Revolve Group, Inc. 10-K

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOC KHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Information with Respect to our Common Stock Our Class A common stock is listed on the New York Stock Exchange, or NYSE, and began trading under the symbol “RVLV” on June 7, 2019. Holders of Record As of February 21, 2022, we had two registered holders of record of our Class A common stock and two registered holders of record of our Class B common stock. Because many of our shares of Class A common stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of beneficial owners of our Class A common stock represented by these holders. Information with Respect to Dividends We have never declared or paid cash dividends on our capital stock. We currently intend to retain all available funds and future earnings, if any, to fund the development and expansion of our business, and we do not anticipate paying any cash dividends in the foreseeable future. Any future determination regarding the declaration and payment of dividends, if any, will be at the discretion of our board of directors and will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant. Our future ability to pay cash dividends on our capital stock is limited by the terms of our existing credit facility and may be limited by any future debt instruments or preferred securities. Unregistered Sales of Equity Securities None. Issuer Purchases of Equity Securities None. 52 Cumulative Stock Performance Graph The following graph and table compare the performance of (1) an investment in our Class A common stock over the period of June 7, 2019 through December 31, 2021, beginning with an investment at the $34.00 closing market price on June 7, 2019, the end of the first day our Class A common stock traded on the NYSE following our initial public offering at $18.00 per share, and thereafter based on the closing price of our Class A common stock on the NYSE, with (2) an investment in the S&P 500 and the S&P Retail Select Industry, in each case beginning with an investment at the closing price on June 7, 2019 and thereafter based on the closing price of the index. The graph and table assume $100 was invested on the starting date at the price indicated above and that dividends, if any, were reinvested. The comparisons are based on historical data and are not indicative of, nor intended to forecast, the future performance of our Class A common stock. (in dollars) June 7, 2019 December 31, 2019 December 31, 2020 December 31, 2021 Revolve Group, Inc. $ 100.00 $ 54.00 $ 91.68 $ 164.82 S&P 500 $ 100.00 $ 113.67 $ 134.58 $ 173.21 S&P Retail Select Industry $ 100.00 $ 113.11 $ 160.19 $ 229.03 The graph and the table above shall not be deemed “filed” with the SEC for the purposes of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing made by us with the SEC, regardless of any general incorporation language in such filing. 53 Item 6. [ RESERVED] 54 Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. Our actual results and the timing of certain events could differ materially from those anticipated in or implied by these forward-looking statements as a result of several factors, including those discussed in the section captioned “Risk Factors” included under Part I, Item 1A and elsewhere in this report. See also the section captioned “Forward-Looking Statements” in this report. For discussion regarding our financial condition and results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019, refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for year ended 2020, which was filed with the Securities and Exchange Commission on February 25, 2021. 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 nearly 20 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 FWRD, that leverage one platform. Through REVOLVE we offer an assortment of premium apparel and footwear, accessories and beauty products from emerging, established and owned brands. Through FWRD we offer an assortment of curated and elevated iconic and emerging luxury brands. REVOLVE has historically been focused on the discovery of trend-driven, ready-to-wear styles, while FWRD has been more heavily weighted toward the statement pieces in her wardrobe such as shoes and handbags. We believe that FWRD provides our customer with a unique destination for luxury products as her spending power increases and her desire for fashion and inspiration remains central to her self-expression. We believe our product mix reflects the desires of the next-generation consumer and we optimize this mix through the identification and incubation of emerging brands and continued development of our owned brand portfolio. The focus on emerging and owned brands minimizes our assortment overlap with other retailers, supporting marketing efficiency, conversion and sales at full price. We have invested in our robust and scalable internally-developed technology platform to meet the specific needs of our business and to support our customers’ experience. We use proprietary algorithms and nearly 20 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 paid search/product listing ads, paid social, retargeting, affiliate marketing, personalized email marketing and mobile “push” communications through our app. 55 We have developed an efficient logistics infrastructure, which allows us to provide free shipping and returns to our customers in the United States. We support our logistics network with proprietary algorithms to optimize inventory allocation, reduce shipping and fulfillment expenses and deliver merchandise quickly and efficiently to our customers, which allows us to ship over 95% of orders on the same day if placed before noon Pacific Time. We continue to modify and expand our fulfillment network to support our growth and the demand for our products. To date, we have primarily focused on expanding our U.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 the UK, the EU and Australia, and further expanded to New Zealand, Singapore and Canada in 2020 and Poland, Spain, Switzerland and the UAE in 2021. For 2021 and 2020, we generated $165.1 million and $113.1 million, respectively, in net sales shipped to customers internationally, or 18.5% and 19.5% of total net sales, respectively. 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 coincident with the escalated spread of the COVID-19 pandemic and resulting lockdowns and social distancing requirements in the United States and elsewhere. Net sales began to decline significantly year-over-year beginning in mid-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 of 2020. Our net sales further improved in 2021, returning to growth and accelerating throughout 2021 due to strong engagement from our customers as well as increased demand as a result of, among other factors, the easing of stay-at-home orders and other restrictions in certain states and countries, U.S. government stimulus payments and the accelerated rollout of vaccinations in the United States and some of our other key markets. With the improving trends in the second half of 2020, we began investing in inventory to support the consumer demand, we increased our investment in headcount and we commenced limited in-person marketing activations. With the continued growth and improvement throughout 2021, we continued to invest in inventory and headcount and increased the scale and frequency of our in-person marketing activations. While demand for our products has improved, the extent of the increased demand in the future remains uncertain. In particular, due to the spread of COVID-19 variants, varied levels of restrictions remain within the United States and certain key markets around the world. The 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 and enhanced cleaning and sanitation. To further prevent the spread of COVID-19, we offer guidance and have provided 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 in 2020 and 2021, as well as other social activities that drove demand for many of our products. As restrictions eased during the first half of 2021, we resumed limited in-person marketing events and in the third quarter of 2021, we increased the scale of our in-person marketing events with multiple activities during New York Fashion Week. Varying levels of restriction remain within the United States and in certain of our key markets around the world and it is unclear how these restrictions will evolve or if the COVID-19 pandemic will spur long-term changes in consumer behavior. Our supply chain has also been impacted by the COVID-19 pandemic. Initially, the impact was largely isolated to production and shipping delays in China. As COVID-19 spread worldwide and other factors emerged, including shipping constraints, port congestion and labor shortages, the impact to our supply chain became more broad-based. We believe we have managed effectively through these challenges, but as these challenges become more prolonged and as more challenges arise, we may not be able to effectively serve our customers. 