REVOLVE GROUP, INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in or implied by these forward-looking statements as a result of several factors, including those discussed in the section captioned "Risk Factors" included under Part I, Item 1A and elsewhere in this report. See also the section captioned "Forward-Looking Statements" in this report. For discussion regarding our financial condition and results of operations for the year endedDecember 31, 2019 compared to the year endedDecember 31, 2018 , refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for year ended 2019, which was filed with theSecurities and Exchange Commission onFebruary 26, 2020 .
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 18 years of continued investment in
technology, data analytics, and innovative marketing and merchandising
strategies, we have built a powerful platform and brand that we believe is
connecting with the next generation of consumers and is redefining fashion
retail for the 21st century.
We sell merchandise through two complementary segments, REVOLVE and 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 curated
and elevated iconic and emerging luxury brands. We believe that FORWARD provides
our customer with a unique destination for luxury products as her spending power
increases and her desire for fashion and inspiration remains central to her
self-expression.
We believe our product mix reflects the desires of the next-generation consumer
and we optimize this mix through the 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.
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 18 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 Millennial consumers, and these
efforts have historically led to higher earned media value than competitors. We
complement our social media efforts through a variety of brand marketing
campaigns and events, which generate a constant flow of authentic content. Our
social media and brand marketing strategy is combined with robust and
sophisticated digital performance marketing activities. 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, paid social, affiliate
marketing, personalized email marketing and mobile "push" communications through
our app.
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-------------------------------------------------------------------------------- We have developed an efficient logistics infrastructure, which allows us to provide free shipping and returns to our customers inthe United States . We support our logistics network with proprietary algorithms to optimize inventory allocation, reduce shipping and fulfillment expenses and deliver merchandise quickly and efficiently to our customers, which allows us to ship approximately 98% of orders on the same day if placed beforenoon Pacific Time . 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 returns and all-inclusive pricing, beginning in 2018, for customers in theUK , the EU andAustralia , and further expanded toNew Zealand ,Singapore andCanada in 2020. For 2020 and 2019, we generated$113.1 million and$98.1 million , respectively, in net sales shipped to customers internationally, or 19.5% and 16.3% of total net sales, respectively. In addition to expanding our global footprint of influencers, we are gradually increasing our level of investment in international expansion, by continuing to focus 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. Impact of COVID-19 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 . We also experienced weakness in some of our key operating metrics and headwinds in the factors affecting our performance which has continued into the first quarter of 2021. 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 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, third and fourth quarter performance. In response to the improving trends in consumer demand and anticipated future 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 inLos 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 in-person 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. Countries, states and local municipalities continue to impose various levels of restrictions based on the case levels and hospitalization rates in the respective areas. 54 -------------------------------------------------------------------------------- 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 initially led to a significant decline in our inventory balance. With the improving trends in consumer demand starting in the second quarter, we began to increase our inventory purchases to support future expected demand. 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 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.
Years Ended December 31,
2020 2019 2018
(in thousands, except
average order value
and percentages)
Gross margin 52.6 % 53.6 % 53.2 %
Adjusted EBITDA $ 69,257 $ 55,605 $ 46,495
Free cash flow $ 71,449 $ 33,602 $ 23,610
Active customers 1,472 1,488 1,175
Total orders placed 4,499 4,715 3,710
Average order value $ 236 $ 275 $ 279 Adjusted EBITDA and free cash flow are non-GAAP measures. See the sections captioned "-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 style that we sell on our sites, among other factors. 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, owned brands decreased as a percentage of REVOLVE segment net sales in 2020 as the COVID-19 pandemic led us to temporarily shift more of our inventory purchases to third-party inventory where we can make shallower initial inventory buys across a broader range of styles. As a result of our cost reduction efforts described above in the section captioned "-Impact of COVID-19," and as a result of work restrictions imposed byLos Angeles County that have impeded our ability to design new 55
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styles and develop new brands, we expect that contribution of owned brands will continue to be adversely affected in 2021.
In the near term, we expect that the contribution of owned brands will remain lower year over year, which would 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. 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
To provide investors with additional information regarding our financial results, we have disclosed in the table above and elsewhere in this report Adjusted EBITDA, a non-GAAP financial measure that we calculate as net income before other expense, net, taxes, depreciation and amortization, adjusted to exclude the effects of equity-based compensation expense, and certain non-routine items. We have provided below a reconciliation of Adjusted EBITDA to net income, the most directly comparable generally accepted accounting principles, or GAAP, financial measure. We have included Adjusted EBITDA in this report because it is a key measure used by our management and board of directors to evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis and, in the case of exclusion of the impact of equity-based compensation, excludes an item that we do not consider to be indicative of our core operating performance. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.
Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
• although depreciation and amortization are non-cash charges, the assets
being depreciated and amortized may have to be replaced in the future,
and Adjusted EBITDA does not reflect cash capital expenditure
requirements for such replacements or for new capital expenditure
requirements;
• Adjusted EBITDA does not reflect changes in, or cash requirements for,
our working capital needs;
• Adjusted EBITDA does not consider the potentially dilutive impact of
equity-based compensation;
• Adjusted EBITDA does not reflect tax payments that may represent a
reduction in cash available to us;
• Adjusted EBITDA does not reflect certain non-routine items that may
represent a reduction in cash available to us; and
• other companies, including companies in our industry, may calculate
Adjusted EBITDA differently, which reduces its usefulness as a
comparative measure.
Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income and our other GAAP results.
Our financial results included certain items that we consider non-routine and
not reflective of the underlying trends in our core business operations.
Non-routine items in 2019 primarily related to legal settlements and non-routine
items in 2018 primarily related to expenses associated with our initial public
offering and entity restructuring. Although we believe these expenses to be
non-routine in nature, we cannot guarantee that these expenses will not be
incurred again in the future.
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A reconciliation of Adjusted EBITDA to net income is as follows:
Years Ended December 31,
2020 2019 2018
(in thousands)
Net income $ 56,790 $ 35,667 $ 30,638
Excluding:
Other expense, net 994 931 631
Provision for income tax 3,282 11,500 10,529
Depreciation and amortization 4,827 3,952 2,867
Equity-based compensation 3,364 2,067 1,400
Non-routine items - 1,488 430
Adjusted EBITDA $ 69,257 $ 55,605 $ 46,495
Free Cash Flow
To provide investors with additional information regarding our financial
results, we have also disclosed in the table above and elsewhere in this report
free cash flow, a non-GAAP financial measure that we calculate as net cash
provided by operating activities less cash used in purchases of property and
equipment. We have provided below a reconciliation of free cash flow to net cash
provided by operating activities, the most directly comparable GAAP financial
measure.
We have included free cash flow in this report because it is a key measure used
by our management and board of directors, which we believe is an important
indicator of our liquidity because it measures the amount of cash we generate.
Free cash flow also reflects changes in working capital. Accordingly, we believe
that free cash flow provides useful information to investors and others in
understanding and evaluating our operating results in the same manner as our
management and board of directors.
Free cash flow has limitations as an analytical tool, and you should not
consider it in isolation or as a substitute for analysis of our results as
reported under GAAP. There are limitations to using non-GAAP financial measures,
including that other companies, including companies in our industry, may
calculate free cash flow differently. Because of these limitations, you should
consider free cash flow alongside other financial performance measures,
including net cash provided by operating activities, purchases of property and
equipment and our other GAAP results.
The following table presents a reconciliation of free cash flow to net cash
provided by operating activities, as well as information regarding net cash used
in investing activities and net cash provided by (used in) financing activities,
for each of the periods indicated:
Years Ended December 31,
2020 2019 2018
(in thousands)
Net cash provided by operating activities
$ 26,655 Purchases of property and equipment (2,324 ) (12,455 ) (3,045 ) Free cash flow$ 71,449 $ 33,602
Net cash used in investing activities$ (2,324 ) $ (12,455 ) $ (3,045 ) Net cash provided by (used in) financing activities$ 8,660 $ 15,179
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 9, Earnings
(Net Loss) per Share, of our consolidated financial statements included
elsewhere in this report for more information regarding our calculation of
earnings (net loss) per share.
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A reconciliation of non-GAAP adjusted diluted earnings per share to diluted
earnings (net loss) per share for the years ended
Years Ended December 31,
2020 2019 2018
Class A Class B Class A Class B Class B
Earnings (net loss) per share - diluted $ 0.79 $ 0.79 $ (0.09 ) $ (0.09 ) $ 0.44
Repurchase of Class B common stock, net - - 0.59 0.59 -
Adjusted earnings per share - diluted
Active Customers We define an active customer as a unique customer account from which a purchase was made across our platform at least once in the preceding 12-month period. We calculate the number of active customers on a trailing 12-month basis given the volatility that can be observed when calculating it on the basis of shorter periods that may not be reflective of longer-term trends; however, such a methodology may not be indicative of other short-term trends, such as changes in new customers. In any particular period, we determine our number of active customers by counting the total number of customers who have made at least one purchase in the preceding 12-month period, measured from the last date of such period. We view the number of active customers as a key indicator of our growth, the reach of our sites, the value proposition and consumer awareness of our brand, the continued use of our sites by our customers and their desire to purchase our products. We believe the number of active customers is a measure that is useful to investors and management in understanding our growth, brand awareness and market opportunity. Our number of active customers drives both net sales and our appeal to vendors. Active customers decreased during the trailing twelve months endedDecember 31, 2020 as compared to the trailing twelve-month period endedDecember 31, 2019 due to reduced customer activity as a result of the COVID-19 pandemic.
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 during the year ended
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. In 2020, average order value for merchandise sold through the REVOLVE and FORWARD segments was approximately$217 and$592 , respectively, reflecting the brands sold and typical profile of the shoppers on such sites. 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 on these products. Average order value may also fluctuate as we expand into and increase our presence in additional product categories and price points. 58
-------------------------------------------------------------------------------- Average order value decreased for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 driven by a shift in mix toward lower price point categories such as beauty, fewer average units per order, a lower percentage of full price sales, higher markdowns on our marked down product and lower gross margins on full price sales. 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 year endedDecember 31, 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. The COVID-19 pandemic remains highly uncertain and we expect that our business operations and results of operations will continue to be adversely impacted in 2021, 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 managing our cash flow, variabilizing our cost structure to more closely
align with top line demand and preserving our financial position. For additional
information, see the section above captioned "-Impact of COVID-19."
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, fuel and energy costs, geo-political activity and region-specific or worldwide health crises. 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. 59
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Customer Acquisition 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 in 2020 as compared to 2019, 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 third and fourth 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 in-person 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.
