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 15, 2023, 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. 51 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, 2022, 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 December 31, 2022 Revolve Group, Inc. $ 100.00 $ 54.00 $ 91.68 $ 164.82 $ 65.47 S&P 500 $ 100.00 $ 113.67 $ 134.58 $ 173.21 $ 141.84 S&P Retail Select Industry $ 100.00 $ 113.11 $ 160.19 $ 229.03 $ 156.39 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. 52 Item 6. [ RESERVED] 53 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 sections titled “Risk Factors” 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 2021, which was filed with the SEC on February 28, 2022. 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, beauty and home products. 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, 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. 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 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’ experience. 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. 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 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, affiliate marketing, paid 54 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. 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, and Saudi Arabia and Monaco in 2022. 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 intend to continue to invest in and develop international markets while maintaining our focus on the core U.S. market. Impact of COVID-19 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 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, 2022 2021 2020 (in thousands, except average order value and percentages) Gross margin 53.8 % 55.0 % 52.6 % Adjusted EBITDA $ 90,234 $ 114,585 $ 69,257 Free cash flow $ 18,269 $ 60,118 $ 71,449 Active customers 2,340 1,840 1,472 Total orders placed 8,304 6,636 4,499 Average order value $ 304 $ 271 $ 236 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 55 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. 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. 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 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. 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 (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. 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 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. 56 A reconciliation of Adjusted EBITDA to net income is as follows: Year Ended December 31, 2022 2021 2020 (in thousands) Net income $ 58,697 $ 99,840 $ 56,790 Excluding: Other (income) expense, net (3,476 ) 563 994 Provision for income taxes 17,919 4,888 3,282 Depreciation and amortization 4,791 4,508 4,827 Equity-based compensation 5,862 4,786 3,364 Non-routine items (1) 6,441 — — Adjusted EBITDA $ 90,234 $ 114,585 $ 69,257 (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 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. 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. 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, 2022 2021 2020 (in thousands) Net cash provided by operating activities $ 23,436 $ 62,313 $ 73,773 Purchases of property and equipment (5,167 ) (2,195 ) (2,324 ) Free cash flow $ 18,269 $ 60,118 $ 71,449 Net cash used in investing activities $ (5,167 ) $ (2,195 ) $ (2,324 ) Net cash provided by financing activities $ 887 $ 12,766 $ 8,660 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 57 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 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 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. Total orders placed, together with average order value, is an indicator of the net sales we expect to recognize in a given period. We believe that total orders placed is a measure that is useful to investors and management in understanding our ongoing operations and in analysis of ongoing operating trends. Total orders placed and total orders shipped in any given period may differ slightly due to orders that are in process at the end of any particular period. Total orders placed increased in 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 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 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 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, product mix, and the number of 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 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. 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; 58 • 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. 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 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. 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. 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. Customer Retention 59 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 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 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 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 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. 60 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 (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 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 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 valuation adjustments, 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 the COVID-19 pandemic. In response, in 2020, we significantly reduced inventory receipts by canceling or delaying orders. 