Good afternoon and welcome to Revolve Group's second-quarter 2019 earnings conference call. Today's call is being recorded and we have allocated one hour for prepared remarks and Q&A. At this time, I would like to turn the conference over to Jesse Timmermans, Chief Financial Officer at Revolve. Thank you. You may begin.

Good afternoon, everyone, and thanks for joining us to discuss Revolve's second-quarter 2019 results. Before we begin, we would like to remind you that this conference call will include forward-looking statements. These statements include our future expectations regarding financial results and guidance, market opportunities, our growth and increased efficiencies, our investments in customer experience, marketing opportunities, and our lower price point offerings. These statements, which are subject to various risks, uncertainties, and assumptions, could cause our actual results to differ materially from these statements. These risks, uncertainties, and assumptions are detailed in this afternoon's press release as well as our filings with the SEC, including our registration statement on Form S-1 that was filed with the SEC and the Form 10-Q that will be filed, all of which can be found on our website at investors.revolve.com. We undertake no obligation to revise or update any forward-looking statements or information except as required by law. During our call today we will also reference certain non-GAAP financial information, including adjusted EBITDA, free cash flow, and adjusted diluted EPS. We use non-GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP. And our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliations of GAAP to non-GAAP measures as well as the description, limitations, and rationale for using each measure can be found in this afternoon's press release and in our SEC filings. Joining me on the call today are our Cofounders and co-CEOs Mike and Michael. Following our prepared remarks, we will open the call for your questions. With that, I will turn the call over to Mike.

Thanks, Jesse. Good afternoon, everyone. Thanks for joining us on our second-quarter earnings call. We had an exceptional quarter, posting record net sales and profits in this first earnings call as a public company, even as we continue to make investments in our infrastructure and customer experience. Our IPO was a very exciting milestone for us, but it was one step in a long journey. Before reviewing the quarter and recent developments, I want to briefly remind everyone of the core attributes and differentiators of Revolve. It starts with the vision and the team. Michael and I have been fortunate enough to have been joined by an incredible group of executives and employees who have shared our vision and helped us build what we believe is the next generation of fashion retail. We wouldn't be here today without such a strong and devoted team and so I wanted to take this moment to thank them. We believe we have a huge opportunity ahead of us, driven by the changing retail landscape. Revolve sits at the intersection of digital commerce and Gen Z and millennial purchasing power, all of which are rapidly growing markets. We believe we have a better way of capturing these markets, both through our data-driven merchandising, which is powered by proprietary technology, and through our innovative marketing approach. As a result, we believe we have built the leading US online premium fashion destination targeted towards millennial and Gen Z consumers. Our data-driven merchandising model allows us to offer broad yet curated assortments of on-trend apparel and accessories while minimizing fashion risk. We leverage our data-driven merchandising model to optimize our product offering and to develop new owned brands and new styles within our portfolio of owned brands. Importantly, Revolve's owned brands are not private label. They are…

Thanks, Mike. Since this is our first earnings call as a public company, I want to provide a framework of our key performance metrics and how we evaluate the business. The key metrics we will report on a quarterly basis, outside of the core financial statement metrics, include active customers, number of orders, average order value, free cash flow, and adjusted EBITDA. We believe these metrics best represent our results on a quarterly basis. Annually, we will provide an update on the percentage of sales at full price and our owned brand penetration. These last two metrics can vary more on a quarter-to-quarter basis and we believe an annual update is most meaningful. Now to the second-quarter results. As Mike mentioned, we delivered another strong quarter and we are very pleased with our performance. Total Company net sales increased 22.8% year over year for the second quarter, driven by the REVOLVE segment, which increased 24% to $143.9 million. This strength in the REVOLVE segment was complemented by our FORWARD segment returning to growth, with net sales of $18 million, an increase of 14.4%. Our overall growth was driven by new customer additions as well as continued loyalty from our existing customers. Our active customers increased 36.2% year over year to 1,359,000 active customers, and total orders placed increased 30.8% year over year. The significant increase in orders placed was partially offset by a slight decrease in our average order value to $275, a 2.2% decrease year over year due in part to a shift in sales mix towards REVOLVE. That said, we believe our AOV is healthy and demonstrates the premium nature of our product. International net sales for the quarter were $25.8 million, representing 16% of total net sales and an increase of 4.3% year over year. We continue…

