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 others, the words "may," "will," "estimate," "intend," "continue," "believe," "expect," "anticipate" or any other similar words. Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. Our future financial condition and results of operations, as well as any forward-looking statements, are subject to change and to inherent risks and uncertainties, such as those disclosed or incorporated by reference in our filings with 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 inChina ;
• our ability to respond to consumer demand, spending and tastes, and
our ability to accurately and effectively engage in predictive analytics; • 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; 20
--------------------------------------------------------------------------------
• the growth of the market for premium lifestyle and luxury products,
and the online market for premium lifestyle and luxury
products in
particular;
• our ability to accurately forecast demand for our products and our
results of operations; • seasonal sales fluctuations; and
• our ability to expand our product offerings, including our owned brands.
Additional factors that could cause actual results to differ materially from our forward-looking statements are set forth in this report, including under the headings "Risk Factors," "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 more than 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. 21 -------------------------------------------------------------------------------- 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 more than 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. 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. 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. We are gradually increasing our level of investment in international expansion, by continuing to focus onEurope ,Australia andCanada as well asAsia Pacific and theMiddle East . We will continue to invest in and develop international markets while maintaining our focus on the core U.S. market.
Impact of COVID-19
The COVID-19 pandemic 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 and fourth quarters. Net sales increased in the first quarter of 2021 due to increased demand as a result of the easing of stay-at-home orders and other restrictions in certain states and countries, additionalU.S. government stimulus and the accelerating rollout of vaccinations inthe United States and some of our other key markets.
As a result of the COVID-19 pandemic, we have also experienced weakness in some of our key operating metrics and headwinds in the factors affecting our performance. 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 22
-------------------------------------------------------------------------------- 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, we began the process of bringing back certain furloughed employees and returned our corporate employees to their pre-COVID-19 salaries and wages. In addition, 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. With the improving trends and increased demand for our products as we exited 2020 and entered the first quarter of 2021, we continued to invest in inventory to support our growth, invested in additional headcount and commenced limited in person marketing activations. 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. While restrictions have eased recently, 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. To further prevent the spread of COVID-19, we are offering, guidance and incentives to our employees to promote vaccine uptake. Government restrictions on travel and social distancing caused the postponement or cancellation of several REVOLVE brand marketing events including the #REVOLVEfestival, as well as other social activities that drove demand for many of our products. As of the date of this report, we have begun to resume in-person marketing events and many states have eased and lifted shelter-in-place orders, however, it is unclear whether these restrictions will be reimposed or if the COVID-19 pandemic will spur long-term changes in consumer behavior. Overseas, additional restrictions have recently been reinstated in several European countries, following increased COVID-19 outbreaks. Our supply chain has also been impacted by COVID-19. Initially, in early 2020 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 had led to significant declines in our inventory balance starting in the second quarter of 2020. With the improving trends in consumer demand during the second half of 2020, 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. While trends improved as we exited 2020 and entered the first quarter of 2021, 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 and to what extent the recent improved trends will continue.
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 March 31, 2021 2020 (in thousands, except average order value and percentages) Gross margin 54.0 % 48.6 % Adjusted EBITDA $ 23,340 $ 5,609 Free cash flow $ 32,473 $ 7,530 Active customers 1,477 1,528 Total orders placed 1,282 1,172 Average order value $ 256 $ 259 23
-------------------------------------------------------------------------------- Adjusted EBITDA and free cash flow are non-GAAP measures. See the sections titled "-Adjusted EBITDA" and "-Free Cash Flow" below for information regarding our use of Adjusted EBITDA and free cash flow and their reconciliation to net income and net cash provided by operating activities, respectively.
