Prospectus Summary
PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our Class A common stock. Before you decide to invest in our Class A common stock, you should read the entire prospectus carefully, including the section entitled “Risk Factors” and the consolidated financial statements and related notes included elsewhere in this prospectus. In this prospectus, unless otherwise stated or the context otherwise indicates, references to “REVOLVE,” “we,” “us,” “our” and similar references refer, prior to the Corporate Conversion discussed elsewhere in this prospectus, to Advance Holdings, LLC and its subsidiaries taken as a whole, and after the Corporate Conversion, to Revolve Group, Inc. and its subsidiaries taken as a whole.REVOLVE GROUP, INC.
Overview
REVOLVE is the next-generation fashion retailer for millennial 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 totaling over 45,000 apparel, footwear, accessories and beauty styles. Our dynamic platform connects a deeply engaged community of millions of consumers, thousands of global fashion influencers, and more than 500 emerging, established and owned brands. Through 15 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.
REVOLVE was founded in 2003, with the vision of leveraging digital channels and technology to transform the shopping experience. We believed that traditional retail was either too mass or too limited, struggled to consistently provide on-trend merchandise, and was failing to connect with younger consumers. REVOLVE was created to offer a scaled, one-stop destination for youthful, aspirational consumers. We believe that our model, which is more targeted than department stores or mass market online retailers, and provides a greater selection than specialty retailers, allows us to more effectively serve consumers.
To improve on the merchandise offerings from traditional retail, we have built a custom, proprietary technology platform to manage nearly all aspects of our business, with a particular focus on developing sophisticated and highly automated inventory management, pricing, and trend-forecasting algorithms. Our proprietary technology leverages data from a vast net of hundreds of thousands of styles, up to 60 attributes per style, and millions of customer interactions, creating a strategic asset of hundreds of millions of data points. We have complemented these efforts with an organization built from the ground-up to make decisions in a data-first, customer centric way. Together, this enables a “read and react” merchandise approach; we make shallow initial buys, then use our proprietary technology to identify and re-order strong sellers, turning the fashion cycle from a predictive art to a data-driven science. This approach facilitates constant newness, with over 1,000 new styles launched per week on average, while mitigating fashion and inventory risk. As a result, in 2017, approximately 75% of our net sales were at full price, which we define as sales at not less than 95% of the full retail price.
Our powerful brand and innovative marketing strategy connects with the increasingly important millennial demographic. These consumers, who came of age in a hyper-connected, digital world, have unique shopping preferences, spend their time in different mediums, and respond to a different style of messaging than generations past. While our marketing competencies extend well beyond social media, we are recognized as a pioneer and a leader in social media and influencer marketing. We have built a community of over 2,500 influencers and brand partners, including many of the most influential social media celebrities in the world, whom we track and manage using our proprietary internal technology platform. Through our deep relationships, history of mutually beneficial partnerships, buzzworthy social events, and recognized leadership position, we believe we have become a partner of choice for influencers worldwide, leading to a significant competitive advantage. These marketing efforts deliver authentic, aspirational experiences and lifestyle content that drive loyalty and engagement. We pair this emotional brand marketing with sophisticated, data-driven performance marketing to further drive profitable customer acquisition, retention and lifetime value.
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Our data-driven merchandising and innovative marketing competencies enable a powerful owned brand strategy that drives consumer demand, increases control of our supply chain, and expands profit margins. We have built a portfolio of 19 owned brands, each crafted with unique attributes and supported by independent marketing investments. We believe our consumers perceive these as highly desirable, independent brands, rather than private labels or house brands. As a result, during the 12 months ended June 30, 2018, our owned brands represented eight out of our top 10 brands, 27% of the REVOLVE segment’s net sales, and three out of the top five brand search terms on external search engines that led to a purchase. Owned brands are significantly more productive on a units sold per style basis, have higher average unit revenue than third-party brands, and generate meaningfully higher gross margins as compared to third-party brands.
