REVOLVE GROUP, INC. 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, and Section 21E of the Securities Exchange Act of 1934, as amended. 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 other, 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 theSecurities and Exchange Commission . 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: • the continued impact of the COVID-19 pandemic on our business, operations and financial results; • 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 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;
• our reliance on overseas suppliers and manufacturing partners,
particularly in China ;
• our ability to respond to consumer demand, spending and tastes, and our
ability to accurately and effectively engage in predictiveanalytics;
• general economic conditions and their impact on consumer demand;
• our ability to expand our operations in an efficient and cost-effective
manner;
• our ability to sustain and expand our gross margin and Adjusted EBITDA
margin, a non-GAAP financial measure;
• 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;
21
--------------------------------------------------------------------------------
• 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," "Management's Discussion and Analysis of Financial Condition and Results of Operations" and in our Consolidated Financial Statements and the related Notes. 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 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 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. 22 -------------------------------------------------------------------------------- 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. A majority of our traffic is derived from organic sources with unpaid social marketing and word of mouth being the largest sources of new customers. 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 and inCanada inOctober 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 material negative impact on our net sales starting in the second week ofMarch 2020 coincident with the escalated spread of the COVID-19 pandemic inthe United States and elsewhere. Net sales began to decline significantly year-over-year beginning inmid-March 2020 . Net sales remained lower year-over-year as we entered the second quarter of 2020, but improved in the latter half of the second quarter before stabilizing for most of the third quarter, with third quarter net sales approximately comparable with the prior year period. We also experienced weakness in some of our key operating metrics and headwinds in the factors affecting our performance which has continued into the fourth 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. As our business operations and operating results improved in the second and third quarters 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 our corporate employees to their pre-COVID-19 salaries and wages. By 23
-------------------------------------------------------------------------------- the end of the third quarter, all remaining employees were returned to their pre-COVID compensation levels. In addition, we accrued for discretionary bonuses related to our second and third quarter performance with payment subject to full year 2020 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 the majority of our 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 regular, 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 eased and lifted 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. Overseas, additional restrictions have recently been reinstated in several countries, including theUnited Kingdom ,France ,Germany andSpain , following increased COVID-19 outbreaks. 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 and third quarters, 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 fourth quarter of 2020, as compared to the third quarter of 2020. We expect inventory to be lower at the end of 2020 as compared to the prior year. 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. As a result of social distancing and stay at home orders around the world, demand for our largest product categories that are focused on social occasions has been significantly negatively impacted. Furthermore, during this time we are unable to host large-scale, in-person events that are key to driving awareness, traffic and new customers. 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 September 30 ,
Nine Months Ended
2020 2019 2020 2019
(in thousands, except average order value and percentages)
Gross margin 55.3 % 53.6 % 51.5 % 53.8 %
Adjusted EBITDA $ 24,025 $ 14,438 $ 50,511 $ 41,955
Free cash flow $ 13,877 $ 7,448 $ 74,383 $ 20,376
Active customers 1,504 1,438 1,504 1,438
Total orders placed 1,141 1,194 3,476 3,623
Average order value $ 232 $ 275 $ 232 $ 270
24
-------------------------------------------------------------------------------- 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.
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. After a few consecutive quarters of comparably higher levels of markdowns and deeper markdowns, the quantity and depth of markdowns decreased in the third quarter of 2020 due to our efficient management of inventory combined with less competitive promotional pressure from competitors when compared to the second quarter of 2020. 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 increased sequentially and was attributable to efficient inventory management resulting in lower mix of markdown inventory and sales. 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.
Adjusted EBITDA
Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income
before other expense (income), 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.
25
--------------------------------------------------------------------------------
A reconciliation of non-GAAP adjusted EBITDA to net income for the three and
nine months ended
Three Months Ended September 30 ,
Nine Months Ended
2020 2019 2020 2019
(in thousands)
Net income $ 19,438 $ 9,559 $ 37,830 $ 27,262
Excluding:
Other expense (income), net 253 (7 ) 300 653
Provision for income taxes 2,104 3,281 6,323 9,547
Depreciation and amortization 1,250 1,132 3,646 2,716
Equity-based compensation 980 513 2,412 1,545
Non-routine items(1) - (40 ) - 232
Adjusted EBITDA $ 24,025 $ 14,438 $ 50,511 $ 41,955 (1) Non-routine items in the nine months ended
relate to legal settlements.