Gross Margin
Gross profit is equal to our net sales less cost of sales. Gross profit as a percentage of our net sales is referred to as gross margin. Cost of sales consists of our purchase price of merchandise sold to customers and includes import duties and other taxes, 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 remain lower as compared to historical trends, which will adversely impact our overall gross margin. Merchandise mix will vary from period to period and if we do not effectively manage our owned brands and accurately forecast demand, our growth, margins and inventory levels may be adversely affected. We review our inventory levels on an ongoing basis to identify slow-moving merchandise and use product markdowns to efficiently sell these products. We monitor the percentage of sales that occur at full price, which we believe reflects customer acceptance of our merchandise and the sense of urgency we create through frequent product introductions in limited quantities. Gross margin is impacted by the mix of sales at full price and markdowns, as well as the level of markdowns. The COVID-19 pandemic has impacted gross margins in several ways. Product mix initially shifted away from certain categories with higher margins, such as dresses, to other categories with lower margins, such as beauty. However, this product mix shift began to reverse late in the first quarter of 2021 with growth in the dresses category rebounding. The percentage of full price sales has increased sequentially and was attributable to efficient inventory management resulting in a 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 "-Impact of COVID-19," we expect that contribution of owned brands will be adversely affected through the remainder of 2021. Certain of our competitors and other retailers report cost of sales differently than we do. As a result, the reporting of our gross profit and gross margin may not be comparable to other companies.
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 (income), 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. 24 -------------------------------------------------------------------------------- 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; and
• other companies, including companies in our industry, may calculate
Adjusted EBITDA differently, which reduces its usefulness as a
comparative measure.
Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income and our other GAAP results.
A reconciliation of non-GAAP adjusted EBITDA to net income for the three months
ended
Three Months Ended March 31, 2021 2020 (in thousands) Net income$ 22,252 $ 4,156 Excluding: Other expense (income), net 233 (127 ) Benefit from income taxes (1,270 ) (175 ) Depreciation and amortization 1,149 1,191 Equity-based compensation 976 564 Adjusted EBITDA$ 23,340 $ 5,609
Adjusted EBITDA for the three months ended
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. 25 -------------------------------------------------------------------------------- Free cash flow has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. There are limitations to using non-GAAP financial measures, including that other companies, including companies in our industry, may calculate free cash flow differently. Because of these limitations, you should consider free cash flow alongside other financial performance measures, including net cash provided by operating activities, purchases of property and equipment and our other GAAP results. The following table presents a reconciliation of free cash flow to net cash provided by operating activities, as well as information regarding net cash used in investing activities and net cash provided by financing activities, for each of the periods indicated: Three Months EndedMarch 31, 2021 2020 (in thousands)
Net cash provided by operating activities
(736 ) (551 ) Free cash flow$ 32,473 $
7,530
Net cash used in investing activities $ (736 ) $ (551 )
Net cash provided by financing activities
Free cash flow for the three months ended
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 period endedMarch 31, 2021 as compared to the period endedMarch 31, 2020 due to reduced customer activity in the preceding 12-month period as a result of the COVID-19 pandemic. Active customers increased slightly on a sequential basis compared to the period endedDecember 31, 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 increased in the three months endedMarch 31, 2021 relative to the same period in 2020 due to increased demand as a result of the easing of stay-at-home orders and other restrictions in certain states and countries. 26 --------------------------------------------------------------------------------
Average Order Value
We define average order value as the sum of the total gross sales from our sites in a given period divided by the total orders placed in that period. We believe our high average order value demonstrates the premium nature of our product. We believe that average order value is a measure that is useful to investors and management in understanding our ongoing operations and in analysis of ongoing operating trends. Average order value varies depending on the site through which we sell merchandise, the mix of product categories sold, the number of units in each order, the percentage of sales at full price and for sales at less than full price, and the level of markdowns. Average order value for the three months endedMarch 31, 2021 was essentially flat relative to the same period in 2020, as a shift in mix toward lower price point categories such as beauty and fewer units per order were offset by a higher percentage of full price sales and lower markdowns on our markdown product.