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. 56 While trends improved during 2021, we cannot reasonably estimate the extent to which our business will continue to be affected by the COVID-19 pandemic and supply chain constraints 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. Year Ended December 31, 2021 2020 2019 (in thousands, except average order value and percentages) Gross margin 55.0 % 52.6 % 53.6 % Adjusted EBITDA $ 114,585 $ 69,257 $ 55,605 Free cash flow $ 60,118 $ 71,449 $ 33,602 Active customers 1,840 1,472 1,488 Total orders placed 6,636 4,499 4,715 Average order value $ 271 $ 236 $ 275 Adjusted EBITDA and free cash flow are non-GAAP measures. See the sections captioned “—Adjusted EBITDA” and “—Free Cash Flow” below for information regarding our use of Adjusted EBITDA and free cash flow and their reconciliation to net income and net cash provided by operating activities, respectively. Gross Margin Gross profit is equal to our net sales less cost of sales. Gross profit as a percentage of our net sales is referred to as gross margin. Cost of sales consists of our purchase price of merchandise sold to customers and includes import duties and other taxes, inbound freight costs, receiving costs, defective merchandise returned from customers, 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 FWRD 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. 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. Gross margin is also impacted by the mix of sales at full price and markdowns, as well as the level of markdowns. 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 and the effectiveness of our inventory management processes and algorithms. The percentage of full price sales increased in 2021 as compared to 2020, which was attributable to efficient inventory management and strong consumer demand resulting in a lower mix of markdown inventory and sales as well as shallower markdowns within our markdown inventory. The COVID-19 pandemic 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 reversed in 2021 with growth in the dresses category rebounding strongly. We also shifted more of our inventory purchases to third-party brands where we can make shallower initial inventory commitments across a broader range of styles. We began reinvesting in our owned brand platform in late 2020 and throughout 2021, which has resulted in year-over-year improvement in the mix of owned brand sales in the fourth quarter of 2021. We will continue to invest in the owned brand platform and expect a further increase in the mix of owned brand sales in 2022. 57 We expect our gross margin to fluctuate due to how we manage our inventory and merchandise mix, both of which have been and may continue to be impacted by the COVID-19 pandemic. In particular, we have recently experienced and may continue to experience an incr ease in the cost of goods due to an increase in the cost of materials as well as an increase in the cost of freight on inbound shipments due to various supply chain challenges across the industry and world. Certain of our competitors and other retailers report cost of sales differently than we do. As a result, the reporting of our gross profit and gross margin may not be comparable to other companies. Adjusted EBITDA To provide investors with additional information regarding our financial results, we have disclosed in the table above and elsewhere in this report Adjusted EBITDA, a non-GAAP financial measure that we calculate as net income before other expense, net, taxes, depreciation and amortization, adjusted to exclude the effects of equity-based compensation expense, and certain non-routine items. We have provided below a reconciliation of Adjusted EBITDA to net income, the most directly comparable generally accepted accounting principles, or GAAP, financial measure. We have included Adjusted EBITDA in this report because it is a key measure used by our management and board of directors to evaluate our operating performance, generate future operating plans and make strategic decisions regarding the allocation of capital. In particular, the exclusion of certain expenses in calculating Adjusted EBITDA facilitates operating performance comparisons on a period-to-period basis and, in the case of exclusion of the impact of equity-based compensation, excludes an item that we do not consider to be indicative of our core operating performance. Accordingly, we believe that Adjusted EBITDA provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. Adjusted EBITDA has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are: • although depreciation and amortization are non-cash charges, the assets being depreciated and amortized may have to be replaced in the future, and Adjusted EBITDA does not reflect cash capital expenditure requirements for such replacements or for new capital expenditure requirements; • Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs; • Adjusted EBITDA does not consider the potentially dilutive impact of equity-based compensation; • Adjusted EBITDA does not reflect tax payments that may represent a reduction in cash available to us; • Adjusted EBITDA does not reflect certain non-routine items that may represent a reduction in cash available to us; and • other companies, including companies in our industry, may calculate Adjusted EBITDA differently, which reduces its usefulness as a comparative measure. Because of these limitations, you should consider Adjusted EBITDA alongside other financial performance measures, including various cash flow metrics, net income and our other GAAP results. Our financial results included certain items that we consider non-routine and not reflective of the underlying trends in our core business operations. Non-routine items in 2019 primarily related to legal settlements. Although we believe these expenses to be non-routine in nature, we cannot guarantee that these expenses will not be incurred again in the future. A reconciliation of Adjusted EBITDA to net income is as follows: 58 Year Ended December 31, 2021 2020 2019 Net income $ 99,840 $ 56,790 $ 35,667 Excluding: Other expense, net 563 994 931 Provision for income taxes 4,888 3,282 11,500 Depreciation and amortization 4,508 4,827 3,952 Equity-based compensation 4,786 3,364 2,067 Non-routine items — — 1,488 Adjusted EBITDA $ 114,585 $ 69,257 $ 55,605 Free Cash Flow To provide investors with additional information regarding our financial results, we have also disclosed in the table above and elsewhere in this report free cash flow, a non-GAAP financial measure that we calculate as net cash provided by operating activities less cash used in purchases of property and equipment. We have provided below a reconciliation of free cash flow to net cash provided by operating activities, the most directly comparable GAAP financial measure. We have included free cash flow in this report because it is a key measure used by our management and board of directors, which we believe is an important indicator of our liquidity because it measures the amount of cash we generate. Free cash flow also reflects changes in working capital. Accordingly, we believe that free cash flow provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors. Free cash flow has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. There are limitations to using non-GAAP financial measures, including that other companies, including companies in our industry, may calculate free cash flow differently. Because of these limitations, you should consider free cash flow alongside other financial