Special Note Regarding Forward-Looking Information
This report contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical fact are "forward-looking statements" for purposes of federal and state securities laws, including any projections of earnings, revenue or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include, among others, the words "may," "will," "estimate," "intend," "continue," "believe," "expect," "anticipate" or any other similar words. Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, such as those disclosed or incorporated by reference in our filings with theSEC . Important factors that could cause our actual results, performance and achievements, or industry results to differ materially from estimates or projections contained in our forward-looking statements include, among others, the following:
•
economic conditions and their impact on consumer demand and our business, operating results and financial condition;
•
our ability to effectively manage or sustain our growth and to effectively expand our operations;
•
our ability to retain our existing customers and acquire new customers;
•
our ability to sustain and expand our gross margin and Adjusted EBITDA margin, a non-GAAP financial measure;
•
our ability to respond to consumer demand, spending and tastes, and our ability to accurately and effectively engage in predictive analytics;
•
the impact of the COVID-19 pandemic on our business, operations and financial results;
•
our ability to retain existing vendors and brands and to attract new vendors and brands;
•
our ability to obtain and maintain differentiated high-quality products from appropriate brands in sufficient quantities from vendors;
•
our ability to obtain and maintain sufficient inventory at prices that will keep our business model profitable, and of a quality that will continue to retain existing customers and attract new customers;
•
our reliance on overseas suppliers and manufacturing partners, particularly in
•
our ability to expand our operations in an efficient and cost-effective manner;
•
our ability to maintain and enhance our brand;
•
our ability to optimize, operate, manage and expand our network infrastructure and our fulfillment center and delivery channels;
•
the growth of the market for premium lifestyle and luxury products, and the online market for premium lifestyle and luxury products in particular;
•
our ability to accurately forecast demand for our products and our results of operations;
•
seasonal sales fluctuations; and
•
our ability to expand our product offerings, including our owned brands.
Additional factors that could cause actual results to differ materially from our forward-looking statements are set forth in this report, including under the headings "Risk Factors" and "Management's Discussion and Analysis of 18 --------------------------------------------------------------------------------
Financial Condition and Results of Operations" and in our condensed consolidated financial statements and the related notes thereto.
Forward-looking statements in this report speak only as of the date hereof, and forward-looking statements in documents that are incorporated by reference speak only as of the date of those documents. We do not undertake any obligation to update or release any revisions to any forward-looking statement or to report any events or circumstances after the date hereof or to reflect the occurrence of unanticipated events, except as required by law. In addition, statements that "we believe" and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this report, and although we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted a thorough inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
In this report, "we," "our," "us," "Company" and "Revolve" refer to
Overview
REVOLVE is the next-generation fashion retailer for Millennial and Generation Z consumers. As a trusted premium lifestyle brand and a go-to online source for discovery and inspiration, we deliver an engaging customer experience from a vast, yet curated, offering of apparel, footwear, accessories, beauty and home products. Our dynamic platform connects a deeply engaged community of millions of consumers, thousands of global fashion influencers, and more than 1,000 emerging, established and owned brands. Through nearly 20 years of continued investment in technology, data analytics, and innovative marketing and merchandising strategies, we have built a powerful platform and brand that we believe is connecting with the next generation of consumers and is redefining fashion retail for the 21st century. We sell merchandise through two complementary segments, REVOLVE and FWRD, that leverage one platform. Through REVOLVE, we offer an assortment of premium apparel, footwear, accessories, beauty and home products from emerging, established and owned brands. Through FWRD, we offer an assortment of curated and elevated iconic and emerging luxury brands. REVOLVE has historically been focused on the discovery of trend-driven, ready-to-wear styles, while FWRD has been more heavily weighted toward the statement pieces in her wardrobe such as shoes and handbags. We believe that FWRD provides our customer with a unique destination for luxury products as her spending power increases and her desire for fashion and inspiration remains central to her self-expression. We believe our product mix reflects the desires of the next-generation consumer and we optimize this mix through the selection of established brands that resonate with our consumer, the identification and incubation of emerging brands and the continued development of our owned brands. The focus on emerging and owned brands minimizes our assortment overlap with other retailers, supporting marketing efficiency, conversion and sales at full price. We have invested in our robust and scalable internally-developed technology platform to meet the specific needs of our business and to support our customers' experience. We use proprietary algorithms and nearly 20 years of data to efficiently manage our merchandising, marketing, product development, sourcing and pricing decisions. Our platform works seamlessly across devices and analyzes browsing and purchasing patterns and preferences to help us make purchasing decisions, which when combined with the small initial orders for new products, allows us to manage inventory and fashion risk. We have also invested in our creative capabilities to produce high-quality visual merchandising that caters to our customers by focusing on style with a distinct point of view rather than on individual products. The combination of our online sales platform and our in-house creative photography allows us to showcase brands in a distinctive and compelling manner. 19 -------------------------------------------------------------------------------- We are pioneers of social media and influencer marketing, using social channels and cultural events designed to deliver authentic and aspirational, yet attainable, experiences to attract and retain Millennial and Generation Z consumers, and these efforts have historically led to higher earned media value than competitors. We complement our social media efforts through a variety of brand marketing campaigns and events, which generate a constant flow of authentic content. Our social media and brand marketing strategy is combined with robust and sophisticated digital performance marketing activities and our proprietary brand ambassador program. Once we have attracted potential new customers to our sites, our goal is to convert them into active customers and then encourage repeat purchases. We acquire and retain customers through paid search/product listing ads, paid social, retargeting, affiliate marketing, our ambassador program, personalized email marketing and mobile "push" communications through our mobile applications. We have developed an efficient logistics infrastructure, which allows us to provide free shipping and returns to our customers inthe United States . We support our logistics network with proprietary algorithms to optimize inventory allocation, reduce shipping and fulfillment expenses and deliver merchandise quickly and efficiently to our customers. To date, we have primarily focused on expanding ourU.S. business and have grown internationally with limited investment and no physical presence, though a small number of our customer service agents are working remotely from outsidethe United States . We began offering a more localized shopping experience, including free returns and all-inclusive pricing, beginning in 2018, for customers in theUnited Kingdom , or theUK , theEuropean Union , or the EU, andAustralia , and further expanded toNew Zealand ,Singapore andCanada in 2020,Poland ,Spain ,Switzerland and theUAE in 2021, andSaudi Arabia in 2022. We are gradually increasing our level of investment in international expansion by continuing to focus onEurope ,Australia andCanada as well asAsia Pacific and theMiddle East . We will continue to invest in and develop international markets while maintaining our focus on the core U.S. market.
