REVOLVE GROUP, INC. Special Note Regarding Forward-Looking Information
This discussion contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements containing words such as "may," "believe," "anticipate," "expect," "intend," "plan," "project," "projections," "business outlook," "estimate," or similar expressions constitute forward-looking statements. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition or state other "forward-looking" information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. They include, but are not limited to, statements about risks related to general economic conditions; the impact of the COVID-19 pandemic; our fluctuating operating results; seasonality in our business; our ability to acquire products on reasonable terms; our online business model; demand for our products; our ability to attract customers in a cost effective manner and retain our existing customers; the strength of our brand; competition; fraud; system interruptions; our ability to fulfill orders; 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 make our business model profitable, and of a quality that will continue to retain existing customers and attract new customers; and our ability to effectively engage in predictive analytics. Our actual results may differ materially from those contained in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, including those factors discussed in Part II, Item 1A (Risk Factors). In light of the significant uncertainties and risks inherent in these forward-looking statements, you should not regard these statements as a representation or warranty by us or anyone else that we will achieve our objectives and plans in any specified time frame, or at all, or as predictions of future events. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. 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. 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 and beauty styles. Our dynamic platform connects a deeply engaged community of millions of consumers, thousands of global fashion influencers, and hundreds of emerging, established and owned brands. Through 17 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 were founded in 2003 by our co-CEOs,Michael Mente andMike Karanikolas . We sell merchandise through two differentiated segments, REVOLVE and FORWARD, that leverage one platform. Through REVOLVE we offer a highly-curated assortment of full-price premium apparel and footwear, accessories and beauty products from emerging, established and owned brands. Through FORWARD we offer an assortment of iconic and emerging luxury brands. We believe that FORWARD provides our customer with a 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 identification and incubation of emerging brands and continued development of our owned brand portfolio. The focus on emerging and owned brands minimizes our assortment overlap with other retailers, supporting marketing efficiency, conversion and sales at full price. 19 -------------------------------------------------------------------------------- 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 17 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. 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 consumers, and these efforts have 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. 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 retargeting, paid search/product listing ads, affiliate marketing, paid social, personalized email marketing and mobile "push" communications through our app. We have developed an efficient logistics infrastructure, which allows us to provide free express shipping and free 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. In 2019, we expanded our capacity by occupying a new centralized warehouse facility, which we believe will support growth beyond 2023. To date, we have primarily focused on expanding ourU.S. business and have grown internationally with limited investment and no physical presence. We began offering a more localized shopping experience, including free express shipping, free returns and all-inclusive pricing, for customers in theUnited Kingdom and theEuropean Union inMay 2018 , inAustralia in late 2018, and free express shipping and free returns inNew Zealand andSingapore inJanuary 2020 . We are gradually increasing our level of investment in international expansion, by focusing onEurope ,Australia andCanada as well asAsia Pacific over the long term. We will continue to invest in and develop international markets while maintaining our focus on the core U.S. market.
Recent Developments
The COVID-19 pandemic has had a materially negative impact on our net sales starting in the second week ofMarch 2020 coincident with the escalation of the COVID-19 outbreak inthe United States and elsewhere. Net sales began to decline significantly year-over-year beginningmid-March 2020 . Net sales remained lower year-over-year as we entered the second quarter of 2020, but improved each month before exiting the second quarter with year-over-year net sales growth as we continued to adjust our marketing and merchandising assortment and as states began reopening and easing shelter-in-place restrictions. We also experienced weakness in some of our key operating metrics and headwinds in the factors affecting our performance which has continued into the third quarter. For additional information see the section captioned "-Key Operating and Financial Metrics" and "-Factors Affecting Our Performance." In earlyApril 2020 , shortly after the pandemic began to materially impact our net sales and based on our projections at the time, we took aggressive actions to mitigate the effect of COVID-19 on our business by reducing non-payroll related operating costs and reducing payroll costs through a combination of pay cuts, employee furloughs and, to a lesser extent, layoffs. We also eliminated or deferred non-essential capital expenditures, significantly reduced planned inventory receipts by canceling or delaying orders, in addition to extending payment terms for both merchandise and non-merchandise vendor invoices. 20 -------------------------------------------------------------------------------- As our business operations and operating results improved throughout the second quarter of 2020 in part due to the easing of stay-at-home orders and other state-imposed restrictions, we began the process of bringing back certain furloughed employees and returned the majority of our corporate employees, except for executives and senior management, to their pre-COVID-19 salaries and wages. In addition, we accrued for discretionary bonuses related to second quarter performance with payment subject to full year performance. In response to the improving trends in consumer demand, we sequentially increased our inventory purchases for future periods and increased operating expenses to support the business. Our facilities and employees are based in Los Angeles County where the government has imposed restrictions designed to slow the spread of COVID-19. The vast majority of our corporate employees continue to work from home. To protect the employees that perform certain limited functions that cannot be performed at home, including those in our fulfillment center, we have implemented measures, such as the requirement for personal protective equipment, mandatory temperature checks prior to entering the facility, social distancing, enhanced cleaning and sanitation and periodic testing. Government restrictions on travel and social distancing have caused the postponement or cancellation of several REVOLVE brand marketing events including the #REVOLVEfestival, our ongoing #REVOLVEaroundtheworld series of activations as well as other social activities that drove demand for many of our products. As of the date of this report, many states have begun easing and lifting shelter-in-place orders, however, it is unclear whether these restrictions will be reimposed due to a recent surge of new cases or if the COVID-19 pandemic will spur long-term changes in consumer behavior. Our supply chain has also been impacted by COVID-19. Initially, the impact was largely isolated to production and shipping delays inChina , but as COVID-19 spread worldwide the impact to our supply chain broadened to include European nations. The spread of COVID-19 also negatively impacted consumer demand. In response, we reduced inventory receipts by canceling or delaying orders, which has led to a significant decline in our inventory balance. With the improving trends in consumer demand during the second quarter, we began to increase our inventory purchases to support future expected demand. As a result of the increase in inventory purchases, we expect our inventory balance to increase in the third and fourth quarters of 2020, as compared to the second quarter of 2020. As compared to the prior year, we expect inventory to continue to be lower throughout 2020. Despite our efforts to increase our inventory purchases in response to increased consumer demand, there is a risk that we may not be able to secure sufficient inventory to support this increased demand. Furthermore, if consumer demand decreases again, we may not be able to respond quickly enough to adjust our inventory position accordingly. While we expect the effects of the pandemic and the related responses to continue to negatively impact our operating results, the duration and severity of the COVID-19 pandemic is unpredictable and we cannot reasonably estimate the extent to which our business will continue to be affected.
