What changed in this filing

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Item 5. Market for Registrant’s Common Equity

2023-02-23 compared with 2022-02-28 · 196 added, 245 removed, 398 unchanged (53% of the section changed)

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December 31, 2021

December 31, 2022

Revolve Group, Inc.

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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.

and “Forward-Looking Statements.”

For discussion regarding our financial condition and results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020, 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.

Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for year ended 2021, which was filed with the SEC on February 28, 2022.

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.

Our dynamic platform connects a deeply engaged community of millions of consumers, thousands of global fashion influencers, and more than 1,000 emerging, established and owned brands.

Through 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 REVOLVE, we offer an assortment of premium apparel, footwear, accessories, beauty and home products from emerging, established and owned brands.

Through FWRD, we offer an assortment of curated and elevated iconic and emerging luxury brands.

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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.

We believe our product mix reflects the desires of the next-generation consumer and we optimize this mix through the selection of established brands that resonate with our consumer, the identification and incubation of emerging brands and the continued development of owned brands.

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’

We use proprietary algorithms and nearly 20 years of data to efficiently manage our merchandising, marketing, product development, sourcing and pricing decisions.

We use proprietary algorithms and 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.

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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.

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 and Generation Z 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 and inspiring content.

Our social media and brand marketing strategy is combined with robust and sophisticated digital performance marketing activities and our proprietary brand ambassador program.

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.

We acquire and retain customers through paid search/product listing ads, affiliate marketing, paid

social, retargeting, our brand ambassador program, personalized email marketing and mobile “push”

communications through our mobile applications.

We have developed an efficient logistics infrastructure, which allows us to provide free shipping and returns to our customers in the United States.

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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.

We have also sold our REVOLVE products on two large international marketplaces, Tmall Global in China and Nykaa Fashion in India, beginning in 2020 and 2022, respectively.

For 2022 and 2021, we generated $187.1 million and $165.1 million, respectively, in net sales shipped to customers internationally, or 17.0% and 18.5% of total net sales, respectively.

We will continue to invest in and develop international markets while maintaining our focus on the core U.S.

We intend to continue to invest in and develop international markets while maintaining our focus on the core U.S.

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.

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.

There continues to be uncertainty around the COVID-19 pandemic and its impact on our business operations and operating results.

While demand for our products has improved as compared to the height of the outbreak and lockdowns, the extent to which this increased demand will continue in the future remains uncertain.

A resurgence of COVID-19 may result in business restrictions and social distancing mandates, the cancellation of large, in-person brand marketing events, supply chain disruptions, changes in consumer behavior and an increase in the cost of goods sold.

Varying levels of restrictions may evolve and may spur long-term changes in consumer behavior.

Key Operating and Financial Metrics

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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.

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 valuation adjustments, and other miscellaneous shrinkage.

Gross margin is impacted by the mix of brands and categories of styles that we sell on our sites.

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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.

Merchandise mix will vary from period to period and if we do not accurately forecast demand, our growth, margins and inventory levels may be adversely affected.

We review our inventory levels on an ongoing basis to identify slow-moving merchandise and use product markdowns to efficiently sell these products.

We monitor the percentage of sales that occur at full price, which we believe reflects customer acceptance of our merchandise and the sense of urgency we create through frequent product introductions in limited quantities 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.

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.

We have maintained a high percentage of sales that occur at full price, which we believe reflects our data-driven merchandising strategy, customer acceptance of our merchandise and the sense of urgency we create through frequent product introductions in limited quantities.

Gross margin is impacted by the mix of sales at full price and markdowns, as well as the level of markdowns.

Certain of our competitors and other retailers report cost of sales differently than we do.

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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.

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 (income) 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.

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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.

Non-routine items in 2022 primarily related to an accrual for a then-pending legal matter that has since been resolved.

Although we believe these expenses to be non-routine in nature, we cannot guarantee that these expenses will not be incurred again in the future.

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Year Ended December 31,

Other expense, net

(in thousands)

Other (income) expense, net

Provision for income taxes

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Adjusted EBITDA

(1) Non-routine items in 2022 primarily relate to an accrual for a then-pending legal matter that has since been resolved.

Free Cash Flow

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Free cash flow also reflects changes in working capital.

Our working capital fluctuates over time primarily as a result of the timing of our inventory purchases to support growth, our effective tax rate and the timing of tax payments, and changes in the level of merchandise that is returned by our customers, which in turn impacts our return reserve.

