Good afternoon, everyone, and thank you for joining us. My name is Nathan Feather, and I work on Lauren Schenk's small- and mid-cap Internet team at Morgan Stanley. I am excited to be joined by Jesse Timmermans, Revolve's Chief Financial Officer. Thank you so much for joining us today.
Yeah, thanks for having us, Nathan. Good to see you again.
Yeah, good to see you. So before we begin, a few quick housekeeping items. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. With that out of the way, I think it'd be helpful to start with a bit of background here. So can you talk through Revolve's business model, marketing opportunity, and strategy?
Yeah, yeah, of course. So it started 20 years ago. Mike and Michael founded Revolve really essentially out of their garage. A tech guy and a business analyst, so 0 experience in fashion, which was a detriment in the beginning, but really a long-term benefit, where they had to rely on data to make their decisions when it came to fashion. So, kind of fast-forward 20 years later, we have been a consistent grower, and not just growing, but profitable growth. So we've been profitable all but 1 year, back in the great financial recession of 2008, 2009.
So I think that's one of the keys and one of the real differentiators, being founder-led, growing profitably over time, and that's led to a really strong balance sheet and allows us to invest through cycles, such as that we're in right now. And I guess maybe a couple other different aspects. One, I mentioned the data-driven merchandising, really key to the core proposition. Two is our really innovative, best-in-class marketing engine, and that combines performance marketing and brand marketing, leveraging influencers, events, kind of aspirational experiences to really engage with that next-generation consumer. And that's another key, is just really engaging with this next-generation consumer. It is the Millennial, Gen Z consumer that we are focused on. Purchasing power is shifting to her, and I say her in that most of our sales are to the female.
And then maybe, you know, kind of getting to the current situation and the macro environment. One of the core thesis in the beginning was the home is the dressing room, so making just that, the home is the dressing room, free shipping, free returns, and that's been with us since day one. Return rate has ticked up as of recent, so we're working our way through that, but that's a key value proposition to the customer and kind of customer at the center of everything.
Okay, great. Now, a lot I wanna dig in on that-
Yeah.
But let's start with the macro, which has been a big focus, especially recently. I guess, how would you classify the macro environment, both for Revolve and FWRD, and how has that really evolved over the past several months?
Yeah, yeah, I would say it's challenging. And you can see it, you know, not just with us, but we are really at the epicenter, I think, focused on this next-generation, younger consumer. We do have a premium price point. It is an aspirational, discretionary purchase, so kind of she's feeling a lot of pressure right now. Again, strong balance sheet, so we are managing through it, investing through the cycle, but it definitely is a challenging time for our customer. And, you know, consistent across both Revolve and FWRD, I think we saw it initially at Revolve , kind of mid last year, and at the time, the higher-end consumer, that aspirational consumer, was holding up for a little bit longer, and then more recently, the last couple quarters, feeling it on the luxury side, that FWRD higher price point.
Yeah. And thinking about 2024, I guess, what levers do you have to reaccelerate growth if the macro environment remains tough?
Yeah, we think we're still very under-penetrated in our core market, so that remains the number one priority, is to continue to capture customers in the core Revolve segment in the U.S. By our estimates, we're 3% penetrated in that core demographic, whether you look at the number of people in that segment, or if you look at the dollars of kind of the TAM out there versus our revenue. So that remains number one. And again, going back to investing through the cycle, continue to market, continue to stay engaged with that customer so that when she is ready to come back, we're there for her, and continue to make the customer experience better. So in a continuing challenging macro environment, I think we'll just- we'll do that. We'll continue to invest.
We're making some really good inroads on cost efficiencies, technology, AI in the background as well.
Okay, great. And, thinking more recently, is there anything you can share about how Black Friday and Cyber Monday performed relative to your expectations? You know, especially given that softening macro backdrop, along with slightly more difficult comps year-over-year.
Yeah, we don't give intra-quarter updates, so no comment specifically on Black Friday, Cyber Monday this year. But more broadly speaking, the holiday isn't as meaningful for us as it is for others. Q4 is generally about 25% of the year, so they're big days for us, but not, you know, not kind of the make or break holiday season like it is for others.
