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As filed with the Securities and Exchange Commission on May 28, 2019

Registration No. 333-227614

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

AMENDMENT NO. 5 TO

FORM S-1

REGISTRATION STATEMENT

Under

The Securities Act of 1933

 

 

REVOLVE GROUP, LLC

to be converted as described herein into a corporation named

REVOLVE GROUP, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   5961   46-1640160

(State or other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

16800 Edwards Road

Cerritos, California 90703

(562) 677-9480

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Michael Karanikolas

Michael Mente

16800 Edwards Road

Cerritos, California 90703

(562) 677-9480

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Michael Nordtvedt

Katherine H. Ku

Wilson Sonsini Goodrich & Rosati

Professional Corporation

633 West Fifth Street, Suite 1550

Los Angeles, California 90071

(323) 210-2900

 

Jesse Timmermans

Jodi Lumsdaine Chapin

Revolve Group, Inc.

16800 Edwards Road

Cerritos, California 90703

(562) 677-9480

 

Thomas Holden

Ropes & Gray LLP

Three Embarcadero Center

San Francisco, California 94111

(415) 315-6300

Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after the effective date of this Registration Statement.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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. (Check one):

 

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 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class

of Securities to be Registered

 

Amount

to be

Registered(1)

 

Proposed

Maximum

Offering

Price per Share

 

Proposed

Maximum
Aggregate

Offering Price(1)

 

Amount of

Registration Fee(2)

Class A Common Stock, par value $0.001

  13,529,411   $18.00   $243,529,398   $29,516

 

 

(1)

Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(a) under the Securities Act of 1933, as amended. Includes the offering price of any additional shares that the underwriters have the option to purchase.

(2)

The Registrant previously paid $12,450 of this amount in connection with the prior filings of this registration statement.

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the U.S. Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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EXPLANATORY NOTE

Revolve Group, LLC, the registrant whose name appears on the cover of this registration statement, is a Delaware limited liability company. Prior to the effectiveness of this registration statement, Revolve Group, LLC will convert into a Delaware corporation pursuant to a statutory conversion and change its name to Revolve Group, Inc. as described in the section captioned “Corporate Conversion.” As a result of the Corporate Conversion, the members of Revolve Group, LLC will become holders of shares of Class B common stock of Revolve Group, Inc. Except as disclosed in the prospectus, the consolidated financial statements and selected historical consolidated financial data and other financial information included in this registration statement are those of Revolve Group, LLC and its subsidiaries and do not give effect to the Corporate Conversion. Shares of the Class A common stock of Revolve Group, Inc. are being offered by the prospectus included in this registration statement.


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

PRELIMINARY PROSPECTUS (Subject to Completion)

Issued May 28, 2019

11,764,706 SHARES

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CLASS A COMMON STOCK

 

 

This is an initial public offering of shares of Class A common stock of Revolve Group, Inc. We are offering 2,941,176 shares of our Class A common stock. The selling stockholders identified in this prospectus are offering an additional 8,823,530 shares of our Class A common stock. We will not receive any proceeds from the sale of shares of Class A common stock by the selling stockholders.

Prior to this offering, there has been no public market for shares of our Class A common stock. We anticipate that the initial public offering price will be between $16 and $18 per share.

We have been approved to list our Class A common stock on the New York Stock Exchange under the symbol “RVLV.”

Following this offering, we will have two classes of common stock, Class A common stock and Class B common stock. The rights of the holders of Class A common stock and Class B common stock will be identical, except for voting and conversion rights. Each share of Class A common stock will be entitled to one vote per share. Each share of Class B common stock will be entitled to ten votes per share and is convertible at any time into one share of Class A common stock. Following this offering, outstanding shares of Class B common stock will represent approximately 98% of the voting power of our outstanding capital stock, and outstanding shares of Class B common stock held by MMMK Development, Inc., an entity controlled by our co-chief executive officers, will represent approximately 67% of the voting power of our outstanding capital stock. Following this offering, we will be a “controlled company” within the meaning of the corporate governance rules of the New York Stock Exchange. See “Management—Controlled Company Exemption.”

 

 

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012. Investing in our Class A common stock involves risks. See “Risk Factors” beginning on page 16.

 

 

 

PRICE $             A SHARE

 

 

 

 

      

Per Share

      

Total

 

Public Offering Price

     $                   $             

Underwriting Discount

     $                       $                 

Proceeds to Revolve Group, Inc. (before expenses)

     $                           $                     

Proceeds to the Selling Stockholders (before expenses)

     $                              $                        

At our request, the underwriters have reserved up to 5% of the shares of Class A common stock offered by this prospectus for sale, at the initial public offering price, to certain individuals associated with us. See section titled “Underwriters—Directed Share Program.”

We and the selling stockholders have granted the underwriters an option for a period of 30 days to purchase an additional 1,764,705 shares of our Class A common stock at the initial public offering price less the underwriting discount to cover over-allotments.

The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The underwriters expect to deliver the shares of Class A common stock to purchasers on                , 2019.

 

 

 

MORGAN STANLEY   CREDIT SUISSE   BofA MERRILL LYNCH

 

BARCLAYS       JEFFERIES

 

COWEN   GUGGENHEIM SECURITIES   RAYMOND JAMES   WILLIAM BLAIR

                    , 2019

 


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You should rely only on the information contained in this prospectus and any free writing prospectus prepared by or on behalf of us or to which we have referred you. Neither we, the selling stockholders nor any of the underwriters have authorized anyone to provide you with information that is different. We and the selling stockholders are offering to sell shares of our Class A common stock, and seeking offers to buy shares of our Class A common stock, only in jurisdictions where such offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our Class A common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

Until and including                 , 25 days after the date of this prospectus, all dealers that buy, sell or trade our Class A common stock, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.

For investors outside of the United States: neither we, the selling stockholders nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus.

We use REVOLVE, the REVOLVE logo, FORWARD, the FORWARD logo, FORWARD BY ELYSE WALKER, the FORWARD BY ELYSE WALKER logo, superdown and other marks as trademarks in the United States and other countries and territories. This prospectus contains references to our trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus, including logos, artwork and other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate in any way that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other entities’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other entity.

 

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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 Revolve Group, 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 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 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 16 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 2018, approximately 79% of our net sales were at full price, which we define as sales at not less than 95% of the full retail price, an increase from 75% in 2017.

Our powerful brand and innovative marketing strategy connects with the increasingly important Millennial and Generation Z demographics. 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



 

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over 3,500 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.

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 21 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 March 31, 2019, our owned brands represented eight out of our top 10 brands, 32.6% of the REVOLVE segment’s net sales, and four 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 2018, we:

 

   

had an average of 9.4 million unique visitors per month;

 

   

delivered approximately 79% of net sales at full price;

 

   

retained 89% of net sales from the prior year’s customers;

 

   

had an average order value of $279; and

 

   

delivered gross margin of 53.2%.