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.

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Year Ended December 31,

(in thousands)

Net cash provided by operating activities

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Net cash provided by financing activities

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):

Year Ended December 31,

Earnings (net loss) per share —

Repurchase of Class B common stock, net

Adjusted earnings per share —

Active Customers

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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.

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 brands, 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.

Our number of active customers drives both net sales and our appeal to brands and partners.

Active customers increased during 2022 as compared to 2021 primarily due to our ability to engage with our existing customers and acquire new customers through our sales and marketing efforts, and to a lesser extent, due to the easing of stay-at-home orders and other restrictions in the United States and other key regions around the world.

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 define total orders placed as the total number of orders placed by our customers, prior to product returns, across our platform in any given 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.

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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.

Total orders placed increased in 2022 as compared to 2021 primarily due to our ability to engage with our existing customers and acquire new customers through our sales and marketing efforts, and to a lesser extent due to the easing of stay-at-home orders and other restrictions in the United States and other key regions around the world

Average Order Value

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In 2022, average order value for merchandise sold through the REVOLVE and FWRD segments was approximately $279 and $690, 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 our high average order value demonstrates the premium nature of our product assortment.

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.

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.

Average order value varies depending on the site through which we sell merchandise, the mix of product categories sold, the number of units in each order, the percentage of sales at full price, and for sales at less than full price, the level of markdowns.

Average order value increased during 2022 as compared to 2021, primarily due to a shift in mix back to higher price point merchandise combined with an increase in the price of products as a result of the increase in the cost of goods and other input costs, partially offset by a lower percentage of full price sales.

Factors Affecting Our Performance

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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;

However, there continues to be uncertainty around the COVID-19 pandemic and its impact on our business operations and operating results.

Our business operations and results of operations may continue to be adversely affected, including as a result of:

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;

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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.

Macro factors that can affect consumer confidence, shopping behavior and spending patterns, and thereby our near-term and long-term results of operations, include inflation, employment rates, business conditions, changes in the housing market, changes in the stock market, the availability of credit, U.S.

government stimulus payments, interest rates, foreign currency exchange rates, fuel, energy and raw material costs, supply chain challenges and Russia’s war against Ukraine.

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

The COVID-19 pandemic has also 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 Retention and Growth in Brand Awareness

Our focus since inception has been on profitable growth, which has created our disciplined approach to acquiring new customers and retaining existing customers at a reasonable cost, relative to the contributions we expect from such customers.

Growth in the number of new customers 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

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.

Failure to attract new visitors to our sites and convert them to customers would impact future net sales growth.

If our marketing efforts do not connect with our customer or fail to cost-effectively promote our brand or convert impressions into purchases of our product, our net sales growth and profitability will be adversely affected.

Competition for social media and influencer-based marketing channels continues to increase, making it more difficult to differentiate our business and cost effectively acquire customers.

Furthermore, changes in the user experience on social media platforms, including a shift towards video and the level of recommended content as well as changes in privacy practices by third parties may make it more difficult to gain customer awareness and cost effectively acquire and retain customers.

Apple has imposed 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.

Additionally, in November 2022, Google announced that it plans to implement similar restrictions to restrict tracking activity across Android devices in early 2023.

We seek to engage with our customers and build awareness of our brands through sponsoring unique events and experiences such as #REVOLVEfestival, #REVOLVEaroundtheworld and the REVOLVE Gallery, as well as short-term pop-up retail experiences.

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 had a negative impact on our ability to drive traffic to our sites, acquire new customers and retain our existing customers.

As restrictions eased and to maximize our opportunity to capture consumer demand as economies reopened, during 2021 and 2022 we increased our marketing investment and began hosting in-person events, including #REVOLVEfestival in April 2022 after a two-year hiatus.

We plan to continue to conduct in-person events at varying levels of scale in the future and 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.

This incremental investment may not deliver a meaningful return in the short term and may adversely impact our operating income in the short term.

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Existing customers as a percentage of total active customers were 50%, 49%, 49% and 45% for 2022, 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.

Existing customers typically place more orders annually than new customers and at higher average order values, resulting in existing customers representing approximately 77% of orders and approximately 79% of net sales in 2022, up from 76% of orders and 77% of net sales in 2021 and 57% of orders and 58% of net sales in 2014, again having increased in each year since 2014.

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.

The chart below illustrates the spending behavior of our customer cohorts over time, as reflected in customer purchases of our products annually.