Impact of COVID-19
There continues to be uncertainty around the COVID-19 pandemic and its impact on our business operations and operating results. While demand for our products improved as compared to the height of the outbreak and lockdowns, the extent of this increased demand in the future remains uncertain. A resurgence of COVID-19 may result in business restrictions and social distancing mandates, the cancellation of large, in-person brand marketing events, supply chain disruptions, changes in consumer behavior and an increase in the cost of goods sold. The majority of our facilities and employees are based in Los Angeles County where the government has in the past imposed, and may in the future impose, restrictions designed to slow the spread of COVID-19. To further prevent the spread of COVID-19, we offer guidance and incentives to our employees to promote vaccine uptake. Government restrictions on travel and social distancing caused the postponement or cancellation of several REVOLVE brand marketing events including the #REVOLVEfestival in 2020 and 2021, as well as other social activities that drove demand for many of our products. As restrictions eased, we have been able to host in-person events with reduced attendance capacity and inApril 2022 we once again hosted the #REVOLVEfestival after a two-year hiatus. Varying levels of restriction remain withinthe United States and in certain of our key markets around the world and it is unclear how these restrictions will evolve or if the COVID-19 pandemic will spur long-term changes in consumer behavior. 20 --------------------------------------------------------------------------------
Key Operating and Financial Metrics
We use the following metrics to assess the progress of our business, make decisions on where to allocate capital, time and technology investments, and assess the near-term and longer-term performance of our business.
Three Months EndedSeptember 30 ,
Nine Months Ended
2022 2021 2022 2021 (in thousands, except average order value and percentages) Gross margin 53.0 % 55.1 % 54.5 % 55.0 % Adjusted EBITDA$ 17,676 $ 21,666 $ 76,097 $ 80,409 Free cash flow $ 8,618 $ 1,340$ 30,547 $ 66,643 Active customers 2,249 1,678 2,249 1,678 Total orders placed 1,951 1,830 6,350 4,881 Average order value $ 320 $ 276 $ 303 $ 263 Adjusted EBITDA and free cash flow are non-GAAP measures. See the sections titled "-Adjusted EBITDA" and "-Free Cash Flow" below for information regarding our use of Adjusted EBITDA and free cash flow and their reconciliation to net income and net cash provided by operating activities, respectively.
Gross Margin
Gross profit is equal to our net sales less cost of sales. Gross profit as a percentage of our net sales is referred to as gross margin. Cost of sales consists of our purchase price of merchandise sold to customers and includes import duties and other taxes, inbound freight costs, receiving costs, defective merchandise returned from customers, inventory valuation adjustments, and other miscellaneous shrinkage. Gross margin is impacted by the mix of brands and categories of styles that we sell on our sites. Gross margin on sales of owned brands is typically higher than that for third-party brands. Gross margin is also affected by the percentage of sales through the REVOLVE segment, which consists primarily of emerging third-party, established third-party and owned brands, compared to our FWRD segment, which consists primarily of established third-party brands. One of our long-term strategies has been to increase the percentage of net sales from owned brands given the attractive margin profile associated with them. Merchandise mix will vary from period to period and if we do not effectively manage our owned brands and accurately forecast demand, our growth, margins and inventory levels may be adversely affected. We review our inventory levels on an ongoing basis to identify slow-moving merchandise and use product markdowns to efficiently sell these products. We have maintained a high percentage of sales that occur at full price, which we believe reflects customer acceptance of our merchandise and the sense of urgency we create through frequent product introductions in limited quantities. Gross margin is impacted by the mix of sales at full price and markdowns, as well as the level of markdowns. The COVID-19 pandemic impacted gross margins in several ways. Product mix initially shifted away from certain categories with higher margins, such as dresses, to other categories with lower margins, such as beauty. However, this temporary product mix shift began to reverse late in the first quarter of 2021 with growth in the dresses category rebounding strongly. During the first three quarters of 2022, the product mix continued to shift with growth in the dresses category significantly outpacing growth within other categories. We also shifted more of our inventory purchases in 2020 to third-party brands where we can make shallower initial inventory commitments across a broader range of styles. We began reinvesting in our owned brand platform in late 2020 and throughout 2021, which has resulted in year-over-year improvement in the mix of owned brand sales as a percentage of the REVOLVE segment sales during the nine months endedSeptember 30, 2022 as compared to the nine months endedSeptember 30, 2021 . Certain of our competitors and other retailers report cost of sales differently than we do. As a result, the reporting of our gross profit and gross margin may not be comparable to other companies. 21 --------------------------------------------------------------------------------
Adjusted EBITDA
To provide investors with additional information regarding our financial results, we have disclosed in the table above and elsewhere in this report Adjusted EBITDA, a non-GAAP financial measure that we calculate as net income before other (income) expense, net; taxes; and depreciation and amortization; adjusted to exclude the effects of equity-based compensation expense and certain non-routine items. We have provided below a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP financial measure. We have included Adjusted EBITDA in this report because it is a key measure used by our management and board of directors to evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis and, in the case of exclusion of the impact of equity-based compensation, excludes an item that we do not consider to be indicative of our core operating performance. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
Adjusted EBITDA has limitations as an analytical tool and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
•
although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements;
•
Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
•
Adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation;
•
Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us;
•
Adjusted EBITDA does not reflect certain non-routine items that may represent a reduction in cash available to us; and
•
other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure.
Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income and our other GAAP results.
A reconciliation of non-GAAP Adjusted EBITDA to net income for the three and
nine months ended
Three Months EndedSeptember 30 ,
Nine Months Ended
2022 2021 2022 2021 (in thousands) Net income$ 11,988 $ 16,668 $ 50,829 $ 70,458 Excluding: Other (income) expense, net (1,440 ) (158 ) (3,769 ) 339 Provision for income taxes 4,203 2,701 15,421 2,558 Depreciation and amortization 1,214 1,119 3,519 3,390 Equity-based compensation 1,524 1,336 4,410 3,664 Non-routine items(1) 187 - 5,687 - Adjusted EBITDA$ 17,676 $ 21,666 $ 76,097 $ 80,409 (1) Non-routine items in the three and nine months ended September 30, 2022 relate to an accrual for a pending legal matter.