In 2018, we reported $498.7 million in net sales, $30.6 million in net income and $46.5 million in Adjusted EBITDA, representing growth of 24.8%, 512.8% and 63.7%, respectively, from 2017. For the three months ended March 31, 2019, we reported $137.3 million in net sales, $5.0 million in net income and $8.5 million in Adjusted EBITDA, representing growth of 21.2%, and decreases of 6.9% and 1.7%, respectively, from the three months ended March 31, 2018. 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.”



 

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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 15 out of our 16-year operating history.

 

Net Sales ($MM)   Gross Margin   Net Income ($MM)  

Adjusted EBITDA ($MM)

Adjusted EBITDA Margin (%)

 

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       LOGO        LOGO   LOGO

 

(1)

Twelve months ended March 31, 2019

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:

 

   

The global apparel and footwear, accessories and beauty market was $2.9 trillion in 2018 and is expected to reach $3.4 trillion in 2021, growing at a compound annual growth rate, or CAGR, of 5.3%.

 

   

The U.S. apparel and footwear, accessories and beauty market was $564 billion in 2018 and is expected to reach $622 billion in 2021, growing at a CAGR of 3.3%.

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:

 

   

The global online apparel and footwear, accessories and beauty market was $520 billion in 2018 and is expected to reach $740 billion in 2021, growing at a CAGR of 12.5%.

 

   

The U.S. online apparel and footwear, accessories and beauty market was $117 billion in 2018 and is expected to reach $170 billion in 2021, growing at a CAGR of 13.2%.

 

   

Online penetration in apparel and footwear, accessories and beauty has increased from 4.1% to 18.0% globally and 6.9% to 20.8% in the United States from 2009 to 2018. Online penetration is expected to reach 22.0% globally and 27.4% in the United States by 2021.

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



 

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Economy (Q1 2018) report by comScore, Inc., an Internet analytics company:

 

   

Mobile commerce discretionary spending grew 40% year-over-year for the fourth quarter of 2017.

 

   

Mobile commerce represented 24% of U.S. digital commerce dollars for the fourth quarter of 2017, compared to 13% for the fourth quarter of 2014.

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 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 Statistics, people born after 1981, including Millennials and Generation Z, accounted for approximately $1.7 trillion or 22% of the nation’s total consumer expenditure in 2017. 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 2018, we generated $498.7 million in net sales, served approximately 1,175,000 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 $279 in 2018, 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



 

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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 March 31, 2019, we generated, on average, 9.8 million unique visitors per month, compared to 7.8 million unique visitors per month during the 12 months ended March 31, 2018, 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 create a sense of urgency for our customers. As a result, in 2018, sales of products at full retail price represented approximately 79% 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 2018, approximately 57% 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 5.5 million Instagram followers as of March 31, 2019 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 3,500 influencers and buzzworthy social events. In the 12 months ended March 31, 2019, we drove 56% of traffic for REVOLVE from free and low-cost sources, as measured by the visitors that landed on the REVOLVE website or mobile application 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,



 

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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 rapid payback, with the average contribution margin from a customer exceeding our average customer acquisition cost within a short timeframe.

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.

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 16 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



 

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invest in attracting new customers to the REVOLVE community and convert them into active customers. We believe we are less than 3% 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.

Grow Sales of Owned Brands. We intend to continue optimizing our assortment to drive revenue and profitability growth by introducing new owned brands and expanding our current owned brands into additional styles and categories. The percentage of the REVOLVE segment’s net sales represented by owned brands has almost doubled since 2017, reaching 35.8% for the three months ended March 31, 2019. Owned brands are some of the most sought-after items on our platform. During the 12 months ended March 31, 2019, four of the top five brand search terms on external search engines that led to a purchase were our owned brands. Owned brands are significantly more productive on a unit 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.

Grow International Sales. We intend to leverage the global reach of the REVOLVE brand and our influencer network to accelerate growth outside of the United States. In 2018, net sales shipped to customers internationally represented 17.9% of net sales while over 45% of our social media followers across Instagram and Facebook were located outside of the United States. In May 2018, we began offering a more localized shopping experience to customers in the United Kingdom and the European Union by offering prices inclusive of regional taxes and duties and improving our distribution and fulfillment capabilities to simplify the ordering and return process. We continue to expand this localized shopping experience to customers in other countries and regions, including Australia in late 2018. While still early, this improved experience is resonating with our customers in these regions and the initial financial results are positive. We intend to increase our investment in Europe, Australia, Canada and, over the longer term, broader Asia Pacific, to bring the full power of our platform to consumers globally. In addition, we intend to expand the global footprint of our influencer network to better connect with customers outside our core U.S. market.

Enhance and Broaden Our Offering. We intend to leverage our community and influencer network and integrated, data-driven operating model to expand our share of adjacent markets through a strategic mix of third-party and owned brands. Areas of potential expansion are:

 

   

Luxury. We plan to profitably scale our FORWARD segment over time, attracting new customers while cross-selling to current REVOLVE customers as their spending power increases.

 

   

Beauty. Launched in late 2016, beauty represents one of our fastest growing categories and we plan to further increase our assortment.

 

   

Lower Price Point. With the launch of superdown, a standalone lower price point site, in March 2019, we believe we can capture additional customers and wallet share through an expanded lower price point offering.



 

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Men’s. We believe the Millennial men’s market is underserved and represents a long-term opportunity.

We may also pursue targeted acquisitions that will allow us to enhance our offering, enter new geographies or augment existing capabilities.

Continue to Innovate. We are innovating across our user interface, technology platform, supply chain and distribution capabilities to improve service levels, further enhance and personalize customer experience, and reduce lead times for our owned brands portfolio. We intend to continue to leverage our technology and owned brand platform to further vertically integrate our operations. We also intend to leverage advancements in artificial intelligence and machine learning to refine our merchandising and marketing capabilities, including visual search capabilities and further size and fit optimization.

Summary Risk Factors

Participating in this offering involves substantial risk. Our ability to execute our strategy is also subject to certain risks. The risks described under the heading “Risk Factors” included elsewhere in this prospectus may cause us not to realize the full benefits of our strengths or may cause us to be unable to successfully execute all or part of our strategy. Some of the most significant challenges and risks include the following:

 

   

If we fail to effectively manage our growth, our business, financial condition and operating results could be harmed; our recent growth rates may not be sustainable or indicative of our future growth.

 

   

If we are unable to anticipate and respond to changing customer preferences and shifts in fashion and industry trends in a timely manner, our business, financial condition and operating results could be harmed.

 

   

Our business depends on our ability to maintain a strong community of brands, engaged customers and influencers. We may not be able to maintain and enhance our existing brand community if we receive customer complaints, negative publicity or otherwise fail to live up to consumers’ expectations, which could materially adversely affect our business, operating results and growth prospects.

 

   

Our industry is highly competitive and if we do not compete effectively, our operating results could be adversely affected.

 

   

We may be unable to accurately forecast net sales and appropriately plan our expenses in the future. Our quarterly operating results may fluctuate, which could cause our stock price to decline.