performance measures, including net cash provided by operating activities, purchases of property and equipment and our other GAAP results. The following table presents a reconciliation of free cash flow to net cash provided by operating activities, as well as information regarding net cash used in investing activities and net cash provided by financing activities, for each of the periods indicated: Year Ended December 31, 2021 2020 2019 Net cash provided by operating activities $ 62,313 $ 73,773 $ 46,057 Purchases of property and equipment (2,195 ) (2,324 ) (12,455 ) Free cash flow $ 60,118 $ 71,449 $ 33,602 Net cash used in investing activities $ (2,195 ) $ (2,324 ) $ (12,455 ) Net cash provided by financing activities $ 12,766 $ 8,660 $ 15,179 Adjusted Diluted Earnings per Share Adjusted diluted earnings per share is a non-GAAP financial measure that we calculate as diluted earnings (net loss) per share adjusted to exclude the per share impact of the issuance and repurchase of Class B common stock as part of our initial public offering, or IPO. We believe adjusted diluted earnings per share, excluding the impact of the repurchase of our Class B common stock, is a measure that is useful to investors and management in understanding our ongoing operations and in analysis of ongoing operating trends. See Note 10, Earnings (Net Loss) per Share , of our consolidated financial statements included elsewhere in this report for more information regarding our calculation of earnings (net loss) per share. A reconciliation of non-GAAP adjusted diluted earnings per share to diluted earnings (net loss) per share for the years ended December 31, 2021, 2020 and 2019 is as follows (in dollars): 59 Year Ended December 31, 2021 2020 2019 Class A Class B Class A Class B Class A Class B Earnings (net loss) per share — diluted $ 1.34 $ 1.34 $ 0.79 $ 0.79 $ (0.09 ) $ (0.09 ) Repurchase of Class B common stock, net — — — — 0.59 0.59 Adjusted earnings per share — diluted $ 1.34 $ 1.34 $ 0.79 $ 0.79 $ 0.50 $ 0.50 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 in 2020 primarily due to decreased consumer demand for our products as a result of the COVID-19 pandemic. Active customers increased during 2021 as compared to 2020 due to in part to our ability to engage with our existing customers and acquire new customers through our sales and marketing efforts, and in part due to the easing of stay-at-home orders and other restrictions in certain states and countries, U.S. government stimulus payments and the accelerated rollout of vaccinations. 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. After declining in 2020 as a result of reduced demand for our products as a result of COVID-19, total orders placed increased in 2021 as compared to 2020 due to in part to our ability to engage with our existing customers and acquire new customers through our sales and marketing efforts, and in part due to the easing of stay-at-home orders and other restrictions in certain states and countries, U.S. government stimulus payments and the accelerated rollout of vaccinations. Average Order Value We define average order value as the sum of the total gross sales from our sites in a given period, prior to product returns, divided by the total orders placed in that period. In 2021, average order value for merchandise sold through the REVOLVE and FWRD segments was approximately $248 and $642, respectively, reflecting the brands sold and typical profile of the shoppers on such sites. We believe our high average order value demonstrates the premium nature of our product. We believe that average order value is a measure that is useful to investors and management in understanding our ongoing operations and in analysis of ongoing operating trends. Average order value varies depending on the site through which we sell merchandise, the percentage of sales at full price, and for sales at less than full price, the level of markdowns on these products, and the number of units per order. Average order value may also fluctuate as we expand into and increase our presence in additional product categories and price points. 60 Average order value increased in 2021 as compared to 2020 primarily due to a higher percentage of full price sales and lower markdowns on our markdown product, a shift in mix back to higher price point merchandise including a higher mix in sales within the FWRD segment, partially offset by a decline in average units per order. 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 business restrictions and social distancing measures imposed in the 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 further easing of stay-at-home orders, the accelerated rollout of vaccinations and additional U.S. government stimulus payments, our operating results continued to improve and demand for our products was strong in 2021. However, the continued impact of the COVID-19 pandemic remains highly uncertain. In particular, the recent rise of cases primarily as a result of COVID-19 variants, has resulted in varying levels of restrictions within the United States as well as certain key markets around the world. 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 and varying levels of restrictions within the United States as well as certain key regions around the world; • increases in COVID-19 cases as a result of COVID-19 variants; • an increase in the cost of materials and disruption to the supply chain caused by distribution and other logistical issues including labor shortages 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 payments, interest rates and fuel, energy and raw material costs. In addition, during periods of low unemployment, we generally experience higher labor costs. The COVID-19 pandemic has had and may continue to have a materially adverse impact on the macroeconomic environment in the United States and substantially all of our target markets. Customer Acquisition and Growth in Brand Awareness Our focus since inception has been on profitable growth, which has created our disciplined approach to acquiring new customers and retaining existing customers at a reasonable cost, relative to the contributions we expect from such customers. Growth in the number of new customers started to increase in the second, third and fourth quarters of 2021 as compared to the respective periods of 2020. Failure to attract new visitors to our sites and convert them to customers impact our future net sales growth. Social media and influencer-based marketing has continued to gain popularity and the market for these channels has become 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, although competition from others that have adopted similar practices make it increasingly difficult to differentiate ourselves. With the travel restrictions and social distancing measures imposed in response to the COVID-19 pandemic during 2020, 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. Upon the onset of COVID-19 in early 2020, we shifted our brand marketing messaging and strategy to address the 61 changes in behavior and preferences of our customer. As restrictions eased during the first half of 2021, we resumed limited in-person marketing events and in the third quarter, we increased the scale of our in-person marketing events with multiple activities during New York Fashion Week. We plan to do more in-person events in the near future as circumstances allow. If our marketing efforts do not connect with our customer or fail to cost-effectively promote our brands or convert impressions into new customers, our net sales growth and profitability will be adversely affected. Competition for social media and influencer-based marketing channels also continues to increase, which has and may continue to negatively impact the cost to acquire and retain customers and may adversely affect our operating results. Furthermore, Apple Inc. has imposed new requirements for consumer disclosures regarding privacy practices, and has implemented an application tracking transparency framework that requires opt-in consent for certain types of tracking. This transparency framework was launched in April 2021 and has made it more difficult and costly to acquire and retain customers, which may adversely affect our operating results. To maximize our opportunity to