UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended March 31, 2020

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from                     to                     .

Commission file number: 001-38927

 

REVOLVE GROUP, INC.

(Exact name of Registrant as Specified in its Charter)

 

 

Delaware

46-1640160

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

12889 Moore Street

Cerritos, California 90703

(Address of principal executive offices) (Zip code)

(562) 677-9480

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:

 

Trading Symbol(s):

 

Name of each exchange on which registered:

Class A Common Stock, par value $0.001 per share

 

RVLV

 

New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes     No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

  

Accelerated filer

Non-accelerated filer

  

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

As of May 7, 2020, 15,812,563 shares of the registrant’s Class A common stock and 53,568,912 shares of the registrant’s Class B common stock were outstanding.

 

 

1


REVOLVE GROUP, INC. AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

 

Item 1. Financial Statements

 

3

 

 

 

Condensed Consolidated Balance Sheets

 

3

 

 

 

Condensed Consolidated Statements of Income

 

4

 

 

 

Condensed Consolidated Statements of Comprehensive Income

 

5

 

 

 

Condensed Consolidated Statements of Cash Flows

 

6

 

 

 

Notes to the Condensed Consolidated Financial Statements

 

7

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

19

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

36

 

 

 

Item 4. Controls and Procedures

 

37

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

Item 1. Legal Proceedings

 

38

 

 

 

Item 1A. Risk Factors

 

38

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

73

 

 

 

Item 3. Defaults Upon Senior Securities

 

73

 

 

 

Item 4. Mine Safety Disclosures  

 

73

 

 

 

Item 5. Other Information

 

73

 

 

 

Item 6. Exhibits

 

74

 

 

 

Signatures

 

76

 

 

 

 


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

REVOLVE GROUP, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands, except share and per share data)

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

103,579

 

 

$

65,418

 

Accounts receivable, net

 

 

3,021

 

 

 

4,751

 

Inventory

 

 

101,369

 

 

 

104,257

 

Income taxes receivable

 

 

966

 

 

 

761

 

Prepaid expenses and other current assets

 

 

18,277

 

 

 

24,155

 

Total current assets

 

 

227,212

 

 

 

199,342

 

Property and equipment, net

 

 

12,914

 

 

 

13,517

 

Intangible assets, net

 

 

1,420

 

 

 

1,457

 

Goodwill

 

 

2,042

 

 

 

2,042

 

Other assets

 

 

609

 

 

 

642

 

Deferred income taxes

 

 

15,290

 

 

 

15,290

 

Total assets

 

$

259,487

 

 

$

232,290

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

38,807

 

 

$

29,813

 

Line of credit

 

 

30,000

 

 

 

 

Income taxes payable

 

 

398

 

 

 

470

 

Accrued expenses

 

 

15,452

 

 

 

19,399

 

Returns reserve

 

 

20,975

 

 

 

35,104

 

Other current liabilities

 

 

17,740

 

 

 

16,740

 

Total current liabilities

 

 

123,372

 

 

 

101,526

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Class A common stock, $0.001 par value; 1,000,000,000 shares

   authorized as of March 31, 2020 and December 31, 2019;

   15,812,563 and 14,009,859 shares issued and outstanding as of March 31, 2020

   and December 31, 2019 respectively.

 

 

16

 

 

 

14

 

Class B common stock, $0.001 par value; 125,000,000 shares authorized

   as of March 31, 2020 and December 31, 2019; 53,568,912 and

   55,069,124 shares issued and outstanding as of March 31, 2020 and December 31,

   2019, respectively.

 

 

54

 

 

 

55

 

Additional paid-in capital

 

 

75,556

 

 

 

74,018

 

Retained earnings

 

 

60,489

 

 

 

56,677

 

Total stockholders' equity

 

 

136,115

 

 

 

130,764

 

Total liabilities and stockholders’ equity

 

$

259,487

 

 

$

232,290

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

3


REVOLVE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In thousands, except per share data)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Net sales

 

$

146,075

 

 

$

137,343

 

Cost of sales

 

 

75,125

 

 

 

66,589

 

Gross profit

 

 

70,950

 

 

 

70,754

 

Operating expenses:

 

 

 

 

 

 

 

 

Fulfillment

 

 

4,493

 

 

 

4,495

 

Selling and distribution

 

 

21,779

 

 

 

20,591

 

Marketing

 

 

21,950

 

 

 

19,498

 

General and administrative

 

 

18,874

 

 

 

19,269

 

Total operating expenses

 

 

67,096

 

 

 

63,853

 

Income from operations

 

 

3,854

 

 

 

6,901

 

Other (income) expense, net

 

 

(127

)

 

 

216

 

Income before income taxes

 

 

3,981

 

 

 

6,685

 

(Benefit from) provision for income taxes

 

 

(175

)

 

 

1,723

 

Net income

 

$

4,156

 

 

$

4,962

 

Earnings per share of Class A and Class B

   common stock:

 

 

 

 

 

 

 

 

Basic

 

$

0.06

 

 

$

0.08

 

Diluted

 

$

0.06

 

 

$

0.07

 

Weighted average Class A and Class B common shares

   outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

69,320

 

 

 

41,936

 

Diluted

 

 

71,903

 

 

 

44,821

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

4


REVOLVE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Net income

 

$

4,156

 

 

