We'll get started. Thanks everybody for coming. We're happy to have Jesse Timmermans, CFO of REVOLVE, here for a fireside chat today. Jesse, thanks for coming. Glad to have you this year.
Yeah, thanks for having me. Good to be here.
I wanted to start out by just asking about REVOLVE's differentiation. You know, it's been a really tough environment, but I think the, you know, the influencer-led, technology-driven strategy really stands out versus competitors. How do you see that leading you through a more challenging backdrop?
Yeah, yeah. I think we are definitely differentiated on that front. One, the technology-driven infrastructure from day one, Mike and Michael founding the company on data, not being fashion guys, and really listening to the data, and building the culture and the organization around that. Two is the influencer-led social media marketing and just the brand that has been built over time. I think, you know, the main differentiation comes through in the results. You know, growing over 20% last year, consistent growth over time. Not just growth, but profitability and cash flow generation. Again, that goes back to Mike and Michael, very entrepreneurial, founder-led, very efficient. If you look at our revenue per employee of almost $100,000, that's increased, you know, I think over 3x over the past few years.
Yeah, I think it comes through in the results.
Maybe explain a little for the audience, the data-led strategy, because I think that's something that not everybody's familiar with. A lot of retail, they guess six to nine months in advance what might be in style. Maybe talk a little bit about how REVOLVE plans and orders inventory differently.
Yeah. It is definitely data-driven. We read the data across a very kind of vast selection of products. We'll cycle through a couple 100,000 different styles over the course of a year. Each style has up to 60 different attributes that we're reading. You know. It's very, very low depth on that breadth that we have. It's also 20 years of data. It's not just, you know, one year, it's 20 years of reading the customer, reading the data, what works, what's checking, and then reordering into the product that does work that leads to a really high full price mix. Last year was 85%, even pre-COVID was 79% full price mix, which leads to, you know, really strong gross margin. It's not just on the merchandising front.
It feeds into marketing and reading which influencer is working, which product is working, feeding that back into the merchandise and the buying and the planning. The ambassador program is a great example of that, where we're reading exactly which influencer is selling what piece of clothing, what piece of clothing is working, and again, feeding that back into the buying and planning process. About 20% of our product mix is own brands, we're leveraging that data across the, you know, call it 1,000 different brands and call it 100,000 different styles on the site to feed into what to develop on our own brand platform, which consists of around 20 different brands, each with their own kind of unique aesthetic and true brand. Not a private label, but a true brand.
Great. How would you characterize the health of your target consumer right now?
Yeah, it's a, it's a tough time. I would say, you know, she is not, she's not where we want her to be. She's not where she wants to be, whether that's via inflation or the consumer confidence, out there. Especially if you look on a year-over-year comp, where, you know, last year money was falling from the sky. She was feeling great. We were getting back out there for the first time in, you know, several years. We've got a year-over-year comp dynamic, then we just also have a macro dynamic. That said, she's still getting out. You know, she's engaged. She wants to look great. Festival's coming up. We've got a lot of good things planned over the course of this year, just really optimistic for the longer term.
Mm-hmm. you know, during a more cost-conscious time for the consumer, where money is not falling out of the sky, what have you seen with respect to basket size or customer retention, like, her willingness to keep coming back? What are you seeing in trends there?
Our basket size has increased pretty meaningfully over the past couple years. Part of that is just due to her getting back out again and getting back into the dress category. Not just dresses, but more kind of within dresses, the more going out dresses. You know, we're kind of back at our historical mix on that front, so we don't expect to see a significant mix shift in the near term there. Retention has been really strong. We had 97% revenue retention in 2022. That's up from 89% pre-COVID. Really strong retention from that core customer base, and we see that consistent over time, and we have 20 years of cohorts to read. She's coming back more frequently when she does stick.
She's buying at higher average price points when she does stick. Over the long term, we're optimistic that we can speak to even more aspects of her life outside of just that occasion. Historically, it was a compliment where, you know, when you run into somebody on the street and she said, "Oh, I have, you know, prom or occasion or something, and I love to go to REVOLVE." Now it's almost a critique, where we want her to think of us not just for that occasion, but for the work wear, for active, for beauty is a great example. A lot of opportunity to increase the reasons for her to come back. One of those ways is FWRD, cross-marketing the FWRD platform to her. FWRD skews more handbags and shoes versus REVOLVE. It over-indexes on dresses and apparel.