Thanks, Jesse. Hi, everyone. As you know, we are one of the innovators and the leaders in the industry at connecting with younger generations, and this quarter was no exception. We had another very active, efficient, and impactful quarter on the marketing front. We started the quarter in the Coachella Valley at our fifth annual Revolve Festival, where we dressed over 750 influencers and generated earned media volume in orders of magnitude higher than our actual marketing investment. The event was hot, with top-tier performances and celebrity attendees, including Offset and Cardi B, SZA, Ray Schirmer, 2 Chainz, Kendall Jenner, Shay Mitchell, and Olivia Culpo, just to name a few. The power of the REVOLVE brand and the success of our activations is also evidenced by successful partnerships with beloved global brands, including Nike, Google, and Virgin Voyages. In May, we leveraged our brand marketing engine with our unique owned brand platform to launch the Song of Style collection in Portugal with Aimee Song, a New York Times best-selling author with an Instagram following of 5.3 million followers. Two weeks after the execution of our IPO in June, we were in Brazil launching the Camila Coelho collection with Camila, who was named a Forbes 30 Under 30 and has graced the cover of numerous magazines and has an Instagram following of 8.1 million followers. These two brand launches represent a significant proof point of the power of our combination of our marketing engine and owned brand platform. The combination of unique and distinctive marketing activations, great products, and Aimee and Camila's collective following of over 13 million Instagram followers resulted in our strongest two brand launches to date. Looking ahead, we will continue to look for opportunities to expand our brand portfolio and add new ranges within our existing portfolio…

[Operator Instructions]. Your first question comes from the line of Kimberly Greenberger from Morgan Stanley. Please go ahead. Your line is open.

Great, thank you so much. A very nice quarter here. I wanted to ask about the trend in AOV. And I would have thought perhaps with the FORWARD segment re-accelerating that the AOV would show a little bit of upward momentum. So I am wondering if you can sort of break down AOV between the brands and talk about the dynamic, especially at the REVOLVE segment.

Yes, sure. Thanks, Kim. So on AOV, if you remember last year is when we started to introduce the lower price points. So in the back half of 2018, we did see AOV start to decrease. Since then, it has come back sequentially. So in Q1, we were down kind of in the high-single digits as compared to Q2, which was down 2.2%. So there is still some mix shift going on there towards the REVOLVE segment, lesser than in prior periods, with FORWARD returning to growth, but there is still some there. And then to your point, there is a slight decrease year over year in AOV on the segment level. But again, we are still comping higher AOVs in the first half of the year last year.

Okay, great. And Jesse, my follow-up is just on the inventory numbers. I assume the new accounting convention was applied also at the end of Q1. Is that correct?

That's right. Yes, we started it on January 1, 2019. So Q1 and Q2 are under the new method.

Okay. So end of Q1, it looks like inventory was up 41%; end of Q2, it looks like it's up 24.7%. It's looking directionally like it's quite clean. And I'm wondering if there were any sort of inventory reduction efforts here in the second quarter that you guys were engaged with? Or was it just simply slowing down inbound orders that allowed the inventory to really get cleaned up?

No, nothing specific. And just to clarify, you need to add back that 13.6 into the inventory that reflect kind of a comparative to last year. That doesn't apply to Q1. So to your point, there has been some improvement in inventory there. And also, in that inventory, keep in mind that we have been investing in the owned brand expansion, the Superdown expansion, where we invested in the lower price points. And then finally, FORWARD returning to growth for the first time in at least 12 months, where FORWARD had year-on-year positive inventory growth. So some investments being made there, but we feel good about the inventory balance looking into the second half of the year and beyond.

Great. Thank you, Jesse.

Your next question comes from the line of Michael Binetti from Credit Suisse. Please go ahead. Your line is open.