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 Ended June 30 ,
Six Months Ended
2020 2019 2020 2019
(in thousands, except average order value and percentages)
Gross margin 50.5 % 55.8 % 49.5 % 53.9 %
Adjusted EBITDA $ 20,877 $ 18,968 $ 26,486 $ 27,517
Free cash flow $ 52,976 $ 1,991 $ 60,506 $ 12,928
Active customers 1,533 1,359 1,533 1,359
Total orders placed 1,163 1,294 2,335 2,429
Average order value $ 204 $ 275 $ 231 $ 268
Adjusted EBITDA and free cash flow are non-GAAP measures. See the section 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.
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--------------------------------------------------------------------------------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, freight in, defective merchandise returned from
customers, receiving costs, inventory write-offs, 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
FORWARD 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.
However, in the near term, we expect that the contribution of owned brands will
decrease, which will adversely impact our overall gross margin. 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
monitor the 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 quantity and depth of markdowns has been elevated in
recent periods and may remain elevated in the short-term, in large part, as a
result of the COVID-19 pandemic that has reduced consumer demand and led to
increased promotional activity.
The COVID-19 pandemic has negatively impacted gross margins in several ways.
Product mix has shifted away from certain categories, such as dresses, with
relatively high margins, to other categories, such as beauty, with lower
margins. The percentage of full price sales has decreased as we have reduced our
inventory balance and reacted to heightened promotional activities by our
competitors, many of whom have physical storefronts and have been impacted even
more than eCommerce companies, such as us. In addition, the contribution to net
sales from our owned brands has decreased as described below in the section
captioned "-Factors Affecting Our Performance-Merchandise Mix." As a result of
our cost reduction efforts described above in the section captioned "-Recent
Developments," and as a result of work restrictions imposed by Los Angeles
County that have impeded our ability to design new styles and develop new
brands, we expect that contribution of owned brands will be adversely affected
for at least the remainder of 2020.
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.
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--------------------------------------------------------------------------------Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income before other expense, net, taxes, depreciation and amortization, adjusted to exclude the effects of equity-based compensation expense and certain non-routine expenses. Adjusted EBITDA is a key measure used by management 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.
A reconciliation of non-GAAP adjusted EBITDA to net income for the three and six
months ended
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
(in thousands)
Net income $ 14,236 $ 12,741 $ 18,392 $ 17,703
Excluding:
Other expense, net 174 444 47 660
Provision for income taxes 4,394 4,543 4,219 6,266
Depreciation and amortization 1,205 889 2,396 1,584
Equity-based compensation 868 521 1,432 1,032
Non-routine items(1) - (170 ) - 272
Adjusted EBITDA $ 20,877 $ 18,968 $ 26,486 $ 27,517 (1) Non-routine items in the three and six months ended
relate to legal settlements.
Adjusted EBITDA for the three months ended June 30, 2020 was positively impacted
by a substantial decrease in operating expenses, both in absolute dollars and as
a percentage of net sales, partially offset by lower net sales and lower gross
margins in the three months ended June 30, 2020 compared to the same period in
2019. Adjusted EBITDA for the six months ended June 30, 2020 was negatively
impacted by lower net sales and lower gross margins, partially offset by lower
operating expenses in absolute dollars and as a percentage of net sales in the
six months ended June 30, 2020 relative to the same period in 2019.
Free Cash Flow
Free cash flow is a non-GAAP financial measure that we calculate as net cash provided by operating activities less net cash used in capital expenditures. We view free cash flow as an important indicator of our liquidity because it measures the amount of cash we generate. Free cash flow also reflects changes in working capital.
A reconciliation of non-GAAP free cash flow to cash provided by operating
activities for the three and six months ended
Three Months Ended June 30 ,
Six Months Ended
2020 2019 2020 2019
(in thousands)
Net cash provided by
operating
activities $ 53,806 $ 6,759 $ 61,887 $ 22,683
Purchases of property and
equipment (830 ) (4,768 ) (1,381 ) (9,755 )
Free cash flow $ 52,976 $ 1,991 $ 60,506 $ 12,928
Net cash used in investing
activities $ (830 ) $ (4,768 ) $ (1,381 ) $ (9,755 )
Net cash (used in)
provided by
financing activities
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-------------------------------------------------------------------------------- Free cash flow for the three months endedJune 30, 2020 was positively impacted by the significant reduction in the amount of inventory purchases, a decrease in capital expenditures and, to a lesser extent, favorable changes in working capital compared to the same period in 2019. Free cash flow for the six months endedJune 30, 2020 was positively impacted by the significant reduction in the amount of inventory purchases and a decrease in capital expenditures, partially offset by unfavorable changes in working capital compared to the same period in 2019.