 

   

Failure to comply with federal, state and international laws and regulations and our contractual obligations relating to privacy, data protection and consumer protection, or the expansion of current or the enactment of new laws or regulations relating to privacy, data protection and consumer protection, could harm our reputation or adversely affect our business and our financial condition.

 

   

We have identified a material weakness in our internal control over financial reporting, and if we have failed to remediate this weakness and maintain proper and effective internal controls, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results, our ability to operate our business and investors’ views of us.

 

   

If we fail to acquire new customers, or fail to do so in a cost-effective manner, we may not be able to increase net sales per active customer or achieve profitability.

 

   

If we fail to retain existing customers, or fail to maintain average order value levels, we may not be able to maintain our revenue base and margins, which would have a material adverse effect on our business and operating results.

 

   

We purchase inventory in anticipation of sales, and if we are unable to manage our inventory effectively, our operating results could be adversely affected.



 

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We rely on consumer discretionary spending, which may be adversely affected by economic downturns and other macroeconomic conditions or trends.

 

   

Our inability to develop and introduce new merchandise offerings in a timely and cost-effective manner may damage our business, financial condition and operating results.

 

   

The dual class structure of our common stock will have the effect of concentrating voting control with our executive officers, directors and their affiliates, and it may depress the trading price of our Class A common stock.

Before you invest in our Class A common stock, you should carefully consider all the information in this prospectus, including matters set forth in the section captioned “Risk Factors.”

Corporate Conversion

We currently operate as a Delaware limited liability company under the name Revolve Group, LLC. Prior to the effectiveness of the registration statement of which this prospectus forms a part, Revolve Group, LLC will convert into a Delaware corporation pursuant to a statutory conversion and change its name to Revolve Group, Inc. In this prospectus, we refer to all of the transactions related to our conversion to a corporation described above as the Corporate Conversion.

In conjunction with the Corporate Conversion, all of the outstanding Class T and Class A Units of Revolve Group, LLC will be converted into an aggregate of 67,889,013 shares of our Class B common stock. The holders of Class T Units will first receive 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 will be allocated pro rata to the Class T and Class A unitholders, based on the number of units held by each holder.

Following the conversion of the Class T and Class A Units into shares of our Class B common stock, we will use $40.8 million of the net proceeds from this offering to repurchase an aggregate of 2,400,960 shares of Class B common stock held by TSG Eminent Holdings, L.P. and certain of its affiliates, or TSG, and Capretto, LLC, or Capretto.

In connection with the Corporate Conversion, Revolve Group, Inc. will continue to hold all property and assets of Revolve Group, LLC and will assume all of the debts and obligations of Revolve Group, LLC. Revolve Group, Inc. will be governed by a certificate of incorporation filed with the Delaware Secretary of State and bylaws, the material portions of which are described in the section captioned “Description of Capital Stock.” On the effective date of the Corporate Conversion, the members of the board of managers of Revolve Group, LLC will become the members of the board of directors of Revolve Group, Inc., and the officers of Revolve Group, LLC will become the officers of Revolve Group, Inc.

Corporate Information

We were originally formed as Advance Holdings, LLC in December 2012 as a Delaware limited liability company. In October 2018, we changed our name to “Revolve Group, LLC.” Prior to the effectiveness of the registration of which this prospectus forms a part, we will convert into a Delaware corporation pursuant to a statutory conversion and be renamed Revolve Group, Inc. See the section captioned “Corporate Conversion.” Our principal executive office is located at 16800 Edwards Road, Cerritos, California 90703. Our telephone number is (562) 677-9480. Our website is www.revolve.com. Information contained in, or that can be accessed through, our website is not a part of, and is not incorporated into, this prospectus.



 

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Implications of Being an Emerging Growth Company

We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of relief from certain reporting requirements and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

   

reduced obligations with respect to financial data, including presenting only two years of audited consolidated financial statements and only two years of selected financial data;

 

   

an exception from compliance with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act;

 

   

reduced disclosure about our executive compensation arrangements in our periodic reports, proxy statements and registration statements; and

 

   

exemptions from the requirements of holding non-binding advisory votes on executive compensation or golden parachute arrangements.

In addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. Section 107 of the JOBS Act provides that any decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable. We have elected to use this extended transition period under the JOBS Act.

We may take advantage of these provisions for up to five years or until such earlier time when we no longer qualify as an emerging growth company. We will cease to be an emerging growth company upon the earliest of (1) the end of the fiscal year following the fifth anniversary of this offering; (2) the last day of the fiscal year during which our annual gross revenues are $1.07 billion or more; (3) the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt securities; or (4) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700.0 million as of the end of the second quarter of that fiscal year. We may choose to take advantage of some or all of these reduced reporting burdens.



 

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THE OFFERING

 

Class A common stock offered by us

   2,941,176 shares

Class A common stock offered by the selling
stockholders

  


8,823,530 shares

Class A common stock to be outstanding immediately after this
offering

  


11,764,706 shares (or 13,529,411 shares if the underwriters exercise their option to purchase additional shares in full)

Class B common stock to be outstanding immediately after this
offering

  


56,664,523 shares (or 55,340,994 shares if the underwriters exercise their option to purchase additional shares in full)

Total Class A and Class B common stock to be outstanding after this offering

  


68,429,229 shares

Over-allotment option to purchase additional shares of Class A common stock

  


1,764,705 shares

Use of proceeds

  

We estimate that the net proceeds from this offering will be approximately $43.0 million after deducting underwriting discounts and commissions and estimated offering expenses payable by us, assuming an initial offering price of $17.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus.

 

The principal purposes of this offering are to increase our financial flexibility, create a public market for our Class A common stock and improve our brand awareness. We intend to use $40.8 million of the net proceeds from this offering to repurchase an aggregate of 2,400,960 shares of Class B common stock from TSG and Capretto following the Corporate Conversion. We intend to use the remainder of the net proceeds from this offering for working capital and other general corporate purposes; however, we do not currently have specific planned uses for the proceeds. We may also use a portion of our net proceeds to acquire or invest in additional brands or businesses; however, we currently have no agreements or commitments to complete any such transactions.

 

We will not receive any proceeds from the sale of shares of common stock by the selling stockholders. See the section captioned “Use of Proceeds” for a more complete description of the intended use of proceeds from this offering.



 

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Voting rights

   We have two classes of common stock, Class A common stock and Class B common stock. The rights of the holders of Class A common stock 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. Following this offering, outstanding shares of our Class B common stock will represent approximately 98% of the voting power of our outstanding capital stock, and outstanding shares of Class B common stock held by MMMK Development, Inc., an entity controlled by our co-chief executive officers, will represent approximately 67% of the voting power of our outstanding capital stock. See in section captioned “Description of Capital Stock.”