capture consumer demand as economies reopened, during the third quarter of 2021 we increased our marketing investment and we intend to continue to make opportunistic investments in marketing initiatives that could 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. Customer Retention Our success is impacted not only by efficient and effective customer acquisition and growth in brand awareness, but also by our ability to retain customers, engage with our community and encourage repeat purchases. Existing customers, whom we define as customers in a year who have purchased from us in any prior year, account for a greater and greater share of active customers over time. Existing customers as a percentage of total active customers were 49%, 49% and 45% for 2021, 2020 and 2019, respectively. Existing customers typically place more orders annually than new customers and at higher average order values, resulting in existing customers representing approximately 76% of orders and approximately 77% of net sales in 2021, up from 74% of orders and 76% of net sales in 2020 and 57% of orders and 58% of net sales in 2014, again having increased in each year. We believe these increasing metrics are reflective of our ability to engage and retain our customers through our differentiated marketing and compelling merchandise offering and shopping experience. The increasing share of our net sales from existing customers reflects our customer loyalty and the net sales retention behavior we see in our customer cohorts. The net sales contribution and retention from existing customer cohorts was temporarily impacted in 2020 by the headwinds from the COVID-19 pandemic, before rebounding strongly in 2021. Cohort net sales retention is calculated as net sales attributable to a given customer cohort divided by the total net sales attributable to the same customer cohort from one year prior. Cohort net sales retention was 120% in 2021 as compared to 74% in 2020 and 89% in 2019. We believe that the 2020 retention performance was short term in nature as a result of the COVID-19 headwinds and not indicative of the value of our customer base over the long term, as evidenced by the strong recovery and retention rates in 2021; however, if the negative customer retention and purchasing pattern experienced in 2020 were to reoccur due to the COVID-19 pandemic or other factors, or if we are unable to otherwise maintain our historically strong retention rates , our operating results could be adversely impacted. Merchandise Mix We offer merchandise across a variety of product types, brands and price points. The brands we sell on our platform consist of a mix of emerging third-party, established third-party, iconic luxury brands 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. In the longer term, we will seek to increase the percentage of net sales from owned brands in an effort to increase our gross 62 margin. Shifts in our owned brand mix and our broader category merchandise mix may result in fluctuations in our gross margin from period to period. Inventory Management We leverage our platform and technology 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. In the normal course of business, we incur inventory write-offs, which impacts our gross margin. 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 had initially 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 significantly increased our investment in inventory 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 levels of inventory to meet customer demand in certain categories. Conversely, if demand does not support 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, enhance our offerings and deliver best in class service to our customers. Over the long term, we expect to continue to make capital investments in our inventory, fulfillment center, and logistics infrastructure as we grow our customer base, 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 FWRD, 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 83.6% and 86.3% of our net sales for the years ended December 31, 2021 and 2020, respectively. During the years ended December 31, 2021 and 2020, REVOLVE generated $745.1 million and $500.9 million in net sales, respectively, representing an increase of 48.8%. The net sales increase in the year ended December 31, 2021, as compared to 2020, was primarily due to an increase in the number of total orders placed by customers complemented by an increase in average order value. Despite the strong recovery in 2021, the impact from the COVID-19 pandemic, including supply chain challenges, may adversely impact net sales and our gross margin in the near term and the long-term impact remains unpredictable. The FWRD segment contributes to a smaller, although expanding, portion of our overall net sales, representing 16.4% and 13.7% of our net sales for the years ended December 31, 2021 and 2020, respectively. During the years ended December 31, 2021 and 2020, FWRD generated $146.3 million and $79.8 million in net sales, respectively, representing an increase of 83.4%. The net sales increase in the year ended December 31, 2021, as compared to 2020, was primarily due to an increase in the number of total orders placed by customers complemented by an increase in average order value. Despite the strong operating results during 2021, the impact from the COVID-19, including supply chain challenges pandemic may adversely impact our net sales and gross margin in the near term and the long-term impact remains unpredictable. 63 Net sales to customers outside of the United States contributed to 18.5% and 19.5% of our net sales for the years ended December 31, 2021 and 2020, respectively. During the years ended December 31, 2021 and 2020, net sales to customers outside of the United States were $165.1 million and $113.1 million, respectively, representing an increase of 45.9%. Despite the strong operating results during 2021, the impact from the COVID-19 pandemic, including supply chain challenges may adversely impact our net sales to customers outside of the United States in the near term and the long-term impact remains unpredictable. In addition, net sales to customers outside of the United States are also 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. Seasonality Seasonality in our business does not follow that of traditional retailers, such as typical concentration of net sales in the fourth quarter around the holidays. The COVID-19 pandemic impacted our historical seasonality and resulted in the postponement or cancellation of several REVOLVE brand marketing events including #REVOLVEfestival, which historically resulted in peak sales during the second quarter of each fiscal year. We have also experienced seasonally lower activity during the first quarter of each fiscal year, which was further impacted by COVID-19. We expect the seasonality trends that we have experienced historically will continue to change in 2022 as we navigate through the ongoing challenges presented by the COVID-19 pandemic and subsequent recovery. With the exception of this specific event or events like it, we expect to revert closer to our historical seasonality and expect this to continue in future years. Our operating income has also been affected by these historical trends because many of our expenses are relatively fixed in the short term. As our growth rates begin to moderate, the impact of these seasonality trends on our results of operations will become more pronounced. Our business is directly affected by the behavior of consumers. Economic conditions and competitive pressures can significantly impact, both positively and negatively, the level of demand by customers for our products. Consequently, the results of any prior quarterly or annual periods should not be relied upon as indications of our future operating performance. Components of Our Results of Operations Net Sales Net sales consist primarily of sales of women’s apparel, footwear, accessories and beauty products. 