Hey, guys. Thanks for all the detail today and congrats on the IPO. And great to talk to you guys after the first quarter out of the gate. I have to -- I want to ask about the gross margin comments by segment. I think when we spoke through the IPO process, I don't think you were expecting much in the near term. You had a lot of moving parts with DCs and obviously launching new brands and mix math, everything like that. But you did mention that REVOLVE was up 30 basis points. I'm curious if that was in line with your thinking on how REVOLVE would be in the quarter. I seem to remember that it seemed like it might be a little bit ahead of where you thought it would be. But then also on FORWARD, obviously there has been a meaningful inventory reset there. You mentioned that gross margins were down a little bit. Maybe just a little bit of color on what pushed the margin down on FORWARD and how you see the two components rolling forward through the year as they fit into the guidance you gave.

Yes, thanks, Michael. So I would say that overall, gross margins are in line with our expectations. REVOLVE had solid margin continued expansion year over year with that owned brand expansion and also really strong full price sales. And we are comping a really strong Q2 last year as well, so it's important to keep that in mind. And then on that comp point, it's highlighted on FORWARD where we had really strong gross margin last year in Q2. So in general, in line with our expectations and feel good about margin this quarter.

And how should we think about the gross margins, and maybe even by segment, as we think about the EBITDA guidance that you gave us for the year?

Yes. As we look ahead to 3Q and 4Q, another thing to call it is just to keep in mind that 2Q is seasonally higher margin. So you shouldn't expect to see this high of margin in the back half of the year, but that's natural and consistent with prior years. So we expect to continue to see strong full price sales and margin on a comparative basis, but again, keep that seasonality in mind.

Okay. And can I just ask you -- sneak in one on the mix of owned brand in the quarter? Can you help us think -- I know you don't want to get into the game of giving directional percent or percent -- exact percentage on owned brand mix year over year. But can you help us think about how the mix of owned brand trended year over year in the quarter on the REVOLVE side? And is that something we should assume as far as a similar magnitude tailwind on the revenue margin components through the year?

Yes, so maybe I will step back and look at Q1 that we disclosed in the S-1, which was 35.8%. And it was a little bit lower than that for the trailing 12 months; I think around 33%. So kind of using that as a level set. And then year over year, we did see an increase in owned brand penetration. Without talking specific percentages, we feel good about the increase there. And as Michael mentioned, we had a couple good product launches this quarter, and then we have FORWARD owned brand coming later this year.

Okay. Thanks a lot for the help, guys.

Your next question comes from the line of Oliver Chen from Cowen and Company. Please go ahead. Your line is open.

Hi, thank you. The tariff situation is quite dynamic. What your thoughts as you think about elasticity and also your assortment and pricing planning across your portfolio? And then our follow-up was just regarding Superdown and as you think about executing on lower price points and the tests you have done and efforts to just minimize cannibalization risk. Thank you.

Sure, this is Jesse. I will take the first one, the tariff question, and then pass it on to Michael for some discussion on Superdown. So on the tariffs, they are here. 10% is better than 25%, but we are by no means immune to them. But we do have ways to manage through the tariff impact as we look ahead. And first is we have great relationships with our vendors in China, so we expect to gain some leverage there. Second, we have been working on diversification really over the last 12 to 18 months and continue to make progress there. And then third, because you probably heard those before, what makes us maybe a little bit more unique is our premium average order values and the very low overlap that we have with other retailers. The combination of emerging and owned brands is over 70% of the product mix, so these are brands and styles that you really can't find anywhere else unless you are really looking. So our shopper comes to us not to price compare, but to look for what is new and exciting. So with that, to your point on elasticity, if mitigation factor number one and two don't fully offset, we do have the option to pass some of that impact on to the consumer without, we believe, a significant impact to demand.