Yeah. Yeah, certainly. So taking a step back, I wanna touch a little bit more on the addressable market, you know, the under-penetrated, I guess. How are you thinking about that addressable market for the business? And then has that evolved at all over the last 12 months or so?
Yeah, I think it remains, you know, intact, and, you know, still that core Millennial, Gen Z consumer, the 18- to 44-year-old female in the U.S. We estimate the TAM, you know, kind of in the $300 billion-$400 billion zone, domestically. And again, that remains the focus. Now, expand that internationally, and you get to a $2 trillion-$3 trillion TAM, and we're under-penetrated internationally relative to the U.S., so even more growth opportunity outside of the U.S. So I think from a customer standpoint, under-penetrated, still a lot of headroom and growth opportunity there. And then from a category perspective, we are still, you know, I think known for... You know, she thinks of us when she's going on the brunch or to festival or to the party. We have other categories.
We know she's shopping other places for those categories, whether it's the, you know, call it the essentials or everyday luxury, the kind of activewear, winter. We've got a couple exciting winter activations planned that, you know, will give her more exposure to those other categories. Beauty is another great example. We had a really, really great quarter in beauty, growing 44% year-over-year. So again, TAM, and then addressing more aspects of her life and capturing more share of her wallet within that core TAM.
Okay, great. And active customers continue to be a real positive standout here, growing 12% year-over-year in 3Q to about 2.5 million or so. I guess, what are the one or two key drivers of that growth? And how do the recent cohorts compare to the existing base in terms of demographic and also spend or frequency?
Yeah, on the active customers, combination of new customers and also existing customers. So continuing to market, continuing to acquire new customers through our core categories, and then those expanded categories as well. Beauty is a great new customer acquisition tool, and we've found that when she comes in via beauty, she tends to buy up over time, her average order value increases. And then the repeat customer, the existing customer. About half of our active customers are existing customers, and they represent nearly 80% of the revenue. So over time, as those cohorts develop and grow, she purchases both more frequently and at higher average order value. So as the customer base grows, that existing customer grows, her frequency increases, and you can see that in the orders per active customer over time.
It is down versus last year when we were kind of in that, you know, over, kind of overextended period last year, where the customer still had savings, was living on stimulus and kind of buying up. But if you look now versus 2019, that order frequency is meaningfully higher than it was. So a combination of new customers driving active and then also the activity of that existing customer. And then you had a second piece to that.
Yeah, just thinking about the recent cohorts.
Ah, recent cohorts.
Yeah.
Yeah. Yeah, cohorts are behaving, you know, relatively consistently over time. What we're seeing is just a compression across all of this, the whole stack. So there's no particular cohort that jumps out that's behaving differently. It's just the compression across the board, which, again, points us back to the macro pressure that we're experiencing.
Yeah. Now, one thing you've touched on a couple of times been the strong performance in the beauty category. What's the long-term roadmap there, and where do you see it moving the most upside in terms of customer growth, the order frequency, or that AOV, you know, kind of climbing over time?
Yeah, yeah, all of the above. Take the easy way out on that one. No, beauty is underpenetrated, we believe. You know, it's about 3% of the business now. It was 4% of the business in Q3. We had a really phenomenal quarter, in part driven by a TikTok Shop that was really successful for us in the quarter. We think it can be a much larger piece of the business, getting into the kinda double-digit, low-teen percent of the entire business. And phase one is really acquiring the right brands and getting the right assortment. We've made some great, brand additions from Laura Mercier, Tarte, Charlotte Tilbury, just to name a few.
Mm-hmm.
So getting those brands on the platform is number one, and then exposing her to the brands and making sure she knows we have those brands. It's a great—not only a great new customer acquisition tool, but also a great add-on product-
Mm-hmm
... for that existing customer. So to your, to your point on driving new customers, but also increasing the units per order and therefore the average order value. We did have some pressure in this past quarter with TikTok Shop, because a lot of those were single item orders, so it put some pressure on the cost structure there, but optimistic over the long term and making some optimization improvements on that front.
Okay, great. Now, flipping over to the other side, inventory levels. Looking much healthier now. Can you discuss the quality of the inventory still on the balance sheet and when you're targeting inventory levels, returning to normal, both across Revolve and FWRD? And then how are you planning the initial 24 inventory buys?