Customer Retention
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 and greater share of active customers over time. Existing customers as a percentage of total active customers were 41%, 45% and 49% for 2018, 2019 and 2020, respectively. Existing customers place more orders annually than new customers, resulting in existing customers representing approximately 74% of orders and approximately 76% of net sales in 2020, up from 71% of orders and 74% of net sales in 2019 and 57% of orders and 58% of net sales in 2014, again having increased in each year. We believe these increasing metrics are reflective of our ability to engage and retain our customers through our differentiated marketing and compelling merchandise offering and shopping experience. The increasing share of our net sales from existing customers reflects our customer loyalty and the net sales retention behavior we see in our cohorts. The net sales contribution and retention from existing customer cohorts was impacted in 2020 by the headwinds from the COVID-19 pandemic. Cohort net sales retention is calculated as net sales attributable to a given customer cohort divided by the total net sales attributable to the same customer cohort from one year prior. In 2020, we retained 74% of the prior cohorts' net sales in 2019 as compared to 89% in the prior year. We believe that the 2020 retention is short term in nature and the result of the COVID-19 headwinds and not indicative of the value of our customer base over the long term; however, if this negative trend in customer retention and purchasing pattern continues for a longer period of time, our operating results could be adversely impacted.
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 and 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 contribute to
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 prior to 2020 when owned brands
declined as a percent of net sales. 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 continued year-over-year 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. 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 in the second and third quarters of 2020. 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 86.3% and 87.7% of our net sales for the years endedDecember 31, 2020 and 2019, respectively. During the years endedDecember 31, 2020 and 2019, REVOLVE generated$500.9 million and$527.3 million in net sales, respectively, representing a decrease of 5.0%. The net sales decrease in the year endedDecember 31, 2020 , as compared to 2019, was 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 in the near term. We also believe that COVID-19, a shift in the mix of product categories purchased and a change in consumer purchasing behavior has positively impacted the rate of returns and our net sales in 2020. If the rate of returns increases in the future, our net sales and financial results may be adversely impacted. 61 -------------------------------------------------------------------------------- The FORWARD segment contributes to a smaller portion of our overall net sales, representing 13.7% and 12.3% of our net sales for the years endedDecember 31, 2020 and 2019, respectively. During the years endedDecember 31, 2020 and 2019, FORWARD generated$79.8 million and$73.7 million in net sales, respectively, representing an increase of 8.1%. The net sales increase in the year endedDecember 31, 2020 , as compared to 2019, was primarily due to fewer merchandise returns, partially offset by decreases in the number of orders placed by customers and a decrease in the average order value. If we are unable to continue to generate net sales and gross profit growth in the FORWARD segment, through the period impacted by COVID-19 and beyond, our financial results would be adversely impacted. We also believe that COVID-19, a shift in the mix of product categories purchased and a change in consumer purchasing behavior has positively impacted the rate of returns and our net sales in 2020. If the rate of returns increases in the future, our net sales and financial results may be adversely impacted. Net sales to customers outside ofthe United States contributed to 19.5% and 16.3% of our net sales for the years endedDecember 31, 2020 and 2019, respectively. During the years endedDecember 31, 2020 and 2019, net sales to customers outside ofthe United States were$113.1 million and$98.1 million , respectively, representing an increase of 15.3%. 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 the section captioned "-Overall Economic Trends" above. Increases in taxes and negative movements in certain currencies have also had in the past, 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, net sales to international customers were stronger in 2020 relative to 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 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. We expect the seasonality trends that we have experienced historically will continue to change in 2021 as we navigate through the ongoing 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 the cost of the product, the number of 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.
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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 remain relatively consistent 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 has been and may continue to be impacted, resulting in a potential increase in our shipping costs through increases in rates and surcharges.
Marketing Expenses
Marketing expenses consist primarily of targeted online performance marketing costs, such as retargeting, paid search/product listing ads, paid social, affiliate marketing, search engine optimization, personalized email marketing and mobile "push" communications through our app. Marketing expenses also include investment in 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 reduced our marketing investment in absolute dollars and as a percentage of net sales through the third quarter of 2020. In the fourth quarter of 2020, we 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 2021. We may also make opportunistic investments in marketing initiatives that may increase marketing as a percentage of net sales to levels in excess of historical levels for certain quarters or periods of time in the future.
General and Administrative Expenses
General and administrative expenses consist primarily of payroll and related benefit costs and equity-based compensation expense for our employees involved in general corporate functions including merchandising, marketing, 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. Over the long term, increases in general and administrative expenses in absolute dollars 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, and starting in the second quarter of 2020, we temporarily reduced costs in this area 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, third and fourth quarter performance. If the negative impacts of COVID-19 are prolonged, 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.
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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.