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 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 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% 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. 61 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” above. 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 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. 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. 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, 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. 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 valuation adjustments, 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. 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 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. 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 62 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. 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, 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 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, 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, 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. 63 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, 2022 2021 2020 (in thousands) Net sales $ 1,101,416 $ 891,390 $ 580,649 Cost of sales 509,093 401,567 275,369 Gross profit 592,323 489,823 305,280 Operating expenses: Fulfillment expenses 31,804 21,322 16,471 Selling and distribution expenses 190,419 133,506 80,496 Marketing expenses 181,648 140,398 76,371 General and administrative expenses 115,312 89,306 70,876 Total operating expenses 519,183 384,532 244,214 Income from operations 73,140 105,291 61,066 Other (income) expense, net (3,476 ) 563 994 Income before income taxes 76,616 104,728 60,072 Provision for income taxes 17,919 4,888 3,282 Net income $ 58,697 $ 99,840 $ 56,790 Year Ended December 31, 2022 2021 2020 Net sales 100.0 % 100.0 % 100.0 % Cost of sales 46.2 45.0 47.4 Gross profit 53.8 55.0 52.6 Operating expenses: Fulfillment expenses 2.9 2.4 2.8 Selling and distribution expenses 17.3 15.0 13.9 Marketing expenses 16.5 15.8 13.2 General and administrative expenses 10.5 10.0 12.2 Total operating expenses 47.2 43.2 42.1 Income from operations 6.6 11.8 10.5 Other (income) expense, net (0.3 ) 0.1 0.2 Income before income taxes 6.9 11.7 10.3 Provision for income taxes 1.6 0.5 0.5 Net income 5.3 % 11.2 % 9.8 % Comparison of Years Ended 2022 and 2021 Net Sales Year Ended December 31, Change 2022 2021 $ % (dollars in thousands) Net sales $ 1,101,416 $ 891,390 $ 210,026 23.6 % 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. 64 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. Net sales generated from our FWRD segment increased 22.9% to $179.7 million in 2022 as compared to net sales of $146.3 million in 2021. Cost of Sales Year Ended December 31, Change 2022 2021 $ % (dollars in thousands) Cost of sales $ 509,093 $ 401,567 $ 107,526 26.8 % Percentage of net sales 46.2 % 45.0 % 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 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 Year Ended December 31, Change 2022 2021 $ % (dollars in thousands) Fulfillment expenses $ 31,804 $ 21,322 $ 10,482 49.2 % Percentage of net sales 2.9 % 2.4 % 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 Year Ended December 31, Change 2022 2021 $ % (dollars in thousands) Selling and distribution expenses $ 190,419 $ 133,506 $ 56,913 42.6 % Percentage of net sales 17.3 % 15.0 % 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 Year Ended December 31, Change 2022 2021 $ % (dollars in thousands) Marketing expenses $ 181,648 $ 140,398 $ 41,250 29.4 % Percentage of net sales 16.5 % 15.8 % 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 65 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 Year Ended December 31, Change 2022 2021 $ % (dollars in thousands) General and administrative expenses $ 115,312 $ 89,306 $ 26,006 29.1 % Percentage of net sales 10.5 % 10.0 % 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. Income Taxes Year Ended December 31, 2022 2021 (dollars in thousands) Income before income taxes $ 76,616 $ 104,728 Provision for income taxes 17,919 4,888 Effective tax rate 23.4 % 4.7 % 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 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. 66 Three Months Ended December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 (in thousands, except per share data) Net sales $ 259,153 $ 268,711 $ 290,054 $ 283,498 $ 239,805 $ 244,064 $ 228,614 $ 178,907 Cost of sales 125,865 126,329 127,812 129,087 108,341 109,588 101,396 82,242 Gross profit 133,288 142,382 162,242 154,411 131,464 134,476 127,218 96,665 Operating expenses: Fulfillment expenses 8,532 8,072 7,910 7,290 5,870 5,776 5,309 4,367 Selling and distribution expenses 45,389 46,477 51,967 46,586 38,036 38,354 32,139 24,977 Marketing expenses 39,893 44,584 51,921 45,250 32,344 46,955 34,871 26,228 General and administrative expenses 28,815 28,498 31,164 26,835 23,278 24,180 21,970 19,878 Total operating expenses 122,629 127,631 142,962 125,961 99,528 115,265 94,289 75,450 Income from operations 10,659 14,751 19,280 28,450 31,936 19,211 32,929 21,215 Other expense (income), net 293 (1,440 ) (1,813 ) (516 ) 224 (158 ) 264 233 Income before income taxes 10,366 16,191 21,093 28,966 31,712 19,369 32,665 20,982 Provision for (benefit from) income taxes 2,498 4,203 4,820 6,398 2,330 2,701 1,127 (1,270 ) Net income $ 7,868 $ 11,988 $ 16,273 $ 22,568 $ 29,382 $ 16,668 $ 31,538 $ 22,252 Earnings per share of Class A and Class B common stock: Basic $ 0.11 $ 0.16 $ 0.22 $ 0.31 $ 0.40 $ 0.23 $ 0.44 $ 0.31 Diluted $ 0.11 $ 0.16 $ 0.22 $ 0.30 $ 0.39 $ 0.22 $ 0.42 $ 