Adjusted EBITDA for the three months ended September 30, 2020 was positively
impacted by a substantial decrease in operating expenses, both in absolute
dollars and as a percentage of net sales, and higher gross margins compared to
the three months ended September 30, 2019 . Adjusted EBITDA for the nine months
ended September 30, 2020 was positively impacted by a substantial decrease in
operating expenses, partially offset by lower net sales and lower gross margins
in the nine months ended September 30, 2020 compared 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 nine months ended
Three Months Ended September 30 ,
Nine Months Ended
2020 2019 2020 2019
(in thousands)
Net cash provided by
operating
activities $ 14,340 $ 9,150 $ 76,227 $ 31,833
Purchases of property and
equipment (463 ) (1,702 ) (1,844 ) (11,457 )
Free cash flow $ 13,877 $ 7,448 $ 74,383 $ 20,376
Net cash used in investing
activities $ (463 ) (1,702 ) $ (1,844 ) $ (11,457 )
Net cash (used in)
provided by
financing activities $ (6,292 ) $ (968 ) $ 19,024 $ 14,567
Free cash flow for the three months ended September 30, 2020 was positively
impacted by the increase in net income adjusted for non-cash items, partially
offset by unfavorable changes in working capital compared to the same period in
2019. Free cash flow for the nine months ended September 30, 2020 was positively
impacted by the increase in net income adjusted for non-cash items, the
significant reduction in inventory and the decrease in capital expenditures,
partially offset by the decrease in the reserve for merchandise returns compared
to the same period in 2019.
26
--------------------------------------------------------------------------------
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 nine months ended
Three Months Ended September 30, Nine Months Ended September 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 $ 0.27 $ 0.27 $ 0.13 $ 0.13 $ 0.52 $ 0.52 $ (0.25 ) $ (0.25 )
Repurchase of Class B
common stock, net - - - - - - 0.63 0.63
Adjusted earnings per share
- diluted $ 0.27 $ 0.27 $ 0.13 $ 0.13 $ 0.52 $ 0.52 $ 0.38 $ 0.38
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. We experienced a decline in new customers in
the third quarter, which resulted in a sequential decrease in active customers
when compared to the second quarter of 2020.
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. Total orders placed decreased in the three and nine months endedSeptember 30, 2020 relative to the same periods in 2019 due to reduced demand as a result of the COVID-19 pandemic. 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 27
-------------------------------------------------------------------------------- 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, and 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 months endedSeptember 30, 2020 relative to the same period in 2019 driven by a shift in mix toward lower price point categories such as beauty and fewer units per order, partially offset by a higher percentage of full price sales and lower markdowns on our markdown product. Average order value decreased for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 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 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 COVID-19 pandemic had a material adverse impact on our business operations and operating results for the first three 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. 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 at least 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 and countries halting and 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.
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
28
-------------------------------------------------------------------------------- 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 , volatile international trade relations and the presidential election.
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 slowed in recent periods and was lower year-over-year in the third quarter of 2020, primarily due to COVID-19. 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 initially. As competition and demand increased throughout the second and third quarters of 2020, pricing increased. 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, which has a negative impact on our ability to drive traffic to our sites, acquire new customers and retain our existing customers. 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, competition for social media and influencer-based marketing channels continues to increase, which may adversely affect our operating results. 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.
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.
29
--------------------------------------------------------------------------------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. In addition, our sales demand has been adversely impacted as a result of COVID-19. In response, we significantly reduced inventory receipts by canceling or delaying orders, which led to a significant decline in our inventory balance. As our sales demand improved sequentially, 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. Conversely, if demand does not improve in line with our inventory commitments, we may carry excess inventory leading to higher markdowns, adversely impacting gross margins.