Yeah. As we entered 2023, number one initiative was to get inventory right-sized. We put a target of mid-year on that and achieved that. Now that's on an overall basis. We feel good about inventory and the inventory health. That said, you go kinda one click below that, Revolve is in much better shape than FWRD. FWRD is number one, a longer buying cycle, and then two, kinda held to the markdown standards of the brands.
Mm-hmm.
So it takes longer to work through that inventory. The inventory is good, healthy, quality inventory. It's, you know, a lot of super brand handbags and shoes that tend to hold their value. So they do move over time. It's just a timing thing. So in the next couple of quarters, you know, we feel like FWRD will be in a better place but is lagging Revolve right now. So different from when we entered 2023, and that being the number one initiative. As we enter 2024, much cleaner inventory position, full price, full price mix in a very healthy place, which positions us well for margin gains in this upcoming year, especially on the Revolve business. As I said, FWRD is a little bit lagging.
As we plan, you know, there's a lot of uncertainty out there still, so we are planning inventory conservatively, but confident that when we do see those green shoots, we can chase into it and not lose out on any of that demand. About two-thirds of our inventory buys are reorders, so that comes from... You know, we're buying broad and shallow on that initial inventory buy, and then when we see things checking, we're reordering into that, and that's a really quickly time product.
Okay, great. Now, moving over to return rates, they've been elevated more recently, pressuring some profitability. I guess, can you touch on what has driven that higher? And then do you expect it to be more or less permanent from these kind of levels? And then what steps are you taking to reduce that return rate over time?
Yeah, yeah. Over a multiyear period, a big portion of the increase in return rate is due to the localization of international regions.
Mm-hmm.
So over time, we've layered in free shipping, free returns in those international regions, localized pricing, all-inclusive pricing, so all the duty and VAT is included in that, which is great from a gross and net sales perspective, but isolated to the return line item, it is a negative impact there. Now, normalized for domestic, international, full price markdown, category mixes, we are still seeing an increase in return rate. We attribute that largely to macro pressure and consumer behavior. On the macro pressure, we did see an uptick in return rate when the first kind of macro pressures and challenges mounted around mid-year last year. And then in the SVB collapse crisis of March of this year, and all the headlines around that, we saw another uptick. Unfortunately, it didn't come down from those upticks.
So I think she just gets more and more comfortable, and we see that in our existing customer base as well. The return rate is higher for those existing customers as she comes in, tests the platform, gets confident in the service levels, and then is confident in making those purchases. So we, we are, you know, again, from day one, the thesis is home is the dressing room. We need to embrace that. We're not gonna make it harder on the customer to return. You know, many are starting to charge for returns or cutting back on the return policy. Never say never, but we're focused on the hard work right now and in those win-win ways of reducing the return rate.
So, a couple recent examples, visualization technology on FWRD, where you can see a handbag next to an iPad, an iPhone, a tube of lipstick, so you can really get a feel for the size or on accessories, seeing it on an ear, so you know the size of the earring or the necklace on her neck. Those are smaller categories, so even though they're wins, it's a smaller impact. And then, you know, working on educating the customer on that initial purchase through better recommendations, better size and fit descriptions, the placement of the size and fit recommendations on the product detail pages, sorts, search algorithm. So a lot of just, you know, kind of website experience and education for that initial purchase for her.
Experimenting with video, because it's not, for us, just a matter of small, medium, large, it's... We have 1,000 different brands, 100,000 different styles, so it's how does the brand fit, how does the dress fit, how is the cut, how is the fabric, how is the flow, where does it sit on my body versus the model's body? So a lot of work going into that. And with the rapid advancement in AI and technology over the last 6-9 months, we are optimistic that over time, it's gonna take a little while, but that over time, there will be technologies that will help in that size and fit for her.