We founded REVOLVE with the goal of transforming the retail shopping experience. All of this is resonating with our target consumers, as evidenced by our strong customer loyalty and revenue retention, and our rapidly growing revenue and profits. In 2017, we:
In 2017, we reported $399.6 million in net sales, $5.0 million in net income and $28.4 million in Adjusted EBITDA, representing growth of 28.0%, 127.5% and 198.6%, respectively from 2016. For the six months ended June 30, 2018, we reported $245.1 million in net sales, $15.8 million in net income and $24.3 million in Adjusted EBITDA, representing growth of 23.7%, 179.9% and 79.8%, respectively, from the six months ended June 30, 2017. Adjusted EBITDA is a non-GAAP measure. For further information about how we calculate Adjusted EBITDA, limitations of its use and a reconciliation of Adjusted EBITDA to net income, see “Selected Consolidated Financial and Other Data—Other Financial and Operating Data.”
Relative to our scale, we are highly efficient and require modest capital expenditures to support our operations. We have raised only $15.0 million in primary outside equity capital to date and have been profitable on a taxable income basis for 14 out of our 15-year operating history.
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Our Industry
Large and Growing Addressable Market
We participate in the large and growing apparel and footwear, accessories and beauty sectors. According to Euromonitor International, Ltd., a market research firm:
We believe the key drivers shaping growth within these markets include favorable demographic trends, constant product newness and the proliferation of emerging brands, as well as an increased focus on fashion and beauty as a reflection of self-expression.
Significant Growth in Digital Channels
Consumers are increasingly using digital channels to make purchases, and as a result, the growth of online sales has outpaced that of traditional brick-and-mortar channels. According to Euromonitor:
Mobile sales in particular have rapidly increased as consumers leverage their ability to discover, browse and purchase anytime from anywhere through their smartphones. According to the State of the U.S. Online Retail Economy (Q1 2018) report by comScore, Inc., an Internet analytics company:
Media Consumption and Shopping Behaviors of Next-Generation Consumers
Consumers, especially millennials (born between 1982 and 2000) and Generation Z (born after 2000), are spending more and more time on digital media and less time on more traditional forms of print media.
The nature of consumer engagement with brands and retailers is evolving in tandem with the transition to digital channels. Next-generation consumers often aspire to express their individual style through fashion and beauty. More than older generations of consumers, they frequently seek an emotional connection with brands that are unique and on-trend and resonate with their values. They look to social media and digital content from influencers as their source of inspiration and discovery and to inform their purchasing decisions. We believe that traditional retailers, with their -4- emphasis on appealing to broad demographic ranges, have struggled to create personal connections with these younger consumers.
Influencers have an outsized impact on the purchasing behaviors of next-generation consumers. Influencers maintain a social media presence on platforms such as Instagram or YouTube, and have thousands or even millions of followers who view, comment, like, and share their fashion and lifestyle posts. Influencers can have a more powerful impact than traditional advertising methods because they bring their followers into their daily lives and share their personal tastes and preferences in an authentic way.
This evolution in consumer behavior accompanies a significant transition of purchasing power to the millennial generation. According to the 2015 U.S. Census Bureau, millennials accounted for more than 25% of the U.S. population, exceeding the number of baby boomers and making it the largest percentage of the workforce in the United States. Further, according to the U.S. Bureau of Labor Statics, people born after 1981, including millennials and Generation Z, accounted for approximately $1.5 trillion or 20% of the nation’s total consumer expenditure in 2016. We expect this number to significantly increase as millennials enter their peak earning years and an increasing percentage of Generation Z joins the workforce.
Next-Generation Consumers are Underserved by Retail and eCommerce
Although the apparel and footwear, accessories and beauty sectors are large, next-generation consumers are currently underserved by traditional brick-and-mortar and online retailers. Department stores and national retailers try to serve a broad demographic with ubiquitous brands and are slow to react to changing trends. Specialty boutiques, while highly curated, often offer a narrow assortment and are limited in their reach. Online retailers tend to deliver a purely transactional customer experience, with limited original fashion content and style advice to facilitate inspiration and discovery. As a fashion authority that is deeply connected to next-generation consumers, we are poised to capitalize on this sizeable yet underserved market.