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 86.5% and 87.8% of our net sales for the three months endedSeptember 30, 2020 and 2019 and 86.8% and 88.7% of our net sales for the nine months endedSeptember 30, 2020 and 2019, respectively. During the three months endedSeptember 30, 2020 and 2019, REVOLVE generated$130.6 million and$135.4 million in net sales, respectively, representing a decrease of 3.6%. During the nine months endedSeptember 30, 2020 and 2019, REVOLVE generated$382.0 million and$402.0 million in net sales, respectively, representing a decrease of 5.0%. The net sales decreases in the three and nine months endedSeptember 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. The FORWARD segment contributes to a smaller portion of our overall net sales, representing 13.5% and 12.2% of our net sales for the three months endedSeptember 30, 2020 and 2019 and 13.2% and 11.3% of our net sales for the nine months endedSeptember 30, 2020 and 2019, respectively. During the three months endedSeptember 30, 2020 and 2019, FORWARD generated$20.5 million and$18.8 million in net sales, respectively, representing an increase of 9.0%. During the nine months endedSeptember 30, 2020 and 2019, FORWARD generated$57.9 million and$51.4 million in net sales, respectively, representing an increase of 12.7%. The net sales increase in the three months endedSeptember 30, 2020 , as compared to the same period in 2019, was primarily due to fewer merchandise returns, partially offset by a decrease in average order value and a decrease in the number of orders placed by customers. The net sales increase in the nine months endedSeptember 30, 2020 , as compared to the same period in 2019, was primarily due to an increase in the number of orders placed by customers and fewer merchandise returns, partially offset by a decrease in average order value. If we are unable to continue to generate 30 --------------------------------------------------------------------------------
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 20.2% and 16.8% of our net sales for the three months endedSeptember 30, 2020 and 2019, respectively, and 18.8% and 16.3% for the nine months endedSeptember 30, 2020 and 2019, respectively. During the three months endedSeptember 30, 2020 and 2019, net sales to customers outside ofthe United States were$30.6 million and$26.0 million , respectively, representing an increase of 17.8%. During the nine months endedSeptember 30, 2020 and 2019, net sales to customers outside ofthe United States were$82.8 million and$73.7 million , respectively, representing an increase of 12.3%. 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. 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.
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, 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.
31
--------------------------------------------------------------------------------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 as well as restocking returned merchandise. 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. In addition, with the increase in online sales as a result of COVID-19, capacity with our third party carriers may be impacted, resulting in an increase in our shipping rates.
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. We have started to increase our level of investment in marketing and expect marketing expressed as a percentage of net sales to return to historical levels in the near 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, 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 in the second and third quarters 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 our corporate
employees to their pre-COVID-19 salaries and wages. By the end of the third
quarter, all remaining employees were returned to their pre-COVID compensation
levels. In addition, we accrued for discretionary bonuses related to second and
third quarter performance with payment subject to full year 2020 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.
32
--------------------------------------------------------------------------------Other Expense (Income), Net
Other expense (income), 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 September 30 ,
Nine Months Ended
2020 2019 2020 2019
(in thousands)
Net sales $ 151,036 $ 154,197 $ 439,895 $ 453,437
Cost of sales 67,569 71,519 213,407 209,587
Gross profit 83,467 82,678 226,488 243,850
Operating expenses:
Fulfillment expenses 4,158 5,118 12,450 14,914
Selling and distribution
expenses 20,870 22,581 61,703 66,811
Marketing expenses 18,903 23,127 55,491 67,539
General and administrative
expenses 17,741 19,019 52,391 57,124
Total operating expenses 61,672 69,845 182,035 206,388
Income from operations 21,795 12,833 44,453 37,462
Other expense (income),
net 253 (7 ) 300 653
Income before income taxes 21,542 12,840 44,153 36,809
Provision for income taxes 2,104 3,281 6,323 9,547
Net income $ 19,438 $ 9,559 $ 37,830 $ 27,262
Three Months Ended September 30, Nine Months Ended September 30,
2020 2019 2020 2019
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales 44.7 % 46.4 % 48.5 % 46.2 %
Gross profit 55.3 % 53.6 % 51.5 % 53.8 %
Operating expenses:
Fulfillment expenses 2.8 % 3.3 % 2.9 % 3.3 %
Selling and distribution
expenses 13.8 % 14.6 % 14.0 % 14.7 %
Marketing expenses 12.5 % 15.0 % 12.6 % 14.9 %
General and administrative
expenses 11.7 % 12.3 % 11.9 % 12.6 %
Total operating expenses 40.8 % 45.3 % 41.4 % 45.5 %
Income from operations 14.5 % 8.3 % 10.1 % 8.3 %
Other expense (income),
net 0.2 % 0.0 % 0.1 % 0.1 %
Income before income taxes 14.3 % 8.3 % 10.0 % 8.1 %
Provision for income taxes 1.4 % 2.1 % 1.4 % 2.1 %
Net income 12.9 % 6.2 % 8.6 % 6.0 %
33
--------------------------------------------------------------------------------
Comparison of the Three Months Ended
Net Sales Three Months Ended September 30, Change 2020 2019 $ % (dollars in thousands) Net sales$ 151,036 $ 154,197 $ (3,161 )
(2.0 %)
The decrease in net sales for the three months ended September 30, 2020 , as
compared to the same period in 2019, was primarily due to a decrease in average
order value to $232 from $275 due to lower average order values within both
segments and a decrease in the number of orders placed by customers of 4.4%.