$

4,962

 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

Cumulative translation adjustment

 

 

(344

)

 

 

143

 

Total other comprehensive (loss) income

 

 

(344

)

 

 

143

 

Total comprehensive income

 

$

3,812

 

 

$

5,105

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5


REVOLVE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

4,156

 

 

$

4,962

 

Adjustments to reconcile net income to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,191

 

 

 

695

 

Equity-based compensation

 

 

564

 

 

 

511

 

Deferred income taxes

 

 

 

 

 

(616

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

1,730

 

 

 

(4,150

)

Inventories

 

 

2,888

 

 

 

(8,383

)

Income taxes receivable

 

 

(205

)

 

 

 

Prepaid expenses and other current assets

 

 

5,878

 

 

 

(1,400

)

Other assets

 

 

33

 

 

 

(1

)

Accounts payable

 

 

8,994

 

 

 

10,867

 

Income taxes payable

 

 

(72

)

 

 

2,341

 

Accrued expenses

 

 

(3,947

)

 

 

2,515

 

Returns reserve

 

 

(14,129

)

 

 

7,969

 

Other current liabilities

 

 

1,000

 

 

 

614

 

Net cash provided by operating activities

 

 

8,081

 

 

 

15,924

 

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property, equipment and other

 

 

(551

)

 

 

(4,987

)

Net cash used in investing activities

 

 

(551

)

 

 

(4,987

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from borrowings on line of credit

 

 

30,000

 

 

 

 

Payment of deferred offering costs

 

 

 

 

 

(248

)

Proceeds from the exercise of stock options, net

 

 

975

 

 

 

 

Net cash provided by (used in) financing activities

 

 

30,975

 

 

 

(248

)

Effect of exchange rate changes on cash and cash equivalents

 

 

(344

)

 

 

143

 

Net increase in cash and cash equivalents

 

 

38,161

 

 

 

10,832

 

Cash and cash equivalents, beginning of period

 

 

65,418

 

 

 

16,369

 

Cash and cash equivalents, end of period

 

$

103,579

 

 

$

27,201

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

25

 

 

$

 

Income taxes, net of refund

 

$

101

 

 

$

 

 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

 

 

6


 

REVOLVE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1. Description of Business

Revolve Group, Inc., or REVOLVE, is an online fashion retailer for Millennial and Generation Z consumers. Through our websites and mobile apps we deliver an aspirational customer experience from a vast, yet curated offering. Our dynamic platform connects a deeply engaged community of consumers, global fashion influencers, and emerging, established and owned brands. We are headquartered in Los Angeles County, California.  

Note 2. Significant Accounting Policies

Basis of Presentation

Our unaudited condensed consolidated interim financial information has been prepared in accordance with Article 10 of the Securities and Exchange Commission’s, or the SEC, Regulation S-X. As permitted under those rules, certain footnotes or other financial information that are normally required by generally accepted accounting principles in the United States, or GAAP, can be condensed or omitted. These financial statements have been prepared on the same basis as our annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, which are necessary for the fair statement of our financial information. These interim results are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2020 or for any other interim period or for any other future year. All intercompany transactions and balances have been eliminated in consolidation. Certain prior period amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations. Our fiscal year ends on December 31 of each year.

The accompanying unaudited condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the fiscal year ended December 31, 2019 contained in our Annual Report on Form 10-K for the year filed with the SEC on February 26, 2020.

Impact of COVID-19 on Our Business

The recent COVID-19 pandemic had a material adverse impact on our business operations and operating results, and operating cash flows for the first quarter of 2020, in particular; during the last two weeks of the quarter. While the length and severity of the reduction in demand due to COVID-19 is uncertain, we expect that our business operations and results of operations, including our net sales, earnings and cash flows, will be materially adversely impacted through the remainder of 2020.

We have taken 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 pay cuts, employee furloughs and to a lesser extent layoffs. We also eliminated or deferred non-essential capital expenditures, significantly reduced planned inventory receipts by canceling or delaying orders, in addition to extending payment terms for both merchandise and non-merchandise vendor invoices. We believe that our existing cash and cash equivalents and cash flows from operations will be sufficient to meet our anticipated cash needs for at least the next 12 months, including the repayment of outstanding borrowings upon the expiration of our line of credit. 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.

 

Reverse Split

On May 24, 2019, we effected a one-for-22.31 reverse split of all of our issued and outstanding Class T units and Class A units. All figures have been presented on the basis of the reverse split wherever applicable for all the periods presented in these condensed consolidated financial statements.

7


 

Corporate Conversion

Prior to our initial public offering, or IPO, we operated as a Delaware limited liability company under the name Revolve Group, LLC. In connection with the IPO, Revolve Group, LLC converted into a Delaware corporation and changed its name to Revolve Group, Inc. so that the top-tier entity in our corporate structure was a corporation rather than a limited liability company, which we refer to as the Corporate Conversion. In conjunction with the Corporate Conversion, all of the outstanding Class T and Class A units of Revolve Group, LLC were converted into an aggregate of 67,889,013 shares of our Class B common stock. The holders of Class T units received an aggregate of 2,400,960 shares, representing the total preference amount for the Class T units.  The remaining 65,488,053 shares of our Class B common stock were allocated on a pro rata basis to the Class T and Class A unitholders based on the number of units held by each holder. In connection with the Corporate Conversion, Revolve Group, Inc. holds all property and assets of Revolve Group, LLC and assumed all of the debts and obligations of Revolve Group, LLC.  The members of the board of managers and the officers of Revolve Group, LLC became the members of the board of directors and the officers of Revolve Group, Inc.