A really complementary product mix on REVOLVE and FWRD. We know that if she's buying a $200 dress that she's gonna wear a few times, she's complementing that with a multi-thousand dollar handbag or a statement pair of shoes.
Great. Where do you see trends heading through 2023? That feels like an unfair question given the volatility. How do you, how do you think sort of big picture about, how to plan inventories and expenses?
Yeah. I think maybe going back to our most recent earnings call and kind of what we do know is that first seven weeks of the year grew at kind of mid-single digits. That said, we're up against some really tough comps in the back half of Q1. If you think back to last year, again, she was getting out for the first time. We kicked off with an amazing Super Bowl weekend that led into a social club that we had open for about six weeks, where we had, you know, 20-plus events at the social club over that six weeks, which led into festival. Again, you know, getting out for the first time in several years, she was really excited.
This year, you know, with the macro, with inflation, with consumer confidence, you know, pulling back on that marketing in Q1 somewhat, gearing up for festival in Q2. You know, I think tough comps coming up. That said, it does get easier in the back half of the year. We are planning conservatively on the inventory buys. You know, those will be down year-over-year. If things pick up, we can always chase. Marketing will look more and kind of closer to historical norms where you see that Q2 and Q3 being the peaks with festival and Fashion Week in the fall. Gonna just have to wait and see what happens in the world. Definitely planning considerably.
That said, we have a strong balance sheet, so we're able to be more offensive than maybe others out there and look for opportunities in the market. Again, with Mike and Michael being founders and being here 20 years, we're thinking about the next five, 10, 20 years, not just for the next quarter.
Great. Can you talk a little bit about categories, recent performance, and then what categories you think will be strong in 2023?
Yeah. I think as I mentioned, dresses is back to our, you know, call it historical norms in terms of mix. Handbags and shoes have been doing really well in the last couple quarters, and part of that comes from the cross-marketing of that FWRD platform to that strong REVOLVE customer base. You know, looking ahead, I think continued strength in dresses as she continues to go out, continued strength in handbags and shoes with, you know, continuing to cross-market that FWRD platform. The loyalty program has been really successful for us and the customer being able to use her loyalty points across the REVOLVE and FWRD platforms. I think longer term, excited about adjacent categories, and again, looking for more ways to tap into her life, whether that's beauty, starting to make more investments in beauty.
That's historically been around 3% of the mix. We think it could be much greater than that. Men's, we've started to make some investments in men's, even those closer adjacent categories like active. We know she's buying her yoga pants somewhere, why not REVOLVE ?
Yeah. Thanks. You expect modest average order value growth this year. Is that a mix thing? Is that a units thing? How do you think about modeling that?
Yeah. I think the message we're trying to get across there is not to expect the significant growth in AOV that we've been seeing the last couple years as her mix has shifted from those lower price point categories like beauty and sweats in the COVID era into the dresses, and not just dresses, but going-out dresses at higher price points. I think looking ahead, it'll be modest, AOV increases via some mix, some inflation as prices continue to go up, and then again, cross-marketing to different aspects of her life. The other piece is full price mix, that of course drives a higher average order value. It'll be pressured, you know, for the next couple quarters as we work through inventory.
Over the long term, as we've expanded the breadth even more, we're able to chase into those reorders, which drives the higher full price mix, which drives the higher average order value.
Okay. For your private label products specifically, are you planning any price increases, or are you just passing through the price increases you're seeing from the branded vendors?
Yeah. Mostly just a pass-through. you know, 80% of the mix is third party on REVOLVE . That's, you know, purely a pass-through. The pricing on the own brands, you know, it kind of follows in making sure we're pricing accordingly. Not looking to raise prices just to drive AOV.
Okay. I wanted to ask about the long-term opportunity around international, how you're marketing, are you doing that on a localized basis, and then what the margin implications of the international expansion are?
Yeah. We see a lot of opportunity internationally. If you think about the domestic TAM in the, call it, $300 billion range, international is in the trillions. Phase one of international has been localizing the customer experience, so getting that experience that she's used to in the U.S. with free shipping, fast shipping, free returns, and also localized pricing, including the VAT and duty and everything all in one in the price and refunding her that full amount. That's been phase one, which started in kinda U.K. and Europe, then moved to Australia, Canada. We're close there. Still some optimization to do. Once we get that, then we can start to really assort region by region and make sure we've got the right assortment for her. Kind of in conjunction is the marketing.