Factors Affecting Our Performance
Impact of COVID-19 on Our Business
The COVID-19 pandemic had a material adverse impact on our business operations and operating results for 2020 due to 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. With lower COVID-19 case counts, further easing of stay-at-home orders, the accelerating rollout of vaccinations and additionalU.S. government stimulus, our operating results continued to improve and demand for our products was strong in the first quarter of 2021. However, the continued impact of the COVID-19 pandemic remains highly uncertain, our business operations and results of operations may continue to be adversely affected and recent favorable trends may not continue, 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. 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,U.S. government stimulus, 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. 27 --------------------------------------------------------------------------------
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 flat in the first quarter of 2021 as compared to the first quarter of 2020. 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. 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 were unable to engage with our customers through larger in-person activations such as #REVOLVEfestival, which has a negative impact on our ability to drive traffic to our sites, acquire new customers and retain our existing customers. In early 2021, we resumed hosting smaller scale, in-person marketing events and we have plans to do more events in the near future as circumstances allow. Additionally, upon the onset of COVID-19 in early 2020, we shifted our brand marketing messaging and strategy to address the changes in behavior and preferences of our customer. If our marketing efforts do not connect with our customer or fail to cost-effectively promote our brand or convert impressions into new customers, our net sales growth and profitability will be adversely affected. Furthermore, competition for social media and influencer-based marketing channels continues to increase, which may adversely affect our operating results. To maximize our opportunity to capture consumer demand as economies reopen, we may make opportunistic investments in marketing initiatives that may increase marketing as a percentage of net sales to levels in excess of historical levels for certain quarters or periods of time in the future. This incremental investment may not deliver a meaningful return in the short term and may adversely impact our operating income in the short term. Our success is impacted not only by efficient and profitable customer acquisition and growth in brand awareness, but also by our ability to retain customers and encourage repeat purchases. Existing customers, whom we define as customers in a year who have purchased from us in any prior year, account for a greater share of active customers over time.
Merchandise Mix
We offer merchandise across a variety of product types, brands and price points. The brands we sell on our platform consist of a mix of emerging third-party, established third-party 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 contributed 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, a decrease in the contribution of owned brands, will adversely impact our overall gross margin. In the longer term, shifts in merchandise mix driven by changes in customer demand may result in fluctuations in our gross margin from period to period.
Inventory Management
We leverage our platform to buy and manage our inventory, including merchandise assortment and fulfillment center optimization. We utilize a data-driven "read and react" buying process to merchandise and curate the latest on-trend fashion. We generally make shallow initial inventory buys, and then use our proprietary technology tools to identify and re-order best sellers, taking into account customer feedback across a variety of key metrics, which allows us to manage inventory and fashion risk. To ensure sufficient availability of merchandise, we generally purchase inventory in advance and frequently before apparel trends are confirmed. As a result, we are vulnerable to demand and pricing shifts and to suboptimal selection and timing of merchandise purchases. We incur inventory 28 -------------------------------------------------------------------------------- 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 until recently had been adversely impacted as a result of COVID-19. In response, in 2020, we significantly reduced inventory receipts by canceling or delaying orders. As our sales demand improved, 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.