Initial Public Offering

On June 7, 2019, we completed an IPO, in which we issued and sold 2,941,176 shares of our Class A common stock at a public offering price of $18.00 per share. We received approximately $45.8 million in net proceeds after deducting $3.3 million of underwriting discounts and approximately $3.8 million in offering costs. Upon the closing of the IPO, we used $40.8 million of the net proceeds from the offering to repurchase an aggregate of 2,400,960 shares of Class B common stock held by TSG6 L.P. and certain of its affiliates, or TSG, and Capretto, LLC.

In June 2019, we issued and sold an additional 441,176 shares of Class A common stock at a price of $18.00 per share following the underwriters’ exercise of their option to purchase additional shares and received proceeds of $7.5 million, net of underwriting discounts and commissions of $0.5 million.

In connection with the IPO, 10,147,059 Class B shares were converted into Class A shares by the selling stockholders.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include: the allowance for sales returns, the valuation of deferred tax assets, inventory, equity‑based compensation, valuation of goodwill, reserves for income tax uncertainties and other contingencies, and breakage of store credit and gift cards.

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 single performance obligation to deliver the product to the customer. We recognize revenue for our single 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.

8


 

In March 2020 we launched the REVOLVE Loyalty Club within the REVOLVE segment.  Eligible customers who enroll in the program will generally earn points for every dollar spent and will automatically receive a $20 REVOLVE Reward once they earn 2,000 points. We defer revenue based on an allocation of the price of the customer purchase and the standalone selling price of the points earned. Revenue is recognized once the reward is redeemed or expires or once unconverted points expire. REVOLVE Rewards generally expire three months after they are issued and unconverted points generally expire if a customer is inactive for a period of 12 months.    

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 in March, April, and May 2020 will be accepted for full refund if returned within 60 days of the original purchase date and may be exchanged up to 90 days from the original purchase date. At the time of sale, we establish a reserve for merchandise returns, based on historical experience and expected future returns, which is recorded as a reduction of sales and cost of sales.

The following table presents a rollforward of our sales return reserve for the three months ended March 31, 2020 and 2019 (in thousands):

 

 

 

March 31,

 

 

March 31,

 

 

 

2020

 

 

2019

 

Beginning balance

 

$

35,104

 

 

$

29,184

 

Returns

 

 

(173,522

)

 

 

(147,619

)

Provisions

 

 

159,393

 

 

 

155,588

 

Ending balance

 

$

20,975

 

 

$

37,153

 

 

We may also issue store credit in lieu of cash refunds 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 for the three months ended March 31, 2020 and 2019 was $0.8 million and $0.2 million, 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 condensed consolidated financial statements.

We have exposure to losses from fraudulent credit card charges. We record losses when incurred related to these fraudulent charges as amounts have historically been insignificant.

See Note 9, Segment Information, for disaggregation of revenue by reportable segment and by geographic area.

9


 

Accounting Pronouncements Not Yet Effective

Under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act, we meet the definition of an emerging growth company. We have elected to use this extended transition period for complying with new or revised accounting standards pursuant to Section 107(b) of the JOBS Act and as a result of this election, our financial statements may not be comparable to companies that comply with public company effective dates. We will remain an emerging growth company until the earliest of (1) the end of the fiscal year in which the market value of our common stock that is held by non-affiliates is at least $700 million as of the last business day of our most recently completed second fiscal quarter, (2) the end of the fiscal year in which we have total annual gross revenues of $1.07 billion or more during such fiscal year, (3) the date on which we issue more than $1.0 billion in non-convertible debt in a three-year period, or (4) the end of the fiscal year in which the fifth anniversary of our IPO occurs.

In December 2019, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to the accounting for income taxes. ASU 2019-12 is effective for us for annual periods beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. We are currently in the process of evaluating the effects of this pronouncement on our consolidated financial statements and related disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairment by removing step two from the goodwill impairment test. Under this new guidance, if the carrying amount of a reporting unit exceeds its estimated fair value, an impairment charge shall be recognized in an amount equal to that excess, limited to the total amount of goodwill allocated to that reporting unit. The update also eliminates the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment. This guidance is effective for us for annual or interim goodwill impairment tests in fiscal years beginning December 15, 2021 with early adoption permitted. We do not expect that this ASU will have a significant impact on our consolidated financial statements and related disclosures.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under this ASU, a lessee is generally required to recognize the lessee’s rights and obligations resulting from leases on the balance sheet by recording a right-of-use asset and a lease liability. The new standard requires lessees to classify leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. In November 2019, the FASB issued ASU No. 2019-10 extending the effective date of this new lease standard by one year making it effective for us for annual periods beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021. The standard requires recognizing and measuring leases using a modified retrospective approach or allowing for application of the guidance at the beginning of the period in which it is adopted by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption rather than at the beginning of the earliest comparative period presented. We plan to elect the package of practical expedients permitted under the transition guidance within the new standard, which among other things, will allow us to carryforward the historical lease classification of our existing leases. However, we are still evaluating the potential impact of this ASU on our consolidated financial statements and related disclosures.