These decreases were partially offset by a decrease in the amount of returned
merchandise.
Net sales in the REVOLVE segment decreased 3.6% to $130.6 million in the three
months ended September 30, 2020 compared to net sales of $135.4 million in the
same period in 2019. Net sales generated from our FORWARD segment increased 9.0%
to $20.5 million in the three months ended September 30, 2020 compared to net
sales of $18.8 million in the same period in 2019.
Cost of Sales
Three Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
Cost of sales $ 67,569 $ 71,519 $ (3,950 ) (5.5 %)
Percentage of net sales 44.7 % 46.4 %
The decrease in cost of sales for the three months ended September 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, import expenses
and inventory valuation adjustments, 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 decrease in cost of sales as a percentage of net sales
was due to lower receiving costs, a lower percentage of markdown sales and
shallower markdowns within the markdown sales, and lower import expenses and
inventory valuation adjustments, partially offset by 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.
Fulfillment Expenses
Three Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
Fulfillment expenses $ 4,158 $ 5,118 $ (960 ) (18.8 %)
Percentage of net sales 2.8 % 3.3 %
The decrease in fulfillment expenses for the three months ended September 30,
2020 , as compared to the same period in 2019, was the result of a decrease in
the number of units processed as well as a decrease in cost per unit 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.
34
--------------------------------------------------------------------------------
Selling and Distribution Expenses
Three Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
Selling and distribution
expenses $ 20,870 $ 22,581 $ (1,711 ) (7.6 %)
Percentage of net sales 13.8 % 14.6 %
The decrease in selling and distribution expenses for the three months ended
September 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, and customer service costs. Shipping and
handling costs decreased $0.8 million , merchant processing fees decreased $0.4
million , and customer service expenses decreased $0.4 million for the three
months ended September 30, 2020 as compared to the same period in 2019.
Marketing Expenses
Three Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
Marketing expenses $ 18,903 $ 23,127 $ (4,224 ) (18.3 %)Percentage of net sales 12.5 % 15.0 % The decrease in marketing expenses in absolute dollars and as a percentage of net sales for the three months endedSeptember 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 absence of several in-person brand marketing events combined with cost-control efforts and efficiencies in marketing investments due to COVID-19. As a result, we experienced a decrease of$3.2 million in brand marketing expenses and a decrease of$1.1 million in performance marketing expenses for the three months endedSeptember 30, 2020 as compared to the same period in 2019.
General and Administrative Expenses
Three Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
General and administrative
expenses $ 17,741 $ 19,019 $ (1,278 ) (6.7 %)
Percentage of net sales 11.7 % 12.3 %
The decrease in general and administrative expenses in absolute dollars and as a
percentage of net sales for the three months ended September 30, 2020 as
compared to the same period in 2019, was due to the cost reduction actions taken
in response to the COVID-19 pandemic including lower headcount, the elimination
of non-essential expenses and decrease in studio and design costs.
35
--------------------------------------------------------------------------------
Income Taxes
Three Months Ended September 30,
2020 2019
(dollars in thousands)
Income before income taxes $ 21,542 $ 12,840
Provision for income taxes 2,104 3,281
Effective tax rate 9.8 % 25.6 %
The decrease in the effective tax rate for the three months ended September 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 third
quarter of 2020.
Comparison of the Nine Months Ended
Net Sales Nine Months Ended September 30, Change 2020 2019 $ % (dollars in thousands) Net sales$ 439,895 $ 453,437 $ (13,542 )
(3.0 %)
The decrease in net sales for the nine months ended September 30, 2020 , as
compared to the same period in 2019, was primarily due to a decrease in average
order value to $232 from $270 in the same period in 2019 and a decrease in the
number of orders placed by customers of 4.1% 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 5.0% to $382.0 million in the nine
months ended September 30, 2020 compared to net sales of $402.0 million in the
same period in 2019. Net sales generated from our FORWARD segment increased
12.7% to $57.9 million in the nine months ended September 30, 2020 as compared
to net sales of $51.4 million in the same period in 2019.