Adjusted Diluted Earnings per Share
Adjusted diluted earnings per share is a non-GAAP financial measure that we calculate as diluted earnings (net loss) per share adjusted to exclude the per share impact of the issuance and repurchase of Class B common stock as part of our initial public offering, or IPO. We believe adjusted diluted earnings per share, excluding the impact of the repurchase of our Class B common stock, is a measure that is useful to investors and management in understanding our ongoing operations and in analysis of ongoing operating trends. See Note 8, Earnings (Net Loss) per Share, of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information regarding our calculation of earnings (net loss) per share.
A reconciliation of non-GAAP adjusted diluted earnings per share to diluted
earnings (net loss) per share for the three and six months ended
Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Class A Class B Class A Class B Class A Class B Class A Class B
Earnings (net loss) per
share - diluted $ 0.20 $ 0.20 $ (0.57 ) $ (0.57 ) $ 0.26 $ 0.26 $ (0.51 ) $ (0.51 )
Repurchase of Class B
common stock, net - - 0.75 0.75 - - 0.76 0.76
Adjusted earnings per share
- diluted $ 0.20 $ 0.20 $ 0.18 $ 0.18 $ 0.26 $ 0.26 $ 0.25 $ 0.25
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.
Total Orders Placed
We define total orders placed as the total number of customer orders placed by
our customers across our platform in any 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 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.
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Total orders placed decreased in the three and six months ended June 30, 2020
relative to the same periods in 2019 due to reduced demand as a result of the
COVID-19 pandemic. Although the year-over-year comparison improved during the
second quarter of 2020, returning to a positive year-over-year comparison in
June consistent with net sales trends, due to the COVID-19 pandemic, it remains
uncertain whether total orders placed will continue to remain positive on a
year-over-year basis.
Average Order Value
We define average order value as the sum of the total gross sales from our sites in a given period divided by the total orders placed in that period. We believe our high average order value demonstrates the premium nature of our product. 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 percentage of sales at full price and for sales at less than full price, the level of markdowns. Average order value may also fluctuate as we expand into and increase our presence in additional product categories and price points, including the expansion of lower price points. Average order value decreased for the three and six months endedJune 30, 2020 relative to the same periods in 2019 driven by a shift in mix toward lower price point categories such as beauty, fewer units per order, a lower percentage of full price sales and higher markdowns on our marked down product. We expect average order value to continue to be lower year-over-year in the near term, primarily due to increased markdowns as well as a shift in mix to product categories with lower average selling prices due to the COVID-19 pandemic.
Factors Affecting Our Performance
Impact of COVID-19 on Our Business
The recent COVID-19 pandemic had a material adverse impact on our business operations and operating results for the first and second quarters of 2020 due to continued 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, particularly in the latter half of the second quarter. However, the COVID-19 pandemic is highly uncertain and we continue to expect that our business operations and results of operations will be adversely impacted through the remainder of 2020, including as a result of: • continued COVID-19 requirements for social distancing, including requirements by certain government authorities around the world for
people to continue to remain at home and for the closure of non-essential
businesses frequented by our customers for special social occasions;
• certain states, in particular
even reversing the easing of business restrictions.
• changing consumer spending habits, including a decrease in discretionary
consumer spending for the apparel merchandise that we sell, as well as
negative trends in consumer spending more generally due to the pandemic's
impact on consumers' disposable income, credit availability, debt levels
and consumer confidence;
• possible further disruption to the supply chain caused by distribution
and other logistical issues 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.
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-------------------------------------------------------------------------------- We are focused on navigating these recent challenges presented by COVID-19 through preserving our liquidity and managing our cash flow as well as temporarily adjusting our cost structure to more closely align with top line demand and meet our short-term liquidity needs. For additional information, see the section captioned "-Recent Developments."
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. Macroeconomic factors that can affect customer spending patterns, and thereby our results of operations, include employment rates, business conditions, changes in the housing market, the availability of credit, interest rates and fuel and energy costs. In addition, during periods of low unemployment, we generally experience higher labor costs. The COVID-19 pandemic has had a materially adverse impact on the macroeconomic environment inthe United States and substantially all of our target markets. We believe consumer demand has also been adversely impacted by the current political environment, including recent large-scale social unrest across much ofthe United States and volatile international trade relations.
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. Growth in the number of new customers has in the past, and is expected in the future, to vary from period to period and the percentage of new customer growth rate may slow as our customer base grows. Failure to attract new visitors to our sites and convert them to customers impacts future net sales growth. Prior to the onset of COVID-19, social media and influencer-based marketing continued to gain popularity and the market for these channels became increasingly competitive. With the onset of COVID-19, competition abated on both social media platforms as well as within the performance marketing channels we utilize to drive traffic. This resulted in favorable pricing. As competition and demand increased throughout the second quarter of 2020, pricing also began to increase. Despite the changing external environment and competitive landscape, we believe we have been able to maintain the effectiveness and efficiency of these channels. With the travel restrictions and social distancing measures imposed in response to the COVID-19 pandemic, we have been and will continue to be unable to engage with our customers through activations such as #REVOLVEfestival, #REVOLVEaroundtheworld and other travel and social related activities. As a result, we have shifted our brand marketing messaging and strategy to address the changes in behavior and preferences of our customer. If our 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. Furthermore, if competition for social media and influencer-based marketing channels returns to or exceeds pre-COVID-19 levels, our operating results may be adversely affected. 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 and owned brands. Our product mix consists primarily of
apparel, footwear, accessories, and beauty products.