Note 3. Line of Credit

On March 23, 2016, we entered into a line of credit agreement with Bank of America, N.A, with an expiration date of March 23, 2021. 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) the LIBOR rate plus 1.00%, in each case plus a margin ranging from 0.25% to 0.75%, or (2) an adjusted LIBOR rate plus a margin ranging from 1.25% to 1.75%. As of March 31, 2020, the Company had $30.0 million outstanding on the line of credit.  The weighted-average interest rate of debt outstanding at March 31, 2020 was 2.3%.  No borrowings were outstanding as of December 31, 2019.  

10


 

We are also obligated to pay other customary fees for a credit facility of this size and type, including an unused commitment fee. The credit agreement also permits us, in certain circumstances, to request an increase in the facility by an additional amount of up to $25.0 million (in an initial minimum amount of $10 million and in increments of $5 million thereafter) at the same maturity, pricing and other terms. 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 in 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 the covenants, we are prohibited from paying cash dividends with respect to our capital stock. We were in compliance with all covenants as of March 31, 2020 and December 31, 2019.

Note 4. Equity-based Compensation

In 2013, Twist Holdings, LLC and Advance Holdings, LLC adopted equity incentive plans, which we refer to collectively as the 2013 Plan, pursuant to which the board of managers could grant options to purchase Class A units to officers and employees. Options could be granted with an exercise price equal to or greater than the unit’s fair value at the date of grant. All issued awards have 10-year terms and generally vest and become fully exercisable annually over five years of service from the date of grant. Awards will become fully vested upon the sale of the company.  In March 2018, the 2013 Plan was amended to increase the maximum number of Class A units to 6,207,978.

Upon the effectiveness of the Corporate Conversion on June 6, 2019, as discussed in Note 2, Significant Accounting Policies, the options to purchase Class A units of Revolve Group, LLC were converted into options to purchase Class B common stock of Revolve Group, Inc. on a 1:1 basis and in a manner that did not result in an increase to the intrinsic value of the converted option.

In September 2018, the board of directors adopted the 2019 Equity Incentive Plan, or the 2019 Plan, which became effective in June 2019.  Under the 2019 Plan, a total of 4,500,000 shares of our Class A common stock are reserved for issuance as options, stock appreciation rights, restricted stock, restricted stock units, RSUs, performance units or performance shares. Upon the completion of our IPO, the 2019 Plan replaced the 2013 Plan, however, the 2013 Plan will continue to govern the terms and conditions of the outstanding awards previously granted under that plan. The number of shares that will be available for issuance under our 2019 Plan also will increase annually on the first day of each year beginning in 2020, in an amount equal to the least of: (a) 6,900,000 shares, (b) 5% of the outstanding shares of all classes of our common stock as of the last day of the immediately preceding year and (c) such other amount as our board of directors may determine. All future grants going forward will be issued under the 2019 Plan. As of March 31, 2020, approximately 3.9 million common shares remain available for future issuance under the 2019 Plan.

All historical data presented in the tables within this footnote have been recast to retroactively reflect all share and per share data of options as if they had been issued by Revolve Group, Inc. and that both the reverse split and Corporate Conversion had occurred. See Note 2, Significant Accounting Policies, for further information regarding the reverse split and Corporate Conversion.

11


 

Option activity for the three months ended March 31, 2020 under the 2013 and 2019 Plans is as follows:

 

 

 

Number of

Shares

 

 

Weighted

Average

Exercise Price

 

 

Weighted

Average

Remaining

Contractual

Term

 

 

Aggregate

Intrinsic

Value (000's)

 

Balance at January 1, 2020

 

 

4,916,074

 

 

$

6.30

 

 

 

5.6

 

 

$

59,368

 

Granted

 

 

623,280

 

 

 

8.64

 

 

 

9.9

 

 

 

 

 

Exercised

 

 

(302,492

)

 

 

3.21

 

 

 

 

 

 

 

 

Forfeited

 

 

(8,835

)

 

 

15.62

 

 

 

 

 

 

 

 

Expired

 

 

(32

)

 

 

15.62

 

 

 

 

 

 

 

 

Balance at March 31, 2020

 

 

5,227,995

 

 

 

6.74

 

 

 

5.8

 

 

 

15,899

 

Exercisable at March 31, 2020

 

 

3,410,609

 

 

 

4.66

 

 

 

4.6

 

 

 

15,283

 

Vested and expected to vest

 

 

5,117,444

 

 

 

6.75

 

 

 

5.9

 

 

 

15,607

 

 

RSU award activity for the three months ended March 31, 2020 under the 2019 Plan is as follows:

 

 

 

Class A

Common

Stock

 

 

Weighted

Average

Grant Date

Fair Value

 

 

Weighted

Average

Remaining

Contractual

Term

 

 

Aggregate

Intrinsic

Value (000's)

 

Unvested at January 1, 2020

 

 

13,130

 

 

$

19.04

 

 

 

3.6

 

 

$

242

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

 

Released

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

 

 

 

 

 

 

 

 

 

 

 

Unvested at March 31, 2020

 

 

13,130

 

 

 

19.04

 

 

 

1.9

 

 

 

113

 

 

There were 623,280 options and no RSUs granted during the three months ended March 31, 2020. The weighted average grant-date fair value of options granted during the three months ended March 31, 2020 was $7.05 per share.  