Free Cash Flow
To provide investors with additional information regarding our financial results, we have also disclosed in the table above and elsewhere in this report free cash flow, a non-GAAP financial measure that we calculate as net cash provided by operating activities less cash used in purchases of property and equipment. We have provided below a reconciliation of free cash flow to net cash provided by operating activities, the most directly comparable GAAP financial measure. 22 -------------------------------------------------------------------------------- We have included free cash flow in this report because it is a key measure used by our management and board of directors, which we believe is an important indicator of our liquidity because it measures the amount of cash we generate. Free cash flow also reflects changes in working capital. Our working capital fluctuates over time primarily as a result of the timing of our inventory purchases to support growth, our effective tax rate and the timing of tax payments, and changes in the level of merchandise that is returned by our customers, which in turn impacts our return reserve. Accordingly, we believe that free cash flow provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. Free cash flow has limitations as an analytical tool and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. There are limitations to using non-GAAP financial measures, including that other companies, including companies in our industry, may calculate free cash flow differently. Because of these limitations, you should consider free cash flow alongside other financial performance measures, including net cash provided by operating activities, purchases of property and equipment and our other GAAP results. The following table presents a reconciliation of free cash flow to net cash provided by operating activities, as well as information regarding net cash used in investing activities and net cash provided by financing activities, for each of the periods indicated: Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 (in thousands) Net cash provided by operating activities $ 10,006 $ 1,855$ 34,451 $ 68,411 Purchases of property and equipment (1,388 ) (515 ) (3,904 ) (1,768 ) Free cash flow $ 8,618 $ 1,340$ 30,547 $ 66,643 Net cash used in investing activities $ (1,388 ) (515 )$ (3,904 ) $ (1,768 ) Net cash provided by financing activities $ 128 $ 1,231 $ 496 $ 9,448 Active Customers We define an active customer as a unique customer account from which a purchase was made across our platform at least once in the preceding 12-month period. We calculate the number of active customers on a trailing 12-month basis given the volatility that can be observed when calculating it on the basis of shorter periods that may not be reflective of longer-term trends; however, such a methodology may not be indicative of other short-term trends, such as changes in new customers. In any particular period, we determine our number of active customers by counting the total number of customers who have made at least one purchase in the preceding 12-month period, measured from the last date of such period. We view the number of active customers as a key indicator of our growth, the reach of our sites, the value proposition and consumer awareness of our brand, the continued use of our sites by our customers and their desire to purchase our products. We believe the number of active customers is a measure that is useful to investors and management in understanding our growth, brand awareness and market opportunity. Our number of active customers drives both net sales and our appeal to vendors. Active customers increased during the period endedSeptember 30, 2022 as compared to the period endedSeptember 30, 2021 due to in part to our ability to engage with our existing customers and acquire new customers through our sales and marketing efforts, and in part due to the easing of stay-at-home orders and other restrictions inthe United States and other key regions around the world.
Total Orders Placed
We define total orders placed as the total number of orders placed by our customers, prior to product returns, across our platform in any given period. We view total orders placed as a key indicator of the velocity of our business and an indication of the desirability of our products and sites to our customers. Total orders placed, together with average order value, is an indicator of the net sales we expect to recognize in a given period. We believe that total orders placed is a measure that is useful to investors and management in understanding our ongoing operations and in 23 --------------------------------------------------------------------------------
analysis of ongoing operating trends. Total orders placed and total orders shipped in any given period may differ slightly due to orders that are in process at the end of any particular period.
Total orders placed increased in the three and nine months endedSeptember 30, 2022 relative to the same periods in 2021 due to in part to our ability to engage with our existing customers and acquire new customers through our sales and marketing efforts, and in part due to the easing of stay-at-home orders and other restrictions inthe United States and other key regions around the world.
Average Order Value
We define average order value as the sum of the total gross sales from our sites in a given period, prior to product returns, divided by the total orders placed in that period. We believe our high average order value demonstrates the premium nature of our product assortment. We believe that average order value is a measure that is useful to investors and management in understanding our ongoing operations and in analysis of ongoing operating trends. Average order value varies depending on the site through which we sell merchandise, the mix of product categories sold, the number of units in each order, the percentage of sales at full price, and for sales at less than full price, the level of markdowns. Average order value increased in the three and nine months endedSeptember 30, 2022 relative to the same periods in 2021, primarily due to a shift in mix back to higher price point merchandise combined with an increase in the price of products as a result of the increase in the cost of goods and other input costs, partially offset by a lower percentage of full price sales.
Factors Affecting Our Performance
Impact of COVID-19 on Our Business
The COVID-19 pandemic had a material adverse impact on our business operations and operating results for 2020 due to business restrictions and social distancing measures imposed inthe United States and other countries, and the severe negative impact on macroeconomic conditions and consumer discretionary spending. As states began rolling back business restrictions and stay-at-home orders, our operating results improved. However, there continues to be uncertainty around the COVID-19 pandemic and its impact on our business operations and operating results. Our business operations and results of operations may continue to be adversely affected, including as a result of:
•
varying levels of restrictions within
•
increases in COVID-19 cases as a result of COVID-19 variants;
•
an increase in the cost of materials and disruption to the supply chain caused by distribution and other logistical issues, including labor shortages as well as potential bankruptcies impacting our suppliers or manufacturing partners;
•
decreased productivity due to work-from-home policies, travel bans or shelter-in-place orders; and
•
a slowdown in the global economy, an uncertain global economic outlook or a credit crisis.
Overall Economic Trends
The overall economic environment and related changes in consumer behavior have a significant impact on our business. In general, positive conditions in the broader economy promote customer spending on our sites, while economic weakness, which generally results in a reduction of customer spending, may have a more pronounced negative effect on spending on our sites. Macro factors that can affect consumer confidence, shopping behavior and spending patterns, and thereby our near-term and long-term results of operations, include inflation, employment rates, business conditions, changes in the housing market, changes in the stock market, the availability of credit,U.S. government stimulus payments, interest rates, fuel, energy and raw material costs, supply chain challenges andRussia's war againstUkraine . In addition, during periods of low unemployment, we generally experience higher labor 24 -------------------------------------------------------------------------------- costs. The COVID-19 pandemic has also had and may continue to have a materially adverse impact on the macroeconomic environment inthe United States and substantially all of our target markets. While COVID-19-related restrictions inthe United States have generally eased, strict lockdowns and continuing threats of future lockdowns inChina have resulted and could continue to result in further disruptions to production, shipping and other commercial activity.