Years Ended December 31,
2020 2019 2018
(in thousands)
Net sales $ 580,649 $ 600,993 $ 498,739
Cost of sales 275,369 279,040 233,433
Gross profit 305,280 321,953 265,306
Operating expenses:
Fulfillment expenses 16,471 19,413 13,292Selling and distribution expenses 80,496 87,706 70,621
Marketing expenses 76,371 89,141 74,394
General and administrative expenses 70,876 77,595 65,201
Total operating expenses 244,214 273,855
223,508
Income from operations 61,066 48,098 41,798
Other expense, net 994 931 631
Income before income taxes 60,072 47,167 41,167
Provision for income taxes 3,282 11,500 10,529
Net income $ 56,790 $ 35,667 $ 30,638
Years Ended December 31,
2020 2019 2018
Net sales 100.0 % 100.0 % 100.0 %
Cost of sales 47.4 46.4 46.8
Gross profit 52.6 53.6 53.2
Operating expenses:
Fulfillment expenses 2.8 3.2 2.7
Selling and distribution expenses 13.9 14.6 14.2
Marketing expenses 13.2 14.9 14.9
General and administrative expenses 12.2 12.9 13.1
Total operating expenses 42.1 45.6 44.9
Income from operations 10.5 8.0 8.3
Other expense, net 0.2 0.2 0.1
Income before income taxes 10.3 7.8 8.2
Provision for income taxes 0.5 1.9 2.1
Net income 9.8 % 5.9 % 6.1 %
Comparison of Years Ended 2020 and 2019
Net Sales Years Ended December 31, Change 2020 2019 $ % (dollars in thousands) Net sales$ 580,649 $ 600,993 $ (20,344 ) -3.4 % The decrease in net sales for the year endedDecember 31, 2020 , as compared to 2019, was primarily due to a decrease in average order value to$236 from$275 in 2019 and a decrease in the number of orders placed by customers of 4.6% as compared to 2019. These decreases were partially offset by customers returning a lower proportion of their purchases in 2020 as compared to 2019. 64 -------------------------------------------------------------------------------- Net sales in the REVOLVE segment decreased 5.0% to$500.9 million in 2020 compared to net sales of$527.3 million in 2019. Net sales generated from our FORWARD segment increased 8.1% to$79.8 million in 2020 compared to net sales of$73.7 million in 2019. Cost of Sales Years Ended December 31, Change 2020 2019 $ % (dollars in thousands) Cost of sales$ 275,369 $ 279,040 $ (3,671 ) -1.3 % Percentage of net sales 47.4 % 46.4 % The decrease in cost of sales was primarily due to a decrease in the volume of merchandise sold combined with lower receiving costs, import expenses and inventory write-downs, 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 mix of third party brand sales and a lower mix of full price sales, partially offset by lower inventory write-downs, receiving costs and import expenses. Fulfillment Expenses Years Ended December 31, Change 2020 2019 $ % (dollars in thousands) Fulfillment expenses$ 16,471 $ 19,413 $ (2,942 ) -15.2 % Percentage of net sales 2.8 % 3.2 % The decrease in fulfillment expenses was primarily 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 customers returning a lower proportion of their purchases in 2020.
Selling and Distribution Expenses
Years Ended December 31, Change
2020 2019 $ %
(dollars in thousands)
Selling and distribution expenses $ 80,496 $ 87,706 $ (7,210 ) -8.2 %
Percentage of net sales 13.9 % 14.6 %
The decrease in selling and distribution expenses was the result of a decrease
in both the number of orders shipped and returned combined with lower merchant
processing fees and packaging costs. Shipping and handling costs decreased $4.7
million , merchant processing fees decreased $1.6 million , and packaging costs
decreased $0.9 million in 2020 as compared to 2019. The decrease in selling and
distribution expenses as a percentage of net sales was primarily due to
customers returning a lower proportion of their purchases in 2020.
Marketing Expenses
Years Ended December 31, Change
2020 2019 $ %
(dollars in thousands)
Marketing expenses $ 76,371 $ 89,141 $ (12,770 ) -14.3 %
Percentage of net sales 13.2 % 14.9 %
65
-------------------------------------------------------------------------------- The decrease in marketing expenses for the year endedDecember 31, 2020 , as compared to 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, including #REVOLVEfestival, combined with cost-control efforts and efficiencies in performance marketing investments due to COVID-19. As a result, we experienced a decrease of$7.4 million in brand marketing expenses and a decrease of$5.4 million in performance marketing expenses for the year endedDecember 31, 2020 as compared to 2019.
General and Administrative Expenses
Years Ended December 31, Change
2020 2019 $ %
(dollars in thousands)
General and administrative expenses
12.2 % 12.9 %
The decrease in general and administrative expenses in absolute dollars and as a
percentage of net sales for the year ended December 31, 2020 as compared to
2019, was due in part to the cost reduction actions taken in response to the
COVID-19 pandemic which resulted in a $3.4 million decrease in general and
administrative expenses resulting from the elimination of non-essential
expenses, a $1.5 million decrease in one-time expenses primarily attributed to
legal settlements, a $1.4 million decrease related to owned brand design and
development, a $0.7 million decrease in product related studio and editorial
photography and a $0.5 million decrease in salaries, benefits and equity-based
compensation due to temporary salary and wage reductions, furloughs and to a
lesser extent layoffs, partially offset by an increase of $0.8 million in
professional and outside service costs to operate as a public company.
Income Taxes
Years Ended December 31,
2020 2019
(in thousands)
Income before income taxes $ 60,072 $ 47,167
Provision for income taxes 3,282 11,500
Effective tax rate 5.5 % 24.4 %
The decrease in the effective tax rate was primarily due to excess tax benefits
related to the exercise of non-qualified stock options during the year ended
December 31, 2020 .
Quarterly Results of Operations and Other Financial and Operations Data
The following tables set forth selected unaudited quarterly results of
operations and other financial and operations data for each of the quarters
indicated. The information for each of these quarters has been prepared on the
same basis as the audited annual consolidated financial statements included
elsewhere in this report and in the opinion of management, includes all
adjustments, which include only normal recurring adjustments, necessary for the
fair statement of our consolidated results of operations for these periods. This
data should be read in conjunction with our consolidated financial statements
and related notes included elsewhere in this report. Our quarterly results of
operations will vary in the future. These quarterly operating results are not
necessarily indicative of our operating results for any future period.