As of March 31, 2020, there was $9.9 million of total unrecognized compensation cost related to unvested options and RSUs granted under the 2013 Plan and 2019 Plan, which is expected to be recognized over a weighted average service period of 4.0 years.

Equity‑based compensation cost that has been included in general and administrative expense in the accompanying condensed consolidated statements of income amounted to $0.6 million and $0.5 million for the three months ended March 31, 2020 and 2019, respectively. There was an excess income tax benefit of $1.2 million and $0 recognized in the condensed consolidated statements of income for equity‑based compensation arrangements for the three months ended March 31, 2020 and 2019, respectively.  

Note 5. Commitments and Contingencies

Contingencies

We record a loss contingency when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. We also disclose material contingencies when we believe a loss is not probable but reasonably possible. Accounting for contingencies requires us to use judgment related to both the likelihood of a loss and the estimate of the amount or range of loss. Although we cannot predict with assurance the outcome of any litigation or tax matters, we do not believe there are currently any such actions that, if resolved unfavorably, would have a material impact on our operating results, financial position and cash flows.

12


 

Indemnifications

In the ordinary course of business, we may provide indemnifications of varying scope and terms to vendors, directors, officers and other parties with respect to certain matters. We have not incurred any material costs as a result of such indemnifications and have not accrued any liabilities related to such obligations in our condensed consolidated financial statements.

Tax Contingencies

We are subject to income taxes in the United States and U.K. Significant judgment is required in evaluating our tax positions and determining our provision for income taxes. During the ordinary course of business, there are transactions and calculations for which the ultimate tax determination is uncertain. We establish reserves for tax-related uncertainties based on estimates or whether, and the extent to which, additional taxes will be due. These reserves are established when we believe that certain positions might be challenged despite our belief that our tax return positions are fully supportable. We adjust these reserves in light of changing facts and circumstances, such as the outcome of tax audits. Our provision for income taxes does not include any reserve provision because we believe that all of our tax positions are highly certain.

Legal Proceedings

We are a defendant in a purported class action lawsuit filed in the Superior Court of California, Los Angeles County, which was filed in May 2019, arising from employee wage-and-hour claims under California law for alleged meal period, rest period, payment of wages at separation, wage statement violations, and unfair business practices.  On January 6, 2020, the Company and the individual defendant in the case entered into a binding memorandum of understanding to settle the case which will need to be submitted for court approval prior to becoming final.  As a result, in December 2019, we accrued approximately $1.0 million to general and administrative expenses which as of March 31, 2020, still remained accrued within accrued expenses on the accompanying condensed consolidated balance sheet.  

Note 6. Income Taxes

The following table summarizes our effective tax rate for the periods presented (in thousands):

 

 

 

Three months ended March 31,

 

 

 

2020

 

 

2019

 

Income before income taxes

 

$

3,981

 

 

$

6,685

 

(Benefit from) provision for income taxes

 

 

(175

)

 

 

1,723

 

Effective tax rate

 

 

(4.4

)%

 

 

25.8

%

 

Due to the impact of the recent COVID-19 pandemic, we are unable to reliably estimate our annual effective tax rate for the three months ended March 31, 2020. Therefore, to calculate the benefit from income taxes we have utilized the actual effective tax rate for the current period.

 

The decrease in the effective tax rate for the three months ended March 31, 2020, as compared to the same period in 2019, was primarily due to an excess tax benefit related to the exercise of non-qualified stock options during the first quarter of 2020.

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, was enacted and signed into law. The CARES Act includes a number of corporate tax related provisions including increasing the amount of tax deductible interest, allowing companies an extended carry-back period for certain net operating losses, or NOLs, and increasing the amount of NOLs that corporations can use to offset taxable income.

 

13


 

The CARES Act did not materially affect our first-quarter income tax provision, deferred tax assets and liabilities, and related taxes payable. Although we currently do not expect the impact to be material, we will continue to assess the future implications of these provisions within the CARES Act on our condensed consolidated financial statements.

 

Note 7. Members’/Stockholders’ Equity

Changes in members’/stockholders’ equity for the three months ended March 31, 2020 and 2019 were as follows:

 

 

 

Three Months Ended March 31, 2020

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Retained

 

 

Total

Stockholders'

 

 

 

Number

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Equity

 

 

 

(in thousands, except share data)

 

Beginning balance

 

 

69,078,983

 

 

$

69

 

 

$

74,018

 

 

$

56,677

 

 

$

130,764

 

Issuance of Class A

   common stock from exercise of stock options

 

 

302,492

 

 

 

1

 

 

 

974

 

 

 

 

 

 

975

 

Equity-based compensation

 

 

 

 

 

 

 

 

564

 

 

 

 

 

 

564

 

Cumulative translation adjustment

 

 

 

 

 

 

 

 

 

 

 

(344

)

 

 

(344

)

Net income

 

 

 

 

 

 

 

 

 

 

 

4,156

 

 

 

4,156

 

Ending balance

 

 

69,381,475

 

 

$

70

 

 

$

75,556

 

 

$

60,489

 

 

$

136,115

 

 

 

 

Three Months Ended March 31, 2019

 

 

 

Class T Preferred Units

 

 

Class A Common Units

 