Customer Acquisition and Retention and Growth in Brand Awareness
Our focus since inception has been on profitable growth, which has created our disciplined approach to acquiring new customers and retaining existing customers at a reasonable cost, relative to the contributions we expect from such customers. Failure to attract new visitors to our sites and convert them to customers would impact future net sales growth. If our marketing efforts do not connect with our customer or fail to cost-effectively promote our brand or convert impressions into new customers, our net sales growth and profitability will be adversely affected. Competition for social media and influencer-based marketing channels continues to increase, making it more difficult to differentiate ourselves and cost effectively acquire customers. Furthermore, changes in the user experience on social media platforms, including a shift towards video and the level of recommended content as well as changes in privacy practices by third parties may make it more difficult to gain customer awareness and cost effectively acquire and retain customers. Apple Inc. has imposed requirements for consumer disclosures regarding privacy practices, and has implemented an application tracking transparency framework that requires opt-in consent for certain types of tracking. This transparency framework was launched inApril 2021 and has made it more difficult and costly to acquire and retain customers, which may adversely affect our operating results. Additionally, inFebruary 2022 , Google announced it planned to adopt similar restrictions to restrict tracking activity across Android devices. We seek to engage with our customers and build awareness of our brands through sponsoring unique events and experiences such as #REVOLVEfestival, #REVOLVEaroundtheworld and theREVOLVE Gallery , as well as short-term pop-up retail experiences. With the travel restrictions and social distancing measures imposed in response to the COVID-19 pandemic during 2020, we were unable to engage with our customers through larger in-person activations such as #REVOLVEfestival, which had a negative impact on our ability to drive traffic to our sites, acquire new customers and retain our existing customers. As restrictions eased and to maximize our opportunity to capture consumer demand as economies reopened, during 2021 and during the first half of 2022 we increased our marketing investment and began hosting in-person events, including #REVOLVEfestival inApril 2022 after a two-year hiatus. We plan to continue to conduct in-person events at varying levels of scale in the future and make opportunistic investments in marketing initiatives that could increase marketing as a percentage of net sales to levels in excess of historical levels for certain quarters or periods of time in the future. This incremental investment may not deliver a meaningful return in the short term and may adversely impact our operating income in the short term. Our success is impacted not only by efficient and profitable customer acquisition and growth in brand awareness, but also by our ability to retain customers and encourage repeat purchases. Existing customers, whom we define as customers in a year who have purchased from us in any prior year, account for a greater share of active customers over time.
Merchandise Mix
We offer merchandise across a variety of product types, brands and price points. The brands we sell on our platform consist of a mix of emerging third-party, established third-party (including iconic luxury brands) and owned brands. Our product mix consists primarily of apparel, footwear, accessories and beauty products. Our merchandise mix across our two reporting segments and across our owned brand and third-party products carry a range of margin profiles and may cause fluctuations in our gross margin. For example, our owned brands have generally contributed higher gross margin as compared to third-party brands. We will continue to seek to increase the percentage of net sales from owned brands in an effort to increase our gross margin over time. Shifts in our owned brand mix and our broader category merchandise mix may result in fluctuations in our gross margin from period to period. 25 --------------------------------------------------------------------------------
Inventory Management
We leverage our platform and technology to buy and manage our inventory, including merchandise assortment and fulfillment center optimization. We utilize a data-driven "read and react" buying process to merchandise and curate the latest on-trend fashion. We generally make shallow initial inventory buys and then use our proprietary technology tools to identify and re-order best sellers, taking into account customer feedback across a variety of key metrics, which allows us to manage inventory and fashion risk. To ensure sufficient availability of merchandise, we generally purchase inventory in advance and frequently before apparel trends are confirmed. As a result, we are vulnerable to demand and pricing shifts and to suboptimal selection and timing of merchandise purchases. In the normal course of business, we incur inventory valuation adjustments, which impacts our gross margin. Moreover, our inventory investments will fluctuate with the needs of our business. For example, entering new categories will require additional investments in inventory. Shifts in inventory levels may result in fluctuations in the percentage of full price sales, levels of markdowns, merchandise mix, as well as gross margin. In addition, our sales demand had initially been adversely impacted as a result of the COVID-19 pandemic. In response, in 2020, we significantly reduced inventory receipts by canceling or delaying orders. With consumer demand trends improving beginning in the second quarter of 2020 and continuing to improve through 2021 and the first quarter of 2022, we invested heavily in inventory to meet the robust demand. However, during the second and third quarters of 2022, consumer demand trended down significantly, resulting in a significant increase in our inventory balance. We have taken swift action in our efforts to balance our inventory levels with the shift in demand, but we may not be able to respond quickly enough to adjust our inventory position accordingly, which may have an adverse impact on our operating results.
Investment in our Operations and Infrastructure
We have made investments over time to grow our customer base, enhance our offerings and deliver best-in-class service to our customers. Over the long term, we expect to continue to make capital investments in our inventory, fulfillment centers, and logistics infrastructure as we grow our customer base, launch new brands, expand internationally and drive operating efficiencies. We believe these investments will yield positive returns in the long term; however, we cannot be certain that these efforts will grow our customer base or be cost-effective in the short term.