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 85.0% and 85.2% of our net sales for the three months endedMarch 31, 2021 and 2020, respectively. During the three months endedMarch 31, 2021 and 2020, REVOLVE generated$152.2 million and$124.5 million in net sales, respectively, representing an increase of 22.2%. The net sales increase in the three months endedMarch 31, 2021 , as compared to the same period in 2020, was primarily due to an increase in the number of orders placed by customers and customers returning a lower proportion of their purchases. We believe COVID-19 and, to a lesser extent our efforts to manage inventory levels, have materially impacted net sales and gross margin. Despite recent recovery, the COVID-19 pandemic may continue to adversely 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 15.0% and 14.8% of our net sales for the three months endedMarch 31, 2021 and 2020, respectively. During the three months endedMarch 31, 2021 and 2020, FORWARD generated$26.7 million and$21.6 million in net sales, respectively, representing an increase of 23.8%. The net sales increase in the three months endedMarch 31, 2021 , as compared to the same period in 2020, was primarily due to an increase in the number of orders placed by customers and customers returning a lower proportion of their purchases, partially offset by a decrease in average order value. While the FORWARD segment was impacted less than the REVOLVE segment, we believe the COVID-19 pandemic and, to a lesser extent, our efforts to manage inventory levels impacted our net sales and gross margin. Despite the strong operating results in the first quarter of 2021, the COVID-19 pandemic may continue to adversely impact our net sales and gross margin in the near term. Net sales to customers outside ofthe United States contributed to 19.9% and 17.6% of our net sales for the three months endedMarch 31, 2021 and 2020, respectively. During the three months endedMarch 31, 2021 and 2020, net sales to customers outside ofthe United States were$35.6 million and$25.7 million , respectively, representing an increase of 38.4%. Net sales to customers outside ofthe United States are impacted by various factors including import and export taxes, currency fluctuations and other macroeconomic conditions described in "-Overall Economic Trends" above. Increases in taxes and negative movements in certain 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, growth in overall net sales to international customers has been relatively stronger than growth in net sales to customers inthe United States . 29 --------------------------------------------------------------------------------
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 contributed to 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. We expect the seasonality trends that we have experienced historically will continue to change for the remainder of 2021 due to the COVID-19 pandemic and anticipated reopening of economies. With the exception of this specific event or events like it, we expect our historical seasonality to revert to historical trends 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 had been negatively impacted by the COVID-19 pandemic before showing signs of recovery in the first quarter of 2021.
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 have been further impacted by COVID-19.
Fulfillment Expenses
Fulfillment expenses represent those costs incurred in operating and staffing the fulfillment center, including costs attributed to inspecting and warehousing inventories and picking, packaging and preparing customer orders for shipment. Fulfillment expenses also include the cost of warehousing facilities. Over the long term, we expect fulfillment expenses to decrease as a percentage of net sales, but we expect fulfillment expenses to fluctuate as a percentage of net sales in the short term reflecting pressure from an expected year-over-year increase in our return rate due to product mix and our customers propensity to return merchandise, to be at least partially offset by operating efficiencies from automation of the fulfillment center workflow.
Selling and Distribution Expenses
Selling and distribution expenses consist primarily of shipping and other transportation costs incurred delivering merchandise to customers and from customers returning merchandise, merchant processing fees, and customer service. Over the long term, we expect selling and distribution costs to remain relatively consistent as a percentage of net sales, but we expect selling and distribution expenses to increase as a percentage of net sales in the short term reflecting pressure from an expected year-over-year increase in our return rate due to product mix and our customers propensity to return merchandise. 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 recent increase in our average shipping costs per package through increases in carrier rates. 30
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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 in 2020. In the first quarter of 2021, we increased 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, we brought back certain furloughed employees and returned our corporate employees to their pre-COVID-19 salaries and wages. General and administrative expenses are expected to increase in the near term as we plan to increase our hiring in 2021 to support future growth. 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 (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. 31
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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.