 

Accumulated

Members'

 

 

Total

Members''

 

 

 

Number

 

 

Amount

 

 

Number

 

 

Amount

 

 

Equity

 

 

Equity

 

 

 

(in thousands, except unit data)

 

Beginning balance

 

 

23,551,834

 

 

$

15,000

 

 

 

41,936,219

 

 

$

3,548

 

 

$

61,270

 

 

$

79,818

 

Cumulative effect of adoption

   of ASC 606

 

 

 

 

 

 

 

 

 

 

 

 

 

 

286

 

 

 

286

 

Equity-based compensation

 

 

 

 

 

 

 

 

 

 

 

511

 

 

 

 

 

 

511

 

Cumulative translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

143

 

 

 

143

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,962

 

 

 

4,962

 

Ending balance

 

 

23,551,834

 

 

$

15,000

 

 

 

41,936,219

 

 

$

4,059

 

 

$

66,661

 

 

$

85,720

 

 

 

Note 8. Earnings per Share

Basic and diluted earnings per share is presented in conformity with the two-class method required for participating securities and multiple classes of common stock. We consider the Class T preferred units, which were outstanding prior to the Corporate Conversion, to be a participating security. In connection with our IPO, we established two classes of authorized common stock: Class A common stock and Class B common stock. The rights of the holders of Class A and Class B common stock are identical, except for voting and conversion rights. Each share of Class A common stock is entitled to one vote per share. Each share of Class B common stock is entitled to ten votes per share and is convertible at any time into one share of Class A common stock.

Undistributed earnings allocated to the Class T preferred units are subtracted from net income in determining net income attributable to common stockholders. Basic earnings per share is computed by dividing the net income attributable to common stockholders by the weighted-average number of common shares outstanding during the period. As a participating security, the Class T preferred units are excluded from basic weighted-average common shares outstanding.

14


 

Diluted earnings per share represents net income divided by the weighted-average number of common shares outstanding, inclusive of the effect of dilutive stock options and RSUs. The undistributed earnings are allocated based on the participation rights of Class A and Class B common shares as if the earnings for the year have been distributed and losses allocated. As the liquidation and dividend rights are identical for both classes, the undistributed earnings are allocated on a proportionate basis.

For the three months ended March 31, 2020, the calculation of diluted earnings per share for Class A common stock assumes the conversion of Class B common stock, while diluted earnings per share of Class B common stock does not assume the conversion of Class A common stock as Class A common stock is not convertible into Class B common stock. Similarly, outstanding options to purchase Class B common stock and RSUs that are dilutive are included in the calculation of diluted earnings for both Class A and Class B common stock.

Basic and diluted earnings per share and the weighted-average shares outstanding have been computed for all periods shown below to give effect to the reverse split and the Corporate Conversion that occurred in connection with our IPO. See Note 2, Significant Accounting Policies, for further information regarding the reverse split and Corporate Conversion.

The following table presents the calculation of basic and diluted earnings per share:

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

Class A

 

 

Class B

 

 

Class B

 

 

 

(in thousands, except per share data)

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

929

 

 

$

3,227

 

 

$

4,962

 

Undistributed earnings to

   participating security

 

 

 

 

 

 

 

 

(1,785

)

Net income attributable to common

   stockholders — basic

 

$

929

 

 

$

3,227

 

 

$

3,177

 

Reallocation of undistributed earnings as a

   result of conversion of Class B to Class A

   shares

 

 

3,227

 

 

 

 

 

 

 

Reallocation of undistributed earnings to

   Class B shares

 

 

 

 

 

33

 

 

 

 

Net income attributable to common

   stockholders — diluted

 

$

4,156

 

 

$

3,260

 

 

$

3,177

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares used to compute

   earnings per share — basic

 

 

15,501

 

 

 

53,819

 

 

 

41,936

 

Conversion of Class B to Class A common

   shares outstanding

 

 

53,819

 

 

 

 

 

 

 

Effect of dilutive stock options and RSUs

 

 

2,583

 

 

 

2,583

 

 

 

2,885

 

Weighted average number of shares used

   to compute earnings per

   share — diluted

 

 

71,903

 

 

 

56,402

 

 

 

44,821

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.06

 

 

$

0.06

 

 

$

0.08

 

Diluted

 

$

0.06

 

 

$

0.06

 

 

$

0.07

 

 

The following have been excluded from the computation of basic and diluted earnings per share as their effect would have been anti-dilutive (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Stock options and RSUs

 

 

629

 

 

 

1,068

 

15


 

 

Note 9. Segment Information

We have two reportable segments, REVOLVE and FORWARD, each offering clothing, shoes, accessories, and beauty products available for sale to customers through their respective websites. Our reportable segments have been identified based on how our chief operating decision makers manage our business, make operating decisions, and evaluate operating performance. Our chief operating decision makers are our co-chief executive officers. We evaluate the performance of our reportable segments based on net sales and gross profit. Management does not evaluate the performance of our reportable segments using asset measures.