Competitive Strengths
Leading Millennial Destination for Online Fashion. We believe we are the leading U.S. online destination targeted towards millennial consumers seeking premium fashion. In 2017, we generated $399.6 million in net sales, served over 840,000 active customers, and delivered over 110,000 unique styles, which we believe makes us one of the largest standalone fashion eCommerce businesses in the United States. Our average apparel order value was $304 in 2017, which is reflective of our focus on premium merchandise and our differentiation from mass market or value-based retailers. Our business is specifically targeted towards millennial consumers, who are substantially younger than the customers of legacy premium department stores, which have reported average customer age of over 42. We believe this more specific targeting results in a better experience for our customer, leading to out-sized growth rates, strong customer loyalty, and increases in market share over time. During the 12 months ended June 30, 2018, we generated, on average, 8.4 million unique visitors per month, compared to 6.6 million unique visitors per month during the 12 months ended June 30, 2017, reflecting the increasing appeal of our site. A unique visitor is anyone who visits any of our websites and mobile applications at least once during the month, not counting repeat visits from the same visitor, as tracked by internal and third-party clickstream tracking tools. We further believe our scaled leadership position has strong network effects among our customers, brands, and influencers, as we are able to provide increasing value to each of those constituents as our scale and leadership position increases.
Data-driven Merchandising Model. Our disciplined, data-driven merchandising approach allows us to offer a broad, yet curated assortment of on-trend apparel and accessories while minimizing fashion and inventory risk. We believe our approach turns the fashion buying cycle from a predictive art into a data-driven science, thus maximizing our ability to react quickly to changing trends. We employ a “read and react” model that combines qualitative and quantitative decision-making to identify trends, curate assortments, facilitate our merchandise planning and re-order processes, and manage pricing. Our technology enables us to automate the rapid identification of new trends and emerging brands, allowing us to offer a vast and diversified product assortment that does not rely on any given trend or style and has minimal overlap with other retailers. Furthermore, by introducing products daily in limited quantities, we -5- create a sense of urgency for our customers. As a result, in 2017, sales of products at full retail price represented approximately 75% of total net sales.
The REVOLVE Brand. Since inception, we have worked to build a deep connection with our community of youthful, aspirational consumers. Our consumers frequently engage with our websites and mobile applications, which we collectively refer to as our sites, coming to us for our inspiring content and styling, and our distinct and constantly changing assortment of on-trend fashion. REVOLVE is a brand in its own right, commanding a premium positioning, strong consumer affinity and reputation as a key fashion influencer for the millennial consumer. In 2017, approximately 55% of net sales came from customers that visited our sites at least twice each week. As our scale grows, our brand value is increasingly becoming a significant point of differentiation with customers, influencers and third-party brands.
Innovative Marketing Approach. REVOLVE’s marketing approach is integrated across all parts of the customer funnel and allows us to efficiently increase brand awareness, promote customer acquisition, encourage retention and maximize lifetime customer value. We have a history of being a leader in innovative digital and community-driven marketing and we believe have positioned ourselves as a preferred partner for influencers and traditional marketing providers. With over 5 million Instagram followers as of June 30, 2018 across REVOLVE, FORWARD and our owned brands, we continuously provide our customers with aspirational and engaging content and amplify our message in a highly efficient manner through our network of over 2,500 influencers and buzzworthy social events. In the 12 months ended June 30, 2018, we drove 54% of traffic for REVOLVE from free and low-cost sources, as measured by the visitors that landed on the REVOLVE website or our mobile applications directly, via email marketing links, or though paid branded search terms and organic search results (regardless of whether a purchase was made). Our brand marketing reach has increased rapidly, particularly surrounding events such as #REVOLVEfestival. We pair our social media and community-driven brand marketing with sophisticated performance marketing efforts, including retargeting, paid search/product listing ads, affiliate marketing, paid social, search engine optimization, personalized email marketing and mobile “push” communications through our app, which together support our highly attractive customer acquisition and retention metrics.
Deep Connection with Our Loyal Customers. We understand the next-generation consumer: who she is, who she follows for fashion and lifestyle inspiration, how she communicates with friends, how to speak with her and what she wants to wear. We engage with her through social media, events, press and other digital channels, generating multiple touchpoints in a way that we believe traditional retailers and brands do not. We integrate our marketing content with our product curation, visual merchandising, and editorial content, using our “Hot List,” daily product stories, and head-to-toe style suggestions to create an inspirational user experience and enhance our reputation as a fashion discovery destination. We enhance our customer experience and encourage our customers to use the home as a dressing room through exceptional customer service and a no-hassle free shipping and returns policy, which we have offered since our launch in 2003, making us one of the pioneers of free returns. She rewards our efforts with her loyalty, as demonstrated by our strong customer economics. Our low customer acquisition cost, strong net revenue retention rates and high average order values drive attractive customer lifetime value and immediate payback, with the average contribution margin from a customer’s initial order exceeding our average customer acquisition cost.