Segment and Geographic Performance
Our financial results are affected by the performance across our two reporting segments, REVOLVE and FWRD, as well as across the various geographies in which we serve our customers. The REVOLVE segment contributes to a majority of our net sales, representing 82.6% and 83.7% of our net sales for the three months endedSeptember 30, 2022 and 2021, respectively, and 83.6% and 83.7% of our net sales for the nine months endedSeptember 30, 2022 and 2021, respectively. During the three months endedSeptember 30, 2022 and 2021, REVOLVE generated$222.1 million and$204.2 million in net sales, respectively, representing an increase of 8.7%. During the nine months endedSeptember 30, 2022 and 2021, REVOLVE generated$704.5 million and$545.2 million in net sales, respectively, representing an increase of 29.2%. The net sales increase in the three and nine months endedSeptember 30, 2022 , as compared to the same periods in 2021, was primarily due to an increase in the number of orders placed by customers combined with an increase in average order value. The FWRD segment contributes to a smaller portion of our overall net sales, representing 17.4% and 16.3% of our net sales for the three months endedSeptember 30, 2022 and 2021, respectively, and 16.4% and 16.3% of our net sales for the nine months endedSeptember 30, 2022 and 2021, respectively. During the three months endedSeptember 30, 2022 and 2021, FWRD generated$46.6 million and$39.9 million in net sales, respectively, representing an increase of 17.0%. During the nine months endedSeptember 30, 2022 and 2021, FWRD generated$137.7 million and$106.4 million in net sales, respectively, representing an increase of 29.4%. The net sales increase in the three and nine months endedSeptember 30, 2022 , as compared to the same periods in 2021, was primarily due to an increase in the number of orders placed by customers combined with an increase in average order value. Net sales to customers outside ofthe United States contributed to 19.0% and 18.7% of our net sales for the three months endedSeptember 30, 2022 and 2021, respectively, and 17.3% and 19.1% of our net sales for the nine months endedSeptember 30, 2022 and 2021, respectively. During the three months endedSeptember 30, 2022 and 2021, net 26 -------------------------------------------------------------------------------- sales to customers outside ofthe United States were$51.1 million and$45.6 million , respectively, representing an increase of 12.2%. During the nine months endedSeptember 30, 2022 and 2021, net sales to customers outside ofthe United States were$145.9 million and$124.4 million , respectively, representing an increase of 17.3%. Net sales to customers outside ofthe United States are impacted by various factors including import and export taxes, currency fluctuations and other macroeconomic conditions described in "-Overall Economic Trends" above. In addition, any weakening of a local currency versus theU.S. dollar results in our products becoming more expensive in that local currency, which has had, and may continue to have, a negative impact on demand for our products in the geographies that use such currency.
Seasonality
Seasonality in our business has not historically followed that of traditional retailers which typically experience concentration of net sales in the fourth calendar quarter in connection with the holidays. We historically experienced increased sales in the spring and summer months that have resulted in peak sales during the second quarter of each fiscal year. We also historically experienced lower activity in the first quarter of each year. The COVID-19 pandemic impacted our historical seasonality, resulting in the second quarter not being the peak quarter for the 2020 and 2021 fiscal years. With the exception of the COVID-19 pandemic and other unpredictable events such as the other macroeconomic conditions described in "-Overall Economic Trends" above, we expect our historical seasonality to revert closer to historical trends in 2022 and future years. Our operating income has also been affected by these historical trends because many of our expenses are relatively fixed in the short term. If our growth rates moderate over the long-term, the impact of these seasonality trends on our results of operations may become more pronounced.
Components of Our Results of Operations
Net sales consist primarily of sales of women's apparel, footwear, accessories and beauty products. We recognize product sales at the time control is transferred to the customer, which is when the product is shipped. Net sales represent the sales of these items and shipping revenue when applicable, net of estimated returns and promotional discounts. Net sales are primarily driven by growth in the number of our customers, the frequency with which customers purchase and average order value.
Cost of Sales
Cost of sales consists of our purchase price for merchandise sold to customers and includes import duties, net of drawback claims, and other taxes, inbound freight costs, receiving costs, defective merchandise returned from customers, inventory valuation adjustments, and other miscellaneous shrinkage. Cost of sales is primarily driven by the cost of the product, the number of total orders placed by customers, the mix of the product available for sale on our sites and transportation costs related to inventory receipts from our vendors. We expect our cost of sales to fluctuate as a percentage of net sales primarily due to how we manage our inventory and merchandise mix. We have recently experienced and may continue to experience an increase in the cost of goods due to an increase in the cost of materials as well as an increase in the cost of freight on inbound shipments due to various supply chain challenges across the industry and world. Fulfillment Expenses Fulfillment expenses represent those costs incurred in operating and staffing our fulfillment centers, including costs attributed to inspecting and warehousing inventories and picking, packaging and preparing customer orders for shipment. Fulfillment expenses also include the cost of warehousing facilities. Over the long term, we expect fulfillment expenses to decrease as a percentage of net sales, but we expect fulfillment expenses to fluctuate as a percentage of net sales in the short-term reflecting pressure from increased costs such as wages and other input cost pressure, expansion of our fulfillment network and an expected year-over-year increase in our return rate in 2022 due to a shift in product mix and our customers' propensity to return merchandise, to be partially offset by operating efficiencies from increased scale as well as automation of the fulfillment center workflow. 27 --------------------------------------------------------------------------------
Selling and Distribution Expenses
Selling and distribution expenses consist primarily of shipping and other transportation costs incurred delivering merchandise to customers and from customers returning merchandise, merchant processing fees, and customer service. Over the long term, we expect selling and distribution costs to remain relatively consistent as a percentage of net sales, but we expect selling and distribution expenses to increase year-over-year as a percentage of net sales in the short-term reflecting pressure from an expected year-over-year increase in our return rate due to product mix and our customers' propensity to return merchandise as well as increases in shipping costs, including the impact of fuel prices incurred through variable surcharges from our shipping partners.
Marketing Expenses
Marketing expenses consist primarily of targeted online performance marketing costs, such as paid search/product listing ads, paid social, retargeting, affiliate marketing, search engine optimization, personalized email marketing and mobile "push" communications through our mobile applications. Marketing expenses also consist of investment in brand marketing channels, including events, payments to influencers and other forms of online and offline marketing such as our brand ambassador program. Marketing expenses are primarily related to growing and retaining our customer base, building the REVOLVE and FWRD brands and expanding our owned brand presence. As a result of the impact on consumer discretionary spending and the required social distancing due to the COVID-19 pandemic, we reduced our marketing investment in absolute dollars and as a percentage of net sales in 2020. In 2021 and the first half of 2022, we increased our level of investment in marketing to maximize our opportunities to capture consumer demand as economies reopened. Over the long term, we expect marketing expenses to increase in absolute dollars as we continue to scale our business, and may fluctuate as a percentage of sales depending on net sales volume and the level of marketing investment in a particular period. We may make opportunistic investments in marketing initiatives that may increase marketing as a percentage of net sales to levels in excess of historical levels for certain quarters or periods of time in the future.