As shown in the chart, 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 and 2022.

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.

Cohort net sales retention was 97% in 2022 as compared to 120% in 2021, 74% in 2020 and 89% in 2019.

We believe that the reduced 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 and 2022;

however, if the negative customer retention and purchasing pattern experienced in 2020 were to recur 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.

The brands we sell on our platform consist of a mix of emerging third-party, established third-party (including 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

Shifts in our owned brand mix and our broader category merchandise mix may result in fluctuations in our gross margin from period to period.

Our merchandise mix across our two reporting segments carry a range of margin profiles and may cause fluctuations in our gross margin.

Shifts in our segment mix and our broader category merchandise mix may result in fluctuations in our gross margin from period to period.

Inventory Management

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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.

In the normal course of business, we incur inventory valuation adjustments, which impacts our gross margin.

Moreover, our inventory investments will fluctuate with the needs of our business.

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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 addition, our sales demand had initially been adversely impacted as a result of the COVID-19 pandemic.

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.

With consumer demand trends improving beginning in the second quarter of 2020 and continuing to improve through 2021, we invested heavily in inventory to meet the robust demand.

However, during the second quarter of 2022, consumer demand began to trend down significantly, resulting in a significant increase in our inventory balance.

We have taken swift action in our efforts to balance our inventory levels with the shift in demand, but we may not be able to respond quickly enough to adjust our inventory position accordingly, which may have an adverse impact on our operating results.

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.

Over the long term, we expect to continue to make capital investments in our inventory, fulfillment centers, 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.

however, we cannot be certain that these efforts will grow our customer base or be cost-effective in the short term.

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%.

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.

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”

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 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.

The REVOLVE segment contributes to a majority of our net sales, representing 83.6% of our net sales for both 2022 and 2021.

During 2022 and 2021, REVOLVE generated $921.7 million and $745.1 million in net sales, respectively, representing an increase of 23.7%.

The net sales increase in 2022 compared to 2021 was primarily due to an increase in the number of total orders placed by customers complemented by an increase in average order value.

The FWRD segment contributes to a smaller portion of our overall net sales, representing 16.4% of our net sales for both 2022 and 2021.

During 2022 and 2021, FWRD generated $179.7 million and $146.3 million in net sales, respectively, representing an increase of 22.9%.

The net sales increase in 2022 compared to 2021 was primarily due to an increase in the number of total orders placed by customers combined with an increase in average order value.

Net sales to customers outside of the United States contributed to 17.0% and 18.5% of our net sales for 2022 and 2021, respectively.

During 2022 and 2021, net sales to customers outside of the United States were $187.1 million and $165.1 million, respectively, representing an increase of 13.2%.

Net sales to customers outside of the United States are impacted by various factors including import and export taxes, currency fluctuations and other macroeconomic conditions described in “—Overall Economic Trends”

In addition, any weakening of a local currency versus the U.S.

dollar results in our products becoming more expensive in that local currency, which has had, and may continue to have, a negative impact on demand for our products in the geographies that use such currency.

Seasonality in our business has not historically followed that of traditional retailers which typically experience concentration of net sales in the fourth calendar quarter in connection with the holidays.

We historically experienced increased sales in the spring and summer months that have resulted in peak sales during the second quarter of each fiscal year.

We also historically experienced lower activity in the first quarter of each year.

The COVID-19 pandemic impacted our historical seasonality, resulting in the second quarter not being the peak quarter for the 2020 and 2021 fiscal years.

With the exception of the COVID-19 pandemic and other unpredictable events such as the other macroeconomic conditions described in “—Overall Economic Trends”

above, we expect our historical seasonality to revert closer to historical trends in future years.

Our operating income has also been affected by these historical trends because many of our expenses are relatively fixed in the short term.

As our growth rates begin to moderate, the impact of these seasonality trends on our results of operations will become more pronounced.

If our growth rates moderate over the long-term, the impact of these seasonality trends on our results of operations may become more pronounced.

Our business is directly affected by the behavior of consumers.

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Components of Our Results of Operations

Net sales consist primarily of sales of women’s apparel, footwear, accessories and beauty products.

Net sales consist primarily of sales of women’s apparel, footwear, accessories, home 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.

Net sales are primarily driven by growth in the number of our customers, the frequency with which customers purchase and average order value.

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.

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.

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.