Directed Share Program

   At our request, the underwriters have reserved up to 588,235 shares of Class A common stock, or 5% of the shares offered by this prospectus, for sale at the initial public offering price to individuals through a directed share program, including our directors, executive officers and employees, as well as friends and family members of our executive officers and certain members of senior management, and persons with whom we have a business relationship, to the extent permitted by local securities laws and regulations. If purchased by these persons, these shares will not be subject to a lock-up restriction, except in the case of shares purchased by any director, executive officer or employee, which will be subject to a 180-day lock-up restriction. The number of shares of Class A common stock available for sale to the general public will be reduced by the number of reserved shares sold to these individuals. Any reserved shares of our Class A common stock that are not so purchased will be offered by the underwriters to the general public on the same terms as the other shares of our Class A common stock offered by this prospectus. We have agreed to indemnify Morgan Stanley & Co. LLC and its affiliates against certain liabilities and expenses, including liabilities under the Securities Act, in connection with sales of the reserved shares. See the section captioned “Underwriters.”

Proposed NYSE trading symbol

   “RVLV”


 

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Risk factors

   See the section captioned “Risk Factors” beginning on page 16 and other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our Class A common stock.

The number of shares of our common stock outstanding immediately after this offering is based on 11,764,706 shares of Class A common stock and 56,664,523 shares of Class B common stock outstanding as of March 31, 2019, after giving effect to the Corporate Conversion, and excludes:

 

   

5,130,502 shares of our Class B common stock issuable upon the exercise of outstanding stock options, as of March 31, 2019, having a weighted-average exercise price of $6.21;

 

   

4,500,000 shares of Class A common stock reserved for future issuance under our 2019 Equity Incentive Plan, which will become effective immediately prior to the effectiveness of the registration statement of which this prospectus forms a part; and

 

   

1,400,000 shares of Class A common stock reserved for future issuance under our 2019 Employee Stock Purchase Plan, which will become effective immediately prior to the effectiveness of the registration statement of which this prospectus forms a part.

Except as otherwise indicated, all information in this prospectus assumes:

 

   

a 1-for-22.31 reverse unit split of the Class A units and Class T units of Revolve Group, LLC, which became effective as of May 24, 2019;

 

   

the completion of the Corporate Conversion, as a result of which all outstanding Class A units of Revolve Group, LLC will be converted into 41,936,219 shares of Class B common stock and all outstanding Class T units of Revolve Group, LLC will be converted into 25,952,794 shares of Class B common stock of Revolve Group, Inc.;

 

   

the repurchase by us of an aggregate of 2,400,960 shares of Class B common stock from TSG and Capretto with the proceeds from this offering following the Corporate Conversion;

 

   

the automatic conversion of 8,823,530 shares of Class B common stock into an equivalent number of shares of Class A common stock upon their sale by the selling stockholders in this offering; and

 

   

no exercise of the underwriters’ option to purchase additional shares.



 

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SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA

The following tables set forth a summary of our historical consolidated financial data as of, and for the periods ended on, the dates indicated. The consolidated statements of income and cash flows data for the years ended December 31, 2017 and 2018 are derived from our audited consolidated financial statements and related notes included elsewhere in this prospectus. The consolidated statements of income and cash flows data for the year ended December 31, 2016 are derived from our audited consolidated financial statements and related notes not included elsewhere in this prospectus. The consolidated statements of income and cash flows data for the three months ended March 31, 2018 and 2019 and the consolidated balance sheet data as of March 31, 2019 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus. We have prepared the unaudited consolidated financial statements on the same basis as the audited consolidated financial statements and have included all adjustments, consisting only of normal recurring adjustments that, in our opinion, are necessary to state fairly the financial information set forth in those statements. You should read this data together with our consolidated financial statements and related notes appearing elsewhere in this prospectus and the information in “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our historical results are not necessarily indicative of our future results, and the results of operations for the three months ended March 31, 2019 are not necessarily indicative of results for the full year. The summary consolidated financial data in this section are not intended to replace the consolidated financial statements and the related notes, and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this prospectus.

Consolidated Statement of Income Data:

 

     Years Ended
December 31,
     Three Months
Ended

March 31,
 
     2016      2017      2018      2018      2019  
     (in thousands, except per unit and per share data)  
                          (unaudited)  

Net sales

   $ 312,082      $ 399,597      $ 498,739      $ 113,305      $ 137,343  

Cost of sales

     166,707        205,907        233,433        56,872        66,589  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     145,375        193,690        265,306        56,433        70,754  

Operating expenses:

              

Fulfillment

     8,618        9,458        13,292        2,782        4,495  

Selling and distribution

     42,114        50,766        70,621        15,853        20,591  

Marketing

     39,000        55,476        74,394        15,353        19,498  

General and administrative

     50,102        57,468        65,201        14,940        19,269  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     139,834        173,168        223,508        48,928        63,853  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

     5,541        20,522        41,798        7,505        6,901  

Other expense, net

     895        1,431        631        197        216  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     4,646        19,091        41,167        7,308        6,685  

Provision for income tax

     2,448        14,091        10,529        1,976        1,723  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

     2,198        5,000        30,638        5,332        4,962  

Less: Net loss attributable to non-controlling interest

     205        347        47        47         
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to Revolve Group, LLC

   $ 2,403      $ 5,347      $ 30,685      $ 5,379      $ 4,962  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income per unit attributable to common unit holders:

              

Basic

   $ 0.04      $ 0.08      $ 0.47      $ 0.08      $ 0.08  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.04      $ 0.08      $ 0.44      $ 0.08      $ 0.07  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common units outstanding:

              

Basic

     41,936        41,936        41,936        41,936        41,936  

Diluted

     43,786        44,044        44,584        44,183        44,821  

Pro forma earnings per share attributable to common stockholders (unaudited)(1):

              

Basic

         $ 0.45         $ 0.07  
        

 

 

       

 

 

 

Diluted

         $ 0.44         $ 0.07  
        

 

 

       

 

 

 

Pro forma weighted average common shares outstanding (unaudited)(1):

              

Basic

           67,627           67,889  

Diluted

           70,276           70,776  

 

(1)

See Note 12 to our consolidated financial statements for an explanation of the calculations of our pro forma basic and diluted earnings per share attributable to common stockholders and the pro forma weighted-average common shares used in the computation of the per share amounts.



 

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Consolidated Statement of Cash Flows Data:

 

     Years Ended
December 31,
    Three Months Ended
March 31,
 
     2016     2017     2018     2018     2019  
     (in thousands)  
                       (unaudited)  

Net cash (used in) provided by:

          

Operating activities

   $ (1,490   $ 16,479     $ 26,655     $ 12,156     $ 15,924  

Investing activities

     (3,026     (2,262     (3,045     (440     (4,987

Financing activities

     5,142       (15,086     (17,621     (15,100     (248

Other Financial and Operating Data:

 

     Years Ended
December 31,
    Three Months Ended
March 31,
 
         2016             2017             2018             2018             2019      
     (in thousands, except average order value and percentages)  
                       (unaudited)  

Gross margin(1)

     46.6     48.5     53.2     49.8     51.5

Adjusted EBITDA(1)

   $ 9,520     $ 28,428     $ 46,495     $ 8,697     $ 8,549  

Free cash flow(1)

   $ (4,516   $ 14,217     $ 23,610     $ 11,716     $ 10,937  

Active customers(1)

     712       842       1,175       904       1,262  

Total orders placed(1)

     1,999       2,552       3,710       817       1,135  

Average order value(1)

   $ 293     $ 304     $ 279     $ 282     $ 259  

 

(2)

See the section titled “Selected Consolidated Financial and Other Data—Other Financial and Operating Data” for information on how we define and calculate this measure.