General and Administrative Expenses
General and administrative expenses consist primarily of payroll and related benefit costs and equity-based compensation expense for our employees involved in general corporate functions including merchandising, marketing, owned brands, studio and technology, as well as costs associated with the use by these functions of facilities and equipment, such as depreciation, rent and other occupancy expenses. In 2021, we reinvested significantly to expand our team to support our strong growth. General and administrative expenses are expected to increase in the near term as we plan to continue to invest in our team to support future growth. Over the long-term, we expect general and administrative expenses to continue to increase moderately in absolute dollars to support business growth and meet our obligations as a public company with general and administrative expenses as a percentage of revenue declining over the long-term as we leverage our investments and as our business scales.
Other (Income) Expense, Net
Other (income) expense, net consists primarily of interest income on our money market funds and interest expense and other fees associated with our line of credit. 28 --------------------------------------------------------------------------------
Results of Operations
The tables below set forth our results of operations for the periods presented and express the relationship of certain line items as a percentage of net sales for those periods. The period-to-period comparison of financial results is not necessarily indicative of future results. Three Months EndedSeptember 30 ,
Nine Months Ended
2022 2021 2022 2021 (in thousands) Net sales$ 268,711 $ 244,064 $ 842,263 $ 651,585 Cost of sales 126,329 109,588 383,228 293,226 Gross profit 142,382 134,476 459,035 358,359 Operating expenses: Fulfillment expenses 8,072 5,776 23,272 15,452 Selling and distribution expenses 46,477 38,354 145,030 95,470 Marketing expenses 44,584 46,955 141,755 108,054 General and administrative expenses 28,498 24,180 86,497 66,028 Total operating expenses 127,631 115,265 396,554 285,004 Income from operations 14,751 19,211 62,481 73,355 Other (income) expense, net (1,440 ) (158 ) (3,769 ) 339 Income before income taxes 16,191 19,369 66,250 73,016 Provision for income taxes 4,203 2,701 15,421 2,558 Net income $ 11,988 $ 16,668 $ 50,829 $ 70,458 Three Months Ended September 30, Nine Months Ended September 30, 2022 2021 2022 2021 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 47.0 % 44.9 % 45.5 % 45.0 % Gross profit 53.0 % 55.1 % 54.5 % 55.0 % Operating expenses: Fulfillment expenses 3.0 % 2.4 % 2.8 % 2.4 % Selling and distribution expenses 17.3 % 15.7 % 17.2 % 14.6 % Marketing expenses 16.6 % 19.2 % 16.8 % 16.6 % General and administrative expenses 10.6 % 9.9 % 10.3 % 10.1 % Total operating expenses 47.5 % 47.2 % 47.1 % 43.7 % Income from operations 5.5 % 7.9 % 7.4 % 11.3 % Other (income) expense, net (0.5 %) (0.1 %) (0.4 %) 0.1 % Income before income taxes 6.0 % 8.0 % 7.8 % 11.2 % Provision for income taxes 1.6 % 1.2 % 1.8 % 0.4 % Net income 4.4 % 6.8 % 6.0 % 10.8 %
Comparison of the Three Months Ended
Three Months Ended September 30, Change 2022 2021 $ % (dollars in thousands) Net sales$ 268,711 $ 244,064 $ 24,647 10.1 % The increase in net sales for the three months endedSeptember 30, 2022 , as compared to the same period in 2021, was primarily due to an increase in average order value of 15.9% and increase in the number of orders placed by customers of 6.6% as compared to the same period in 2021, partially offset by a higher proportion of returned purchases. 29 -------------------------------------------------------------------------------- Net sales in the REVOLVE segment increased 8.7% to$222.1 million in the three months endedSeptember 30, 2022 compared to net sales of$204.2 million in the same period in 2021. Net sales generated from our FWRD segment increased 17.0% to$46.6 million in the three months endedSeptember 30, 2022 as compared to net sales of$39.9 million in the same period in 2021. Cost of Sales Three Months Ended September 30, Change 2022 2021 $ % (dollars in thousands) Cost of sales$ 126,329 $ 109,588 $ 16,741 15.3 % Percentage of net sales 47.0 % 44.9 % The increase in cost of sales for the three months endedSeptember 30, 2022 , as compared to the same period in 2021, was primarily due to an increase in the volume of merchandise sold. The increase in cost of sales as a percentage of net sales was due to a lower percentage of full price sales and deeper markdowns within the markdown sales, partially offset by a higher mix of owned brand sales and a favorable shift in category mix of merchandise sales. Owned brand sales generally carry higher gross margins than that of third-party brand sales. Fulfillment Expenses Three Months Ended September 30, Change 2022 2021 $ % (dollars in thousands)
Fulfillment expenses $ 8,072 $ 5,776
3.0 % 2.4 % Fulfillment expenses for the three months endedSeptember 30, 2022 were higher as compared to the same period in 2021, primarily due to an increase in the number of units processed. The increase in fulfillment expenses as a percentage of net sales was primarily due to customers returning a higher proportion of their purchases, higher wages for fulfillment staff and the expansion of our fulfillment network.
Selling and Distribution Expenses
Three Months Ended September 30, Change 2022 2021 $ % (dollars in thousands) Selling and distribution expenses$ 46,477 $ 38,354 $ 8,123 21.2 % Percentage of net sales 17.3 % 15.7 % The increase in selling and distribution expenses for the three months endedSeptember 30, 2022 , as compared to the same period in 2021, was primarily due to an increase in the number of orders shipped. Shipping and handling costs increased$5.1 million , other selling expenses increased$1.5 million , customer service costs increased$0.8 million and merchant processing fees increased$0.7 million for the three months endedSeptember 30, 2022 as compared to the same period in 2021. The increase in selling and distribution expenses as a percentage of net sales was due to customers returning a higher proportion of their purchases as compared to the comparative period in the prior year combined with increased average shipping and handling fees per package through increases in carrier rates and fuel surcharges. 30 --------------------------------------------------------------------------------
Marketing Expenses Three Months Ended September 30, Change 2022 2021 $ % (dollars in thousands) Marketing expenses$ 44,584 $ 46,955 $ (2,371 ) -5.0 % Percentage of net sales 16.6 % 19.2 % The decrease in marketing expenses for the three months endedSeptember 30, 2022 , as compared to the same period in 2021, was due to reduced investment in brand marketing activations, partially offset by increased costs to acquire customers and retain existing customers through our other marketing channels to drive higher net sales. The decrease was due to a decrease in brand marketing expense of$5.6 million , partially offset by an increase of$3.2 million in performance marketing expense. Both periods presented reflect brand marketing expense related toThe REVOLVE Gallery during fashion week inNew York . In addition, the third quarter of 2021 reflects brand marketing expense related to the Dundas X REVOLVE Fashion Show.