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Three Months Ended
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
2020 2020 2020 2020 2019 2019 2019 2019
(in thousands, except per share data)
Net sales $ 140,754 $ 151,036 $ 142,784 $ 146,075 $ 147,556 $ 154,197 $ 161,897 $ 137,343
Cost of sales 61,962 67,569 70,713 75,125 69,453 71,519 71,479 66,589
Gross profit 78,792 83,467 72,071 70,950 78,103 82,678 90,418 70,754
Operating expenses:
Fulfillment expenses 4,021 4,158 3,799 4,493 4,499 5,118 5,301 4,495
Selling and distribution
expenses 18,793 20,870 19,054 21,779 20,895 22,581 23,639 20,591
Marketing expenses 20,880 18,903 14,638 21,950 21,602 23,127 24,914 19,498
General and administrative
expenses 18,485 17,741 15,776 18,874 20,471 19,019 18,836 19,269
Total operating expenses 62,179 61,672 53,267 67,096 67,467 69,845 72,690 63,853
Income from operations 16,613 21,795 18,804 3,854 10,636 12,833 17,728 6,901
Other expense (income), net 694 253 174 (127 ) 278 (7 ) 444 216
Income before income taxes 15,919 21,542 18,630 3,981 10,358 12,840 17,284 6,685
(Benefit) provision for income taxes (3,041 ) 2,104 4,394 (175 ) 1,953 3,281 4,543 1,723
Net income 18,960 19,438 14,236 4,156 8,405 9,559 12,741 4,962
Less: Repurchase of
Class B common
stock upon
corporate conversion - - - - - - (40,816 ) -Net income (loss) attributable to
common stockholders$ 18,960 $ 19,438 $ 14,236 $ 4,156 $ 8,405 $ 9,559$ (28,075 ) $ 4,962 Earnings (net loss) per share of Class A and Class B common stock: Basic 0.27 0.28 0.21 0.06 0.12 0.14 (0.57 ) 0.08 Diluted 0.26 0.27 0.20 0.06 0.12 0.13 (0.57 ) 0.07 Weighted average Class A and Class B common shares outstanding: Basic 70,478 69,872 69,415 69,320 68,921 68,871 49,025 41,936 Diluted 72,382 72,281 71,659 71,903 71,947 72,658 49,025 44,821 Three Months Ended December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31, 2020 2020 2020 2020 2019 2019 2019 2019 Net sales 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 44.0 44.7 49.5 51.4 47.1 46.4 44.2 48.5 Gross profit 56.0 55.3 50.5 48.6 52.9 53.6 55.8 51.5 Operating expenses: Fulfillment expenses 2.9 2.8 2.7 3.1 3.0 3.3 3.2 3.3 Selling and distribution expenses 13.4 13.8 13.3 14.9 14.2 14.7 14.6 15.0 Marketing expenses 14.8 12.5 10.3 15.1 14.6 15.0 15.4 14.2
General and
administrative
expenses 13.1 11.7 11.0 12.9 13.9 12.3 11.6 14.0
Total operating
expenses 44.2 40.8 37.3 46.0 45.7 45.3 44.8 46.5 Income from operations 11.8 14.5 13.2 2.6 7.2 8.3 11.0 5.0
Other expense (income),
net 0.5 0.2 0.1 (0.1 ) 0.2 (0.0 ) 0.3 0.1
Income before income
taxes 11.3 14.3 13.1 2.7 7.0 8.3 10.7 4.9
(Benefit) provision for income tax (2.2 ) 1.4 3.1 (0.1 ) 1.3 2.1 2.8 1.3
Net income 13.5 % 12.9 % 10.0 % 2.8 % 5.7 % 6.2 % 7.9 % 3.6 %
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Three Months Ended
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
2020 2020 2020 2020 2019 2019 2019 2019
(in thousands, except average order value and percentages) Other Financial and
Operations Data Gross margin 56.0 % 55.3 % 50.5 % 48.6 % 52.9 % 53.6 % 55.8 % 51.5 % Adjusted EBITDA(1)$ 18,746 $ 24,025
$ (2,934 ) $ 13,877
1,472 1,504 1,533 1,528 1,488 1,438 1,359 1,262
Total orders placed 1,023 1,141 1,163 1,172 1,092 1,194 1,294 1,135
Average order value $ 256 $ 232 $ 204 $ 259 $ 282 $ 275 $
275
(1) 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 items. Please see the section captioned
"-Key Operating and Financial Metrics-Adjusted EDBITDA" above for more
information. Non-routine items include certain items that we consider
non-routine and not reflective of the underlying trends in our core business
operations. Non-routine items in the first and fourth quarters of 2019
related primarily to legal settlements.