Now, to the extent return rate is where it is, we are also working on ways to make it more efficient on the back end, because it is a significant cost impact, and impact to the P&L. So to the extent we can't get return rate down in those win-win ways, how can we make it more efficient? One was the East Coast distribution center, opened a distribution center in Pennsylvania, so we're not shipping product back and forth across the country. We opened a consolidated Canada returns facility, so consolidating all of our Canada returns and then bulk shipping them across the border, primarily to that East Coast distribution center. Most of our Canada orders come from the East Coast of Canada. And then a U.K. re-fulfillment center.
So again, instead of shipping the onesie-twosies across the pond, holding that product in the UK, and using our data and algorithms, we can determine the probability of those items reselling in the region. So just keeping those items in the region and reselling and saving on the shipping fees there. So a lot of good work going into, kind of return rate and cost efficiencies overall, but kind of covered up by a lot of headwinds still.
Yeah, thinking a little bit more about the international side of the business. We've seen a lot of strength in Mexico recently. I guess, how should we think about what's led that success? And then conversely, the Chinese market has been weak. How much of that do you attribute to, you know, continued softness through reopening and a lot of the volatility there, and when do you see potential for re-acceleration in that market?
Yeah. Mexico has been a great success story for us. You know, over the last year, it's become one of our top five regions, and a number of factors coming into play there. One, the product resonates really well. Two, currencies have held up better in Mexico than other regions over the last year, which helps the consumer there. We've also made localization improvements, payment types, et cetera, to make the experience easier on the customer.
Mm-hmm.
Finally, marketing in the region. Our brand marketing is largely global. There's no borders to that. Influencers resonate across the world, but having specific in-country marketing events has really added to the new customer base in Mexico. So, great work on a number of fronts for Mexico, specifically. China, as you mentioned, has been soft as of recent, and I think it's largely macro. The young consumers pressure there, the reopening wasn't as robust as people anticipated. That said, we're still optimistic on the region. You know, I think styles are converging. Revolve is resonating more in China than it has in the past. Historically, it's been more of a kind of FWRD, you know, brand name appeal in that region.
But Revolve really starting to starting to capture her her purchasing and and investing in the region. We hired a head of China six months ago or so, and embracing, you know, different types of marketing, whether that's live streaming or kind of specific marketing within their social media channels. So a lot of good work going into it. Optimistic, but it remains a challenging macro backdrop.
Yeah, certainly. And you started doing a lot more localized fulfillment and shipping initiatives. I guess, can you talk to the benefit of that across... I know you touched on it a little bit, but how does that impact the reduced shipping cost and then, maybe more critically, the improvement in the customer experience?
Yeah, yeah, and thank you for the second part. Yeah. Very focused on the customer experience. You know, we've put up record customer satisfaction scores this past quarter, you know, continued to improve the NPS scores. So that remains number one. But there are cost opportunities as well. So on the customer front, East Coast distribution center allows us to get product to her, you know, same day or one day, similar to what we do in California. And then on the cost front, because we're not shipping it across the country, we get improvements there. Other ways, I think optimizing carriers, utilizing kind of different last-mile carriers, alternate carriers, both domestically and internationally...
You know, I think you know, with one of the benefits of this softening macro environment is that kind of the pressure and leverage that we've experienced with freight over the last couple of years is starting to subside. So, you know, whether that's in fuel or the base rate charges themselves. So, hopefully some you know, at least not headwinds as we look ahead into the next year. And then, you know, going so far as to do our own kind of line haul and again, different last mile and alternative carrier methods to improve that cost on the back end.
Okay, great. Now, can you dig maybe a bit into the high-level marketing strategy here? Obviously, been a key driver of the story, and then, more specifically, on the recent success you've had within TikTok Shop.
Yeah. Marketing strategy is evolves over time. So I think we're known for being, you know, the leader in influencer marketing, social media marketing. You know, we are kind of first to the scene, maintain pole position. But really, it's wherever she's at. Even before social media, Instagram, we were working with bloggers. And we're growing, you know, really healthy pre-Instagram. So it's really just being where the customer is at. That feeds into your kind of TikTok question. It has shifted over the last few years, whether it's to TikTok or even just to video within Instagram and just the different ways she's interacting with social media. So TikTok has been really successful for us, and really embracing that this past quarter. TikTok Shop led to a significant increase in beauty, specifically, and performed really well.