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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. Historically,
we have sought to increase the percentage of net sales from owned brands, which
has led to an increase in gross margin over time. The mix between owned and
third-party net sales and the pace of growth for owned brand net sales will
vary. In the near term, shifts in merchandise mix as a result of changes in
customer demand due to COVID-19, as well as a decrease in the contribution of
owned brands, will adversely impact our overall gross margin. In the longer
term, shifts in merchandise mix driven by changes in customer demand may result
in fluctuations in our gross margin from period to period.
Inventory Management
We leverage our platform 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. We incur inventory write-offs, which impact our gross margins. 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. We believe our level of inventory in comparison to our net sales has impacted the percentage of sales at full price, gross margins on marked-down merchandise, and overall gross margin in the current period and will likely continue to impact the percentage of sales at full price, gross margin on marked-down merchandise, and overall gross margin in the near term. In addition, our sales demand has been adversely impacted as a result of COVID-19. In response, we have significantly reduced inventory receipts by canceling or delaying orders, which has led to a significant decline in our inventory balance. As our sales demand improved sequentially throughout the second quarter, we increased our inventory purchases to support this demand. Our response may continue to impact the pace of growth in net sales in the near term as we may not have sufficient inventory or the appropriate assortment to meet customer demand.
Investment in our Operations and Infrastructure
We have made investments over time to grow our customer base and enhance our offerings. Over the long term, we expect to continue to make capital investments in our inventory, fulfillment center, and logistics infrastructure as we 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 near term, we have reduced capital expenditures in response to the COVID-19 pandemic.
Segment and Geographic Performance
Our financial results are affected by the performance across our two reporting segments, REVOLVE and FORWARD, 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 88.9% of our net sales for both the three months endedJune 30, 2020 and 2019 and 87.0% and 89.1% of our net sales for the six months endedJune 30, 2020 , and 2019, respectively. During the three months endedJune 30, 2020 and 2019, REVOLVE generated$126.9 million and$143.9 million in net sales, respectively, representing a decrease of 11.8%. During the six months endedJune 30, 2020 and 2019, REVOLVE generated$251.4 million and$266.6 million in net sales, respectively, representing a decrease of 5.7%. The net sales decreases in the three and six months endedJune 30, 2020 , as compared to the same periods in 2019, were primarily due to a decrease in average order value as well as a decrease in the number of orders placed by customers, partially offset by fewer merchandise returns. We believe COVID-19 and, to a lesser extent our efforts to manage inventory levels, have materially impacted, and will continue to impact net sales and our gross margin in the near term. 27 -------------------------------------------------------------------------------- The FORWARD segment contributes to a smaller portion of our overall net sales, representing 11.1% of our net sales for both the three months endedJune 30, 2020 and 2019 and 13.0% and 10.9% of our net sales for the six months endedJune 30, 2020 and 2019, respectively. During the three months endedJune 30, 2020 and 2019, FORWARD generated$15.9 million and$18.0 million in net sales, respectively, representing a decrease of 11.6%. During the six months endedJune 30, 2020 and 2019, FORWARD generated$37.5 million and$32.6 million in net sales, respectively, representing an increase of 14.8%. The net sales decrease in the three months endedJune 30, 2020 , as compared to the same period in 2019, was primarily due to a decrease in average order value as well as a decrease in the number of orders placed by customers. The net sales increase in the six months endedJune 30, 2020 , as compared to the same period in 2019, was primarily due to an increase in the number of orders placed by customers partially offset by a decrease in average order value and fewer merchandise returns. If we are unable to continue to generate revenue and gross profit growth in the FORWARD segment, through the period impacted by COVID-19 and beyond, our financial results would be adversely impacted. Net sales to customers outside ofthe United States contributed to 18.6% and 16.0% of our net sales for the three months endedJune 30, 2020 and 2019, respectively, and 18.1% and 16.0% for the six months endedJune 30, 2020 and 2019, respectively. During the three months endedJune 30, 2020 and 2019, net sales to customers outside ofthe United States were$26.5 million and$25.8 million , respectively, representing an increase of 2.6%. During the six months endedJune 30, 2020 and 2019, net sales to customers outside ofthe United States were$52.3 million and$47.8 million , respectively, representing an increase of 9.4%. 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. Increases in taxes and negative movements in currencies have also had, and may continue to have, an adverse impact on our financial results. In addition, although net sales to customers outsidethe United States have also been, and likely will continue to be, negatively impacted by the COVID-19 pandemic, through the date of this report overall net sales to international customers have been relatively stronger than net sales to customers inthe United States .