Consolidated Balance Sheet Data:

 

     As of March 31, 2019  
     Actual      Pro Forma(1)      Pro Forma as
Adjusted(2)(3)
 
     (in thousands)  
     (unaudited)  

Cash

   $ 27,201      $          27,201      $ 29,346  

Working capital

     57,890           57,890        60,035  

Total assets

     191,522           191,522        193,667  

Total liabilities

     105,802           105,802        105,802  

Total equity

     85,720           85,720        87,865  

 

(1)

The pro forma consolidated balance sheet data gives effect to (a) the Corporate Conversion and (b) the filing and effectiveness of our certificate of incorporation that will be in effect on the completion of this offering.

(2)

The pro forma as adjusted consolidated balance sheet data reflects (a) the items described in footnote (1) above, (b) our receipt of estimated net proceeds from the sale of shares of Class A common stock that we are offering at an assumed initial public offering price of $17.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, after deducting the estimated underwriting discounts and commissions and estimated offering expenses and (c) the repurchase by us of 2,400,960 shares of Class B common stock from TSG and Capretto at a price of $17.00 per share.

(3)

A $1.00 increase (decrease) in the assumed initial public offering price of $17.00 per share, the midpoint of the estimated price range set forth on the cover page of this prospectus, would increase (decrease) each of cash, working capital, total assets and total equity by $2.8 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses. Similarly, each increase (decrease) of 1.0 million shares in the number of shares of Class A common stock offered by us would increase (decrease) each of cash, working capital, total assets and total equity by $15.9 million, assuming the assumed initial public offering price of $17.00 per share of Class A common stock remains the same, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses.



 

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RISK FACTORS

Investing in our Class A common stock involves a high degree of risk. Before making an investment decision, you should carefully consider the risks and uncertainties described below, which we believe are material risks of our business and this offering. Our business, financial condition, operating results or growth prospects could be harmed by any of these risks. In such an event, the trading price of our Class A common stock could decline, and you may lose all or part of your investment. In assessing these risks, you should also refer to all of the other information contained in this prospectus, including our consolidated financial statements and related notes. Please also see “Cautionary Note Regarding Forward-Looking Statements.”

Risks Related to Our Business and Industry

If we fail to effectively manage our growth, our business, financial condition and operating results could be harmed.

We have grown rapidly, with our net sales increasing from $399.6 million for 2017 to $498.7 million for 2018. To effectively manage our growth, we must continue to implement our operational plans and strategies, improve and expand our infrastructure of people and information systems, and expand, train and manage our employee base. Since our inception, we have rapidly increased our employee headcount to support the growth of our business. The number of our employees increased from 742 as of December 31, 2017 to 983 as of December 31, 2018. We have expanded across all areas of our business. To support continued growth, we must effectively integrate, develop and motivate a large number of new employees while maintaining our corporate culture. We face significant competition for personnel. To attract top talent, we have had to offer, and expect to continue to offer, competitive compensation and benefits packages before we can validate the productivity of new employees. We may also need to increase our employee compensation levels to remain competitive in attracting and retaining talented employees. The risks associated with a rapidly growing workforce will be particularly acute if we choose to expand into new merchandise categories and internationally. Additionally, we may not be able to hire new employees quickly enough to meet our needs. If we fail to effectively manage our hiring needs or successfully integrate new hires, our efficiency, our ability to meet forecasts and our employee morale, productivity and retention could suffer, which may have an adverse effect on our business, financial condition and operating results.

We are also required to manage numerous relationships with various vendors and other third parties. Further growth of our operations, vendor base, fulfillment centers, information technology systems or internal controls and procedures may not be adequate to support our operations. If we are unable to manage the growth of our organization effectively, our business, financial condition and operating results may be adversely affected.

If we are unable to anticipate and respond to changing customer preferences and shifts in fashion and industry trends in a timely manner, our business, financial condition and operating results could be harmed.

Our success largely depends on our ability to consistently gauge tastes and trends and provide a balanced assortment of merchandise that satisfies customer demands in a timely manner. We typically enter into agreements to manufacture and purchase our merchandise in advance of the applicable selling season and our failure to anticipate, identify or react appropriately, or in a timely manner to changes in customer preferences, tastes and trends or economic conditions could lead to, among other things, missed opportunities, excess inventory or inventory shortages, markdowns and write-offs, all of which could negatively impact our profitability and have a material adverse effect on our business, financial condition and operating results. Failure to respond to changing customer preferences and fashion trends could also negatively impact our brand image with our customers and result in diminished brand loyalty.

 

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Our business depends on our ability to maintain a strong community of brands, engaged customers and influencers. We may not be able to maintain and enhance our existing brand community if we receive customer complaints, negative publicity or otherwise fail to live up to consumers’ expectations, which could materially adversely affect our business, operating results and growth prospects.

Over the course of 2018, we offered over 850 emerging and established brands through REVOLVE, including 21 brands developed and owned by us, which we refer to as owned brands, and over 250 brands through FORWARD, but we have a limited operating history with many of these brands. Our ability to identify new brands and maintain and enhance our relationships with our existing brands is critical to expanding our base of customers. A significant portion of our customers’ experience depends on third parties outside of our control, including vendors, suppliers and logistics providers such as FedEx, UPS and the U.S. Postal Service. If these third parties do not meet our or our customers’ expectations or if they increase their rates, our business may suffer irreparable damage or our costs may increase. In addition, maintaining and enhancing relationships with third-party brands may require us to make substantial investments, and these investments may not be successful. Also, if we fail to promote and maintain our brands, or if we incur excessive expenses in this effort, our business, operating results and financial condition may be materially adversely affected. We anticipate that, as our market becomes increasingly competitive, maintaining and enhancing our brands may become increasingly difficult and expensive. Maintaining and enhancing our brands will depend largely on our ability to provide high quality products to our customers and a reliable, trustworthy and profitable sales channel to our vendors, which we may not do successfully.

Customer complaints or negative publicity about our sites, products, product delivery times, customer data handling and security practices or customer support, especially on blogs, social media websites and our sites, could rapidly and severely diminish consumer use of our sites and consumer and supplier confidence in us and result in harm to our brands. We believe that much of the growth in our customer base to date has originated from social media and influencer-driven marketing strategy. If we are not able to develop and maintain positive relationships with our network of over 3,500 of influencers, our ability to promote and maintain awareness of our sites and brands and leverage social media platforms to drive visits to our sites may be adversely affected.