Revenue from external customers for each group of similar products and services is not reported to our chief operating decision makers. The separate identification for purposes of segment disclosure is impracticable, as it is not readily available and the cost to develop would be excessive. During the three months ended March 31, 2020 and 2019, no customer represented over 10% of net sales. The following table summarizes our net sales and gross profit for each of our reportable segments (in thousands):

 

 

 

Three Months Ended March 31,

 

Net sales

 

2020

 

 

2019

 

REVOLVE

 

$

124,472

 

 

$

122,651

 

FORWARD

 

 

21,603

 

 

 

14,692

 

Total

 

$

146,075

 

 

$

137,343

 

 

Gross profit

 

 

 

 

 

 

 

 

REVOLVE

 

$

62,380

 

 

$

65,263

 

FORWARD

 

 

8,570

 

 

 

5,491

 

Total

 

$

70,950

 

 

$

70,754

 

 

The following table lists net sales by geographic area (in thousands):

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

United States

 

$

120,330

 

 

$

115,405

 

Rest of the world (1)

 

 

25,745

 

 

 

21,938

 

Total

 

$

146,075

 

 

$

137,343

 

 

(1)

No individual country exceeded 10% of total net sales for any period presented.

16


 

Note 10. Fair Value Measurements

We utilize valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible pursuant to the provisions of FASB Accounting Standards Codification, or ASC, Topic 820, Fair Value Measurements and Disclosures, or ASC 820. We determine fair value based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. The carrying amounts for our cash and cash equivalents, accounts receivable, accounts payable, line of credit to the extent borrowings are outstanding and accrued expenses approximate fair value due to their short-term maturities. When considering market participant assumptions in fair value measurements, the following fair value hierarchy as established under ASC 820 distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:

Level 1: Inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2: Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3: Inputs are unobservable inputs for the asset or liability.

We consider all highly liquid investments purchased with a maturity of three months or less to be cash equivalents. Our cash equivalents are comprised of money market funds, which are valued based on Level 1 inputs consisting of quoted prices in active markets.  Our cash equivalents were $75.4 million and $37.6 million as of March 31, 2020 and December 31, 2019, respectively.

Note 11. Detail of Certain Balance Sheet Accounts

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Expected merchandise returns, net

 

$

8,472

 

 

$

12,989

 

Advanced payments on inventory to be delivered from vendors

 

 

3,759

 

 

 

4,605

 

Prepaid insurance

 

 

1,044

 

 

 

1,858

 

Prepaid rent

 

 

383

 

 

 

381

 

Prepaid packaging

 

 

314

 

 

 

393

 

Other

 

 

4,305

 

 

 

3,929

 

Total prepaid expenses and other current assets

 

$

18,277

 

 

$

24,155

 

 

17


 

Accrued Expenses

Accrued expenses consist of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Marketing

 

$

6,353

 

 

$

6,127

 

Salaries and related benefits

 

 

3,322

 

 

 

4,275

 

Selling and distribution

 

 

2,574

 

 

 

3,360

 

Sales taxes

 

 

1,282

 

 

 

3,023

 

Other

 

 

1,921

 

 

 

2,614

 

Total accrued expenses

 

$

15,452

 

 

$

19,399

 

 

Other Current Liabilities

Other current liabilities consist of the following (in thousands):

 

 

 

March 31,

 

 

December 31,

 

 

 

2020

 

 

2019

 

Store credit

 

$

10,618

 

 

$

10,080

 

Gift cards

 

 

1,475

 

 

 

2,133

 

Other

 

 

5,647

 

 

 

4,527

 

Total other current liabilities

 

$

17,740

 

 

$

16,740

 

 

 

 

18


 

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Special Note Regarding Forward-Looking Information

This discussion contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements containing words such as “may,” “believe,” “anticipate,” “expect,” “intend,” “plan,” “project,” “projections,” “business outlook,” “estimate,” or similar expressions constitute forward-looking statements. You should read these statements carefully because they discuss future expectations, contain projections of future results of operations or financial condition or state other “forward-looking” information. These statements relate to our future plans, objectives, expectations, intentions and financial performance and the assumptions that underlie these statements. They include, but are not limited to, statements about risks related to general economic conditions; the impact of the COVID-19 pandemic; our fluctuating operating results; seasonality in our business; our ability to acquire products on reasonable terms; our online business model; demand for our products; our ability to attract customers in a cost effective manner and retain our existing customers; the strength of our brand; competition; fraud; system interruptions; our ability to fulfill orders; our ability to retain existing vendors and brands and to attract new vendors and brands; our ability to obtain and maintain differentiated high-quality products from appropriate brands in sufficient quantities from vendors; our ability to obtain and maintain sufficient inventory at prices that will make our business model profitable, and of a quality that will continue to retain existing customers and attract new customers; and our ability to effectively engage in predictive analytics.

Our actual results may differ materially from those contained in or implied by any forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and elsewhere in this report, including those factors discussed in Part II, Item 1A (Risk Factors).

In light of the significant uncertainties and risks inherent in these forward-looking statements, you should not regard these statements as a representation or warranty by us or anyone else that we will achieve our objectives and plans in any specified time frame, or at all, or as predictions of future events. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Overview

REVOLVE is the next-generation fashion retailer for Millennial and Generation Z consumers. As a trusted, premium lifestyle brand, and a go-to online source for discovery and inspiration, we deliver an engaging customer experience from a vast yet curated offering of apparel, footwear, accessories and beauty styles. Our dynamic platform connects a deeply engaged community of millions of consumers, thousands of global fashion influencers, and hundreds of emerging, established and owned brands. Through 17 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 were founded in 2003 by our co-CEOs, Michael Mente and Mike Karanikolas. We sell merchandise through two differentiated segments, REVOLVE and FORWARD, that leverage one platform. Through REVOLVE we offer a highly-curated assortment of full-price premium apparel and footwear, accessories and beauty products from emerging, established and owned brands.  Through FORWARD we offer an assortment of iconic and emerging luxury brands. We believe that FORWARD provides our customer with a destination for luxury products as her spending power increases and her desire for fashion and inspiration remains central to her self-expression.