Cost of Sales
Nine Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
Cost of sales $ 213,407 $ 209,587 $ 3,820 1.8 %
Percentage of net sales 48.5 % 46.2 %
The increase in cost of sales for the nine months ended September 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,
lower receiving costs, import expenses and inventory valuation adjustments. 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, partially offset by lower inventory valuation adjustments,
receiving costs and import expenses.
36
--------------------------------------------------------------------------------
Fulfillment Expenses
Nine Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
Fulfillment expenses $ 12,450 $ 14,914 $ (2,464 ) (16.5 %)
Percentage of net sales 2.9 % 3.3 %
The decrease in fulfillment expenses for the nine months ended September 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
Nine Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
Selling and distribution
expenses $ 61,703 $ 66,811 $ (5,108 ) (7.6 %)
Percentage of net sales 14.0 % 14.7 %
The decrease in selling and distribution expenses for the nine months ended
September 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, and customer service costs. Shipping and handling
costs decreased $3.1 million , merchant processing fees decreased $1.6 million ,
and customer service expenses decreased $0.4 million for the nine months ended
September 30, 2020 as compared to the same period in 2019.
Marketing Expenses
Nine Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
Marketing expenses $ 55,491 $ 67,539 $ (12,048 ) (17.8 %)
Percentage of net sales 12.6 % 14.9 %
The decrease in marketing expenses for the nine months ended September 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 $7.6 million in brand marketing
expenses and a decrease of $4.5 million in performance marketing expenses for
the nine months ended September 30, 2020 as compared to the same period in 2019.
37
--------------------------------------------------------------------------------
General and Administrative Expenses
Nine Months Ended September 30, Change
2020 2019 $ %
(dollars in thousands)
General and administrative
expenses $ 52,391 $ 57,124 $ (4,733 ) (8.3 %)
Percentage of net sales 11.9 % 12.6 %
The decrease in general and administrative expenses in absolute dollars and as a
percentage of net sales for the nine months ended September 30, 2020 as compared
to the same period in 2019, was due to the cost reduction actions taken in
response to the COVID-19 pandemic which resulted in a $1.2 million decrease in
salaries and related benefits due to salary and wage reductions, furloughs and
layoffs, 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
Nine Months Ended September 30,
2020 2019
(dollars in thousands)
Income before income taxes $ 44,153 $ 36,809
Provision for income taxes 6,323 9,547
Effective tax rate 14.3 % 25.9 %
The decrease in the effective tax rate for the nine months ended September 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 nine
months ended September 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
September 30, 2020 December 31, 2019
(in thousands)
Cash and cash equivalents $ 158,701 $ 65,418
Accounts receivable, net 4,713
4,751
Working capital 142,946 97,816
As of September 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 $15.0
million was subsequently repaid during the second and third quarters of 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 improved in the second and third quarters 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 our corporate employees to their pre-COVID-19 salaries and wages.
By the end of the third quarter, all remaining employees were returned to their
pre-COVID compensation levels. In addition, we accrued for discretionary bonuses
related to second and third quarter performance with payment subject to full
year 2020
38
-------------------------------------------------------------------------------- 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.
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 ofSeptember 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 ofSeptember 30, 2020 , we had$15.0 million outstanding on the line of credit. The weighted-average interest rate of debt outstanding atSeptember 30, 2020 was 1.5%. 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 ofSeptember 30, 2020 andDecember 31, 2019 . 39
--------------------------------------------------------------------------------
Historical Cash Flows
Nine Months Ended
September 30,
2020 2019
Net cash provided by operating activities
Net cash used in investing activities (1,844 ) (11,457 )
Net cash provided by financing activities 19,024 14,567
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, 2020 , we generated$76.2 million of operating cash flow as compared to$31.8 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$1.8 million and$11.5 million for the nine months endedSeptember 30, 2020 and 2019, respectively. The decrease was primarily due to capital expenditures incurred during the nine months endedSeptember 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$19.0 million for the nine months endedSeptember 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$14.6 million for the nine months endedSeptember 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 ofSeptember 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
40
--------------------------------------------------------------------------------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.
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.
41--------------------------------------------------------------------------------
© Edgar Online, source