Seasonality
Seasonality in our business does not follow that of traditional retailers, such as typical concentration of net sales in the holiday quarter. The recent COVID-19 pandemic has impacted our historical seasonality and has resulted in the postponement or cancellation of several REVOLVE brand marketing events including #REVOLVEfestival, which historically resulted in peak sales during the second quarter of each fiscal year. We have also experienced seasonally lower activity during the first quarter of each fiscal year, which was further impacted by COVID-19 in the first quarter of 2020. The seasonality trends that we have experienced historically will continue to change for the remainder of 2020 as we navigate through the recent challenges presented by the COVID-19 pandemic. With the exception of this specific event or events like it, we expect our historical seasonality to continue in 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 begin to moderate, in 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. 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, all of which have been negatively impacted by the COVID-19 pandemic.
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Cost of sales consists of our purchase price for merchandise sold to customers and includes import duties, net of drawback claims, and other taxes, freight-in, defective merchandise returned from customers, receiving costs, inventory write-offs, and other miscellaneous shrinkage. Cost of sales is primarily driven by growth in 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, both of which are further impacted by COVID-19.
Fulfillment Expenses
Fulfillment expenses represent those costs incurred in operating and staffing the fulfillment center, 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 as we may not able to fully offset the impact of COVID-19.
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 decrease as a percentage of net sales, but we expect selling and distribution expenses to fluctuate as a percentage of net sales in the short term as we may not able to fully offset the impact of COVID-19.
Marketing Expenses
Marketing expenses consist primarily of targeted online performance marketing
costs, such as retargeting, paid search/product listing ads, affiliate
marketing, paid social, search engine optimization, personalized email marketing
and mobile "push" communications through our app. Marketing expenses also
include our spend on brand marketing channels, including events, payments to
influencers and other forms of online and offline marketing. Marketing expenses
are primarily related to growing and retaining our customer base, building the
REVOLVE and FORWARD brands and expanding our owned brand presence. Over the long
term, we expect marketing expenses to increase in absolute dollars as we
continue to scale our business, but remain relatively consistent as a percentage
of net sales. As a result of the impact on consumer discretionary spending and
the required social distancing due to the COVID-19 pandemic, we have reduced our
marketing investment in absolute dollars and as a percentage of net sales, which
we expect to continue over the near-term.
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--------------------------------------------------------------------------------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, 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. General and administrative expenses are primarily driven by increases in headcount required to support business growth and meet our obligations as a public company. Due to the COVID-19 pandemic, we reduced costs in this area in the second quarter by reducing non-payroll related expenditures and reducing our payroll-related expenses through salary, wage and schedule reductions, furloughs and to a lesser extent, layoffs. As our business operations and operating results improved throughout the second quarter of 2020 due to adjustments in our marketing and merchandise assortment as well as the easing of stay-at-home orders and other state-imposed restrictions on businesses, we began the process of bringing back certain furloughed employees and returned the majority of our corporate employees, except for executives and senior management, to their pre-COVID-19 salaries and wages. In addition, we accrued for discretionary bonuses related to second quarter performance with payment subject to full year performance. However, if state-mandated restrictions are reimposed or if the reopening of states is delayed, general and administrative expenses may increase as a percentage of net sales in the short-term as expenses are largely fixed and do not fluctuate with net sales. In the long-term, we expect general and administrative expenses to decline as a percentage of net sales as we scale our business and leverage investments in these areas.
Other Expense, Net
Other expense, net consists primarily of interest expense and other fees associated with our line of credit and interest income on our money market funds.
Results of Operations
The following tables 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 Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
(in thousands)
Net sales $ 142,784 $ 161,897 $ 288,859 $ 299,240
Cost of sales 70,713 71,479 145,838 138,068
Gross profit 72,071 90,418 143,021 161,172
Operating expenses:
Fulfillment expenses 3,799 5,301 8,292 9,796
Selling and distribution
expenses 19,054 23,639 40,833 44,230
Marketing expenses 14,638 24,914 36,588 44,412
General and administrative
expenses 15,776 18,836 34,650 38,105
Total operating expenses 53,267 72,690 120,363 136,543
Income from operations 18,804 17,728 22,658 24,629
Other expense, net 174 444 47 660
Income before income taxes 18,630 17,284 22,611 23,969
Provision for income taxes 4,394 4,543 4,219 6,266
Net income $ 14,236 $ 12,741 $ 18,392 $ 17,703
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Three Months Ended June 30, Six Months Ended June 30,
2020 2019 2020 2019
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 49.5 % 44.2 % 50.5 % 46.1 %
Gross profit 50.5 % 55.8 % 49.5 % 53.9 %
Operating expenses:
Fulfillment expenses 2.7 % 3.3 % 2.9 % 3.3 %
Selling and distribution
expenses 13.3 % 14.6 % 14.1 % 14.8 %
Marketing expenses 10.3 % 15.4 % 12.7 % 14.8 %
General and administrative
expenses 11.0 % 11.6 % 12.0 % 12.7 %
Total operating expenses 37.3 % 44.9 % 41.7 % 45.6 %
Income from operations 13.2 % 11.0 % 7.8 % 8.2 %
Other expense, net 0.1 % 0.3 % 0.0 % 0.2 %
Income before income taxes 13.0 % 10.7 % 7.8 % 8.0 %
Provision for income taxes 3.1 % 2.8 % 1.5 % 2.1 %
Net income 10.0 % 7.9 % 6.4 % 5.9 %
Comparison of the Three Months Ended
Net Sales Three Months Ended June 30, Change 2020 2019 $ % (dollars in thousands) Net sales$ 142,784 $ 161,897 $ (19,113 ) (11.8 %) The decrease in net sales for the three months endedJune 30, 2020 , as compared to the same period in 2019, was primarily due to a decrease in average order value to$204 from$275 due to lower average order values within both segments and a decrease in the number of orders placed by customers of 10.1%. These decreases were partially offset by a decrease in the amount of returned merchandise. Net sales in the REVOLVE segment decreased 11.8% to$126.9 million in the three months endedJune 30, 2020 compared to net sales of$143.9 million in the same period in 2019. Net sales generated from our FORWARD segment decreased 11.6% to$15.9 million in the three months endedJune 30, 2020 compared to net sales of$18.0 million in the same period in 2019. Cost of Sales Three Months Ended June 30, Change 2020 2019 $ % (dollars in thousands) Cost of sales$ 70,713 $ 71,479 $ (766 ) (1.1 %)
Percentage of net sales 49.5 % 44.2 %
The decrease in cost of sales for the three months ended June 30, 2020 , as
compared to the same period in 2019, was primarily due to a decrease in the
volume of merchandise sold combined with lower receiving costs and inventory
write-offs, partially offset by a higher mix of third-party brand sales, which
generally carry higher cost of sales than that of owned brand goods. The
increase in cost of sales as a percentage of net sales was due to a higher
percentage of markdown sales and deeper markdowns within the markdown component
of net sales, combined with a shift in category mix of merchandise sales and a
higher mix of third party brand sales as compared to the same period in 2019.