General and Administrative Expenses
Three Months Ended September 30, Change 2022 2021 $ % (dollars in thousands) General and administrative expenses$ 28,498 $ 24,180 $ 4,318 17.9 % Percentage of net sales 10.6 % 9.9 % The increase in general and administrative expenses for the three months endedSeptember 30, 2022 , as compared to the same period in 2021, was due to a$2.5 million increase in salaries and related benefits and equity-based compensation expense related to an increase in our headcount, a$1.1 million increase related to professional services and other occupancy costs, and a$0.7 million increase in other operating expenses. The increase in general and administrative expenses as a percentage of net sales was primarily driven by growth in general and administrative expenses outpacing growth in net sales. Income Taxes Three Months Ended September 30, 2022 2021 (dollars in thousands) Income before income taxes$ 16,191 $ 19,369 Provision for income taxes 4,203 2,701 Effective tax rate 26.0 % 13.9 % The increase in the effective tax rate for the three months endedSeptember 30, 2022 , as compared to the same period in 2021, was primarily due to a decrease in excess tax benefits related to the exercise of non-qualified stock options.
Comparison of the Nine Months Ended
Nine Months Ended September 30, Change 2022 2021 $ % (dollars in thousands) Net sales$ 842,263 $ 651,585 $ 190,678 29.3 %
The increase in net sales for the nine months ended
31 --------------------------------------------------------------------------------
order value of 15.2% as compared to the same period in 2021, partially offset by a higher proportion of returned purchases.
Net sales in the REVOLVE segment increased 29.2% to$704.5 million in the nine months endedSeptember 30, 2022 compared to net sales of$545.2 million in the same period in 2021. Net sales generated from our FWRD segment increased 29.4% to$137.7 million in the nine months endedSeptember 30, 2022 as compared to net sales of$106.4 million in the same period in 2021. Cost of Sales Nine Months Ended September 30, Change 2022 2021 $ % (dollars in thousands) Cost of sales$ 383,228 $ 293,226 $ 90,002 30.7 % Percentage of net sales 45.5 % 45.0 % The increase in cost of sales for the nine months endedSeptember 30, 2022 , as compared to the same period in 2021, was primarily due to an increase in the volume of merchandise sold. The increase in cost of sales as a percentage of net sales was due to a lower percentage of full price sales and higher routine inventory adjustments, partially offset by a higher mix of owned brand sales and a favorable shift in category mix of merchandise sales. Owned brand sales generally carry higher gross margins than that of third-party brand sales. Fulfillment Expenses Nine Months Ended September 30, Change 2022 2021 $ % (dollars in thousands) Fulfillment expenses$ 23,272 $ 15,452 $ 7,820 50.6 % Percentage of net sales 2.8 % 2.4 % Fulfillment expenses for the nine months endedSeptember 30, 2022 were higher as compared to the same period in 2021, primarily due to an increase in the number of units processed. The increase in fulfillment expenses as a percentage of net sales was primarily due to customers returning a higher proportion of their purchases, higher wages for fulfillment staff and the expansion of our fulfillment network.
Selling and Distribution Expenses
Nine Months Ended September 30, Change 2022 2021 $ % (dollars in thousands) Selling and distribution expenses$ 145,030 $ 95,470 $ 49,560 51.9 % Percentage of net sales 17.2 % 14.6 % The increase in selling and distribution expenses for the nine months endedSeptember 30, 2022 , as compared to the same period in 2021, was primarily due to an increase in the number of orders shipped. Shipping and handling costs increased$31.4 million , merchant processing fees increased$8.0 million , other selling expenses increased$6.8 million and customer service costs increased$3.4 million for the nine months endedSeptember 30, 2022 as compared to the same period in 2021. The increase in selling and distribution expenses as a percentage of net sales was due to customers returning a higher proportion of their purchases as compared to the comparative period in the prior year combined with increased average shipping and handling fees per package through increases in carrier rates and fuel surcharges. 32 --------------------------------------------------------------------------------
Marketing Expenses Nine Months Ended September 30, Change 2022 2021 $ % (dollars in thousands) Marketing expenses$ 141,755 $ 108,054 $ 33,701 31.2 % Percentage of net sales 16.8 % 16.6 % The increase in marketing expenses for the nine months endedSeptember 30, 2022 , as compared to the same period in 2021, was due to an increase in marketing investments to acquire customers and retain existing customers to drive higher net sales. The increase was due to an increase in performance marketing expense of$25.0 million as well as an increase of$8.7 million in brand marketing expense. The higher investment in 2022 to date is reflective of the increased cost to acquire new customers and retain existing customers as well as investments made in brand marketing initiatives including The Homecoming Weekend events that took place in the first quarter duringSuper Bowl weekend, the opening of theRevolve Social Club inMarch 2022 , #REVOLVEfestival which we hosted inApril 2022 , the return ofREVOLVE Gallery in September and various other smaller scale events throughout the year to date period. Due to COVID-19 related restrictions in the comparable prior year period, our in-person, event-based marketing events were limited, particularly in the first half of the year.