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

Fulfillment expenses represent those costs incurred in operating and staffing our fulfillment centers, including costs attributed to inspecting and warehousing inventories and picking, packaging and preparing customer orders for shipment.

Fulfillment expenses also include the cost of warehousing facilities.

Over the long term, we expect fulfillment expenses to decrease as a percentage of net sales, but we expect fulfillment expenses to fluctuate as a percentage of net sales in the short-term reflecting pressure from 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.

We expect fulfillment expenses to fluctuate as a percentage of net sales due to pressure from increased costs such as wages and other input cost pressure, expansion of our fulfillment network footprint and capacity, and our customers' propensity to return merchandise, to

be partially offset by operating efficiencies from increased scale as well as 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.

We expect selling and distribution expenses to fluctuate as a percentage of net sales reflecting pressure from elevated return rates due to product mix and consumer behavior, investments in international markets to offer hassle-free returns as well as increases in shipping costs, including the impact of fuel prices incurred through variable surcharges from our shipping partners, partially offset by efficiencies realized from optimized shipping methods.

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.

Marketing expenses consist primarily of targeted online performance marketing costs, such as paid search/product listing ads, affiliate marketing, paid social, retargeting, search engine optimization, personalized email marketing and mobile “push”

communications through our mobile applications.

Marketing expenses also consist of investment in brand marketing channels, including events, payments to influencers and other forms of online and offline marketing such as our brand ambassador program.

Marketing expenses are primarily related to growing and retaining our customer base and building the REVOLVE and FWRD brands.

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.

In 2021 and 2022, we increased our level of investment in marketing to maximize our opportunities to capture consumer demand as economies reopened.

Over the long term, we expect marketing expenses to increase in absolute dollars as we continue to scale our business, and may fluctuate as a percentage of sales depending on net sales volume, the level of marketing investment in a particular period and the competitive environment.

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.

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, as well as costs associated with the use by these functions of facilities and equipment, such as depreciation, rent and other occupancy expenses.

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.

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, albeit at a more moderate year-over-year growth rate than in 2021.

Over the long-term, we expect general and administrative expenses to continue to increase moderately in absolute dollars to support business growth and meet our obligations as a public company with general and administrative expenses as a percentage of revenue declining over the long-term as we leverage our investments and as our business scales.

Other (Income) Expense, Net

Other (income) expense, net consists primarily of interest income on our money market funds, interest expense and other fees associated with our line of credit and foreign exchange (gains) losses.

Results of Operations

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Income from operations

Other expense, net

Other (income) expense, net

Income before income taxes

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Income from operations

Other expense, net

Other (income) expense, net

Income before income taxes

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(dollars in thousands)

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

stay-at-home orders and other restrictions in certain states and countries, U.S.

government stimulus payments and the accelerated rollout of vaccinations.

The increase in net sales for 2022 compared to 2021 was primarily due to an increase in the number of total orders placed by customers of 25.1% and increase in average order value of 12.2% as compared to 2021, partially offset by a higher proportion of returned purchases.

Net sales in the REVOLVE segment increased 23.7% to $921.7 million in 2022 compared to net sales of $745.1 million in 2021.

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The increase in cost of sales in 2022, as compared to 2021, 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.

The increase in cost of sales as a percentage of net sales was due to a lower percentage of full price sales and higher routine inventory adjustments, partially offset by a higher mix of owned brand sales.

Fulfillment Expenses

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Percentage of net sales

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.

Fulfillment expenses in 2022 were higher as compared to 2021, primarily due to an increase in the number of units processed.

The increase in fulfillment expenses as a percentage of net sales was primarily due to customers returning a higher proportion of their purchases, higher wages for fulfillment staff, the mix of units processed and the expansion of our fulfillment network footprint and capacity.

Selling and Distribution Expenses

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Percentage of net sales

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.

The increase in selling and distribution expenses in 2022, as compared to 2021, was primarily due to an increase in the number of orders shipped.

Shipping and handling costs increased $36.0 million, merchant processing fees increased $8.4 million, other selling expenses increased $4.7 million, packaging costs increased $4.0 million and customer service costs increased $3.8 million during 2022 as compared to 2021.

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 through increases in carrier rates and fuel surcharges.

Marketing Expenses

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Percentage of net sales

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.

The increase in marketing expenses in 2022, as compared to 2021, was due to an increase in marketing investments to acquire customers and retain existing customers to drive higher net sales.

The increase was due to an increase in performance marketing expense of $30.5 million as well as an increase of $10.8 million in brand marketing expense.