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 were negatively impacted by the COVID-19 pandemic in 2020 before they started to recover in the first quarter of 2021 and continued to recover during the remainder 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, inbound freight costs, receiving costs, defective merchandise returned from customers, inventory write-offs, and other miscellaneous shrinkage. Cost of sales is primarily driven by the cost of the product, the number of total 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 and may continue to be impacted by the COVID-19 pandemic. In particular, we have recently experienced and may continue to experience an increase in the cost of goods due to an increase in the cost of materials as well as an increase in the cost of freight on inbound shipments due to various supply chain challenges across the industry and world. 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 64 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 increased costs such as wages and an expected year-over-year increase in our return rate in 2022 due to product mix and other input cost pressures, 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 year-over-year 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, as a result of COVID-19 and other broad-based supply chain challenges, our average shipping costs have and may continue to increase. Furthermore, while we have been able to maintain our high customer service levels, continuing capacity restraints with our third-party carriers may have an adverse impact on our service levels in the future. Marketing Expenses Marketing expenses consist primarily of targeted online performance marketing costs, such as paid search/product listing ads, paid social, retargeting, 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 FWRD brands and expanding our owned brand presence. 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 2021, we increased our level of investment in marketing to maximize our opportunities to capture consumer demand as economies reopened, resulting in marketing expressed as a percentage of net sales exceeding historical levels. We have also experienced an increase in the cost to acquire and retain customers in recent periods. 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. 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. 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, owned brands, 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 salaries and wages. In 2021, we reinvested significantly to expand our team to support our strong growth. General and administrative expenses are expected to increase in the near term as we plan to continue to invest in our team 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, Net Other expense, net consists primarily of interest expense and other fees associated with our line of credit and interest income on our money market funds. 65 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. Year Ended December 31, 2021 2020 2019 (in thousands) Net sales $ 891,390 $ 580,649 $ 600,993 Cost of sales 401,567 275,369 279,040 Gross profit 489,823 305,280 321,953 Operating expenses: Fulfillment expenses 21,322 16,471 19,413 Selling and distribution expenses 133,506 80,496 87,706 Marketing expenses 140,398 76,371 89,141 General and administrative expenses 89,306 70,876 77,595 Total operating expenses 384,532 244,214 273,855 Income from operations 105,291 61,066 48,098 Other expense, net 563 994 931 Income before income taxes 104,728 60,072 47,167 Provision for income taxes 4,888 3,282 11,500 Net income $ 99,840 $ 56,790 $ 35,667 Year Ended December 31, 2021 2020 2019 Net sales 100.0 % 100.0 % 100.0 % Cost of sales 45.0 47.4 46.4 Gross profit 55.0 52.6 53.6 Operating expenses: Fulfillment expenses 2.4 2.8 3.2 Selling and distribution expenses 15.0 13.9 14.6 Marketing expenses 15.8 13.2 14.9 General and administrative expenses 10.0 12.2 12.9 Total operating expenses 43.2 42.1 45.6 Income from operations 11.8 10.5 8.0 Other expense, net 0.1 0.2 0.2 Income before income taxes 11.7 10.3 7.8 Provision for income taxes 0.5 0.5 1.9 Net income 11.2 % 9.8 % 5.9 % Comparison of Years Ended 2021 and 2020 Net Sales Year Ended December 31, Change 2021 2020 $ % (dollars in thousands) Net sales $ 891,390 $ 580,649 $ 310,741 53.5 % The increase in net sales for the year ended December 31, 2021, as compared to the year ended December 31, 2020, was primarily due to an increase in the number of total orders placed by customers of 47.5% and increase in average order value of 14.8% as compared to 2020, partially offset by a higher proportion of returned purchases. The increase in total orders placed and average order value was due in part to our ability to engage with our existing customers and acquire new customers through our marketing and merchandising, and in part due to the easing of 66 stay-at-home orders and other restrictions in certain states and countries, U.S. government stimulus payments and the accelerated rollout of vaccinations. Net sales in the REVOLVE segment increased 48.8% to $745.1 million in 2021 compared to net sales of $500.9 million in 2020. Net sales generated from our FWRD segment increased 83.4% to $146.3 million in 2021 as compared to net sales of $79.8 million in 2020. Cost of Sales Year Ended December 31, Change 2021 2020 $ % (dollars in thousands) Cost of sales $ 401,567 $ 275,369 $ 126,198 45.8 % Percentage of net sales 45.0 % 47.4 % The increase in cost of sales in 2021, as compared to 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 higher percentage of full price sales and shallower markdowns, partially offset by higher inventory write-offs and a higher mix of third party brand sales combined with higher receiving costs and import expenses. Fulfillment Expenses Year Ended December 31, Change 2021 2020 $ % (dollars in thousands) Fulfillment expenses $ 21,322 $ 16,471 $ 4,851 29.5 % Percentage of net sales 2.4 % 2.8 % Fulfillment expenses for the year ended December 31, 2021 were higher as compared to the same period in 2020 due to an increase in the number of orders and units processed through our fulfillment network, including those units resulting from an increased return rate. The decrease in fulfillment expenses as a percentage of net sales was primarily due to general efficiencies gained with greater volume and scale, an increase in average order value as well as continued automation efforts in our fulfillment center, partially offset by wage pressure and a higher return rate as compared to the same period in 2020. Selling and Distribution Expenses Year Ended December 31, Change 2021 2020 $ % (dollars in thousands) Selling and distribution expenses $ 133,506 $ 80,496 $ 53,010 65.9 % Percentage of net sales 15.0 % 13.9 % The increase in selling and distribution expenses for the year ended December 31, 2021, as compared to the same period in 2020, was primarily due to an increase in the number of orders shipped. Shipping and handling costs increased $32.5 million, merchant processing fees increased $12.5 million, other selling expenses increased $5.4 million and customer service costs increased $2.6 million for the year ended December 31, 2021 as compared to the same period in 2020. The increase in selling and distribution expenses as a percentage of net sales was due to customers returning a higher proportion of their purchases as compared to the comparative period in the prior year combined with increased average shipping and handling fees per package as a result of increases in carrier rates and higher merchant processing fees. 67 Marketing Expenses Year Ended December 31, Change 2021 2020 $ % (dollars in thousands) Marketing expenses $ 140,398 $ 76,371 $ 64,027 83.8 % Percentage of net sales 15.8 % 13.2 % The increase in marketing expenses for the year ended December 31, 2021, as compared to the same period in 2020, was due to an increase in marketing investments to acquire customers and retain existing customers to drive higher net sales. The overall increase was comprised of an increase in performance marketing expenses of $43.2 million and an increase of $20.8 million in brand marketing expenses. The higher investment in 2021 is reflective of the significantly reduced investment in 2020 resulting from cost-control efforts and efficiencies in marketing investments in 2020 due to COVID-19, increased brand marketing investments in 2021 for large-scale activations including The REVOLVE Gallery and other events during New York Fashion Week 2021, and increased cost to acquire new customers and retain existing customers. General