Our industry is highly competitive and if we do not compete effectively our operating results could be adversely affected.

The retail industry is highly competitive. We compete with department stores, specialty retailers, independent retail stores, the online offerings of these traditional retail competitors and eCommerce companies that market merchandise similar to the merchandise we offer. We believe our ability to compete depends on many factors within and beyond our control, including:

 

   

attracting new customers and engaging with existing customers;

 

   

cultivating our relationships with our customers;

 

   

further developing our data analytics capabilities;

 

   

maintaining favorable brand recognition and effectively marketing our services to customers;

 

   

the amount, diversity and quality of brands and merchandise that we or our competitors offer;

 

   

expanding and maintaining appealing owned brands and merchandise;

 

   

the price at which we are able to offer our merchandise;

 

   

maintaining and growing our market share;

 

   

price fluctuations or demand disruptions of our third-party vendors;

 

   

the speed and cost at which we can deliver merchandise to our customers and the ease with which they can use our services to return merchandise; and

 

   

anticipating and quickly responding to changing apparel trends and consumer shopping preferences.

 

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We expect competition to increase as other established and emerging companies enter the markets in which we compete, as customer requirements evolve and as new products and technologies are introduced.

Many of our current competitors have, and potential competitors may have, longer operating histories, larger fulfillment infrastructures, greater technical capabilities, faster shipping times, lower-cost shipping, larger databases, greater financial, marketing, institutional and other resources and larger customer bases than we do. These factors may allow our competitors to derive greater revenue and profits from their existing customer bases, acquire customers at lower costs or respond more quickly than we can to new or emerging technologies and changes in apparel trends and consumer shopping behavior. These competitors may engage in more extensive research and development efforts, enter or expand their presence in the personalized retail market, undertake more far-reaching marketing campaigns, and adopt more aggressive pricing policies, which may allow them to build larger customer bases or generate revenue from their existing customer bases more effectively than we do. If we fail to execute on any of the above better than our competitors, our operating results may be adversely affected.

Competition, along with other factors such as consolidation within the retail industry and changes in consumer spending patterns, could also result in significant pricing pressure. These factors may cause us to reduce prices to our customers, which could cause our gross margins to decline if we are unable to appropriately manage inventory levels and/or otherwise offset price reductions with comparable reductions in our operating costs. If our prices decline and we fail to sufficiently reduce our product costs or operating expenses, our profitability may decline, which could have a material adverse effect on our business, financial condition and operating results.

We may be unable to accurately forecast net sales and appropriately plan our expenses in the future.

We base our current and future expense levels on our operating forecasts and estimates of future net sales and gross margins. Net sales and operating results are difficult to forecast because they generally depend on the volume, timing, value and type of the orders we receive, all of which are uncertain. In addition, we cannot be sure the same growth rates, trends and other key performance metrics are meaningful predictors of future growth. Our business is affected by general economic and business conditions in the United States, and we anticipate that it will be increasingly affected by conditions in international markets. In addition, we experience seasonal trends in our business, and our mix of product offerings is highly variable from day-to-day and quarter-to-quarter. This variability makes it difficult to predict sales and could result in significant fluctuations in our net sales, margins and profitability from period-to-period. A significant portion of our expenses is fixed, and as a result, we may be unable to adjust our spending in a timely manner to compensate for any unexpected shortfall in net sales. Any failure to accurately predict net sales or gross margins could cause our operating results to be lower than expected, which could materially adversely affect our financial condition and stock price.

Our recent growth rates may not be sustainable or indicative of our future growth.

Although our net sales and profitability have grown rapidly, this should not be considered as indicative of our future performance. We may not be successful in executing our growth strategy, and even if we achieve our strategic plan, we may not be able to sustain profitability. In future periods, our net sales could decline or grow more slowly than we expect.

We believe that our continued revenue growth will depend upon, among other factors, our ability to:

 

   

identify new and emerging brands, maintain relationships with emerging and established brands, and develop and grow existing owned brands or develop new owned brands;

 

   

acquire new customers and retain existing customers;

 

   

develop new features to enhance the consumer experience on our sites;

 

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increase the frequency with which new and repeat customers purchase products on our sites through merchandising, data analytics and technology;

 

   

add new suppliers and deepen our relationships with our existing suppliers;

 

   

enhance and scale the systems our consumers use to interact with our sites and invest in our infrastructure platform;

 

   

target additional categories and price points beyond premium apparel for Millennials, such as luxury, beauty, men’s apparel and lower price points;

 

   

expand internationally; and

 

   

pursue strategic acquisitions.

We cannot assure you we will be able to achieve any of the foregoing. Our customer base may not continue to grow or may decline as a result of increased competition and the maturation of our business. Failure to continue our revenue growth rates could have a material adverse effect on our financial condition and operating results. You should not rely on our historical rate of revenue growth as an indication of our future performance or the rate of growth we may experience in any new category or internationally. International markets have historically grown, and we expect will continue to grow, at a slower rate at least until we have more infrastructure in place in those markets.

Use of social media and influencers may materially and adversely affect our reputation or subject us to fines or other penalties.

We use third-party social media platforms as, among other things, marketing tools. For example, we maintain Instagram, Snapchat, Facebook, Twitter, Pinterest, YouTube and Google+ accounts. We also maintain relationships with thousands of social media influencers and engage in sponsorship initiatives. As existing eCommerce and social media platforms continue to rapidly evolve and new platforms develop, we must continue to maintain a presence on these platforms and establish presences on new or emerging popular social media platforms. If we are unable to cost-effectively use social media platforms as marketing tools or if the social media platforms we use do not evolve quickly enough for us to fully optimize such platforms, our ability to acquire new consumers and our financial condition may suffer. Furthermore, as laws and regulations rapidly evolve to govern the use of these platforms and devices, the failure by us, our employees, our network of social media influencers, our sponsors or third parties acting at our direction to abide by applicable laws and regulations in the use of these platforms and devices or otherwise could subject us to regulatory investigations, class action lawsuits, liability, fines or other penalties and have a material adverse effect on our business, financial condition and operating results.

In addition, an increase in the use of social media for product promotion and marketing may cause an increase in the burden on us to monitor compliance of such materials, and increase the risk that such materials could contain problematic product or marketing claims in violation of applicable regulations. For example, in some cases, the FTC has sought enforcement action where an endorsement has failed to clearly and conspicuously disclose a financial relationship or material connection between an influencer and an advertiser. We do not prescribe what our influencers post, and if we were held responsible for the content of their posts or their actions, we could be forced to alter our practices, which could have an adverse impact on our business.

Negative commentary regarding us, our products or influencers and other third parties who are affiliated with us may also be posted on social media platforms and may be adverse to our reputation or business. Influencers with whom we maintain relationships could engage in behavior or use their platforms to communicate directly with our customers in a manner that reflects poorly on our brand and may be attributed to us or otherwise adversely affect us. It is not possible to prevent such behavior, and the precautions we take to detect this activity may not be effective in all cases. Our target consumers often value readily available information and often act on such information without further investigation and without regard to its accuracy. The harm may be immediate, without affording us an opportunity for redress or correction.