Unique Owned Brand Platform. We leverage our data-driven merchandising model to optimize our product assortment through the development of new owned brands and additional styles within our existing portfolio of owned brands. Our team develops brands that embody a unique aesthetic and authentic point of view, using our proprietary data analytics to identify trends and assortment gaps and inform design and merchandising decisions, and supporting them with robust brand marketing. Unlike traditional private label, our owned brands command pricing similar to third-party brands due to their brand equity. Further, the owned brand portfolio enhances loyalty, given that the substantial majority of our owned brand styles are available only on the REVOLVE site. We bring new products to market quickly by working with a flexible network of manufacturing partners that enable us to order in small initial order quantities and employ our “read and react” model. The broad reach of our pioneering social media–driven marketing and events generate instant consumer appeal and credibility for our owned brands, expanding our reach and driving incremental traffic to our sites. The higher margin profile of our owned brands provides us with the opportunity to expand profitability and further invest in our business.
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Proprietary, Scalable Technology and Data Analytics Platform. Our proprietary, scalable technology and data analytics platform efficiently and seamlessly manages our merchandising, marketing, product development, sourcing, and pricing decisions. We have a proven history of leveraging our technology platform to flexibly expand capacity in a capital-efficient manner. We leverage a strategic asset of hundreds of millions of data points, drawing from 15 years of data across hundreds of thousands of styles, up to 60 attributes per style, and millions of customer interactions. This data is leveraged throughout our operations to provide an optimized product offering, tailor our marketing efforts and continually enhance the experience on our sites. Our team of engineers and data scientists continuously innovates to improve our platform and business processes to best serve our customers.
Founder-led Management and Innovative Culture. Our co-CEOs, Michael and Mike, founded REVOLVE with the goal to transform the apparel shopping experience by leveraging data, innovative business strategies and the emerging eCommerce channel. Our founders’ inspiration to create an innovative and data-driven culture continues to influence everything we do. Our company culture and team mirror the attributes of our core customer; we are socially engaged, digital-first, high energy, results driven and collaborative. We hire people who are passionate about fashion, technology and entrepreneurialism, and who are not burdened by conventional notions of traditional retail. We encourage creativity and focus on constant improvement, and we give our employees the opportunity to make an immediate contribution to our business. This culture, together with our singular focus on customer experience and our commitment to maximizing value over the long term, gives us an edge to anticipate and react to the evolving shopping behavior of our consumers.
Growth Strategies
Continue to Acquire New Customers. We generate a significant return on our customer acquisition investments. The contribution margin from a customer’s initial order exceeds our customer acquisition cost, on average, and repeat purchase behavior generates an attractive ratio of customer lifetime value to customer acquisition cost. We believe there is significant room to expand our customer base and thus will continue to invest in attracting new customers to the REVOLVE community and convert them into active customers. We believe we are less than 2% penetrated in our core demographic of 18- to 44- year old women in the United States, based on the number of active customers and U.S. census data, with younger and international consumers representing a significant additional opportunity. We believe we are well-positioned to convert younger consumers into active customers and capture more of their wallet share as millennials enter their peak earning years and Generation Z enter the workforce.
Continue to Increase Customer Loyalty and Wallet Share. We intend to deepen our existing customer relationships to improve our already strong revenue retention and increase our wallet share. We are enhancing our customer experience by continuing to refine our customer segmentation, increasing personalization, launching progressive web apps for our mobile site, and providing additional opportunities to pre-order coveted products. Additionally, we are building a more holistic offering by increasing our footwear and accessories assortment and expanding our nascent loyalty and preferred customer programs for high-value consumers. Our preferred customer program sends high-value customers products specifically curated for her by our stylists. The loyalty program affords these customers additional benefits such as early access to new styles and invitations to exclusive REVOLVE events. Each of these initiatives is designed to increase revenue per customer and take advantage of the rising spending power of the next generation of consumers.