Three Months Ended March 31, 2021 2020 (in thousands) Net sales$ 178,907 $ 146,075 Cost of sales 82,242 75,125 Gross profit 96,665 70,950 Operating expenses: Fulfillment expenses 4,367 4,493 Selling and distribution expenses 24,977 21,779 Marketing expenses 26,228 21,950 General and administrative expenses 19,878 18,874 Total operating expenses 75,450 67,096 Income from operations 21,215 3,854 Other expense (income), net 233 (127 ) Income before income taxes 20,982 3,981 Benefit from income taxes (1,270 ) (175 ) Net income$ 22,252 $ 4,156 Three Months Ended March 31, 2021 2020 Net sales 100.0 % 100.0 % Cost of sales 46.0 % 51.4 % Gross profit 54.0 % 48.6 % Operating expenses: Fulfillment expenses 2.4 % 3.1 % Selling and distribution expenses 14.0 % 14.9 % Marketing expenses 14.7 % 15.0 % General and administrative expenses 11.1 % 12.9 % Total operating expenses 42.2 % 45.9 % Income from operations 11.8 % 2.6 % Other expense (income), net 0.1 % (0.1 %) Income before income taxes 11.7 % 2.7 % Benefit from income taxes (0.7 %) (0.1 %) Net income 12.4 % 2.8 % 32
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Comparison of the Three Months Ended
Three Months Ended March 31, Change 2021 2020 $ % (dollars in thousands)
Net sales
The increase in net sales for the three months endedMarch 31, 2021 , as compared to the same period in 2020, was primarily due to an increase in the number of orders placed by customers of 9.4% as compared to the same period in 2020 and customers returning a lower proportion of their purchases. Net sales in the REVOLVE segment increased 22.2% to$152.2 million in the three months endedMarch 31, 2021 compared to net sales of$124.5 million in the same period in 2020. Net sales generated from our FORWARD segment increased 23.8% to$26.7 million in the three months endedMarch 31, 2021 as compared to net sales of$21.6 million in the same period in 2020. Cost of Sales Three Months Ended March 31, Change 2021 2020 $ % (dollars in thousands) Cost of sales$ 82,242 $ 75,125 $ 7,117 9.5 % Percentage of net sales 46.0 % 51.4 % The increase in cost of sales for the three months endedMarch 31, 2021 , as compared to the same period in 2020, was primarily due to an increase in the volume of merchandise sold. The decrease in cost of sales as a percentage of net sales was due to a lower percentage of markdown sales and shallower markdowns, combined with lower inventory valuation adjustments, write-offs, receiving costs and import expenses. Fulfillment Expenses Three Months Ended March 31, Change 2021 2020 $ % (dollars in thousands) Fulfillment expenses$ 4,367 $ 4,493 $ (126 ) (2.8 %) Percentage of net sales 2.4 % 3.1 % Fulfillment expenses for the three months endedMarch 31, 2021 were slightly lower as compared to the same period in 2020, as the increase in number of units processed was offset by efficiencies gained through the automation efforts implemented in our fulfillment center. 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 that took place in 2019 combined with customers returning a lower proportion of their purchases.
Selling and Distribution Expenses
Three Months Ended March 31, Change 2021 2020 $ % (dollars in thousands) Selling and distribution expenses$ 24,977 $ 21,779 $ 3,198 14.7 % Percentage of net sales 14.0 % 14.9 % The increase in selling and distribution expenses for the three months endedMarch 31, 2021 , as compared to the same period in 2020, was primarily due to an increase in the number of orders shipped combined with higher merchant processing fees. Merchant processing fees increased$1.5 million and shipping and handling costs 33
-------------------------------------------------------------------------------- increased$1.4 million for the three months endedMarch 31, 2021 as compared to the same period in 2020. The decrease in selling and distribution expenses as a percentage of net sales was due to customers returning a lower proportion of their purchases. Marketing Expenses Three Months Ended March 31, Change 2021 2020 $ % (dollars in thousands) Marketing expenses$ 26,228 $ 21,950 $ 4,278 19.5 % Percentage of net sales 14.7 % 15.0 % The increase in marketing expenses for the three months endedMarch 31, 2021 , as compared to the same period in 2020, was due to an increase of$4.4 million in performance marketing expenses, partially offset by decrease of$0.1 million in brand marketing expenses.