and Administrative Expenses Year Ended December 31, Change 2021 2020 $ % (dollars in thousands) General and administrative expenses $ 89,306 $ 70,876 $ 18,430 26.0 % Percentage of net sales 10.0 % 12.2 % The increase in general and administrative expenses for the year ended December 31, 2021, as compared to the same period in 2020, was due to a $10.8 million increase in salaries and related benefits and equity-based compensation expense related to increases in our headcount, a $3.9 million increase in other operating expenses to support business growth, and a $3.7 million increase related to professional services and other occupancy costs. The decrease in general and administrative expenses as a percentage of net sales was primarily driven by scale efficiencies with growth in net sales significantly outpacing growth in general and administrative expenses. Income Taxes Year Ended December 31, 2021 2020 (in thousands) Income before income taxes $ 104,728 $ 60,072 Provision for income taxes 4,888 3,282 Effective tax rate 4.7 % 5.5 % The effective tax rate was 4.7% for the year ended December 31, 2021 and 5.5% for the year ended December 31, 2020, as both periods benefited from excess tax benefits related to the exercise of non-qualified stock options. Quarterly Results of Operations and Other Financial and Operations Data The following tables set forth selected unaudited quarterly results of operations and other financial and operations data for each of the quarters indicated. The information for each of these quarters has been prepared on the same basis as the audited annual consolidated financial statements included elsewhere in this report and in the opinion of management, includes all adjustments, which include only normal recurring adjustments, necessary for the fair statement of our consolidated results of operations for these periods. This data should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. Our quarterly results of operations will vary in the future. These quarterly operating results are not necessarily indicative of our operating results for any future period. 68 Three Months Ended December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 (in thousands, except per share data) Net sales $ 239,805 $ 244,064 $ 228,614 $ 178,907 $ 140,754 $ 151,036 $ 142,784 $ 146,075 Cost of sales 108,341 109,588 101,396 82,242 61,962 67,569 70,713 75,125 Gross profit 131,464 134,476 127,218 96,665 78,792 83,467 72,071 70,950 Operating expenses: Fulfillment expenses 5,870 5,776 5,309 4,367 4,021 4,158 3,799 4,493 Selling and distribution expenses 38,036 38,354 32,139 24,977 18,793 20,870 19,054 21,779 Marketing expenses 32,344 46,955 34,871 26,228 20,880 18,903 14,638 21,950 General and administrative expenses 23,278 24,180 21,970 19,878 18,485 17,741 15,776 18,874 Total operating expenses 99,528 115,265 94,289 75,450 62,179 61,672 53,267 67,096 Income from operations 31,936 19,211 32,929 21,215 16,613 21,795 18,804 3,854 Other expense (income), net 224 (158 ) 264 233 694 253 174 (127 ) Income before income taxes 31,712 19,369 32,665 20,982 15,919 21,542 18,630 3,981 Provision for (benefit from) income taxes 2,330 2,701 1,127 (1,270 ) (3,041 ) 2,104 4,394 (175 ) Net income $ 29,382 $ 16,668 $ 31,538 $ 22,252 $ 18,960 $ 19,438 $ 14,236 $ 4,156 Earnings per share of Class A and Class B common stock: Basic $ 0.40 $ 0.23 $ 0.44 $ 0.31 $ 0.27 $ 0.28 $ 0.21 $ 0.06 Diluted $ 0.39 $ 0.22 $ 0.42 $ 0.30 $ 0.26 $ 0.27 $ 0.20 $ 0.06 Weighted average number of shares of Class A and Class B common stock outstanding: Basic 73,057 72,810 72,387 71,782 70,478 69,872 69,415 69,320 Diluted 74,834 74,881 74,422 74,033 72,382 72,281 71,659 71,903 69 Three Months Ended December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 Net sales 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 45.2 44.9 44.4 46.0 44.0 44.7 49.5 51.4 Gross profit 54.8 55.1 55.6 54.0 56.0 55.3 50.5 48.6 Operating expenses: Fulfillment expenses 2.4 2.4 2.3 2.4 2.9 2.8 2.7 3.1 Selling and distribution expenses 15.9 15.7 14.1 14.0 13.4 13.8 13.3 14.9 Marketing expenses 13.5 19.2 15.3 14.7 14.8 12.5 10.3 15.0 General and administrative expenses 9.7 9.9 9.6 11.1 13.1 11.7 11.0 12.9 Total operating expenses 41.5 47.2 41.3 42.2 44.2 40.8 37.3 45.9 Income from operations 13.3 7.9 14.3 11.8 11.8 14.5 13.2 2.6 Other expense (income), net 0.1 (0.1 ) 0.1 0.1 0.5 0.2 0.1 (0.1 ) Income before income taxes 13.2 8.0 14.2 11.7 11.3 14.3 13.1 2.7 Provision for (benefit from) income taxes 1.0 1.2 0.5 (0.7 ) (2.2 ) 1.4 3.1 (0.1 ) Net income 12.2 % 6.8 % 13.7 % 12.4 % 13.5 % 12.9 % 10.0 % 2.8 % Three Months Ended December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 (in thousands, except average order value and percentages) Other Financial and Operations Data Gross margin 54.8 % 55.1 % 55.6 % 54.0 % 56.0 % 55.3 % 50.5 % 48.6 % Adjusted EBITDA (1) $ 34,176 $ 21,666 $ 35,403 $ 23,340 $ 18,746 $ 24,025 $ 20,877 $ 5,609 Free cash flow $ (6,525 ) $ 1,340 $ 32,830 $ 32,473 $ (2,934 ) $ 13,877 $ 52,976 $ 7,530 Active customers 1,840 1,678 1,554 1,477 1,472 1,504 1,533 1,528 Total orders placed 1,755 1,830 1,769 1,282 1,023 1,141 1,163 1,172 Average order value $ 292 $ 276 $ 255 $ 256 $ 256 $ 232 $ 204 $ 259 (1) Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income before other expense (income), net, taxes, depreciation and amortization, adjusted to exclude the effects of equity-based compensation expense, and certain non-routine items. Please see the section captioned “—Key Operating and Financial Metrics—Adjusted EBITDA” above for more information. Non-routine items include certain items that we consider non-routine and not reflective of the underlying trends in our core business operations. The following table presents the reconciliation of Adjusted EBITDA to net income: 70 Three Months Ended December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 (in thousands) Net income $ 29,382 $ 16,668 $ 31,538 $ 22,252 $ 18,960 $ 19,438 $ 14,236 $ 4,156 Excluding: Other expense (income), net 224 (158 ) 264 233 694 253 174 (127 ) Provision for (benefit from) income tax 2,330 2,701 1,127 (1,270 ) (3,041 ) 2,104 4,394 (175 ) Depreciation and amortization 1,118 1,119 1,122 1,149 1,181 1,250 1,205 1,191 Equity-based compensation 1,122 1,336 1,352 976 952 980 868 564 Adjusted EBITDA $ 34,176 $ 21,666 $ 35,403 $ 23,340 $ 18,746 $ 24,025 $ 20,877 $ 5,609 The following table presents a reconciliation of free cash flow, a non-GAAP financial measure, to net cash (used in) provided by operating activities, as well as information regarding net cash used in investing activities and net cash provided by (used in) financing activities: Three Months Ended December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 (in thousands) Net cash (used in) provided by operating activities $ (6,098 ) $ 1,855 $ 33,347 $ 33,209 $ (2,454 ) $ 14,340 $ 53,806 $ 8,081 Purchases of property and equipment (427 ) (515 ) (517 ) (736 ) (480 ) (463 ) (830 ) (551 ) Free cash flow (1) $ (6,525 ) $ 1,340 $ 32,830 $ 32,473 $ (2,934 ) $ 13,877 $ 52,976 $ 7,530 Net cash used in investing activities (2) $ (427 ) $ (515 ) $ (517 ) $ (736 ) $ (480 ) $ (463 ) $ (830 ) $ (551 ) Net cash provided by (used in) financing activities 3,318 1,231 3,900 4,317 (10,363 ) (6,292 ) (5,660 ) 30,975 (1) Free cash flow is a non-GAAP financial measure that we calculate as net cash (used in) provided by operating activities less net cash used for purchases of property and equipment. Please see the section captioned “—Key Operating and Financial Metrics—Free Cash Flow” above for more information. (2) Net cash used in investing activities includes payments for purchases of property and equipment, which is also included in our calculation of free cash flow. Seasonality and Quarterly Trends Seasonality in our b usiness has not historically followed that of traditional retailers, such as typical concentration of net sales in the fourth quarter around the holidays. The COVID-19 pandemic impacted our historical seasonality and resulted in the postponement or cancellation of several REVOLVE brand marketing events including #REVOLVEfestival, which historically resulted in peak sales during the second quarter of each fiscal year. We have also experienced seasonally lower activity during the first quarter of each fiscal year, which was further impacted by COVID-19. We expect the seasonality trends that we have experienced historically will continue to change in 2022 as we navigate through the ongoing challenges presented by the COVID-19 pandemic and subsequent recovery. With the exception of this specific event or events like it, we expect this seasonality to revert closer to the historical patterns in future years. Our operating income has also been affected by these historical trends because many of our expenses are relatively fixed in the short term. As our growth rates begin to moderate, the impact of these seasonality trends on our results of operations will become more pronounced. We focus our internal measurements of performance on quarterly year-over-year comparisons but discuss quarterly sequential information below to help investors understand fluctuations in our business. 