Like I said, we have some kind of optimization to do on the back end to make those more cost-effective because it did result in a lot of single-unit orders that impacted AOV in the quarter, and units per transaction, that led to some cost pressure. But some really good traction, really good customer engagement. So it's still early, very early in that, in that roadmap, but excited to see what it can do.
Okay, great. And conversely, some e-commerce companies have called out increases in advertising costs and CPM, CPCs, led by China-based exporters, particularly on Google and Meta. Are you seeing that as well? And if so, what mitigating steps are you taking?
Yeah, we have heard the same thing. That said, we did get CPM, CPC efficiency in the quarter. So despite all of the money coming into those platforms, we were able to get some efficiency in the quarter. So we'll have to see how it plays out over the next, you know, couple quarters, how much they continue to invest, how much it impacts us. We do operate at a significantly different price point and a different kind of customer proposition than they have, so we are kind of isolated from that fray. But, you know, the marketing dollars going into those platforms does create a kind of broad-based pressure.
Great. Now, moving on to the men's side of the business, you know, can you provide some color on the long-term opportunity there and strategy for that segment, along with where you're at today?
Yeah. We are very early in the men's business. Currently a very small piece of the business. Historically, we haven't overly focused on it. We've had men's but haven't marketed, haven't really focused on the assortment, it's just kind of there. So over the last year, we hired a leader to focus specifically on men's. Number one, similar to our international strategy as well, number one, get the assortment right. You know, we had a lot of kind of a great assortment on FWRD, not as much on Revolve . It was a little more, you know, kinda edgy, fashiony, so getting some more basics, essentials, kind of things that he'll come back for time and time again. So that's number one, is get the assortment right. Number two is then start to market against it.
Nearly half of the kind of male product purchases out there come from a female. We have a very large and active female customer base, so making her aware that we have this men's assortment. And then beyond just marketing to that current customer, creating more marketing directly to the male customer and, you know, kind of building the social presence, the performance marketing, and everything that makes that core Revolve female customer base so great, apply that to the men's customer.
Okay, great. And, talking a little bit more about Revolve and FWRD, how are you thinking about the cross-marketing and cross-shopping opportunity there?
Yeah, we still think it's huge. Pressured right now, given all the challenges, you know, that we talked about on the aspirational customer. And we do think she overshot last year and bought the handbag, bought the extra handbag, bought the shoes. She had stimulus, excess savings. You don't need necessarily one of those handbags every year, so we're seeing some of that hangover now. So we haven't seen the overlap increase this year given that, but we still think there's a huge opportunity there. The product categories overlap really nicely, where Revolve is primarily dresses and fashion apparel, FWRD is handbags and shoes. We know that Revolve customer is buying a nice handbag, buying a nice pair of shoes somewhere. Why not FWRD? So making her aware of that, and we've got some...
Started to cross-market and tie in those two brands more over the past year, and we've got some really exciting activations coming up that should be announced any day now, that more directly tie those two brands together. So we're optimistic about not just the crossover, but what FWRD can do in the broader landscape as well.
Okay, great. I wanna touch on the own brands business a bit. Taking a step back, where's that segment today versus pre-COVID? And then more short term, you've been more conservative on inventory buys there, just given the deeper upfront commitment needed. You know, what are you looking to see in order to get back to a more normalized buy cadence?
Yeah, maybe to paint the picture, we were at 36% of the Revolve business in 2019. That was a peak. We hit COVID, and because we have to produce at higher depths for that own brands business, we tend to pull back on that business first when we're trying to right-size inventory. Coming out of COVID, starting to rebuild that business, and then we're hit with this over-inventory position again in the macro environment. So again, makes more sense to pull back on own brands, which put us at 22% of the business, of the Revolve business last year. And before we really start to expand that business and grow the mix, we're really focused on getting the core metrics right there.
We think we can be at equivalent economics at a lower mix going forward if we do it right. So that's what we're focused on right now, building the team, building the processes, getting those core metrics right, the full price sell-through, kind of the style and brand architecture, and where everything fits. We've had a couple really great wins this year. Helsa, which is a collaboration and brand that we do with Elsa Hosk, has been a phenomenal success for us, and carried on both Revolve and FWRD at a higher price point and different aesthetic than we've particularly carried in the past. So really excited about that and how that can apply to the broader own brand strategy.
