Good afternoon and welcome to Revolve Group's Fourth Quarter and Full Year 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 Erik Randerson, Vice President of Investor Relations at Revolve. Thank you. You may begin.

Good afternoon, everyone, and thanks for joining us to discuss Revolve’s fourth quarter and full year 2019 results. Before we begin, I would like to mention that we have a posted a presentation containing Q4 and full year 2019 financial highlights to our Investor Relations website located at investors.revolve.com. I would also like to remind you that this conference call will include forward-looking statements. These statements include our expectations regarding financial results and guidance, market opportunities, our growth and increased efficiencies, our owned brand mix, our inventory position, our dilutive share count, our investments in customer experiences and fulfillment centers, the impact of tariffs and our tariff mitigation efforts, the potential impact of coronavirus on our supply chain and operating results, 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 in our filings with the SEC, including our registration statement on Form S-1 that was filed with the SEC, our Form 10-Q for the third quarter of 2019 that was filed with the SEC on November 7, 2019 and the Form 10-K for the full year 2019 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 Co-Founders and Co-CEOs, Mike Karanikolas and Michael Mente, as well as Jesse Timmermans, our CFO. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn the call over to Mike.

Thanks Erik. Good afternoon, everyone. Thanks for joining us today. I’ll start with highlights for the full year 2019, followed by our key priorities for 2020. Next up, Michael will drill a level deeper in discussing our 2020 priorities and initiatives, particularly in owned brands, FORWARD and marketing. And finally, Jesse will wrap up with a review of our fourth quarter results and our guidance for 2020. As entrepreneurs and founders, Michael and I, as well as the management team, are focused on delivering long-term value for our shareholders. With that lens in mind, it is important for us to take a step back and evaluate our performance for the full year 2019. 2019 was a record year with a number of significant accomplishments. We are proud of our team for delivering such powerful results: Net sales increased 21% year-over-year in 2019. The REVOLVE segment net sales grew 22% and the FORWARD segment returned to double-digit growth after a successful inventory repositioning. International net sales growth accelerated during the second half of 2019, driven by the continued improvement of service levels that further strengthened our value proposition in overseas markets. Gross margin expanded 40 basis points year-over-year as we continued to build on the momentum of our owned brands. 79% of our net sales came at full price, equaling our record performance in 2018, and well ahead of retail industry benchmarks. Net income grew 16% and adjusted EBITDA grew 20%, despite incremental costs we incurred to operate as a public company. Free cash flow increased 42% to $34 million, nearly equaling our net income for the year. We did this while investing approximately $10 million in our new fulfillment center, expanding our warehouse capacity to beyond 2023. We implemented automation that is driving operational efficiencies and even further improvements in…

Thanks Mike. 2019 was an incredible year for us. Not only because of our much-anticipated IPO in June, but more importantly, because it laid the foundation for our next phase of growth. We are still under penetrated in our core domestic market with incredible long-term potential to build REVOLVE into a massive global business. Starting with building the brand. Customers who know REVOLVE love us and we will continue to invest in our pioneering ways to increase our brand awareness and elevate the REVOLVE brand. As Mike mentioned, we are excited about The Bachelor collaboration that aired in January for more than 5 million viewers. Props to Raissa Gerona and Gil Manzuri for securing this incredible opportunity for brand exposure in front of a large audience of our core customer demographic. We generated significant exposure and favorable press, and as just one proof point of the success, we drove a meaningful increase in mobile app downloads in the days that followed. We are gearing up for another exciting influencer event with a globally admired company that we believe could similarly elevate and amplify the REVOLVE brand. I can’t want to get into specifics just yet, although I will share that it is unlike anything we have done to-date. We also plan to even further expand the ways in which we engage with our customer by leveraging emerging and existing social platforms such as TikTok and YouTube. Lastly, we will drive additional excitement for our brand and product offering through continued collaborations with celebrities and global influencers. All of this is a focus on driving awareness and continuing to build the REVOLVE brand. Shifting to owned brands, a core pillar of our long-term strategy. Building the owned brand platform and expanding our offering of owned brands has been incredibly successful, growing…