The following table presents the reconciliation of Adjusted EBITDA to net
income:
Three Months Ended
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
2020 2020 2020 2020 2019 2019 2019 2019
(in thousands)
Net income $ 18,960 $ 19,438 $ 14,236 $ 4,156 $ 8,405 $ 9,559 $ 12,741 $ 4,962
Excluding:
Other expense
(income), net 694 253 174 (127 ) 278 (7 ) 444 216
(Benefit) provision
for income tax (3,041 ) 2,104 4,394 (175 ) 1,953 3,281 4,543 1,723
Depreciation and
amortization 1,181 1,250 1,205 1,191 1,236 1,132 889 695 Equity-based compensation 952 980 868 564 522 513 521 511 Non-routine items - - - - 1,256 (40 ) (170 ) 442 Adjusted EBITDA$ 18,746 $ 24,025 $ 20,877 $ 5,609 $ 13,650 $ 14,438 $ 18,968 $ 8,549
The following table presents a reconciliation of free cash flow, a non-GAAP financial measure, to net cash (used in) provided by operating activities, as well as information regarding net cash used in investing activities and net cash (used in) provided by financing activities:
Three Months Ended
December 31, September 30, June 30, March 31, December 31, September 30, June 30, March 31,
2020 2020 2020 2020 2019 2019 2019 2019
(in thousands)
Net cash
(used in)
provided by
operating activities $ (2,454 ) $ 14,340 $ 53,806 $ 8,081 $ 14,224 $ 9,150 $ 6,759 $ 15,924
Purchases of
property and
equipment (480 ) (463 ) (830 ) (551 ) (998 ) (1,702 ) (4,768 ) (4,987 )
Free cash flow(1) $ (2,934 ) $ 13,877 $ 52,976 $ 7,530 $ 13,226 $ 7,448 $ 1,991 $ 10,937
Net cash used in
investing activities(2) $ (480 ) $ (463 ) $ (830 ) $ (551 ) $ (998 ) $ (1,702 ) $ (4,768 ) $ (4,987 )
Net cash (used in)
provided by
financing activities (10,363 ) (6,292 ) (5,660 ) 30,975 612 (968 ) 15,783 (248 )
68
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(1) Free cash flow is a non-GAAP financial measure that we calculate as net cash
(used in) provided by operating activities less net cash used for purchases
of property and equipment. Please see the section captioned "-Key Operating
and Financial Metrics-Free Cash Flow" above for more information.
(2) Net cash used in investing activities includes payments for purchases of
property and equipment, which is also included in our calculation of free
cash flow.
Seasonality and Quarterly Trends
Seasonality in our business does not follow that of traditional retailers, such
as typical concentration of net sales in the holiday quarter. The 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. We expect the seasonality trends that we
have experienced historically will continue to change in 2021 as we navigate
through the ongoing challenges presented by the COVID-19 pandemic. With the
exception of this specific event or events like it, we expect this 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. As our growth rates begin to moderate, the impact of these
seasonality trends on our results of operations will become more pronounced.
We focus our internal measurements of performance on quarterly year-over-year
comparisons but discuss quarterly sequential information below to help investors
understand fluctuations in our business.
Net sales increased in the first quarter of 2019 due to continued growth in the
business. Net sales continued to increase in second quarter of 2019 due to
continued growth in the business combined with seasonality. Net sales decreased
in the third quarter of 2019 due to seasonality and further decreased in the
fourth quarter due to the reduction of new inventory receipts within the REVOLVE
segment. Our quarterly net sales in 2020 are reflective of the seasonality and
COVID-19 impacts as discussed above. During the first quarter of 2020 we
experienced seasonally lower activity, which was further impacted by the
COVID-19 pandemic. In addition, the COVID-19 pandemic resulted in the
cancellation of several REVOLVE brand marketing events including the
#REVOLVEfestival, which historically resulted in peak sales during the second
quarter of each fiscal year. Net sales in the third quarter of 2020 stabilized
and were comparable with the prior year period. During the fourth quarter of
2020, a number of state-imposed restrictions were reinstated resulting in a
decrease in our net sales when compared to the same period in the prior year. As
noted above, the seasonality of our business has resulted in variability in our
total net sales quarter-to-quarter. As a result, we believe that comparisons of
net sales and results of operations for a given quarter to net sales and results
of operations for the corresponding quarter in the prior fiscal year are
generally more meaningful than comparisons of net sales and results of
operations for sequential quarters.
Our quarterly gross profit has fluctuated quarter to quarter primarily due to
the quarterly fluctuations in net sales, among other factors. In 2019 and
consistent with our historical seasonal patterns, gross margin was lower in the
first quarter and higher in the second quarter, reflecting the seasonal demand
of our merchandise as discussed above. We believe the fourth quarter of 2019 was
sequentially lower due to increased levels of discounting that we believe was
due to a reduction in the new inventory receipts in the REVOLVE segment as
discussed above. Our gross margins in the first and second quarters of 2020 were
negatively impacted by the COVID-19 pandemic, and were lower when compared to
the same period in 2019 due to lower full price mix, higher markdowns placed on
markdown sales and the cancellation of several REVOLVE brand marketing
activations. During the third quarter of 2020, gross margins improved
sequentially due to an increase in the percentage of our full price sales, a
decrease in the level of markdowns placed on markdown sales and lower inventory
write-downs, all due to efficient inventory management coupled with lower
receiving and import costs.
69
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Fulfillment expenses and selling and distribution expenses have also
fluctuated quarter-to-quarter, primarily due to the quarterly fluctuation in net
sales. The fluctuation in fulfillment costs is driven by the costs incurred to
fulfill orders placed by our customers, while the fluctuation in selling and
distribution costs is primarily due to the costs incurred to package and ship
products ordered by our customers, ship returns from our customers, provide
customer service and costs incurred related to merchant processing. Fulfilment
expenses increased in the first, second and third quarters of 2019, partially as
the result of investments in our fulfillment capabilities through the expansion
of our fulfillment center infrastructure and the implementation of further
automation within our facility. Fulfilment expenses decreased in the second,
third and fourth quarters of 2020 due to efficiencies gained through the
consolidation and automation of our fulfillment center in the prior year
combined with lower returned merchandise received.