Okay, great. Now, thinking about the tech side of the business, you've leveraged AI in kind of various forms for quite some time. You know, given the rapid pace of improvement in AI, especially over the past year, can you talk some of the ways you're utilizing those advancements at the moment? And then longer term, what do you see as some key friction points that you could help alleviate using AI?
Yeah. Yeah, it is, to your point, a big piece of the business, and it has been before it was kind of sexy and cool this year. So, you know, from day one, like I said, Mike and Michael being data kind of engineering types, data-driven merchandising was core to the business. That grew over time. We have a very robust BI and data science team, so we didn't have to make, you know, excessive hires to embrace this new AI technology. We had the talent. So it was just kind of leveraging our talent and the new technology that is advancing so fast. That came through probably the most visible, early, kind of way you could see it for us, was, AI-generated editorial campaign as we headed into festival this year, Revolve Festival.
So it was an entire campaign generated by AI, the models, the clothing. We put it on billboards heading out to the desert during Revolve Festival, and then we actually took the clothes that was generated via that editorial campaign and produced the clothing, and a number of the styles sold out. So that's one area, is editorial, photography, campaigns. And you know, it's not just about doing things cheaper, but faster, better, and multiple iterations. Another area is just the site and making that site experience better, more recommendations, more personalization on the site. We are testing visual search and then also more kind of narrative-based search, where instead of maybe searching black dress, you're searching wedding reception in Nashville in the spring and getting a whole outfit recommended for you. So things like that on the site.
Over time, and it applies to all aspects of the business. We have an internal task force and a lot of opportunity there from the editorial and other imagery that I mentioned, to actually designing the clothes. We think there's opportunity there. And then, key friction point goes back to return rate. I think with the advancing technology, there will be, over time, not sure when, but over time, there will be ways to better recommend the product for her, better recommendation of size, better kind of imagery and visualization of how it fits and looks on her to reduce that return rate.
Okay, great. Before we open up to the audience, I wanna spend a quick minute on capital allocation. Unlike many peers, you're profitable, been consistently profitable over the lifespan of the company, and that's enabled a $267 million cash balance or so. Now, with the recent start of share buybacks, how should investors think about capital allocation between, you know, the various factors going forward?
Yeah, yeah, it's all about maximizing total shareholder return. So number one is investing back in the business, and we continue to do that, whether that's, you know, through this cycle, continuing to hire engineers, invest in technology, invest in, you know, these initiatives around return rate, invest in the team, invest in own brands, keep marketing, and keeping the pedal down on marketing to acquire new customers through the cycle, so that remains number one. Then we announced the share buyback plan a couple of quarters ago, last quarter. A $100 million plan, that doesn't preclude us from also looking at other ways to return capital or kind of enhance the, enhance the business via M&A or other things.
So we are still actively looking at things, very disciplined when it comes to that, but that's the next kind of natural place outside of the buybacks. And, again, being profitable and, free cash flow positive, able to execute that buyback and still have a very healthy cash balance to do things.
Yeah, certainly. Okay, do we have any questions from the audience? Okay, great. Well, maybe we will wrap it up here. What are, I would say, you know, the one or two things you think investors most underappreciate or misunderstand about the Revolve story?
Yeah, I think until this year, it was. We didn't get enough appreciation for the profitability, cash flow, strong balance sheet. That is starting to, you know, get a lot of attention, and rightly so. I think the other one is the very strong customer base and the retention elements of that customer. After year one, we have at or over 100% revenue retention. So once she sticks, she sticks, and she places more orders over time, higher average order value. So I think just the strength of that customer and purchasing power continuing to shift to this younger generation customer.
Okay.
And then maybe the last one is customer service. You know, I think the marketing gets a lot of attention, the social media, data-driven merchandising, of course, but at the core is the customer. You know, the customer is the boss, so you know, a really high focus on customer being number one and maintaining... and not just maintaining, but improving those really great service levels for her.
Okay, great. Well, thank you so much for being here.
Yeah, thank you.
I really appreciate it.
Yeah, thanks a lot.