Thanks, Michael. Since Mike covered the full-year highlights, I’m going to focus my remarks on the fourth quarter results. I will also discuss guidance for the full year 2020 that we announced today, including some key assumptions and drivers. Starting with the fourth quarter. Our Q4 results had some clear positives as well as some challenges. On the positive side, Adjusted EBITDA exceeded the high end of our implied Q4 guidance range. Free cash flow was exceptional and we made great progress on working through our inventory. We also drove strong demand to the site with the highest year-on-year traffic growth of the year in the fourth quarter. On the other hand, while within our guidance range, net sales came in towards the low end of that range. Drilling into the top line. Total net sales for the fourth quarter were $147.6 million, an increase of 16% year-over-year. REVOLVE Segment net sales were $125.2 million, an increase of 13% year-over-year. As mentioned, we generated strong demand to the site, but with the reduction in new, fresh inventory, our conversion rates declined, resulting in some pressure to the REVOLVE segment top line. Despite new inventory being relatively flat year-over-year, we were able to drive 13% sales growth in the REVOLVE segment. In addition, we believe the focus areas Mike discussed will help us improve the REVOLVE segment growth outlook later in 2020 and particularly heading into 2021. Meanwhile, the FORWARD segment performance was strong in the fourth quarter. FORWARD net sales were $22.3 million, an increase of 33% year-on-year. It’s the highest growth rate in more than three years. When evaluating our segment performance in Q4, keep in mind that the REVOLVE segment faced a difficult comparison against 32% net sales growth in Q4 2018, while FORWARD faced a much easier…

2019 was a great year and a testament to our long-term focus on growth and profitability. We’re excited to be here, sharing our story through the public markets and while we’ve been doing this for 17 years, it truly is just the beginning. We’re excited for the future and the opportunities ahead of us. With that, I’ll turn it over to the operator for your questions.

Thank you. [Operator Instructions] Your first question comes from Justin Post from Bank of America. Your line is open.

Great, thank you. Definitely saw some progress with inventory growth on the balance sheet. But just wondering, what’s currently on the balance sheet that’s causing the gross margin pressure, maybe go through new versus old. And what’s your expectation for full price sales in the first half. And then maybe a bigger picture question, I know the own brand mix was a big long-term margin driver that’s supposed to help in 2021 and going forward. Is it a one year reset and then you think you’ll start seeing the own brand really increases a percentage of sales. How are you thinking about that over the next three years? Thank you.

Yes. Sure, Justin, this is Jesse. So kind of working through your questions in order. To your point, we made great progress on the inventory going from plus 40% in Q2 to plus 30% in Q3 and then plus 15% at the end of the year, all while investing in forward at the same time. So we feel good about that. But there still is a component of inventory that is marked down and it’s higher than we’d like. And that will take us a little while to work through as we indicated last quarter. It’ll take a few quarters to do that. So that’s where the impact on the gross margin came, both in the fourth quarter and as we look ahead for the first half of 2020. If you combined then, in your second question, the own brand mix, still a very much a core pillar of the business and a gross margin driver over the long-term. But this is a reset period. We’ve invested heavily. It went from 30% in 2018 to 36% in 2019. So we are reinvesting there. But as we look ahead into 2021, again, still a growth driver and we expect that penetration to then reaccelerate.

Thank you.

Your next question comes from Oliver Chen from Cowen. Your line is open.

Hi. Regarding the markdowns and the higher than normal mix of markdown inventory, how did that go relative to your expectations? And what does the outlook for in terms of the receipts of new inventory going forward. And what you’ll plan to do with trying to reinstate that over time?

Yes. The markdowns, full price sales are strong at 79% for the year. So as ratio of markdown in full price, full price remains strong. But within that markdown category, the discounts were deeper and that’s what impacted us in Q4. The other thing in Q4 to think about, as Mike mentioned in the prepared remarks, is the demand was strong as our highest year-over-year traffic growth quarter of the year. So the demand was there, but the new fresh receipts as we’ve worked through this inventory situation were lower, which then impacted the conversion, and ultimately, the net sales. So again, we’ll continue to work through that great progress, but there is a near-term impact as we head into the first half of 2020. And then, I forgot your second question.