Third-party brand sales generally carry lower gross margins than that of owned
brand sales.
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Fulfillment Expenses
Three Months Ended June 30, Change
2020 2019 $ %
(dollars in thousands)
Fulfillment expenses $ 3,799 $ 5,301 $ (1,502 ) (28.3 %)
Percentage of net sales 2.7 % 3.3 %
The decrease in fulfillment expenses for the three months ended June 30, 2020 ,
as compared to the same period in 2019, was the result of a decrease in the
number of units processed. The decrease in fulfillment expenses as a percentage
of net sales was primarily due to efficiencies gained through the consolidation
and automation of our fulfillment center in the prior year combined with lower
returned merchandise received.
Selling and Distribution Expenses
Three Months Ended June 30, Change
2020 2019 $ %
(dollars in thousands)
Selling and distribution
expenses $ 19,054 $ 23,639 $ (4,585 ) (19.4 %)
Percentage of net sales 13.3 % 14.6 %
The decrease in selling and distribution expenses for the three months ended
June 30, 2020 , as compared to the same period in 2019, was primarily the result
of a decrease in both the number of orders shipped and returned combined with
lower merchant processing fees, customer service costs, and packaging
expenses. Shipping and handling costs decreased $3.0 million , merchant
processing fees decreased $1.0 million , customer service expenses decreased $0.3
million , and packaging expenses decreased $0.3 million for the three months
ended June 30, 2020 as compared to the same period in 2019.
Marketing Expenses
Three Months Ended June 30, Change
2020 2019 $ %
(dollars in thousands)
Marketing expenses $ 14,638 $ 24,914 $ (10,276 ) (41.2 %)
Percentage of net sales 10.3 % 15.4 %
The decrease in marketing expenses for the three months ended June 30, 2020 , as
compared to the same period in 2019, was primarily due to reduced investment in
both brand marketing activations and performance marketing campaigns The reduced
marketing investment was driven primarily by the cancelation of several brand
marketing events, including the #REVOLVEfestival combined with cost-control
efforts and efficiencies in marketing investments due to COVID-19. As a result,
we experienced a decrease of $6.6 million in brand marketing expenses and a
decrease of $3.7 million in performance marketing expenses for the three months
ended June 30, 2020 as compared to the same period in 2019.
General and Administrative Expenses
Three Months Ended June 30, Change
2020 2019 $ %
(dollars in thousands)
General and administrative
expenses $ 15,776 $ 18,836 $ (3,060 ) (16.2 %)
Percentage of net sales 11.0 % 11.6 %
The decrease in general and administrative expenses in absolute dollars and as a
percentage of net sales for the three months ended June 30, 2020 as compared to
the same period in 2019, was due to the cost reduction actions
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taken in response to the COVID-19 pandemic which resulted in a $1.3 million
decrease in salaries and related benefits due to salary and wage reductions,
furloughs and, to a lesser extent, layoffs, a decrease of $0.7 million related
to lower professional services and other occupancy costs, and a $1.0 million
decrease in other costs as result of the elimination of non-essential items.
Income Taxes
Three Months Ended June 30,
2020 2019
(dollars in thousands)
Income before income taxes $ 18,630 $ 17,284
Provision for income taxes 4,394 4,543
Effective tax rate 23.6 % 26.3 %
The decrease in the effective tax rate for the three months ended June 30, 2020
as compared to the same period in 2019, was primarily due to an excess tax
benefit related to the exercise of non-qualified stock options during the second
quarter of 2020.