Starting to market more directly region by region. The great thing is that social media, you know, more or less, outside of a couple regions, has no boundaries, so those influencers work, you know, cross-border. A lot of our influencers are international. But still opportunity to market more directly to that customer, along with the kind of more curated assortment internationally. On the kind of on the optimization front and cost efficiencies, being able to. Right now, we ship everything out of L.A. We can serve 80% of the international revenue in two to three business days, which is great, but it costs more to ship internationally. When somebody returns, we have to take that all the way back over the ocean, back to L.A., and then reship it back to that international customer.
Looking for ways to take returns in that local region, hold them in the local region, and reship out of that region without shipping back and forth across the ocean. Both on growth opportunities and then margin optimization opportunities over time.
Okay. Just to follow up on that, holding the inventory, I mean, it seems like a great idea. The return rate has been certainly affected by the movement to international. Do you think that's because people don't know the brands as well, so they don't know what to order? Or is it just they have this much longer lead time and hold time?
Yeah. I think it's more the service. Making it easier for her to return drives that return rate up, which we're more than happy to have a higher return rate because it comes with higher net sales. If you look at a region like Canada, after launching the localization initiative, Canada grew at triple digits for the next, you know, at least several quarters. In general, our return rate is higher than others, given the, I think, one, it's part of the thesis. The home is the dressing room. Give her the opportunity to try on three or four different dresses to find that right one. The other element is the mix. It's a higher mix of dresses, which has a higher return rate. Also just the amount of emerging brands. Every brand, every style fits different.
It's not just small, medium, large. It's cut and fit and making sure she finds that right piece of clothing. Over the long term, look for ways to optimize the experience, not make it harder for her to return, but make her initial purchase decision smarter. Whether that's personalization on the website, better product recommendations, a lot of kind of AI machine learning developments, especially over the last six months, that will help drive that return rate low over long term.
We've seen some retailers put things like, "Jessica is 5' 10 and wearing," like, any other ways that you're thinking about trying to help that customer really hone in on the right size?
Yeah. Yeah. We do that right now.
Yeah.
Have the sizing recommendations. It has to go further in, really the customer-specific body and shape and how that works with the fit. You know, whether that's via, you know, some sort of kind of virtual interface, where she can see that piece of clothing on her. The technology's not quite there yet, but over time, we're optimistic that there will be something that can make her initial purchase decision better.
Great. I wanted to talk a little bit about marketing. How are you planning activation events? You discussed last year you had a very full slate of events. As festival season approaches, will marketing and activation be similar year-on-year, pulled back, more efficient? You know, we saw some efficiencies in Fashion Week. Like, how should we think about the number and magnitude of these events?
Yeah. Yeah. For the full year, as a percentage of net sales, around the same as last year, a tick lower. Q1, we pulled back in comparison to last year. Last year, again, you know, she was getting out for the first time. We made the decision to invest more in Q1 of last year. This year, not as much. Q2 will be in the same zone. Planning on festival, getting excited for that. Only, I guess, a few weeks away now. So the team is in full planning mode there. Q3, similar with the Fashion Week activation, and then, you know, some other activations along the way. But I'd say kind of holding the course, at least for this year with those two kind of tent pole activations and then a few other things, scattered throughout.
You know, over time, you know, I think opportunity for efficiency there, but we wanna continue to invest. We think we're really low penetration in this target demographic, so a long ways to go in acquiring those new customers, and we wanna keep the pedal down on marketing.
Okay. Then just switching over to inventory, what is the composition like now by category? Then maybe you could talk between REVOLVE and FWRD.
Yeah. We think the inventory that we do have, you know, we're working through it. It's on plan. We expect to be rebalanced, you know, by the end of Q2. Category by category feels healthy. FWRD over indexes right now on inventory versus the sales mix, given that it takes a little while longer to work through that FWRD inventory, given the lead times that we're working with and, limited markdown opportunity as we work with the, with the brands there. A little ways to go on FWRD, and, kind of Revolve under indexing versus that platform. Feel good about the overall quality. We're working through it. Algorithms are doing their thing. The teams are on top of it.