71 Our quarterly net sales in 2020 are reflective of the seasonality and COVID-19 impact as discussed above. Our net sales improved and returned to growth in 2021 due to increased demand as a result of our ability to acquire new customers and effectively engage with our existing customers, and among other factors, the easing of stay-at-home orders and other restrictions in certain states and countries, U.S. government stimulus payments and the accelerated rollout of vaccinations in the United States and some of our other key markets. Our quarterly gross profit has fluctuated quarter to quarter primarily due to the quarterly fluctuations in net sales, among other factors. Fulfillment expenses and selling and distribution expenses have also fluctuated quarter-to-quarter, primarily due to the quarterly fluctuation in net sales. The fluctuation in fulfillment costs is driven by the costs incurred to fulfill total orders placed by our customers, while the fluctuation in selling and distribution costs is primarily due to the costs incurred to package and ship products ordered by our customers, ship returns from our customers, provide customer service and costs incurred related to merchant processing. Fulfilment expense as a percentage of net sales decreased in 2021 due to efficiencies gained through automation and scale as well as an increase in average order values, partially offset by an increase in the percentage of merchandise returned by customers. Marketing expenses vary quarter-to-quarter, primarily due to the timing of our brand marketing events. The reduced marketing investment during the second and third quarter of 2020 was driven primarily by the cancelation of several brand marketing events, including the #REVOLVEfestival, combined with cost-control efforts and efficiencies in performance marketing investments due to COVID-19. The third quarter of 2021 included marketing expense related to The REVOLVE Gallery and the Dundas Fashion Show during New York Fashion Week. Marketing expense will continue to fluctuate quarter-to-quarter, depending on macro factors and the timing and scale of marketing events. General and administrative expenses have generally increased sequentially quarter-to-quarter as we continued to increase our headcount to support business growth prior to COVID-19. During the second quarter of 2020, we took aggressive actions to mitigate the effect of COVID-19 on our business by reducing non-payroll related operating costs and reducing payroll costs through a combination of salary reductions, employee furloughs and, to a lesser extent, layoffs. As our business operations and operating results improved in the second and third quarters of 2020 in part due to the easing of stay-at-home orders and other state-imposed restrictions, we began the process of bringing back certain furloughed employees and returned our corporate employees to their pre-COVID-19 salaries and wages. By the end of the third quarter, all remaining employees were returned to their pre-COVID compensation levels. General and administrative expenses increased in 2021 to support business growth. We had net income for all periods presented. Our business is directly affected by the behavior of consumers. Economic conditions and competitive pressures can significantly impact, both positively and negatively, the level of demand by customers for our products. Consequently, the results of any prior quarterly or annual periods should not be relied upon as indications of our future operating performance. Liquidity and Capital Resources The following tables show our cash and cash equivalents, accounts receivable and working capital as of the dates indicated: As of December 31, 2021 December 31, 2020 (in thousands) Cash and cash equivalents $ 218,455 $ 146,013 Accounts receivable, net 4,639 4,621 Working capital 279,620 171,237 (1) Working capital for all periods presented above is defined as current assets less current liabilities. 72 As of December 31, 2021, the majority of our cash and cash equivalents was held for working capital purposes. In March 2020, due to the uncertain environment created by the COVID-19 pandemic and out of an abundance of caution, we elected to draw down $30 million in borrowings under our line of credit all of which was subsequently repaid during the second, third and fourth quarters of 2020. As of December 31, 2021, we had no borrowings under our line of credit and were in compliance with all financial covenants. We believe that our existing cash and cash equivalents, cash flows from operations as well as the available borrowing capacity under our line of credit will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, our liquidity assumptions may prove to be incorrect, and we could exhaust our available financial resources sooner than we currently expect. We may seek to borrow funds under our line of credit or raise additional funds at any time through equity, equity-linked or debt financing arrangements. Our future capital requirements and the adequacy of available funds will depend on many factors, including those described in Item 1A— Risk Factors of this report. We may not be able to secure additional financing to meet our operating requirements on acceptable terms, or at all. Sources of Liquidity Since our inception, we have financed our operations and capital expenditures primarily through cash flows generated by operations, private sales of equity securities, the incurrence of debt, the net proceeds we received through our IPO, as well as proceeds received from the exercise of stock options. Line of Credit On March 23, 2021, we amended and restated our existing credit agreement to, among other things, extend the expiration date from March 23, 2021 to March 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 of December 31, 2021 and 2020. 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 financial covenants as of December 31, 2021 and 2020. Uses of Cash Our short-term and long-term liquidity requirements primarily arise from operating costs such as merchandise purchases, compensation and benefits, lease obligations, marketing and other expenditures necessary to support our business growth. We used a substantial portion of the proceeds from the IPO to repurchase shares of our Class B common stock. We believe that our existing cash and cash equivalents, cash flows from operations as well as the available borrowing capacity under our line of credit will be sufficient to meet our anticipated cash needs for at least the next 12 months. However, our liquidity assumptions may prove to be incorrect given the uncertainty of the COVID-19 pandemic, and we could exhaust our available financial resources sooner than we currently expect. We may seek to borrow funds under our line of credit or raise additional funds at any time through equity, equity-linked or debt financing arrangements. 