 

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Our quarterly operating results may fluctuate, which could cause our stock price to decline.

Our quarterly operating results may fluctuate for a variety of reasons, many of which are beyond our control. These reasons include those described in these risk factors as well as the following:

 

   

fluctuations in net sales generated from the brands on our sites, including as a result of seasonality and the timing and success of events that we host, such as our annual #REVOLVEfestival in the Coachella Valley;

 

   

fluctuations in product mix between sites and between owned and non-owned brands;

 

   

our ability to effectively launch and manage new sites and brands;

 

   

fluctuations in the levels or quality of inventory;

 

   

fluctuations in capacity as we expand our operations;

 

   

our success in engaging existing customers and attracting new customers;

 

   

the amount and timing of our operating expenses;

 

   

the timing and success of new products and brands we introduce;

 

   

the impact of competitive developments and our response to those developments;

 

   

our ability to manage our existing business and future growth;

 

   

disruptions or defects in our sites, such as privacy or data security breaches; and

 

   

economic and market conditions, particularly those affecting our industry.

Fluctuations in our quarterly operating results may cause those results to fall below the expectations of analysts or investors, which could cause the price of our Class A common stock to decline. Fluctuations in our results could also cause a number of other problems. For example, analysts or investors might change their models for valuing our Class A common stock, we could experience short-term liquidity issues, our ability to retain or attract key personnel may diminish and other unanticipated issues may arise.

In addition, we believe that our quarterly operating results may vary in the future and that period-to-period comparisons of our operating results may not be meaningful. For example, our historical growth may have overshadowed the seasonal effects on our historical operating results. These seasonal effects may become more pronounced over time, which could also cause our operating results to fluctuate. You should not rely on the results of one quarter as an indication of future performance.

If we fail to acquire new customers, or fail to do so in a cost-effective manner, we may not be able to increase net sales or maintain profitability.

Our success depends on our ability to acquire customers in a cost-effective manner. In order to expand our customer base, we must appeal to and acquire customers who have historically used other means of commerce in shopping for apparel and may prefer alternatives to our offerings, such as traditional brick-and-mortar retailers and the websites of our competitors. We have made significant investments related to customer acquisition and expect to continue to spend significant amounts to acquire additional customers. For example, we engage in social media marketing campaigns and maintain relationships with thousands of social media and celebrity influencers. Such campaigns are expensive and may not result in the cost-effective acquisition of customers. In addition, the competition for relationships with influencers is increasing, and the cost of maintaining such relationships will likely increase. We cannot assure you that the net profit from new customers we acquire will ultimately exceed the cost of acquiring those customers. If we fail to deliver a quality shopping experience, or if consumers do not perceive the products we offer to be of high value and quality, we may not be able to acquire new customers. If we are unable to acquire new customers who purchase products in numbers sufficient to grow

 

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our business, we may not be able to generate the scale necessary to drive beneficial network effects with our suppliers, our net sales may decrease, and our business, financial condition and operating results may be materially adversely affected.

We also seek to engage with our customers and build awareness of our brands through sponsoring unique events and experiences such as #REVOLVEfestival”, #REVOLVEaroundtheworld,” and #REVOLVEAwards”, as well as short-term pop-up retail experiences. We anticipate that our marketing initiatives may become increasingly expensive as competition increases, and generating a meaningful return on those initiatives may be difficult. If our marketing efforts are not successful in promoting awareness of our brands and products, driving customer engagement or attracting new customers, or if we are not able to cost-effectively manage our marketing expenses, our operating results will be adversely affected.

We obtain a significant amount of traffic via social networking websites or other channels used by our current and prospective customers. As eCommerce and social networking continue to rapidly evolve, we must continue to establish relationships with these channels and may be unable to develop or maintain these relationships on acceptable terms. We also use paid and non-paid advertising. 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 mobile apps. If we are unable to cost-effectively drive traffic to our sites, our ability to acquire new customers and our financial condition would suffer.

If we fail to retain existing customers, or fail to maintain average order value levels, we may not be able to maintain our revenue base and margins, which would have a material adverse effect on our business and operating results.

A significant portion of our net sales are generated from sales to existing customers, particularly those existing customers who are highly engaged and make frequent and/or large purchases of the merchandise we offer. If existing customers no longer find our offerings appealing, or if we are unable to timely update our offerings to meet current trends and customer demands, our existing customers may make fewer or smaller purchases in the future. A decrease in the number of our customers who make repeat purchases or a decrease in their spending on the merchandise we offer could negatively impact our operating results. Further, we believe that our future success will depend in part on our ability to increase sales to our existing customers over time, and if we are unable to do so, our business may suffer. If we fail to generate repeat purchases or maintain high levels of customer engagement and average order value, our growth prospects, operating results and financial condition could be materially adversely affected.

We purchase inventory in anticipation of sales, and if we are unable to manage our inventory effectively, our operating results could be adversely affected.

Our business requires us to manage a large volume of inventory effectively. We add a total of over 1,000 new apparel, footwear, accessories and beauty styles to our sites in a typical week, and we depend on our forecasts of demand for and popularity of various products to make purchase decisions and to manage our inventory of stock-keeping units, or SKUs. Demand for products, however, can change significantly between the time inventory is ordered and the date of sale. Demand may be affected by seasonality, new product launches, rapid changes in product cycles and pricing, product defects, promotions, changes in consumer spending patterns, changes in consumer tastes with respect to our products and other factors, and our consumers may not purchase products in the quantities that we expect.

Seasonality in our business does not follow that of traditional retailers, such as typical concentration of net sales in the holiday quarter. We believe our results are impacted by a pattern of increased sales leading up to #REVOLVEfestival in April and during the early summer months, which results in increased sales during the second quarter of each fiscal year. We also believe that we have experienced slower growth in orders placed and active customers during the first quarter. We expect this seasonality to continue in future years.

 

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It may be difficult to accurately forecast demand and determine appropriate levels of product. We generally do not have the right to return unsold products to our suppliers. If we fail to manage our inventory effectively or negotiate favorable credit terms with third-party suppliers, we may be subject to a heightened risk of inventory obsolescence, a decline in inventory values, and significant inventory write-downs or write-offs. In addition, if we are required to lower sale prices in order to reduce inventory level or to pay higher prices to our suppliers, our profit margins might be negatively affected. Any of the above may materially and adversely affect our business, financial condition and operating results.

Merchandise returns could harm our business.

We allow our customers to return products, subject to our return policy. If the rate of merchandise returns increases significantly or if merchandise return economics become less efficient, our business, financial condition and operating results could be harmed. Further, we modify our policies relating to returns from time to time, which may result in customer dissatisfaction or an increase in the number of product returns. From time to time our products are damaged in transit, which can increase return rates and harm our brand.

We rely on consumer discretionary spending, which may be adversely affected by economic downturns and other macroeconomic conditions or trends.