Optimistic for, you know, when we get through this first half of the year.
Yeah. Okay. you know, I think when you look at fulfillment, it's been a pretty tough line item for everybody because of freight costs and shipping. How are you thinking about that potentially becoming a tailwind? Maybe with that, you could touch on some expected efficiencies from the East Coast distribution center.
Yeah. It has been challenging, across the board, both on the selling and distribution, which is primarily freight. Also our fulfillment, distribution center network. Not expecting any or at least not modeling in any tailwinds this year. We expect it to remain a challenge. Now there is some hope that we'll get some benefits, maybe fuel comes down, not factoring it in yet. Some efficiencies from the East Coast distribution center, not meaningful. We're kind of holding the line there in terms of the model, with some hope for opportunity. You know, the return rate definitely plays into that.
You know, and again, not looking to make it harder for her to return, but, you know, keeping it easy for her to return and looking for the opportunities on the back end, to get the cost efficiencies, which goes into your question on fulfillment center. We just opened the East Coast distribution center in Q4, started taking returns in just in the last month, started reshipping inventory out of that fulfillment center. That's phase two, is to, you know, reship that returned inventory. Then phase three is to actually stock new inventory there and save on the shipping back and forth across the country. Also from a customer service perspective too, being able to serve that East Coast customer in, you know, one day, similar to what we do on the West Coast.
We'll start to see some benefit, you know, towards the tail end of this year. Nothing meaningful that we're factoring in, but really into 2024, starting to see some benefits from that. Next phase is beyond the East Coast distribution center, is international regions and opening up smaller distribution centers internationally, where we can take the returns, hold the returns there, and not ship back and forth across the ocean.
Do you think you'll run and own those international distribution centers?
TBD. likely more of a 3PL type model internationally. Right now everything we do is 1 P. We have all of our own fulfillment centers and own inventory management systems, which is crucial to the customer experience and managing that inventory. At least for the near term, internationally, it would likely be, some sort of partnership.
Great. When you think about owned brands, can you talk a little bit about why you have it, where you see it going and, lessons learned on some past launches, what the outlook is?
Yeah. Yeah. We're owned brands, you know, call it 20-25 owned brands right now, and they're true brands. We're careful to call them owned brands versus a private label because they are unique. They have their own aesthetic, they have their own Instagram, they have their own, you know, marketing behind them. That's one key differentiator and attribute, is that they are true brands, and they are additive to the third parties. We're filling gaps in assortment where we see them, and leveraging, you know, partnerships where we can. For example, Helsa, which was a recent launch partnering with Elsa Hosk, which was a new and exciting own brand for us, and that it was a higher price point, and carried across both REVOLVE and FWRD.
I think over time, we expect to increase the penetration there, not at the rate we did in the past. Back in 2019, we were at 36%. We were over-indexed on certain price points within dresses. I think that's one of the learnings is, you know, really refine the assortment and get a quality assortment, not over-indexed in any one category, and make that a healthy assortment across the board. Tap into some of those other categories and price points. We anticipated increasing that at a much more moderate pace than in the past, and looking for ways to again, fill in that assortment and look for different opportunities, whether that's Helsa, like I mentioned, at the higher price point or the Remi Bader launch, which was more size inclusive, you know, sustainable brands.
We've launched a couple of sustainable brands, over the last couple of years. Optimistic, but at a cautious kind of moderate pace.
I think a lot of investors just associate own brands with sort of a lower priced private label.
Yeah.
Can you talk about the price differential and also the margin differential between.
Yeah.
The third parties?
Yeah. Great point. Yeah. Much higher margin than a third party brand that we carry. That'll be margin accretive over time. They're at similar price points as a third party, so we're not trying to undercut. They're on par. They're not, again, not like a private label, but a true brand in and of themselves. From a customer per-customer perspective, they don't know that it's an own brand. It has to really speak to the customer, not from a, again, from a private label perspective, but more from a brand perspective.
None of them are called REVOLVE .
Right. Yeah. Yeah.
Maybe just zooming back over the past several quarters, you have seen higher priced products performing better than lower priced products within the full priced assortment. Do you think that continues? You know, is there any way to capitalize on sort of that higher end bent?