Comparison of the Six Months Ended
Net Sales Six Months Ended June 30, Change 2020 2019 $ % (dollars in thousands) Net sales$ 288,859 $ 299,240 $ (10,381 ) (3.5 %) The decrease in net sales for the six months endedJune 30, 2020 , as compared to the same period in 2019, was primarily due to a decrease in average order value to$231 from$268 in the same period in 2019 and a decrease in the number of orders placed by customers of 3.9% as compared to the same period in 2019. These decreases were partially offset by a decrease in the amount of returned merchandise. Net sales in the REVOLVE segment decreased 5.7% to$251.4 million in the six months endedJune 30, 2020 compared to net sales of$266.6 million in the same period in 2019. Net sales generated from our FORWARD segment increased 14.8% to$37.5 million in the six months endedJune 30, 2020 as compared to net sales of$32.6 million in the same period in 2019. Cost of Sales Six Months Ended June 30, Change 2020 2019 $ % (dollars in thousands) Cost of sales$ 145,838 $ 138,068 $ 7,770 5.6 %
Percentage of net sales 50.5 % 46.1 %
The increase in cost of sales for the six months ended June 30, 2020 , as
compared to the same period in 2019, was primarily due to a higher mix of
third-party brand sales, which generally carry higher cost of sales than that of
owned brand goods, partially offset by a decrease in volume of merchandise sold.
The increase in cost of sales as a percentage of net sales was due to a shift in
category mix of merchandise sales, a higher percentage of markdown sales and
deeper markdowns within the markdown sales, combined with a higher mix of third
party brand sales as compared to the same period in 2019. Third-party sales
generally carry lower gross margins than that of owned brand sales.
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Fulfillment Expenses
Six Months Ended June 30, Change
2020 2019 $ %
(dollars in thousands)
Fulfillment expenses $ 8,292 $ 9,796 $ (1,504 ) (15.4 %)
Percentage of net sales 2.9 % 3.3 %
The decrease in fulfillment expenses for the six months ended June 30, 2020 , as
compared to the same period in 2019, was primarily the result of a decrease in
the number of units processed and a decrease in the incremental costs associated
with moving into our new fulfillment center in the prior year. The decrease in
fulfillment expenses as a percentage of net sales was primarily due to lower
moving costs and rent expense, efficiencies gained through the consolidation and
automation of our fulfillment center that took place in 2019 combined with lower
returned merchandise received.
Selling and Distribution Expenses
Six Months Ended June 30, Change
2020 2019 $ %
(dollars in thousands)
Selling and distribution
expenses $ 40,833 $ 44,230 $ (3,397 ) (7.7 %)
Percentage of net sales 14.1 % 14.8 %
The decrease in selling and distribution expenses for the six months ended
June 30, 2020 , as compared to the same period in 2019, was the result of a
decrease in both the number of orders shipped and returned combined with lower
merchant processing fees. Shipping and handling costs decreased $2.3 million and
merchant processing fees decreased $1.2 million for the six months ended June
30, 2020 as compared to the same period in 2019.
Marketing Expenses
Six Months Ended June 30, Change
2020 2019 $ %
(dollars in thousands)
Marketing expenses $ 36,588 $ 44,412 $ (7,824 ) (17.6 %)
Percentage of net sales 12.7 % 14.8 %
The decrease in marketing expenses for the six months ended June 30, 2020 , as
compared to the same period in 2019, was primarily due to reduced investment in
both brand marketing activations and performance marketing campaigns. The
reduced marketing investment was driven primarily by the cancelation of several
brand marketing events, including the #REVOLVEfestival combined with
cost-control efforts and efficiencies in marketing investments due to COVID-19.
As a result, we experienced a decrease of $4.4 million in brand marketing
expenses and a decrease of $3.4 million in performance marketing expenses for
the six months ended June 30, 2020 as compared to the same period in 2019.
General and Administrative Expenses
Six Months Ended June 30, Change
2020 2019 $ %
(dollars in thousands)
General and administrative
expenses $ 34,650 $ 38,105 $ (3,455 ) (9.1 %)
Percentage of net sales 12.0 % 12.7 %
The decrease in general and administrative expenses in absolute dollars and as a
percentage of net sales for the six months ended June 30, 2020 as compared to
the same period in 2019, was due to the cost reduction actions taken
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in response to the COVID-19 pandemic which resulted in a $1.1 million decrease
in salaries and related benefits due to salary and wage reductions, furloughs
and layoffs, and a $2.8 million decrease in other operating expenses as result
of the elimination of non-essential items, partially offset by an increase of
$0.5 million in costs to operate as a public company.
Income Taxes
Six Months Ended June 30,
2020 2019
(dollars in thousands)
Income before income taxes $ 22,611 $ 23,969
Provision for income taxes 4,219 6,266
Effective tax rate 18.7 % 26.1 %
The decrease in the effective tax rate for the six months ended June 30, 2020 ,
as compared to the same period in 2019, was primarily due to an excess tax
benefit related to the exercise of non-qualified stock options during the six
months ended June 30, 2020 .
