced and nimble operating structure, and our innovative, entrepreneurial mindset, we believe we are well positioned to take market share in the years ahead and build a larger and more powerful collection of brands than we have today.
We remain incredibly excited about what lies ahead of us this year and for many years beyond. Now, I will turn it over to Jesse for a discussion of the financials.
Jesse Timmermans: Thanks, Michael, and hello everyone. I’ll start by recapping our fourth quarter results and then close with updates on recent trends in the business and commentary on our cost structure for 2024. Starting with the fourth quarter results. Net sales were $258 million, a year-over-year decrease of 1%, and a 3-point improvement from our comparison in the third quarter of 2023 as we continue to navigate a challenging environment for consumer discretionary spending, particularly in our luxury segment. REVOLVE segment net sales increased 1% and FWRD segment net sales decreased 10% year-over-year in the fourth quarter. By territory, domestic net sales decreased 2% and international net sales increased 7% year-over-year.
Active Customers, which is a trailing 12-month measure, increased by 33,000 customers during the fourth quarter. This growth expanded our active customer count to 2.5 million, an increase of 9% year-over-year. Our customers placed 2.0 million orders in the fourth quarter, an increase of 3% year-over-year. The increase in orders placed was offset by a decrease in average order value, or AOV, of 1% year-over-year to $303, as well as a year-over-year increase in return rate. Shifting to gross profit. Consolidated gross margin was 52.0%, at the high end of our guidance range. The increase of 57 basis points year-over-year primarily reflects a higher mix of net sales at full price and an increased mix of net sales from the higher margin REVOLVE Segment, partially offset by a lower mix of Owned Brand net sales within our REVOLVE Segment compared to the fourth quarter of 2022.
The gross profit comparison at the segment level is more favorable at REVOLVE than FWRD, underscoring our great progress in rebalancing the REVOLVE Segment inventory. Moving on to operating expenses. A high-level summary is that much better-than-expected efficiency in selling and distribution expenses in the fourth quarter was largely offset by our general and administrative expenses coming in higher than our outlook. Fulfillment costs were 3.5% of net sales, slightly better than our outlook, and higher year-over-year as expected. Selling and distribution costs were 17.8% of net sales, around 120 basis points more efficient than our fourth quarter outlook, and an increase of 24 basis points year-over-year. Our efforts to drive reductions in our global shipping and logistics costs are starting to become visible on our P&L, partially offset by a higher return rate year-over-year in the fourth quarter.
Our marketing investment also came in more favorable than expected, representing 16.4% of net sales, an increase of 104 basis points year-over-year. The increase reflects a planned increase in brand marketing investment and a shift in the timing of events in the fourth quarter of 2023 as compared to the prior year, partially offset by year-over-year efficiency improvements in performance marketing as a percentage of net sales. General and administrative costs were $34.7 million, an increase of 21% year-over-year that included $2.8 million of non-routine import and export fees and an additional $600,000 in costs for the legal matter mentioned last quarter that has now been settled. Our tax rate was 28% in the fourth quarter, up from 24% in the prior year.
Net income was $3.5 million, or $0.05 per diluted share. The 56% year-over-year decline in net income primarily reflects our increased marketing investment year-over-year and increased G&A expenses year-over-year. Adjusted EBITDA was $9 million, a decrease of 40% year-over-year. Moving on to the balance sheet and cash flow statement. For the full-year 2023, net cash provided by operating activities was $43 million and free cash flow was $39 million, an increase of 85% and 114% year-over-year, respectively. Contributing to the strong cash flow metrics were improved inventory dynamics, partially offset by lower net income. Inventory at December 31, 2023 was $204 million, a decrease of 5% year-over-year. The year-over-year decline was four points steeper than our net sales decline, demonstrating the important progress we have made in rebalancing our inventory.