We believe our product mix reflects the desires of the next-generation consumer and we optimize this mix through the identification and incubation of emerging brands and continued development of our owned brand portfolio. The focus on emerging and owned brands minimizes our assortment overlap with other retailers, supporting marketing efficiency, conversion and sales at full price.

19


 

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 17 years of data to efficiently manage our merchandising, marketing, product development, sourcing and pricing decisions. Our platform works seamlessly across devices and analyzes browsing and purchasing patterns and preferences to help us make purchasing decisions, which when combined with the small initial orders for new products, allows us to manage inventory and fashion risk. We have also invested in our creative capabilities to produce high-quality visual merchandising that caters to our customers by focusing on style with a distinct point of view rather than on individual products. The combination of our online sales platform and our in-house creative photography allows us to showcase brands in a distinctive and compelling manner.

We are pioneers of social media and influencer marketing, using social channels and cultural events designed to deliver authentic and aspirational, yet attainable, experiences to attract and retain Millennial consumers, and these efforts have 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. 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 retargeting, paid search/product listing ads, affiliate marketing, paid social, personalized email marketing and mobile “push” communications through our app.

We have developed an efficient logistics infrastructure, which allows us to provide free express shipping and free 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. In 2019, we expanded our capacity by occupying a new centralized warehouse facility, which we believe will support growth beyond 2023.

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 express shipping, free returns and all-inclusive pricing, for customers in the United Kingdom and the European Union in May 2018, in Australia in late 2018, and in New Zealand and Singapore in January 2020. In addition to expanding our global footprint of influencers, we are gradually increasing our level of investment in international expansion, by focusing on Europe, Australia and Canada as well as Asia Pacific over the long term. We will continue to invest in and develop international markets while maintaining our focus on the core U.S. market.

Recent Developments

 

The COVID-19 pandemic has had a materially negative impact on our net sales starting in the second week of March coincident with the escalation of the COVID-19 outbreak in the United States and elsewhere.  After increasing more than 20% year-over-year in January and February 2020 on a combined basis, net sales subsequently declined significantly year-over-year.  We also experienced weakness in our key operating metrics and headwinds in the factors affecting our performance which has continued into the second quarter. For additional information see the section captioned “—Key Operating and Financial Metrics” and “—Factors Affecting Our Performance.”

 

As a result, we took several additional measures in response, including:

 

 

reducing executive salaries such that our co-Chief Executive Officers’ salaries were reduced by more than 99% to $1 and our Chief Operating Officer and Chief Financial Officers’ salaries were reduced by 50%.

 

reducing salaries for senior management by 35% to 45%;

 

reducing corporate staff overhead through furloughs or layoffs of approximately 40% of the existing corporate headcount;

 

a combination of salary and wage reductions for the remainder of our corporate employees;

 

reducing fulfillment, selling and distribution costs through a reduction in hours;

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lowering operating costs and eliminating non-essential items;

 

reducing capital expenditures by delaying or cancelling select projects;

 

reducing planned inventory receipts by cancelling or delaying orders; and

 

extending payment terms for both merchandise and non-merchandise vendor invoices.

Our facilities and employees are based in Los Angeles County where the government has imposed restrictions designed to slow the spread of COVID-19. The vast majority of our corporate employees are working from home and we have implemented measures, such as personal protective equipment, temperature checks and social distancing, to protect the employees that preform certain limited functions, including those in our fulfillment center, that cannot be performed at home. Government restrictions on travel and social distancing have caused the postponement or cancellation of several REVOLVE brand marketing events including the #REVOLVEfestival, our ongoing #REVOLVEaroundtheworld series of activations as well as other social activities that drove demand for many of our products. As of the date of this report, it is unclear when and to what extent such restrictions will be lifted, whether they will be reimposed if temporarily lifted or if the COVID-19 pandemic will spur long-term changes in consumer behavior.

Our supply chain has also been impacted by COVID-19. Initially, the impact was largely isolated to production and shipping delays in China, but as COVID-19 spread worldwide the impact to our supply chain broadened. The spread of COVID-19 has negatively impacted consumer demand, which has contributed to our ability to manage inventory receipts to reduced levels. Through our efforts to provide a safe workplace for those employees in our fulfillment center, we have been able to meet fulfillment and shipping standards and have not experienced significant delays from our third-party shipping providers. However, if further restrictions are placed on our operations, if there is an outbreak in our fulfillment center or if our third-party shipping providers fail to meet their service obligations, our customers’ orders and demand for our product may further decline and our brand and reputation may be damaged.

While we expect the effects of the pandemic and the related responses to negatively impact our operating results, cash flows and financial position, the duration and severity of pandemic is unpredictable and we cannot reasonably estimate the extent to which our business will be affected.

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.

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

 

 

(in thousands, except average order value and percentages)