And regarding Superdown, I think Superdown is a perfect example of our business philosophy in terms of read and react. Like our merchandising model or test and iterate is how we speak on the technology side. And our investment with the launch of Superdown was quite small and we are learning very, very quickly. So we will keep you guys up to date as things develop. Cannibalization is very, very top of mind for us. And we think that we know that this consumer loves REVOLVE. We also know that the younger consumer not necessarily could afford to shop on REVOLVE on a regular basis. But by focusing on this younger consumer, it also allows us to engage with influencers that were not appropriate for REVOLVE. It really -- not only does it expand our TAM, but it also expands our marketing capabilities, leveraging our proven techniques with a different set of influencers for a different audience. So this is something very top of mind, and as I said, to keep you guys posted quarter to quarter as the brand and the business develop.

Thank you. Best regards.

Your next question comes from the line of Randy Konik from Jefferies. Please go ahead. Your line is open.

Yes, thanks a lot. So I guess a question for Jesse. You spoke about slightly higher fulfillment costs in the quarter, but it seems as if that has the opportunity to kind of get leverage over time. So kind of give us some thoughts on that. And then on the marketing side, you got some nice leverage it looks like or came in much more efficient than expected. So it looks like to me that the REVOLVE platform creates this platform for the influencers themselves that draws in more influencers that you can thereby leverage that marketing expansion and distort it across the business more efficiently. So kind of walk us through your plan to kind of think about distortion of marketing expense going forward to kind of -- and the process that you are seeing of influencers seeing other influencers on your platform and wanting to get a piece of this REVOLVE action, if you will.

Yes, sure. So I will take the first part there on the fulfillment. So to your point, higher year on year, so we lost some efficiency there. And that was primarily due to the investment in the fulfillment center, so we are carrying some excess capacity, some excess facility right now. But we expect to, to your point, gain leverage in the future. We won't see a meaningful impact on that until 2020, but feel really good about our capacity and our ability to grow into that facility. And not just grow into it, but we are also layering in the automation, which should give us efficiencies in the future. And then just to call out quick to you, that inefficiency is year-on-year inefficiency. We actually gained some leverage sequentially from Q1. And then I will pass it on for the exciting influencer one.

Yes, so on the marketing side, you are right. It was a great quarter for us on the marketing front, particularly from an efficiency standpoint. I think there is a couple important things to understand. One is that quarter to quarter, you are going to see some fluctuations on the marketing side, changing competitive dynamics, changing kind of opportunities for us. So Q1, if you recall, was actually a little bit up year over year and then we had a little bit of efficiency year over year in Q2. We think it was driven in large part by some really spectacular brand marketing activations that we had in Q2 that really resonated and hit home. To your point long term on marketing, we are definitely of the belief that there is potential long-term upside as the kind of platform effect of REVOLVE kind of continues to take root with consumers. And we kind of grow our influencer network, our network of products on the site, and the consumer shopping us. So yes, some great dynamics in Q2. I wouldn't expect anything in particular in terms of back half of the year. Related to those, there are fluctuations quarter to quarter, but long term I think there is opportunity for us.

Great. And can I ask I guess a follow-up on if we think about the influencer brand collaborations, I guess what we would be really interested in hearing about is how do you think about the size of or the penetration of those collaborations? I.e., the number of collaborations you may want to get to? And then how deep you go with those partnerships and how -- what's the duration of those partnerships with those influencers? And then if you can expand upon that from a financial perspective, is there any real differential in the margin characteristics greatly from the owned brand margins that you see relative to third party? Thanks.

Yes, the brand collaborations for us is at a really early stage. We have launched two with significant focus. And they were incredible launches, as we mentioned in the earlier session, that they were the best launches of any brand -- any two brands we have ever had on the site in our history. So we really think we are on to something great here. And it really depends, in terms over the long term, where we have to constantly be aware of where fashions are going, where influencers are going, and how they relate. So we are very opportunistically seeking to expand this. We think that it's early stages here and it's definitely something that due to the massive success we will continue to explore and explore opportunities.

And then really quick, Randy, on your question on the margins. Those owned brands carry meaningfully higher margin than a third party would.

Right. So is the influencer brands collaboration kind of -- are they considered third party or are they considered partly owned brand? How does the financial arrangement work there?

We classify them as an owned brand.

And from a financial standpoint, they are much more similar to owned brand financial characteristics than third party.