Liquidity and Capital Resources
The following tables show our cash and cash equivalents, accounts receivable and working capital as of the dates indicated:
As of
June 30, 2020 December 31, 2019
(in thousands)
Cash and cash equivalents $ 150,772 $ 65,418
Accounts receivable, net 4,849
4,751
Working capital 118,919 97,816
As of June 30, 2020 , the majority of our cash and cash equivalents was held for
working capital purposes. In March 2020 , due to the uncertain environment
created by the COVID-19 pandemic and out of an abundance of caution, we elected
to draw down $30 million in borrowings under our line of credit of which $6.0
million was subsequently repaid in June 2020 . In addition, in the first part of
April, we took preemptive actions to preserve our liquidity and manage our cash
flow by reducing non-payroll related operating costs and reducing payroll costs
through a combination of pay cuts, employee furloughs and to a lesser extent
layoffs. We also eliminated or deferred non-essential capital expenditures,
significantly reduced planned inventory receipts by canceling or delaying
orders, in addition to extending payment terms for both merchandise and
non-merchandise vendor invoices. As our business operations and operating
results gradually improved throughout the second quarter of 2020, in part due to
a shift in our marketing and merchandise assortment and the easing of
stay-at-home orders and other state-imposed restrictions on businesses, we began
the process of bringing back certain furloughed employees and returned the
majority of our corporate employees, except for executives and senior
management, to their pre-COVID-19 salaries and wages. In addition, we accrued
for discretionary bonuses related to second quarter performance with payment
subject to full year performance. However, due to the continued uncertainty
surrounding the COVID-19 pandemic, we plan to continue controlling our cost
structure, capital expenditures and liquidity position through the efforts
previously mentioned. 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, including the repayment of outstanding
borrowings upon the expiration of our line of credit. However, our liquidity
assumptions may prove to be incorrect given the uncertainty of the COVID-19
pandemic and we could exhaust our available financial resources sooner than we
currently expect.
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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, as well as the net proceeds we received through our IPO. As ofJune 30, 2020 , we have raised a total of$68.3 million from the sale of equity units, net of costs and expenses associated with such financings, including net proceeds from our IPO. Our primary use of cash includes operating costs such as merchandise purchases, compensation and benefits, 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 our existing cash and cash equivalent balances and cash flows from operations will be sufficient to meet our working capital and capital expenditure needs for at least the next 12 months, including the repayment of outstanding borrowings upon the expiration of our line of credit. However, our liquidity assumptions may prove to be incorrect given the uncertainty of the COVID-19 pandemic, and we could exhaust our available financial resources sooner than we currently expect. We may seek to borrow additional 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 Item 1A - Risk Factors of this Quarterly Report on Form 10-Q. We may not be able to secure additional financing to meet our operating requirements on acceptable terms, or at all.
Line of Credit
InMarch 2016 , we entered into a line of credit withBank of America, N.A . that provides us with up to$75.0 million aggregate principal in revolver borrowings. 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) the LIBOR rate plus 1.00%, in each case plus a margin ranging from 0.25% to 0.75%, or (2) an adjusted LIBOR rate plus a margin ranging from 1.25% to 1.75%. We are also obligated to pay other customary fees for a credit facility of this size and type, including an unused commitment fee and fees associated with letters of credit. The credit agreement also permits us, in certain circumstances, to request an increase in the facility by an additional amount of up to$25.0 million (in an initial minimum amount of$10 million and in increments of$5 million thereafter) at the same maturity, pricing and other terms. As ofJune 30, 2020 , we had$24.0 million outstanding on the line of credit. The weighted-average interest rate of debt outstanding atJune 30, 2020 was 2.2%. No borrowings were outstanding as ofDecember 31, 2019 . Our obligations under the credit agreement are secured by substantially all of our assets. The credit agreement also contains customary covenants restricting our activities, including limitations on our ability to sell assets, engage in mergers and acquisitions, enter into transactions involving related parties, obtain letters of credit, incur indebtedness or grant liens or negative pledges on our assets, make loans or make other investments. Under these covenants, we are prohibited from paying cash dividends with respect to our capital stock. We were in compliance with all covenants as ofJune 30, 2020 andDecember 31, 2019 . Historical Cash Flows Six Months Ended June 30, 2020 2019 Net cash provided by operating activities$ 61,887 $ 22,683 Net cash used in investing activities (1,381 ) (9,755 ) Net cash provided by financing activities 25,315 15,535 36
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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 six months endedJune 30, 2020 , we generated$61.9 million of operating cash flow as compared to$22.7 million for the same period in 2019. The increase in our operating cash flow was primarily due to favorable changes in working capital primarily due to lower inventory receipts, as well as an increase in net income.
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$1.4 million and$9.8 million for the six months endedJune 30, 2020 and 2019, respectively. The decrease was primarily due to capital expenditures incurred during the six months endedJune 30, 2019 relating to the consolidation, expansion and automation of our fulfillment center infrastructure, which was completed in late 2019.
Net Cash Provided by Financing Activities
Until our IPO, our financing activities historically have primarily consisted of borrowings and repayments related to the existing line of credit.
Net cash provided by financing activities was$25.3 million for the six months endedJune 30, 2020 , which was attributable to proceeds from borrowings on our line of credit, net of repayments, and the cash proceeds from the exercise of stock options. Net cash provided by financing activities was$15.5 million for the six months endedJune 30, 2019 , which was attributable to the proceeds from our IPO, net of the repurchase of the preference amount, underwriting discounts, and offering expenses, in addition to payments of deferred offering costs.
Contractual Obligations
As ofJune 30, 2020 , 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 disclosed in our Annual Report on Form 10-K for the year endedDecember 31, 2019 , filed with theSEC onFebruary 26, 2020 .
Off-Balance Sheet Arrangements
As of
Critical Accounting Policies
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.
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There have been no material changes to our critical accounting policies as
compared to the critical accounting policies and significant judgments and
estimates disclosed in our Annual Report on Form 10-K for the year ended
Emerging Growth Company Status
Section 107 of the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an "emerging growth company" can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. Section 107 of the JOBS Act provides that any decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable. We have elected to use this extended transition period under the JOBS Act.
Recent Accounting Pronouncements
See Note 2, Significant Accounting Policies, of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information regarding recently issued accounting pronouncements.
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