Regarding new inventory and…

New inventory. Yes, yes. And we feel good about the quality of the new inventory coming in. We are still working through this. So there is slightly lower mix of newer fresher inventory, which contribute to that demand or the convergence situation.

And Jesse, regarding deeper markdowns that you experienced, what is your guidance assume in terms of the deepness of the markdowns going forward?

Yes. We don’t speak to the specific factors behind the markdowns depth or mix in full price versus markdown. But our margin assumption for the full year 2020 and EBITDA assumption there does factor this in. And as we indicated we expect the 2020 overall gross margin to be lower than that Q4 margin that we posted.

Thank you. And follow-up is on own brand recalibration as you spoke to it. Part of what you mentioned was people and different capabilities. Can you elaborate on the timing and what factors will be important as you build this? And does it change how you might think about your long-term gross margin potential. It sounded like you were comfortable with long-term targets.

Yes. Going backwards, Oliver, it’s Michael here. Definitely comfortable with the long-term targets, more excited than ever. I think what we’re really seeing is, our data driven merchandising identifying a lot of opportunities and that’s just printing to capture all those opportunities. But it’s clear that additional investments will be necessary. Majority of those investments will be team people and processes, next CapEx is really just developing the in-house know how to diversify our offering across price points and categories and such. What was the multipart question there?

Related that Michael, which products and categories might have the most opportunity, it seems like outside of dresses or tops, is where there could be opportunity.

It’s really quite diverse. I think if you look at the kind of the price category matrix, there’s a number of opportunities outside of addresses and tops. But if you do look at dresses and tops, we see a very exciting opportunity there in the upper tier price points. We’ve had great progress with the below the average [indiscernible] product and that’s been important to us for many seasons out. But looking forward, we do think that in the higher upper end range is a really exciting opportunity. We don’t feel a lot of competition there. We have tested product area with Reve Riche recently and it was phenomenally successful. But that was just a small product set. I mean, we need to invest in terms of the team and the capabilities to lead you that at scale.

Thank you. Best regards.

Thank you.

Your next question comes from Michael Binetti from Credit Suisse. Your line is open.

Hey, this is KC Katten on for Michael. Thank you so much for the color so far and for taking our question. I guess, wanted to dive in a little bit more on what you’re seeing around coronavirus. Can you talk through what sort of impact you’re seeing on the business today, both on the revenue side and supply chain side. I know you talked about the 1 to 3 percentage point negative impact. Can you help us understand the assumption behind how that should show up on the P&L and whether there’s any sort of mitigating factors you see? And I guess, even on cadence, are you assuming the supply chain impact is more of a second quarter issue relative to first quarter? Any color there would be helpful.

Yes. Yes, sure. So I guess first of all, our hearts go out to those impacted in our partners in China. But as we get into it and think about that 1 to 3 point negative impact, that we indicated in the prepared remarks and apologize if this might be a little bit lengthy. But I think it’s important to really frame this one out, because it is very uncertain. There’s a lot of moving pieces right now. So if we start with that 1 to 3 point negative impact on the top line in 2020. And first of all, framing that as a supply impact versus a demand impact. Our relative sales mix from the Greater China region is very small. So for us, it’s primarily a supply impact. And that supply impact, we’re estimating right now to be a three to four week delaying shipments from China. So if you look at that three to four weeks, first of all, we have most visibility into our own brand supply chain versus the third-party supply chain. So if we look at that and if you kind of quantify that 36% of our sales in 2019 was our own brands and then the remainder was the third-party. Within own brand, 75% to 80% of our supply is sourced from China. And then on the third-party side, 35% to 40% is sourced in China. So if we look at that and then drill just one click deeper on the own brand supply chain, generally speaking, and just to back up a little bit, workers were due back to work in the factories around February 10 following the Lunar New Year. But with the delay, of course, due to the virus, they return to work was impacted. We’ve been in pretty close…

Got it. That’s really helpful. And then I guess, maybe switching the AOV, you called out those 3% AOV growth that you saw in fourth quarter is the first kind of positive growth you’ve seen in nine quarters. And I think you said trends were positive at both REVOLVE and FORWARD. It’s somewhat surprising, I guess, given the elevated markdown you’ve been working through on that REVOLVE side of the business. Can you maybe help us unpack the AOV a little bit to understand what drove the strength in 4Q and I guess your confidence behind that AOV should continue to improve slightly in 2020?