General and Administrative Expenses
Three Months Ended March 31, Change 2021 2020 $ % (dollars in thousands) General and administrative expenses$ 19,878 $ 18,874 $ 1,004 5.3 % Percentage of net sales 11.1 % 12.9 % The increase in general and administrative expenses for the three months endedMarch 31, 2021 , as compared to the same period in 2020, was primarily due to an increase of$0.8 million in salaries and related benefits and equity-based compensation expense. The decrease in general and administrative expenses as a percentage of net sales was as a result of elimination of non-essential items combined with an improved growth in net sales. Income Taxes Three Months Ended March 31, 2021 2020 (dollars in thousands) Income before income taxes$ 20,982 $ 3,981 Benefit from income taxes (1,270 ) (175 ) Effective tax rate (6.1 %) (4.4 %) The decrease in the effective tax rate for the three months endedMarch 31, 2021 , as compared to the same period in 2020, was primarily due to excess tax benefits related to the exercise of non-qualified stock options during the three months endedMarch 31, 2021 , as compared to similar excess tax benefits during the three months endedMarch 31, 2020 . 34 --------------------------------------------------------------------------------
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 March 31, 2021 December 31, 2020 (in thousands) Cash and cash equivalents$ 182,907 $ 146,013 Accounts receivable, net 6,584 4,621 Working capital(1) 199,376 171,237
(1) Working capital for all periods presented above is defined as current assets
less current liabilities. As ofMarch 31, 2021 , 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. We believe that our existing cash and cash equivalents and cash flows from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, our liquidity assumptions may prove to be incorrect and we could exhaust our available financial resources sooner than we currently expect, particularly if there is a COVID-19 resurgence through new variants or otherwise. 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. 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. However, our liquidity assumptions may prove to be incorrect if there is a COVID-19 resurgence through new variants or otherwise, 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
OnMarch 23, 2021 , we amended and restated our existing credit agreement to, among other things, extend the expiration date fromMarch 23, 2021 toMarch 23, 2026 . The line of credit provides us with up to$75.0 million aggregate principal in revolver borrowings, based on eligible inventory and accounts receivable less reserves. Borrowings under the credit agreement accrue interest, at our option, at (1) a base rate equal to the highest of (a) the federal funds rate, plus 0.50%, (b) the prime rate and (c) an adjusted LIBO rate determined on the basis of a one-month interest period, plus 1.00%, or (2) an adjusted LIBO rate, subject to a floor of 0.00%, in each case, plus a margin ranging from 0.25% to 0.75% per year in the case of base rate loans, and 1.25% to 1.75% per year in the case of LIBO rate loans. No borrowings were outstanding as ofMarch 31, 2021 andDecember 31, 2020 . 35 -------------------------------------------------------------------------------- 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 ofMarch 31, 2021 andDecember 31, 2020 . Historical Cash Flows Three Months EndedMarch 31, 2021 2020
Net cash provided by operating activities
(736 ) (551 )
Net cash provided by financing activities 4,317 30,975
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 three months endedMarch 31, 2021 , we generated$33.2 million of operating cash flow as compared to$8.1 million for the same period in 2020. The increase in our operating cash flow was primarily due to an increase in net income adjusted for non-cash items, complemented by favorable changes in working capital.
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
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
Net cash provided by financing activities was$31.0 million for the three months endedMarch 31, 2020 , which was attributable to proceeds from borrowings on our line of credit and the cash proceeds from the exercise of stock options.
Contractual Obligations
As ofMarch 31, 2021 , 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, 2020 , filed with theSEC onFebruary 25, 2021 . 36 --------------------------------------------------------------------------------
Off-Balance Sheet Arrangements
As of
Critical Accounting Policies
Our management's discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates.
There have been no material changes to our critical accounting policies as
compared to the critical accounting policies and significant judgments and
estimates disclosed in our Annual Report on Form 10-K for the year ended
Emerging Growth Company Status
Section 107 of the JOBS Act provides that an "emerging growth company" can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an "emerging growth company" can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. Section 107 of the JOBS Act provides that any decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable. We have elected to use this extended transition period under the JOBS Act.
Recent Accounting Pronouncements
See Note 2, Significant Accounting Policies, of our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for more information regarding recently issued accounting pronouncements.
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