Marketing expenses vary quarter-to-quarter, primarily due to the timing of our
brand marketing events. The second quarter of 2019 included marketing expense
related to #REVOLVEfestival. The third quarter of 2019 included marketing
expense related to #REVOLVEsummer. The fourth quarter of 2019 included marketing
expense related to the #REVOLVEawards.
The reduced marketing investment during the second and third quarter of 2020 was
driven primarily by the cancelation of several brand marketing events, including
the #REVOLVEfestival, combined with cost-control efforts and efficiencies in
performance marketing investments due to COVID-19. Marketing expense will
continue to fluctuate quarter-to-quarter, depending on the timing of events.
General and administrative expenses have generally increased sequentially
quarter-to-quarter as we continued to increase our headcount to support business
growth prior to COVID-19. The first and fourth quarters of 2019 included
incremental professional services costs associated with operating as a public
company and certain non-routine items primarily related to legal settlements.
During the second quarter of 2020, 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. 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 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, third and fourth quarter performance.
We had net income for all periods presented.
Our business is directly affected by the behavior of consumers. Economic conditions and competitive pressures can significantly impact, both positively and negatively, the level of demand by customers for our products. Consequently, the results of any prior quarterly or annual periods should not be relied upon as indications of our future operating performance.
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
December 31, 2020 December 31, 2019
(in thousands)
Cash and cash equivalents $ 146,013 $ 65,418
Accounts receivable, net 4,621
4,751
Working capital 171,237 97,816
(1) Working capital for all periods presented above is defined as current
assets less current liabilities.
70
-------------------------------------------------------------------------------- As ofDecember 31, 2020 , the majority of our cash and cash equivalents was held for working capital purposes. InMarch 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 all of which was subsequently repaid during the second, third and fourth quarters of 2020. As ofDecember 31, 2020 , we had no borrowings under our line of credit and were in compliance with all covenants. We believe that our existing cash and cash equivalents, cash flows from operations as well as the available borrowing capacity under our line of credit will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, our liquidity assumptions may prove to be incorrect, and we could exhaust our available financial resources sooner than we currently expect. We may seek to borrow funds under our line of credit or raise additional funds at any time through equity, equity-linked or debt financing arrangements. Our future capital requirements and the adequacy of available funds will depend on many factors, including those described in Item 1A-Risk Factors of this report. We may not be able to secure additional financing to meet our operating requirements on acceptable terms, or at all.
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 ofDecember 31, 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 that our existing cash and cash equivalents, cash flows from operations as well as the available borrowing capacity under our line of credit will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, our liquidity assumptions may prove to be incorrect 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 funds under our line of credit or raise additional funds at any time through equity, equity-linked or debt financing arrangements. Line of Credit InMarch 2016 , we entered into a line of credit withBank of America, N.A . with an expiration date ofMarch 23, 2021 , 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 ofDecember 31, 2020 and 2019, there were no amounts outstanding under the line of credit. Historically, our debt has resulted from the need to help fund our normal operations and working capital needs. Management expects that it will be negotiating a new or renewing the existing credit facility before the existing facility expires. 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 ofDecember 31, 2020 . 71
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Historical Cash Flows
Years Ended December 31,
2020 2019 2018
(in thousands)
Net cash provided by operating activities
Net cash used in investing activities (2,324 ) (12,455
) (3,045 )
Net cash provided by (used in) financing
activities 8,660 15,179 (17,621 )
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 year endedDecember 31, 2020 , we generated$73.8 million of operating cash flow as compared to$46.1 million in 2019. The increase in our operating cash flow was primarily due to higher net income generated and favorable changes in working capital.
Our primary investing activities have consisted of purchases of property and equipment to support our fulfillment center 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$2.3 million and$12.5 million for the year endedDecember 31, 2020 and 2019, respectively. The decrease was primarily due to capital expenditures incurred during the year endedDecember 31, 2019 relating to the consolidation, expansion and automation of our fulfillment center infrastructure, which was completed in late 2019.
Net Cash Provided by (Used in) Financing Activities
Until our IPO in
Net cash provided by financing activities was$8.7 million for the year endedDecember 31, 2020 , which was attributable to the proceeds from the exercise of stock options. Net cash provided by financing activities was$15.2 million in 2019, which was attributable to the proceeds from our IPO, net of the repurchase of the preference amount and underwriting discounts, and proceeds from the exercise of stock options, partially offset by the payment of deferred offering costs.
Off Balance Sheet Arrangements
We did not have any off balance sheet arrangements in 2020 or 2019, except for operating leases as discussed below.
Contractual Obligations
As ofDecember 31, 2020 , we leased various offices and our fulfilment center, including our corporate headquarters inLos Angeles County, California , under operating lease agreements that expire from 2021 to 2023. The terms of the lease agreements provide for rental payments on a graduated basis. We recognize rent expense on a straight-line basis over the lease periods. We do not have any debt or material capital lease obligations and most of our property, equipment and software have been purchased with cash. We have no material long-term purchase obligations outstanding with any vendors or third parties. Our future minimum payments under non-cancelable operating leases for equipment and office facilities are as follows as ofDecember 31, 2020 : 72 --------------------------------------------------------------------------------
Payments Due by Period
2026 &
Total 2021 2022 2023 2024 2025 Thereafter
(in thousands)
Operating lease obligations $ 11,200 $ 4,802 $ 3,201 $ 3,197 $ - $ - $ -
The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding.