Yes, yes, for sure. And the increase in AOV is what we expected. Stepping back into late 2018 into early 2019 is when we really invested in behind the launch of the lower price point, specifically super down. So we saw over index of new customers, orders, orders outpacing significantly net sales and therefore the decrease in AOV for the past several quarters. We’ve cycled through that and have seen to your point, both strength in the REVOLVE segment and the FORWARD segment. But to your point, important to call out that, that is despite the higher levels of markdowns within the markdown mix. And also contributing to that is the increase in mix of the FORWARD segment as FORWARD outpace the REVOLVE segment. So we feel good about AOV. Looking ahead into 2020, we expect continued slight increases in that number, which will then provide some leverage on the cost structure as well as there’s less units moving through the system.

Your next question comes from Ed Yruma from KeyBanc Capital Markets. Your line is open.

Hi, this is Abbie Zvejnieks on for Ed. I have two questions. Could you talk about the pacing of the investments in the private label capabilities? And maybe in hindsight, how could the private label issues been prevented by augmented capabilities? And then understanding just that you have less product now given the inventory receipts. How has customer acceptance been of these newer products?

I think the second half of your question cut off, do you mind repeating it?

Yes. So how has the customer acceptance been of the newer products given that the inventory receipts have been less?

Well, starting with – we don’t have a quite private label division of our own brand division is that the investments will be made quite gradual, steady over time, starting with some senior leadership positions and some building with some teams. And we’ll be a little bit more gradual paths over the next few years. I think kind of – in line with kind of like our overall growth and profit oriented philosophy. I think there’s always going to be periods where we’re pushing and pushing aggressively and push a little bit too hard. I think that’s by design in terms of how we operate the business. I think this is parallel the other segments of the business. There’s a lots of opportunities and I think that ultimately – if we don’t have hiccups at times, that moves into slip. So I think this is a typical cadence of the business as we’re seeing in other things like, FORWARD right now. As far as new receipts and such like that, I think we’re seeing that across the board. Additional – a greater quantity as we received in Q4 would have been, with hindsight, a little bit more optimal. But as we’re seeing a lot of improvements with our overall inventory position on a year-over-year basis, as well as term basis, it’s quite clear that our shifting inventory strategy is really paying off.

Great. Thank you.

Your next question comes from Kimberly Greenberger from Morgan Stanley. Your line is open.

Hi, this is Alex Straton on for Kimberly Greenberger. You said you still expect to have a few quarters of REVOLVE segment gross margin pressure. Have you worked through that elevated inventory levels? Could you give us a sense of how much of the inventory backlog you’ve cleared through? And what types of items comprise inventory backlog?

Yes, yes. So maybe again, working through the quarter-to-quarter cadence from plus 40% and Q2 to plus 30% in Q3 three and then plus 15% at the end of the year. And that plus 15% year-over-year is an overall inventory mix. So that includes the investment in FORWARD. So we actually feel really good about the progress we’ve made and working through that REVOLVE segment inventory. But as we indicated, there still is a higher than desired mix of markdown products within that inventory. So although the overall inventory levels are healthy with plus 15% being lighter than the net sales growth for the quarter and for the year. We’ve still got some to work through on that markdown component. It’s not – you can go on the site and look at the markdown mix by SKU, call it roughly 50-50. It’s not to that level, just due to the cost of the inventory. But we still have a couple of quarters to work through that.

Great, thank you. And then maybe just one quick follow-up is, just on the REVOLVE segment gross margin being down for the full year. Can you just give us a sense of kind of the cadence throughout the quarter and what are the components just throughout the year?