General and Administrative Expenses
Nine Months Ended September 30, Change 2022 2021 $ % (dollars in thousands) General and administrative expenses$ 86,497 $ 66,028 $ 20,469 31.0 % Percentage of net sales 10.3 % 10.1 % The increase in general and administrative expenses for the nine months endedSeptember 30, 2022 , as compared to the same period in 2021, was due to a$9.0 million increase in salaries and related benefits and equity-based compensation expense related to an increase in our headcount, a$5.7 million accrual for a pending legal matter, a$3.2 million increase related to professional services and other occupancy costs, and a$2.6 million increase in other operating expenses to support business growth. The increase in general and administrative expenses as a percentage of net sales was primarily driven by the$5.7 million accrual for a pending legal matter. Income Taxes Nine Months Ended September 30, 2022 2021 (dollars in thousands)
Income before income taxes
15,421 2,558 Effective tax rate 23.3 % 3.5 % The increase in the effective tax rate for the nine months endedSeptember 30, 2022 , as compared to the same period in 2021, was primarily due to a decrease in excess tax benefits related to the exercise of non-qualified stock options. 33 --------------------------------------------------------------------------------
Liquidity and Capital Resources
The following table shows our cash and cash equivalents, accounts receivable and working capital as of the dates indicated:
As of September 30, 2022 December 31, 2021 (in thousands) Cash and cash equivalents $ 244,046 $ 218,455 Accounts receivable, net 6,720 4,639 Working capital(1) 327,991 279,620 (1)
Working capital for all periods presented above is defined as current assets less current liabilities.
As ofSeptember 30, 2022 , the majority of our cash and cash equivalents was held for working capital purposes. We believe that our existing cash and cash equivalents and cash flows from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, our liquidity assumptions may prove to be incorrect and we could exhaust our available financial resources sooner than we currently expect.
Sources of Liquidity
Since our inception, we have financed our operations and capital expenditures primarily through cash flows generated by operations, private sales of equity securities, the incurrence of debt, the net proceeds we received through our IPO, as well as proceeds received from the exercise of stock options.
Line of Credit
OnMarch 23, 2021 , we amended and restated our existing credit agreement to, among other things, extend the expiration date fromMarch 23, 2021 toMarch 23, 2026 . The line of credit provides us with up to$75.0 million aggregate principal in revolver borrowings, based on eligible inventory and accounts receivable less reserves. Borrowings under the credit agreement accrue interest, at our option, at (1) a base rate equal to the highest of (a) the federal funds rate, plus 0.50%, (b) the prime rate and (c) an adjusted LIBO rate determined on the basis of a one-month interest period, plus 1.00%, or (2) an adjusted LIBO rate, subject to a floor of 0.00%, in each case, plus a margin ranging from 0.25% to 0.75% per year in the case of base rate loans, and 1.25% to 1.75% per year in the case of LIBO rate loans. No borrowings were outstanding as ofSeptember 30, 2022 andDecember 31, 2021 . Our obligations under the credit agreement are secured by substantially all of our assets. The credit agreement also contains customary covenants restricting our activities, including limitations on our ability to sell assets, engage in mergers and acquisitions, enter into transactions involving related parties, obtain letters of credit, incur indebtedness or grant liens or negative pledges on our assets, make loans or make other investments. Under these covenants, we are prohibited from paying cash dividends with respect to our capital stock. We were in compliance with all financial covenants as ofSeptember 30, 2022 andDecember 31, 2021 . Uses of Cash Our short-term and long-term liquidity requirements primarily arise from operating costs such as merchandise purchases, compensation and benefits, lease obligations, marketing and other expenditures necessary to support our business growth. We used a substantial portion of the proceeds from the IPO to repurchase shares of our Class B common stock. We believe that our existing cash and cash equivalents, cash flows from operations as well as the available borrowing capacity under our line of credit will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, our liquidity assumptions may prove to be incorrect, and we could exhaust our available financial resources sooner than we currently expect. We may seek to borrow funds under our line of credit or raise additional funds at any time through equity, equity-linked or debt financing arrangements. Our future capital requirements and the adequacy of available funds will depend on many factors, including those described in the "Risk Factors" section of this report. We may not be able to secure additional financing to meet our operating requirements on acceptable terms or at all. 34 --------------------------------------------------------------------------------
Historical Cash Flows Nine Months EndedSeptember 30, 2022 2021
Net cash provided by operating activities
Net Cash Provided by Operating Activities
Cash from operating activities consists primarily of net income adjusted for certain non-cash items, including depreciation, equity-based compensation, and the effect of changes in working capital and other activities. For the nine months endedSeptember 30, 2022 , we generated$34.5 million of operating cash flow as compared to$68.4 million for the same period in 2021. The decrease in our operating cash flow was primarily due to negative impact from changes in working capital and lower net income adjusted for certain non-cash items.
Our primary investing activities have consisted of purchases of property and equipment to support our fulfillment centers and our overall business growth and internally developed software for the continued development of our proprietary technology infrastructure. Purchases of property and equipment may vary from period-to-period due to timing of the expansion of our operations. Net cash used in investing activities was$3.9 million and$1.8 million for the nine months endedSeptember 30, 2022 and 2021, respectively. The increase was primarily due to capital expenditures related to our new fulfillment centers.
Net Cash Provided by Financing Activities
Our financing activities primarily consist of proceeds from the exercise of stock options and borrowings and repayments related to the existing line of credit, when applicable.
Net cash provided by financing activities was
Off-Balance Sheet Arrangements
As of
Contractual Obligations
As ofSeptember 30, 2022 , our principal obligations consist of obligations under operating leases for office and fulfillment facilities. There have been no material changes in our contractual obligations and commitments as compared to the contractual obligations disclosed in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 , filed with theSEC onFebruary 28, 2022 .
Inflation
We have been impacted by rising levels of inflation in recent periods resulting in part from various supply chain disruptions, increased shipping and transportation costs, increased merchandise and labor costs and other disruptions caused by the COVID19 pandemic and general economic and market conditions. We continue to monitor the impact of inflation in order to minimize its effects through pricing strategies, productivity improvements and cost reductions. 35 --------------------------------------------------------------------------------
These mitigating actions may adversely impact demand for our products. Furthermore, if costs were to become subject to significant incremental inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
There have been no material changes to our critical accounting policies and
estimates as compared to the critical accounting policies and significant
judgments and estimates disclosed in our Annual Report on Form 10-K for the
fiscal year ended
Recent Accounting Pronouncements
See Note 2, Significant Accounting Policies, to our condensed consolidated financial statements included elsewhere in this report for information regarding recently issued accounting pronouncements.
36
--------------------------------------------------------------------------------
© Edgar Online, source