0.30 Weighted average number of shares of Class A and Class B common stock outstanding: Basic 73,349 73,328 73,312 73,264 73,057 72,810 72,387 71,782 Diluted 74,286 74,354 74,635 74,803 74,834 74,881 74,422 74,033 67 Three Months Ended December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 Net sales 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales 48.6 47.0 44.1 45.5 45.2 44.9 44.4 46.0 Gross profit 51.4 53.0 55.9 54.5 54.8 55.1 55.6 54.0 Operating expenses: Fulfillment expenses 3.3 3.0 2.7 2.6 2.4 2.4 2.3 2.4 Selling and distribution expenses 17.5 17.3 17.9 16.4 15.9 15.7 14.1 14.0 Marketing expenses 15.4 16.6 17.9 16.0 13.5 19.2 15.3 14.7 General and administrative expenses 11.1 10.6 10.7 9.5 9.7 9.9 9.6 11.1 Total operating expenses 47.3 47.5 49.2 44.5 41.5 47.2 41.3 42.2 Income from operations 4.1 5.5 6.7 10.0 13.3 7.9 14.3 11.8 Other expense (income), net 0.1 (0.5 ) (0.6 ) (0.2 ) 0.1 (0.1 ) 0.1 0.1 Income before income taxes 4.0 6.0 7.3 10.2 13.2 8.0 14.2 11.7 Provision for (benefit from) income taxes 1.0 1.6 1.7 2.3 1.0 1.2 0.5 (0.7 ) Net income 3.0 % 4.4 % 5.6 % 7.9 % 12.2 % 6.8 % 13.7 % 12.4 % Three Months Ended December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 (in thousands, except average order value and percentages) Other Financial and Operations Data Gross margin 51.4 % 53.0 % 55.9 % 54.5 % 54.8 % 55.1 % 55.6 % 54.0 % Adjusted EBITDA (1) $ 14,137 $ 17,676 $ 26,878 $ 31,543 $ 34,176 $ 21,666 $ 35,403 $ 23,340 Free cash flow $ (12,278 ) $ 8,618 $ (30,798 ) $ 52,727 $ (6,525 ) $ 1,340 $ 32,830 $ 32,473 Active customers 2,340 2,249 2,165 2,041 1,840 1,678 1,554 1,477 Total orders placed 1,954 1,951 2,243 2,156 1,755 1,830 1,769 1,282 Average order value $ 306 $ 320 $ 303 $ 288 $ 292 $ 276 $ 255 $ 256 (1) 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. 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: 68 Three Months Ended December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 (in thousands) Net income $ 7,868 $ 11,988 $ 16,273 $ 22,568 $ 29,382 $ 16,668 $ 31,538 $ 22,252 Excluding: Other expense (income), net 293 (1,440 ) (1,813 ) (516 ) 224 (158 ) 264 233 Provision for (benefit from) income tax 2,498 4,203 4,820 6,398 2,330 2,701 1,127 (1,270 ) Depreciation and amortization 1,272 1,214 1,203 1,102 1,118 1,119 1,122 1,149 Equity-based compensation 1,452 1,524 1,395 1,491 1,122 1,336 1,352 976 Non-routine items (1) 754 187 5,000 500 - — — — Adjusted EBITDA $ 14,137 $ 17,676 $ 26,878 $ 31,543 $ 34,176 $ 21,666 $ 35,403 $ 23,340 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 financing activities: Three Months Ended December 31, 2022 September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 (in thousands) Net cash (used in) provided by operating activities $ (11,015 ) $ 10,006 $ (29,352 ) $ 53,797 $ (6,098 ) $ 1,855 $ 33,347 $ 33,209 Purchases of property and equipment (1,263 ) (1,388 ) (1,446 ) (1,070 ) (427 ) (515 ) (517 ) (736 ) Free cash flow (1) $ (12,278 ) $ 8,618 $ (30,798 ) $ 52,727 $ (6,525 ) $ 1,340 $ 32,830 $ 32,473 Net cash used in investing activities (2) $ (1,263 ) $ (1,388 ) $ (1,446 ) $ (1,070 ) $ (427 ) $ (515 ) $ (517 ) $ (736 ) Net cash provided by financing activities 391 128 242 126 3,318 1,231 3,900 4,317 (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 titled “—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 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 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. 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. 69 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 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. 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 table shows our cash and cash equivalents, accounts receivable and working capital as of the dates indicated: As of December 31, 2022 December 31, 2021 (in thousands) Cash and cash equivalents $ 234,724 $ 218,455 Accounts receivable, net 5,421 4,639 Working capital 337,131 279,620 (1) Working capital for all periods presented above is defined as current assets less current liabilities. 70 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. 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 section titled “Risk Factors.” 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, 2022 and 2021. 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, 2022 and 2021. 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, 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. 71 Historical Cash Flows Year Ended December 31, 2022 2021 2020 (in thousands) Net cash provided by operating activities $ 23,436 $ 62,313 $ 73,773 Net cash used in investing activities (5,167 ) (2,195 ) (2,324 ) Net cash provided by financing activities 887 12,766 8,660 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. 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 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 $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 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 As of December 31, 2022, 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 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. 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. 72 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 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, 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. 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. 73 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 $1.7 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. 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 information regarding recently issued accounting pronouncements.