Yeah. We'll see what happens this year with the macro environment. To your point, you know, that higher price point is holding up better, which, you know, lends itself to the higher end consumer holding up better. That said, markdowns, you know, she did gravitate a little bit more towards markdown in the fourth quarter, which you can see in the margin. I think over time it's the opportunity on FWRD and, you know, really cross-marketing that assortment to her as she increases her income, as she kind of progresses through her career, has more wallet to share. There's opportunity for us to capture that.
Really, you know, kind of a gap in the market for that young luxury consumer in that space where FWRD is more curated, you know, kind of the editorial is more West Coast young luxury than some of the other luxury players out there. I think we've got a unique assortment, unique curation, and kind of messaging to that consumer.
What's the current overlap between REVOLVE and FWRD? Maybe talk to some of your efforts to really cross market.
Yeah. Yeah. It's about 5% now, which I think speaks to the opportunity over time to really cross market that FWRD platform to her. The loyalty program is a very effective way to do that, where she can earn points on either platform and use them across platforms. You know, brand marketing, we haven't done significant brand marketing on the FWRD platform yet, so investing more there this year. Kendall Jenner being the creative director brings a lot of, you know, I think kind of not just brand curation, marketing, but also just kind of that halo for FWRD. The ambassador program.
We just launched the ambassador program on FWRD as well, which is a great way to, you know, spread the message, acquire new customers, but also read what product is working and feed that back into the buying process on both sites.
Yeah, we get a lot of questions on how FWRD differentiates as more luxury companies are building their own online opportunities and offerings. Can you talk a little bit about the curation, about the customer lens you're using and why that's a real differentiator and a reason for somebody to come to FWRD?
Yeah. I think it's just that, the curation and that, again, the young luxury, the editorial, having that inspiration. She's looking for, you know, similar to REVOLVE, where it's more, there's more emerging brands. You know, she wants to look different, not wanna look the same as all of her other friends, wants to be unique. I think also, I lost what I was going to say there. Oh, the service. The service is, you know, really second to none, you know, with that fast free shipping and then the free returns and consistency. We get that feedback from customers all the time, and that goes back to the retention of our core customer and that 97% revenue retention that we had this year.
We have 20 years of cohorts that speak to that great service from day one.
Great. Then what are the areas for REVOLVE that you're most excited about for 2023?
All of them. No. I think, number one, not just 2023, but beyond. I think again, this goes back to the long-term mind and nature of the organization of Mike and Michael. I think number one is just continuing to capture more of this core customer. We have a long ways to go in just that core market. Number two is addressing more aspects of her life and expanding into those categories like beauty and some of the other, you know, adjacent categories like active and, you know, like I said, the work wear and get her to think about REVOLVE not just for the occasion, but for all aspects of her life. That feeds into the FWRD overlap as well, and getting her to come back, you know, more frequently.
International is a huge opportunity, longer term. A lot. You know, I think we're very early innings of where we can be longer term.
Great. Let's open it up and see if there are any questions from the audience. Maybe while we'll wait, I wanted to ask you to elaborate a little bit on beauty. It was such a nice positive surprise during COVID, how that customer really got interested and involved in REVOLVE Beauty. How do you think REVOLVE 's different? 'Cause there's a lot of places you can buy beauty. I mean, what do you think you bring to the table for partners, and what do you think you bring to the table for customers?
I think for partners, it is that really powerful next generation consumer and having access to this next generation consumer and the power of the REVOLVE brand and how it speaks to that consumer. I think for the customer, it is the curation and service. It always goes back to service. Having that consistent high level of service for her. I think part of it's gonna be the curation of brands, her trust in REVOLVE and us bringing the best to her. It's a great way to get into the REVOLVE ecosystem. It's a very accessible price point. Then she comes back. We found it a good new customer acquisition tool. Then she comes back for higher price points in the dress or, you know, the other categories over time.
Again, it's just a way to kinda complete that full offering to her. It's about 3% of the business right now. We think it can be much bigger. If you look at some of the other legacy players out there where it's 10%+ of the mix, we think that's very attainable over time. Again, having a one-stop shop for her.
The influencer marketing strategy. I think you pioneered it. Many have followed. How do you think about evolving that into either something different or new or really maintaining your leadership position in that marketing structure?