Yes. Maybe starting with the second part first on the full year cadence. We typically see the highest gross margin in Q2 that’s relatively consistent year-to-year with that being our peak season and REVOLVE Festival and heading into summer in that festival season. For the Q4 dynamics, there wasn't anything significantly intra-quarter due to seasonality. We followed our same kind of sale and markdown cadence that we have in the past. So we weren't necessarily more promotional than other years. It was just the depth of markdowns within that down inventory and working through this inventory position.

Great. Thank you.

Your next question comes from Mark Altschwager from Baird. Your line is open.

Hi, good afternoon. Thanks for taking my question. As we head into the spring season, I think that's typically when you see some of the greatest social media activity of the year coinciding with your REVOLVE Festival. I was hoping you could dig into some of the changes you're planning this year or some of the initiatives to drive some greater buzz around that event and brand activations. And I do think you mentioned some plans for increased marketing investment in the second quarter relative to the rest of the year. And then as a follow-up, I think you indicated that you expect active customer growth to be in line with the revenue growth for the year, which would imply net adds that are maybe in the low to mid-200 range, I think lower than we've seen the last couple of years, kind of despite those marketing plans that you had talked about. So hopefully, you could talk a little bit more about your thoughts there as well.

This is Jesse. Maybe I'll start with second part first and then hand it over to Michael. That new customer addition cadence and the active customer cadence is going back to the launch of lower price mix in the back half of 2018 and early 2019, where we saw customers and orders over-index the pace of net sales. And now as we comp through that we expect those to converge as we started to see this quarter. And then it kind of linked in to that is that AOV dynamic.

And to take that first part of the question, I think from a consumer perspective, if you look at what we have going over the next few quarters. The macro level is going to appear to be a lot more of the same, our festival is very, very important for us. And we're deep into the planning process of there and we will continue to revolve around the world trips and such, really highlighting the Revolve lifestyle. But a little bit behind the covers, a little bit behind the scenes, there's going to be a lot of fine-tuning and tweaking, things that of course for competitive reasons. We don't want to get too into the details. But as we look into like last year, we've definitely seen in – competitive marketplace continued efficiency with the adaptation and evolution of our strategy. At the same time, there's going to be a lot of continued investments and experimentations and testing a lot of newer things. We see a lot of interesting things going on, new or existing – newer platforms like TikTok and existing platforms like YouTube and such. And we're really in the phase of trying to leverage that and really make it repeatable. And then again create programs where we can scale these in a very, very aggressive way. So these are all things that we should look forward to be seeing in the next few quarters as well.

Your next question comes from Bob Drbul from Guggenheim Securities. Your line is open.

Hey guys. Good evening. Just a couple of questions for me. The first one is just generally on customer acquisition costs, I guess, on the REVOLVE segment and also on the FORWARD segment. Can you just talk about trends that you're seeing there, how it's running throughout the business?

Yes, sure. Thanks Bob. Michael touched on this in the question just prior but we've been able to remain very efficient on the marketing spend. If you look at that as a percentage of net sales, we gained 10, 20 basis points on both the fourth quarter and the full year. If you also look at marketing per order or per active customer, that's also gained efficiency in the quarter. So we feel good about the level of efficiency there. Continuing to gain efficiencies but at the same time, we're not going to take our pedal off or put off the pedal and we're going to continue to invest there both in acquisition and retention. On the other side of that kind of equation is the kind of the behavior of our repeat customers, which continue to be very strong. Retained 89% of sales from prior year cohorts in 2019, which was consistent with 2018, the active – the portion of active customers made up by existing customers continues to increase. And they continue – order at a greater frequency and a higher AOV is consistent with the trends that we've seen in past cohorts.

Got it. And can you elaborate a little bit more on the international side of the business in terms of what you're seeing there? And I'd be curious just even into the first quarter, what you're seeing, anything around differences versus the fourth quarter?