The higher investment in 2022 is reflective of the increased cost to acquire new customers and retain existing

customers as well as investments made in brand marketing initiatives including the Homecoming Weekend events that took place in the first quarter during Super Bowl weekend, the opening of the Revolve Social Club in March 2022, #REVOLVEfestival which we hosted in April 2022 after a two-year hiatus, the return of REVOLVE Gallery in September, #REVOLVEwinterland and various other smaller scale events throughout the year.

Due to COVID-19 related restrictions in the comparable prior year period, our in-person, event-based marketing events were limited, particularly in the first half of the prior year.

General and Administrative Expenses

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Percentage of net sales

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.

The increase in general and administrative expenses in 2022, as compared to 2021, was due to a $11.3 million increase in salaries and related benefits and equity-based compensation expense related to an increase in our headcount, a $6.3 million accrual for a then-pending legal matter that has since been resolved, a $3.5 million increase related to professional services and other occupancy costs, and a $4.9 million increase in other operating expenses to support business growth.

The increase in general and administrative expenses as a percentage of net sales was primarily driven by the $6.3 million accrual for the then-pending legal matter.

Year Ended December 31,

(in thousands)

(dollars in thousands)

Income before income taxes

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Effective tax rate

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.

The increase in the effective tax rate for 2022 compared to 2021 was primarily due to a decrease in excess tax benefits related to the exercise of non-qualified stock options.

Quarterly Results of Operations and Other Financial and Operations Data

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Fulfillment expenses

Selling and distribution

Selling and distribution expenses

Marketing expenses

General and administrative

General and administrative expenses

Total operating expenses

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Provision for (benefit from)

Earnings per share of Class A and

Class B common stock:

Weighted average number of shares of Class A and Class B

common stock outstanding:

Earnings per share

of Class A and

Class B common

Weighted average

number of shares

of Class A and

Class B common stock outstanding:

Three Months Ended

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Fulfillment expenses

Selling and distribution

Selling and distribution expenses

Marketing expenses

General and administrative

General and administrative expenses

Total operating

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Average order value

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”

Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income before other (income) expense, net, taxes, depreciation and amortization, adjusted to exclude the effects of equity-based compensation expense, and certain non-routine items.

Please see the section titled “—Key Operating and Financial Metrics—Adjusted EBITDA”

above for more information.

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(in thousands)

Other expense

(income), net

Other expense (income), net

Provision for (benefit from) income tax

Depreciation and

Depreciation and amortization

Equity-based compensation

Non-routine items (1)

Adjusted EBITDA

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

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investing activities (2)

Net cash provided by

(used in) financing activities

Net cash provided by financing activities

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”

Please see the section titled “—Key Operating and Financial Metrics—Free Cash Flow”

above for more information.

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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.

We have also experienced seasonally lower activity during the first quarter of each fiscal year, which was further impacted by COVID-19.

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.

We historically experienced increased sales in the spring and summer months that have resulted in peak sales during the second quarter of each fiscal year.

We also historically experienced lower activity in the first quarter of each year.

The COVID-19 pandemic impacted our historical seasonality, resulting in the second quarter not being the peak quarter in 2020 and 2021.

With the exception of the COVID-19 pandemic and other unpredictable events such as the other macroeconomic conditions described in “—Overall Economic Trends”

above, we expect our seasonality to revert closer to historical trends in future years.

Our operating income has also been affected by these historical trends because many of our expenses are relatively fixed in the short term.

As our growth rates begin to moderate, the impact of these seasonality trends on our results of operations will become more pronounced.

If our growth rates moderate over the long-term, the impact of these seasonality trends on our results of operations may 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.

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 net sales are reflective of the seasonality as discussed above with the second quarter of 2022 reflecting the impact of seasonal increases leading up to the early summer months.

Net sales increased in the first quarter of 2022 due to continued growth in the business and further increased in the second quarter of 2022 due to growth in the business and seasonality.

Net sales decreased in the third and fourth quarters of 2022 due to seasonality and weak macroeconomic conditions.

Our quarterly gross profit has fluctuated quarter to quarter primarily due to the quarterly fluctuations in net sales, among other factors.

The decrease in gross profit margin in the third and fourth quarter of 2022 was primarily due to a lower percentage of full price sales and deeper markdowns within the markdown sales.

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.