73 Historical Cash Flows Year Ended December 31, 2021 2020 2019 (in thousands) Net cash provided by operating activities $ 62,313 $ 73,773 $ 46,057 Net cash used in investing activities (2,195 ) (2,324 ) (12,455 ) Net cash provided by financing activities 12,766 8,660 15,179 Net Cash Provided by Operating Activities Cash from operating activities consists primarily of net income adjusted for certain non-cash items, including depreciation, equity-based compensation, and the effect of changes in working capital and other activities. For the year ended December 31, 2021, we generated $62.3 million of operating cash flow as compared to $73.8 million in 2020. The decrease in our operating cash flow was primarily due to increased investments in inventory, partially offset by higher net income adjusted for non-cash items and an increase in the returns reserve. Net Cash Used in Investing Activities Our primary investing activities have consisted of purchases of property and equipment to support our fulfillment center and our overall business growth and internally developed software for the continued development of our proprietary technology infrastructure. Purchases of property and equipment may vary from period-to-period due to the timing and extent of the expansion of our operations. Net cash used in investing activities was $2.2 million and $2.3 million for the year ended December 31, 2021 and 2020, respectively. Net Cash Provided by Financing Activities Net cash provided by financing activities was $12.7 million for the year ended December 31, 2021, which was attributable to the proceeds from the exercise of stock options. Net cash provided by financing activities was $8.7 million for the year ended December 31, 2020, which was attributable to the proceeds from the exercise of stock options. Off Balance Sheet Arrangements We did not have any off balance sheet arrangements as of December 31, 2021, except for operating leases that had not commenced as of such date. For additional information, please see Note 5, Leases , to our consolidated financial statements included elsewhere in this report. Contractual Obligations As of December 31, 2021, our principal contractual obligations consist of obligations under operating leases for office and fulfillment facilities. For a description of our leases, please see Note 5, Leases , to our consolidated financial statements included elsewhere in this report. Inflation We do not believe that inflation has had a material effect on our business, financial condition or results of operations. We continue to monitor the impact of inflation in order to minimize its effects through pricing strategies, productivity improvements and cost reductions. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations. 74 Critical Accounting Policies and Estimates Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, net sales, expenses and related disclosures. We evaluate our estimates and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. We believe that the assumptions and estimates associated with revenue recognition and inventory have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting policies and estimates. For further information on all of our significant accounting policies, please see Note 2, Significant Accounting Policies , of the accompanying notes to our consolidated financial statements included elsewhere in this report. Net Sales Revenue is primarily derived from the sale of apparel merchandise through our sites and, when applicable, shipping revenue. We recognize revenue through the following steps: (1) identification of the contract, or contracts, with the customer; (2) identification of the performance obligations in the contract; (3) determination of the transaction price; (4) allocation of the transaction price to the performance obligations in the contract; and (5) recognition of revenue when, or as, we satisfy a performance obligation. A contract is created with our customer at the time the order is placed by the customer, which creates a performance obligation to deliver the product to the customer. We recognize revenue for the performance obligation at the time control of the merchandise passes to the customer, which is at the time of shipment. In addition, we have elected to treat shipping and handling as fulfillment activities and not a separate performance obligation. In accordance with our policy on returns and exchanges, merchandise returns are accepted for full refund if returned within 30 days of the original purchase date and may be exchanged up to 60 days from the original purchase date. We modify our policy during the holiday season to extend the return and exchange period. In addition, to provide our customers with more flexibility to return or exchange during this time of increased social distancing as a result of the COVID-19 pandemic, merchandise returns for purchases made starting in March 2020 are accepted for full refund if returned within 60 days of the original purchase date and may be exchanged up to 90 days from the original purchase date. At the time of sale, we establish a reserve for merchandise returns, based on historical experience, merchandise mix and expected future returns, which is recorded as a reduction of sales. Accordingly, cost of sales is also reduced and an offsetting asset is recorded within prepaid expenses and other current assets for expected merchandise to be returned. Our returns reserve as of December 31, 2021 and 2020 was $49.3 million and $25.6 million, respectively, and the provisions recorded for returns were $894.1 million and $480.2 million, during the years ended December 31, 2021 and 2020, respectively. Actual levels of returns may vary from our estimates as of period ends and would be recorded in future periods. In March 2020 we launched the REVOLVE Loyalty Club within the REVOLVE segment and in April 2021 we expanded the program to include the FWRD segment to reward and incentivize cross shopping on both sites. Eligible customers who enroll in the program will generally earn points for every dollar spent and will automatically receive a $20 reward once they earn 2,000 points. We defer revenue based on an allocation of the price of the customer purchase and the estimated standalone selling price of the points earned. Revenue is recognized once the reward is redeemed or expires or once unconverted points expire. Rewards generally expire 90 days after they are issued and unconverted points generally expire if a customer fails to engage in any activity that generates points for a period of one year or if their participation in the program is otherwise terminated. 75 We may also issue store credit in lieu of cash refunds or exchanges and sell gift cards without expiration dates to our customers. Store credits issued and proceeds from the issuance of gift cards are recorded as deferred revenue and recognized as revenue when the store credit or gift cards are redeemed or upon inclusion in our store credit and gift card breakage estimates. Revenue recognized in net sales on breakage on store credit and gift cards was $1.2 million and $1.3 million for the years ended December 31, 2021 and 2020, respectively. Sales taxes and duties collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales. We currently collect sales taxes in all states that have adopted laws imposing sales tax collection obligations on out-of-state retailers and are subject to audits by state governments of sales tax collection obligations on out-of-state retailers in jurisdictions where we do not currently collect sales taxes, whether for prior years or prospectively. No significant interest or penalties related to sales taxes are recognized in the accompanying consolidated financial statements. We have exposure to losses from fraudulent credit card charges. We record losses when incurred related to fraudulent charges as such amounts have historically been insignificant. Inventory Inventories are stated at the lower of cost and net realizable value. Cost is determined using the specific identification method. Cost of inventory includes import duties and other taxes and transport and handling costs. We write down inventory where it appears that the carrying cost of the inventory may not be recovered through subsequent sale of the inventory. We analyze the quantity of inventory on hand, the quantity sold in the past year, the anticipated sales volume, the expected sales price and the cost of making the sale when evaluating the value of our inventory. If the sales volume or sales price of specific products declines, additional write-downs may be required. Recent Accounting Pronouncements See Note 2, Significant Accounting Policies , to our consolidated financial statements included elsewhere in this report for additional information regarding recent accounting pronouncements.