Yes, definitely. Mike Karanikolas here, we're seeing some really fantastic momentum on the international side of the business. A lot of it is really the foundational pieces that we've been putting in place in the preceding quarters. But as we talked about in previous calls, we've been experiencing a lot of macro headwinds in the forms of currency, some issues in our Asia region and other things. And as we've comped and cycle through these macro headwinds. We're finally starting to see the fruits of our labor and some really nice growth there. And speaking to Q1, we don't talk about kind of intra-quarter dynamics within the quarter. But I can say, we're confident in the momentum of the international business and we feel like the investments are going to continue to pay off over time.

Got it. And if I could just sneak in one more, just on Instagram checkout, in terms of how that's going and where that stands and sort of what you're learning and what you've learned so far. Can you just talk about that? I don't think you guys have talked about that at all?

Yes, definitely. So Instagram checkout, it's a very interesting program to us. We're really excited that we're one of Instagram's first partners on that program. It continues to be small and nascent. It's something that Instagram's continuing to iterate on. We're excited about the long-term opportunity of it. But it remains a work in progress, at this point, its not yet a large part of our business.

Your next question comes from Ralph Schackart from William Blair. Your line is open.

Good evening. Just want to circle back on owned brand collaborations, certainly seeing some more advertising around them. And I think, Michael, you talked about a little bit on today's call. Just curious how this fits into the overall long-term strategy and maybe how they're performing relative to the non-collaboration brands. Thank you.

Yes, this is – our owned brands, particularly influencer collaborations are going quite well. I think quite similar to all of our brands, if we just take some time to really build up the initial launch, I think it's a little bit different than compared to a lot of competitors, who will have a flash at a launch period. And then, it really is not built for the long-term, whereas for us it's really about investing in building and creating the shoe brands that we can continue to grow. So all of our existing influencer brands continue to grow well, the most two notable ones, the Song of Style and Camila Coelho, are not even one year – so we're still in the process of learning kind of what – on a full calendar year, what the collection should be like, what we should entail, and we’re seeing great progress there still – that we continue to be areas of investment and they'll also be areas where we will see some new ones coming in the future as well.

Great. Thanks. Maybe I could add just one more. On the coronavirus situation, I know it's very fluid, but Jesse talked about I think 75% to 80% in-source from China. If this continues to persist, what are the opportunities for you to perhaps or some other regions, what sort of plans you have in place in case there’s unfortunately, if things turned out?

Yes. We did start a diversification effort back in, call it back in the 2018 era with the trade war. So there are some opportunities there. We continue to make progress. It's still not a significant portion of the supply, so we are still over-indexed in China. We're working on various things. We're leveraging third-parties. But it is very, very fluid. So we're kind of taking it day-by-day at this point.

Your next question comes from Ross Sandler from Barclays. Your line is open.

Hi, guys. It's Ross Sandler for Ross Sandler. Couple of questions, Mike, you mentioned traffic was the strongest of the year in the fourth quarter. I guess, what channels are driving the traffic acceleration? And your guidance doesn't really factor in that conversion rate that you talked about picking up. So I guess, other than fresher inventory, what things are you working on to close that gap? And then I got a couple of follow-ups.

Yes, definitely. So from a traffic standpoint, what was particularly great to see was a lot of it was essentially, call it unpaid traffic. And I use that term loosely because a lot of the brand activations that we do in brand building that we do spend money on and that causes a lot of growth there. So that was fantastic to see and we made some shifts in our marketing strategy on the brand marketing side that we think paid off well in the fourth quarter and are going to continue to pay off through the upcoming year. So we're really excited about that. And then with regards to expectations for conversion rates, we're going to continue to see light in inventory receipts, particularly through the first half of the year as we just continue to optimize our inventory position. One great side effect of that is a pretty nice cash flow and we saw that in the fourth quarter and we should continue to see that through the first half of the year. But that will continue to put some pressure on conversion rates. And certainly until we kind of fully work our way through the situation, we don't want to assume anything changing too dramatically kind of to the higher sides until we actually see those results. So I think if we look at the year ahead, the first half of the year is going to be a little bit tougher growth wise, with coronavirus, with the latter inventory receipts. And then as we get into the back half of the year, we're hoping to see some nice acceleration.