Perfect. That's all I needed. Thank you. Thanks, guys.

Your next question comes from the line of Bob Drbul from Guggenheim. Please go ahead. Your line is open.

Hi, guys, good afternoon. I guess just two questions that I would have. I think you had 100,000 new customers quarter over quarter and I think 360,000 year over year. Can you just talk to international customers or where you are on the international side and how much of the new customer is international, given was it Aimee Song and Camila? If you could talk to that, that would be helpful. And then the second question that I have is on the return rates, I guess are you making any changes to your return policies and assumptions around the acceptance and usage of Happy Returns so far? Thanks.

Yes, definitely. So a couple parts that I will break that question down into. So with regards to the brand launches, you are right. Both Aimee and Camila have big international followings. We did see a large impact there, but by and large, the biggest impact was in our core domestic market with those brand launches. And with regards to new customers, as you know, the growth on the domestic side continues to be really robust. The international, we are still fighting some headwinds there in terms of overall growth. I think the regions that we have invested in in a big way, such as the UK, we are seeing really great results. In fact, growth that's faster than our domestic growth rate, despite a lot of the macro headwinds there in the UK. So overall, new customer growth and active customer growth driven on the US side, but long-term huge international opportunity. And then sorry. What was the back half of the question? Return rates, yes. So with regards to return rates, we did see a little bit of an uptick there in the quarter. Really consistent with recent trends on the return rate side. This has been a core part of our value proposition to customers from day one. We encourage customers to take risks and try items on in their own home. And we have really the margin profile and the ASPs that readily support very healthy kind of try-on rates or return rates. We do think there is some exciting opportunities in the future and then exciting ones such as Happy Returns that we just launched. And Happy Returns is a great example of the kind of opportunity we are focused on: win-win solutions where the customer wins and we also win as a Company. So much more convenient for customers to do those returns. They get an immediate credit at the Happy Returns kiosk versus having to wait. But then for us, it actually improves the return economics because we are able to get some shipping costs out of the consolidation that comes from Happy Returns. So a number of things that we are focused on. We think long term it's a big opportunity and point of leverage for us.

Great. Thank you very much, guys.

Your next question comes from the line of Ross Sandler from Barclays. Please go ahead. Your line is open.

Hi. Can you let us know what kind of ROI you are seeing from influencer marketing today versus one year ago?

Yes, I mean, as we discussed, it was a great quarter from a marketing efficiency standpoint in the second quarter. And that was actually driven in large part by a lot of the great brand marketing visions that we had. So we actually saw increased efficiency year over year in terms of an ROI perspective on our influencer marketing.

Your next question comes from the line of Ralph Schackart from William Blair. Please go ahead. Your line is open.

Good afternoon and thanks for taking the question. Just curious your overall thoughts and what you are seeing in terms of the health of the consumer. Orders were certainly higher than we had modeled and expected in the quarter. But I think you talked about some international headwinds perhaps and some geographic location. So any color you could add there. And then just a follow-on. Any commentary you could add just in terms of initial reads on Instagram beta with the new Checkout feature and how that is performing. Thank you.

Yes, definitely. So on the domestic side, we saw great consumer strength with some really strong continued growth on the domestic side of our business. And then international, as we noted, there were some headwinds there. Really macro headwinds, currency headwinds worldwide. In our major regions across the world, currency shifted about 5% to 8% against us. We also had a 10% GST tax in Australia. Between those two things, Australia customers actually faced close to a 20% price increase for the same product and then none of that 20% drops to our income statement. So I think really challenging macro environment internationally; despite that, international business continued to grow. We think it is a huge long-term opportunity. And also, we think as we cycle some of these really likely short- and midterm headwinds, we think a strong potential to accelerate out of that. And then sorry, what was the back half again? Oh, Instagram Checkout. Yes, so Instagram Checkout is really exciting for us. We are really excited about kind of all the new things Instagram is working on. We were part of the initial beta launch; a really select group of companies. It has been very exciting for us thus far, but I think it is still small and nascent. Consumers I think are still kind of learning how to use it; still learning how to view Instagram as kind of a shopping partner. But we are excited for the long-term potential for this to be a major channel for us.