Yeah. I think we were the pioneer. It's where the customer was at. I think wherever she's at, we will be. We can pivot fast. We can move fast. A great example of that is video over the last, you know, call it year to 18 months, where video is, you know, she's engaging with video more than she used to. The static posts aren't as engaging as they were in that kind of first phase of social media. The team's been able to pivot really fast, have really good results from the video. I think over time, it just, again, depends on where she goes, whether that's via video, TikTok, Instagram. She's always looking for something, for somebody, for inspiration, and that's where we'll be. I think evolution over time and different ways to stay ahead.
The ambassador program is a great example where. We've always worked with affiliates, but it's been kind of a black box on exactly which influencer is working, which product is working. Now, having all that in-house, additive to the affiliates, which we still work with, but having, the direct data feedback on what product is working, which influencer is working. Then rewarding those ambassadors. If you look at, the Marianna Hewitt collection that we did just recently, you know, where she was able to curate a selection for the customer, which resonated really well. I think it's just, again, looking for new and different ways, to work with not only the influencers, but also the customers and make it very authentic and effective.
Maybe for those in the audience who don't spend a lot of time on TikTok, you could talk about how you're marketing on TikTok and how that's different from Instagram or some of the other social platforms.
Yeah. Certainly more video based, you know, the short clips video, more I guess I would say more interactive content. We just launched on the TikTok Shop, which is a way for the customer to buy directly from TikTok. We're one of the first to partner with them there. You know, small now, but I think it speaks to the power of the brand and us being one of the first that they reached out to experiment with that platform.
Great. Moving on to, you mentioned active as a place you're really focused. It's a very competitive landscape out there. What do you think differentiates the active offering at Revolve, and how big do you think that could get?
No, we think it, we think it could be a meaningful size of the business. You know, that, if you think about the $300 billion TAM, a large piece of that is active. Again, I think it's the power of the brand, the curation, the selection, having the content that will inspire her, and again, you know, a great way to pull people into the REVOLVE ecosystem. I think the differentiation comes in assortment, curation, and just the content and inspiration.
Maybe the same question on men's. How do you target a male customer? It's you know, seems like a pretty different business.
Yeah.
How quickly or not are you moving into that channel?
Yeah.
What are your early learnings?
Yeah. Personally, really excited about expanding the men's assortment. Yeah, I think historically it's been there. We haven't invested heavily. It's been managed by, you know, maybe just a couple of people. We recently hired a leader in the men's men's department, a Director of men's. First comes assortment and getting the assortment right, and then really starting to market behind it once we have that right. A large portion of the men's product purchases out there come from a female. We've already got this really engaged female customer where she, again, in that kind of one-stop shop, can buy for, you know, for her other half, for her brother, for her, you know, significant other, whatever it is.
I think, you know, there's again, a gap in the market to serve this kind of next generation male consumer in a more curated way and not having to go to multiple different platforms for the different different pieces of that full look. It's across REVOLVE and FWRD. We have men's offerings on both, which there will be some overlap and then some differentiation. Really excited about that over time. I think if you look at a Lululemon, you know, of 10 years ago versus now where it's over 30% of the mix there.
Yeah.
You know, gives us confidence that there's opportunity, for that male offering.
Who's the customer?
Yeah. It is similar to the female that we're targeting, that, you know, 25 to 44-year-old millennial customer. You know, he's going out, he's professional, he's wanting to look great. He's going to festival with her. Also knows what he likes. I think, you know, having that core offering of basics where he's coming back again and again, with also you get kind of those complimentary pieces where, you know, it's for the occasion or for the festival or, you know, something unique.
Yeah. One more. I know we spent some time on inventory already, but I just wanted to ask about your ability to chase. You know, you said you're planning conservatively, and if things are better, you'll get it. How is the supply chain? You know, how are your vendors positioned? Are they ready and able if sales trends do start to re-accelerate, to be able to provide a lot of product newness?
Yeah. I think, one, we have great relationships with our vendors and with the brands. We're the largest customer of a lot of those brands, given the emerging nature of the product assortment that we have. We think they're in good shape. The supply chain is in much better shape than it was, you know, one year ago, 18 months ago, of course. And even today, consistently over half of our buys are reorders. We have a really good reorder process, reorder funnel. We're confident that we can chase, and hopefully that's the case when things pick up.
Great. Well, we are about out of time. Jesse, thank you for coming. We appreciate it.
Absolutely.
Thanks to all of you for attending.