Fulfilment expenses as a percentage of net sales increased in the first two quarters of 2022 due to customers returning a higher proportion of their purchases as well as higher wages for fulfillment staff and further increased in the third and fourth quarters of 2022 due to the expansion of our fulfillment network footprint and capacity as well as the mix of units processed.

Selling and distribution expense as a percentage of net sales increased in the first, second, third and fourth quarters of 2022 due to customers returning a higher proportion of their purchases, increased shipping rates and higher surcharges.

Marketing expenses vary quarter-to-quarter, primarily due to fluctuations in our marketing investments to acquire and retain customers to drive higher net sales and the timing of our brand marketing events.

The first quarter of 2022 includes marketing expenses related to the Homecoming Weekend and the opening of the Revolve Social Club.

The second quarter of 2022 includes marketing expenses related to #REVOLVEfestival.

During the first half of 2021, due to COVID-19 restrictions, our in-person event-based marketing events were limited, and we were unable to host the aforementioned events.

The third quarters of 2022 and 2021 include expenses attributed to REVOVLE Gallery.

The fourth quarter of 2022 included #REVOLVEwinterland.

General and administrative expenses have generally increased sequentially quarter-to-quarter as we continued to increase our headcount to support business growth.

We had net income for all periods presented.

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Liquidity and Capital Resources

The following tables show our cash and cash equivalents, accounts receivable and working capital as of the dates indicated:

The following table shows our cash and cash equivalents, accounts receivable and working capital as of the dates indicated:

December 31, 2022

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(1) Working capital for all periods presented above is defined as current assets less current liabilities.

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.

As of December 31, 2022, the majority of our cash and cash equivalents was held for working capital purposes, 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.

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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.

Our future capital requirements and the adequacy of available funds will depend on many factors, including those described in the section titled “Risk Factors.”

We may not be able to secure additional financing to meet our operating requirements on acceptable terms, or at all.

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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.

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 the "Risk Factors" section of this report.

We may not be able to secure additional financing to meet our operating requirements on acceptable terms or at all.

Historical Cash Flows

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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.

We generated $23.4 million of operating cash flow in 2022 compared to $62.3 million in 2021.

The decrease in our operating cash flow was primarily due to a $40.2 million decrease in net income adjusted for non-cash items and a $29.4 million decrease from changes in other working capital, partially offset by a $30.7 million increase due to reduced investments in inventory.

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.

Our primary investing activities have consisted of purchases of property and equipment to support our fulfillment centers and our overall business growth and internally developed software for the continued development of our proprietary technology infrastructure.

Purchases of property and equipment may vary from period-to-period due to 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 used in investing activities was $5.2 million and $2.2 million in 2022 and 2021, respectively.

The increase was primarily due to capital expenditures related to our new fulfillment centers.

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.

Our financing activities primarily consist of proceeds from the exercise of stock options and borrowings and repayments related to the existing line of credit, when applicable.

Net cash provided by financing activities was $0.9 million and $12.7 million in 2022 and 2021, respectively, and was attributable to the proceeds from the exercise of stock options.

Contractual Obligations

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For a description of our leases, please see Note 5, Leases , to our consolidated financial statements included elsewhere in this report.

We do not believe that inflation has had a material effect on our business, financial condition or results of operations.

We have been impacted by rising levels of inflation in recent periods resulting in part from various supply chain disruptions, increased shipping and transportation costs, increased merchandise and labor costs and other disruptions caused by the COVID‐19 pandemic and general economic and market conditions.

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.

These mitigating actions may adversely impact demand for our products.

Furthermore, if costs were to become subject to significant incremental 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.

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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.

In accordance with our policy on returns and exchanges, merchandise returns are generally accepted for full refund if returned within 60 days of the original purchase date and merchandise 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.

Our returns reserve as of December 31, 2022 and 2021 was $63.4 million and $49.3 million, respectively, and the provisions recorded for returns were $1,410.5 million and $894.1 million, during 2022 and 2021, 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.

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.

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.

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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.

Revenue recognized in net sales on breakage on store credit and gift cards was $1.7 million and $1.2 million for 2022 and 2021, 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.

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Recent Accounting Pronouncements

See Note 2, Significant Accounting Policies , to our consolidated financial statements included elsewhere in this report for additional information regarding recent accounting pronouncements.

See Note 2, Significant Accounting Policies , to our consolidated financial statements included elsewhere in this report for information regarding recently issued accounting pronouncements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 5. Market for Registrant’s Common Equity