Got it. Okay. And then the second question is other Mike, you mentioned TikTok and YouTube is opportunity. So I guess, can those channels, I guess collectively be as big as Instagram for you guys, what would it take for that to happen and what are the things that you're doing to kind of ramp those channels in 2020 and then I've got one more follow-up.

Yes, I think in 2020, it's hard to predict and also in the long-term it's hard to predict. But I think that's kind of the balance – kind of mindset as we're approaching things. If you rewind, as times past, of course Instagram’s had an incredible – been a core incredible job for us. But prior to that, it was a very, very parallel shift from Facebook to Instagram. So it's something we're monitoring closely and thought, I think that we're really taking a look at it that in each of these channels kind of works together in cohesion, based on their platform, based on their audience, based on the format. They really work complimentary and I think a lot of times we'll also seeing that a lot of influencers that we work with – will be worked with on a cross channel platform. So it's really – probably not – our mindset or our perspective to really do them as a replacement for each other more as a supplement and a compliment.

Got it. Okay. And then last one, you guys mentioned the loyalty program. And I think this has been live for a little while now, I think maybe a year or so. So I guess, can you just give us a little history on the loyalty program and then what kind of frequency do you see from customers that are in the loyalty program versus just the regular customers and what percent of the business is loyalty today and what do you think that could get to long term? Thank you.

Yes, definitely. So just to clarify, the loyalty program has been like to a small set of customers as part of a long running beta test that we're running for quite some time. We still haven't officially launched the program to our entire set of customers. I think that as we noted in the earlier on the call, we're expecting to do a full launch sometime in advance of REVOLVE Festival this year. So we're really excited about the impact that can have for the business, but we've seen from the beta test if there is a significant lift in the group of customers that received the option of access to the loyalty program versus those that didn't. So we're excited to see what a full launch can do.

Your next question comes from Susan Anderson from B. Riley FBR. Your line is open.

Hi. Thanks for taking my question. I guess, I was curious within REVOLVE between the owned brands and the branded product. Did you see any difference, I guess, in sales growth? And then also did you have to discount the branded product in addition to owned brands or is this really just the owned brand issue?

Yes, Mike here. So the primary issue is on the owned brand side. We really invested heavily in that area. We got a little ahead of ourselves in terms of the magnitude of those investments into that pricing inventory levels and I think is resulted in us having to mark down more than, than we'd like there. That being said, whenever you have excess inventory in any area of the business, it can pressure the overall business. And so there is some impact on the third-party side. We think it's mostly kind of a side effect of the positions we've moved on elsewhere.

Got it. Okay. And then just to follow up on the gross margin cadence for 2020. So it sounds like you expect first half to be down year-over-year or should we expect that then to inflect up year-over-year or flattish in the back half or is it going to be pressured all year?

Yes, pressured all year, over-indexed in the first half of the year as we've worked through this inventory and then it should return to that normal cadence of seasonality. But looking at the full year, which is what we'd guide to, you'll see pressure for the full year.

Got it. Okay. But you do expect to clear through the excess product by the first half or should it linger into the second half too?

That's our current expectation. Yes, is that we started this – we communicated last quarter. They would take a few quarters. We've made great progress for that first quarter of a few quarters, but it will take a couple more.

Got it. Okay. And then lastly, just on the CapEx, I think you said $5 million for this year versus $12 million last year. Can you maybe just talk about the drivers in difference there?

Yes. Last year – 2019 being last year, we invested heavily in both the consolidation of our fulfillment centers into one fulfillment center with capacity that will put us out past 2023. And then layering on top of that, we invested in automation, so that was roughly $10 million in that project. So we don't expect to do a project of that magnitude in 2020 but we'll continue to invest in the business both in technology, fulfillment, operations, et cetera.

Great. Thanks so much. Good luck the rest of the year.

Thanks.

We're out of questions today. I would now like to turn the call over to management for closing remarks.

Well, thanks everyone. It’s been an exciting year for us and we're only, I guess, six, seven weeks into the year, but we're really into a lot of the exciting things that we've talked about. We're excited to share updates with you guys soon.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.