Great. And one more if I could please. Just in terms of the full-year guidance, what is contemplated in there in terms of FX for the full year?

No significant fluctuations in FX. We have factored in that year-on-year comp for the things like Mike talked about, the GST. We started facing the currency headwinds in the second half of last year. So those things are factored in, but no significant currency fluctuations.

Great. Thanks, Jesse. Thanks, Mike.

Your next question comes from the line of Aaron Kessler, Raymond James.

Yes, hi, guys. Congrats on the first quarter. Just a couple questions. Maybe first on the localization efforts internationally as well. Can you just talk to us maybe about where you are with different -- in terms of the different markets at which stage you are for localization? And then maybe some of the newer categories that we didn't cover, such as men's and beauty. Kind of where are we at in terms of development of those categories as well? Thank you.

Definitely, so I will cover the international and then pass men's and beauty over to Michael. So we are furthest along with our localization in the UK. We still have work to do, but we have made a lot of great upgrades. Really trying to bring that experience as close as possible to the US experience. After the UK, I would say Western Europe and Australia are probably kind of next closest. And call them maybe halfway there in terms of -- compared to where we want them to be. And then you can kind of go down the list of Canada, which is a little bit behind those two, and then probably Asian markets and rest of world is earliest in the cycle. But we think there is huge opportunities to bring up the experience. And again, we think the UK is a really powerful proof point of what can happen when we take that core service level proposition that REVOLVE has to our worldwide markets.

And the second question is on -- I think we are definitely -- I guess this has been a gift from the Christmas since that like. We are uniquely positioned to really take advantage of a lot of opportunities, so that is why it's ultra important for us to really prioritize it. I think it is -- as entrepreneurs by nature, new opportunities are very, very exciting. But also of course, as public co-CEOs, we are very, very focused on prioritization and discipline. So beauty and men's remains things that are a little bit lower investment while we really concentrate on the core, of course, with REVOLVE but also FORWARD and Superdown. But it's great to note that both of those segments are showing improvements, both men's as well as beauty, with minimal investment of resources and time. When the time comes to prioritize those opportunities, it will be very exciting to pursue that for sure.

Great, thank you.

Your next question comes from the line of Justin Post from Bank of America. Please go ahead. Your line is open.

Hello, thank you for taking my question. This is Joanna Zhao for Justin Post. I have a question on your advertising spend mix on the new customers versus existing customers. Do you see that trend changing for the remainder of 2019 or 2020? And my second question is on the tariff. I understand that there was a question asked on the tariff earlier. And I just want to better understand in terms of passing the pricing on to the customer versus looking for new suppliers in China. What do you think of the timing of that we would expect? Would it be the second half of this year or more so in 2020?

Yes, I can take that one, Joanna. So on the first one on the marketing spend, you know, we are not seeing significant shifts in the -- we are not talking specifics about new and repeat customer and spend there on a quarterly basis. But no significant shifts. Our cohorts continue to behave very consistently over time, generating that 6.3x four-year LTV. And then just keep in mind that, and as Mike mentioned to you, Q2 is seasonally high with Revolve Festival. So if you are looking at just very finite quarters and half years, keep that in mind. And then on the tariffs, no specific step function timing there. It is definitely a process. I think everybody knows the timing of the tariffs hitting on September 1, so it is not to say that everything is going to hit on September 1. There will be a slow roll and we have to work through our inventory. So you won't see, like I said, a necessary step function in either customer pricing or margins or anything else.

Okay, thank you.

And now I would like to turn the call back to Mike and Michael.

Hi, everyone. Well, of course the IPO was very, very exciting for us. And honestly this earnings call with you guys is very, very exciting for us. But at the same time, we are very, very focused on the long term. We have been doing this for a long time. We are looking at a small three-month period and we have been doing this for 15-plus years. So we'll remain focused on building the biggest business we can. And we look forward to chatting with you guys for decades and decades to come.

This concludes today's conference call. You may now disconnect.