As of December 31, 2023, cash and cash equivalents were $245 million, an increase of $11 million, or 5% year-over-year, and we had no debt. Since the end of 2019, we have increased our cash balance by $180 million. Our strong financial position enabled us to continue to invest in the business while returning capital to stockholders through the repurchase of Class A common shares as part of our commitment to enhancing shareholder value. During the fourth quarter, we repurchased nearly 1.3 million Class A common shares at an average price of $13.94. Approximately $69 million remained on our $100 million stock repurchase program at year end. Now, let me update you on some recent trends in the business since the fourth quarter ended and provide some direction on our cost structure to help in your modeling of the business for 2024.
Starting from the top. The top-line pressure we experienced in the fourth quarter has continued, with net sales through the first eight weeks of 2024 decreasing by a mid-single digit percentage year-over-year. To provide context for our net sales trending for the 8-week period through February 25, remember that in early 2023, we had a much larger assortment of markdown inventory than we do today. Notably, our net sales at full price have increased slightly year-over-year through the first eight weeks of 2024, while our markdown sales have decreased as our inventory today is substantially healthier. With much healthier inventory entering the year, the proportion of our net sales at full price and our gross margin are also much healthier in early 2024 as compared to the same period in 2023.
To assist in your modeling of net sales for the full first quarter of 2024, I also want to highlight that our net sales comparison for the upcoming month of March is easier than the year-over-year comparison we faced through the first eight weeks of 2024, consistent with our commentary on our fourth quarter 2022 earnings conference call last February. Consistent with recent performance, net sales comparisons in the REVOLVE segment continued to outperform the FWRD segment year-over-year in early 2024. Lastly, I would like to point out the difficult comparison we face in international markets in the first quarter, as our international net sales increased 16% year-over-year in the first quarter of 2023. Shifting to gross margin. We expect gross margin in the first quarter of 2024 of between 51.4% and 51.9%, implying a nearly two-point increase in gross margin year-over-over compared to the first quarter of 2023.
For the full-year 2024, we expect gross margin of between 52.5% and 53.0%, an increase of about 90 basis points year-over-year at the midpoint. Fulfillment: We expect fulfillment as a percentage of net sales of approximately 3.5% for the first quarter of 2024. For the full-year 2024, we expect fulfillment costs of between 3.3% and 3.5% of net sales, approximately flat year-over-year, at the midpoint of the range. Selling and Distribution: We expect selling and distribution costs for the first quarter of 2024 to be approximately 18.1%, which implies our first year-over-year decrease in selling and distribution expense as a percentage of net sales in three years. For the full-year 2024, we expect selling and distribution costs of between 17.8% and 18.0%, an expected decrease of roughly 50 basis points year-over-year at the midpoint of the range, as we continue to realize the efficiency efforts we invested in during 2023.
Marketing: We have an active calendar of brand building events in the first quarter, including two impactful events held in Las Vegas around the Super Bowl and dozens of events in Aspen at the REVOLVE and FWRD Pop Up. As a result, we expect marketing in the first quarter of 2024 to be approximately 16.0% of net sales. For the full-year 2024, we expect our marketing investment to represent between 16.0% and 16.2% of net sales, consistent with our marketing investment of 16.1% of net sales in 2023. In terms of sequencing, in 2024, we expect marketing as a percentage of net sales to be more linear than in recent years, particularly in the second quarter. General and Administrative: We expect G&A expense of approximately $33 million in the first quarter of 2024 and between $130 million and $133 million for the full-year 2024.
This implies a 4% year-over-year increase in G&A costs for the full-year 2024, at the midpoint of the guidance range, as we continue to invest in longer term growth initiatives. We expect G&A expense in dollar terms to be fairly steady throughout the year. And lastly, we continue to expect our effective tax rate to be around 24% to 26%, both in the first quarter and in the full-year 2024. To recap, we closed out a challenging year with a solid fourth quarter, highlighted by a return to gross margin expansion year-over-year that we expect will continue in 2024. We also expect to drive efficiencies in our largest operating expense category, selling and distribution costs. And finally, we expect to continue to leverage our financial strength and invest in the attractive long-term opportunity ahead of us.
Now, we’ll open it for your questions.
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