Critical Accounting Policies
Our management's discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these 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. We believe that the assumptions and estimates associated with revenue recognition, inventory, and income taxes have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information on all of our significant accounting policies, please see Note 2, Significant Accounting Policies, of the accompanying notes to our consolidated financial statements included elsewhere in this report.
Revenue is primarily derived from the sale of apparel merchandise through our sites and, when applicable, shipping revenue. We recognize revenue through the following steps: (1) identification of the contract, or contracts, with the customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, we satisfy a performance obligation. A contract is created with our customer at the time the order is placed by the customer, which creates a single performance obligation to deliver the product to the customer. We recognize revenue for our single performance obligation at the time control of the merchandise passes to the customer, which is at the time of shipment. In addition, we have elected to treat shipping and handling as fulfillment activities and not a separate performance obligation. In accordance with our policy on returns and exchanges, merchandise returns are accepted for full refund if returned within 30 days of the original purchase date and may be exchanged up to 60 days from the original purchase date. We modify our policy during the holiday season to extend the return and exchange period. In addition, to provide our customers with more flexibility to return or exchange during this time of increased social distancing as a result of the COVID-19 pandemic, merchandise returns for purchases made starting inMarch 2020 will be accepted for full refund if returned within 60 days of the original purchase date and may be exchanged up to 90 days from the original purchase date. At the time of sale, we establish a reserve for merchandise returns, based on historical experience and expected future returns, which is recorded as a reduction of sales and cost of sales. InMarch 2020 we launched theREVOLVE Loyalty Club within the REVOLVE segment. Eligible customers who enroll in the program will generally earn points for every dollar spent and will automatically receive a$20 REVOLVE Reward once they earn 2,000 points. We defer revenue based on an allocation of the price of the customer purchase and the standalone selling price of the points earned. Revenue is recognized once the reward is redeemed or expires or once unconverted points expire. REVOLVE Rewards generally expire three months after they are issued and unconverted points generally expire if a customer is inactive for a period of 12 months. 73
-------------------------------------------------------------------------------- We may also issue store credit in lieu of cash refunds or exchanges and sell gift cards without expiration dates to our customers. Store credits issued and proceeds from the issuance of gift cards are recorded as deferred revenue and recognized as revenue when the store credit or gift cards are redeemed or, as a result of the adoption of Accounting Standards Codification (ASC) 606, upon inclusion in our store credit and gift card breakage estimates. Revenue recognized in net sales on breakage on store credit and gift cards was$1.3 million and$2.4 million for the years endedDecember 31, 2020 and 2019, respectively. In the third quarter of 2019, our breakage revenue increased as the result of a change in our breakage rate estimate which is periodically updated based on historical redemption patterns. Results for reporting periods beginningJanuary 1, 2019 and thereafter are presented under ASC 606, while prior period amounts have not been adjusted and continue to be reported in accordance with ASC 605. See Note 2, Significant Accounting Policies, to our consolidated financial statements included elsewhere in this report for additional information regarding the transitional impact of adopting ASC 606. Sales taxes and duties collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales. We currently collect sales taxes in all states that have adopted laws imposing sales tax collection obligations on out-of-state retailers and are subject to audits by state governments of sales tax collection obligations on out-of-state retailers in jurisdictions where we do not currently collect sales taxes, whether for prior years or prospectively. No significant interest or penalties related to sales taxes are recognized in the accompanying consolidated financial statements. We have exposure to losses from fraudulent credit card charges. We record losses when incurred related to fraudulent charges as such amounts have historically been insignificant. Inventory Inventories are stated at the lower of cost and net realizable value. Cost is determined using the specific identification method. Cost of inventory includes import duties and other taxes and transport and handling costs. We write down inventory where it appears that the carrying cost of the inventory may not be recovered through subsequent sale of the inventory. We analyze the quantity of inventory on hand, the quantity sold in the past year, the anticipated sales volume, the expected sales price and the cost of making the sale when evaluating the value of our inventory. If the sales volume or sales price of specific products declines, additional write-downs may be required.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and are recorded
net on the face of the balance sheet. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. We
recognize the effect of income tax positions only if those positions are
more-likely than-not of being sustained. Recognized income tax positions are
measured at the largest amount that is greater than 50% likely of being
realized. Changes in recognition or measurement are reflected in the period in
which the change in judgment occurs.
Deferred tax assets are recognized to the extent it is believed that these
assets are more-likely than-not to be realized. In assessing the realizability
of deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible. Management considers the scheduled reversal of deferred tax
liabilities (including the impact of available carryback and carryforward
periods), projected future taxable income, and tax-planning strategies in making
this assessment. Based upon the level of historical taxable income and
projections for future taxable income over the periods in which the deferred tax
assets are deductible, management believes it is more-likely than-not that we
will realize the benefits of these deductible differences, net of the valuation
allowance. The amount of the deferred tax asset considered realizable, however,
could be reduced in the near term if estimates of future taxable income during
the carryforward period are reduced.
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Recent Accounting Pronouncements
See Note 2, Significant Accounting Policies, to our consolidated financial statements included elsewhere in this report for additional information regarding recent accounting pronouncements.
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