Our business and operating results are subject to global economic conditions and their impact on consumer discretionary spending. Some of the factors that may negatively influence consumer spending include high levels of unemployment, higher consumer debt levels, reductions in net worth, declines in asset values and related market uncertainty, home foreclosures and reductions in home values, fluctuating interest rates and credit availability, fluctuating fuel and other energy costs, fluctuating commodity prices and general uncertainty regarding the overall future political and economic environment. Economic conditions in certain regions may also be affected by natural disasters, such as earthquakes, hurricanes, tropical storms and wildfires. Consumer purchases of discretionary items, including the merchandise that we offer, generally decline during periods of economic uncertainty, when disposable income is reduced or when there is a reduction in consumer confidence. For example, our business was adversely affected by the Great Recession in 2008.

Adverse economic changes could reduce consumer confidence, and thereby could negatively affect our operating results. In challenging and uncertain economic environments, we cannot predict when macroeconomic uncertainty may arise, whether or when such circumstances may improve or worsen or what impact such circumstances could have on our business.

Our inability to identify, develop and introduce new merchandise offerings in a timely and cost-effective manner may damage our business, financial condition and operating results.

The retail industry is driven in part by fashion and beauty trends, which may shift quickly. Our continued success depends on our ability to anticipate, gauge and react in a timely and cost-effective manner to changes in consumer preferences for products, consumer attitudes toward our industry and brand and where and how consumers shop for those products. We must continually work to develop, produce and market new products, maintain and enhance the recognition of our brands, maintain a favorable mix of products and develop our approach as to how and where we market and sell our products.

We have an established process for the identification, development, evaluation and validation of our new products. Nonetheless, each new product launch involves risks, as well as the possibility of unexpected consequences. For example, sales of our new products may not be as high as we anticipate, due to lack of acceptance of the products themselves or their price, or limited effectiveness of our marketing strategies. In addition, our ability to launch new products may be limited by delays or difficulties affecting the ability of our suppliers or manufacturers to timely manufacture, distribute and ship new products. Sales of new products may also be affected by inventory management. We may also experience a decrease in sales of certain existing

 

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products as a result of newly-launched products. Any of these occurrences could delay or impede our ability to achieve our sales objectives, which could have a material adverse effect on our business, financial condition and operating results.

As part of our ongoing business strategy we expect we will need to continue to introduce new products in our traditional product categories of clothing, shoes and accessories, while also expanding our product launches into adjacent categories in which we may have little to no operating experience. For example, in December 2016, we launched REVOLVE Beauty, which now includes over 225 brands in skincare, cosmetics and haircare. In addition, we launched a lower price point offering in March 2019, which may cannibalize sales from our other sites and adversely affect customer lifetime value and our operating results. The success of product launches in adjacent categories could be hampered by our relative inexperience operating in such categories, the strength of our competitors or any of the other risks referred to above. Furthermore, any expansion into new product categories may prove to be an operational and financial constraint which inhibits our ability to successfully accomplish such expansion. Our inability to introduce successful products in our traditional categories or in adjacent categories could limit our future growth and have a material adverse effect on our business, financial condition and operating results.

There is no assurance that consumers will continue to purchase our products in the future. Customers may consider our offerings to be premium products and purchase fewer or lower-priced products if their discretionary income decreases. During periods of economic uncertainty, we may need to reduce prices in response to competitive pressures or otherwise, to maintain sales, which may adversely affect margins and profitability.

Our business, including our costs and supply chain, is subject to risks associated with sourcing, manufacturing and warehousing.

A majority of the merchandise we offer on our sites is sourced from third-party vendors, and as a result we may be subject to price fluctuations or demand disruptions. Our operating results would be negatively impacted by increases in the prices of our merchandise, and we have no guarantees that prices will not rise. In addition, as we expand into new categories and product types, we expect that we may not have strong purchasing power in these new areas, which could lead to higher prices than we have historically seen in our current categories. We may not be able to pass increased prices on to customers, which could adversely affect our operating results. Moreover, in the event of a significant disruption in the supply of the fabrics or raw materials used in the manufacture of the merchandise we offer, we and the vendors that we work with might not be able to locate alternative suppliers of materials of comparable quality at an acceptable price.

In addition, merchandise and materials we receive from vendors and suppliers may not be of sufficient quality or free from damage, or such merchandise may be damaged during shipping, while stored in one of our fulfillment centers or when returned by customers. We may incur additional expenses and our reputation could be harmed if customers and potential customers believe that our merchandise does not meet their expectations, is not properly labeled or is damaged.

If we do not successfully optimize, operate and manage the expansion of capacity of our fulfillment centers, our business, financial condition and operating results could be harmed.

If we do not optimize and operate our fulfillment centers successfully and efficiently, it could result in excess or insufficient fulfillment capacity, an increase in costs or impairment charges or harm our business in other ways. If we do not have sufficient fulfillment capacity or experience a problem fulfilling orders in a timely manner, our customers may experience delays in receiving their purchases, which could harm our reputation and our relationship with our customers.

We have designed and built our own fulfillment center infrastructure, including customizing third-party inventory and package handling software systems, which is tailored to meet the specific needs of our business. If

 

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we continue to add fulfillment and warehouse capabilities, add new businesses or categories with different fulfillment requirements or change the mix in products that we sell, our fulfillment network will become increasingly complex and operating it will become more challenging. Failure to successfully address such challenges in a cost-effective and timely manner could impair our ability to timely deliver our customers’ purchases and could harm our reputation and ultimately, our business, financial condition and operating results.

In September 2018, we entered into a five-year lease for approximately 281,000 square feet of fulfillment and office space. In the first quarter of 2019, we consolidated substantially all of our fulfillment activities into this centralized facility and have terminated the lease of our existing distribution facility. Beginning in May 2019, we will sublet one of our existing fulfillment centers through its remaining lease term. We are still in the process of consolidating certain other facilities, which may include subleasing or terminating additional existing facilities. The transition has, and will continue to put near-term pressure on our managerial, financial, operational and other resources. We expect that our current capacity will support our near-term growth plans. Over the long term, we cannot assure you that we will be able to locate suitable facilities on commercially acceptable terms in accordance with our expansion plans, nor can we assure you that we will be able to recruit qualified managerial and operational personnel to support our expansion plans. If we are unable to secure new facilities for the expansion of our fulfillment operations or to effectively control expansion-related expenses, our business, prospects, financial condition and operating results could be materially and adversely affected. If we grow faster than we anticipate, we may exceed our fulfillment center capacity sooner than we anticipate, we may experience problems fulfilling orders in a timely manner or our customers may experience delays in receiving their purchases, which could harm our reputation and our relationship with our customers, and we would need to increase our capital expenditures more than anticipated. Many of the expenses and investments with respect to our fulfillment centers are fixed, and any expansion of such fulfillment centers will require additional investment of capital. We expect to incur higher capital expenditures in the future for our fulfillment center operations. We may incur such expenses or make such investments in advance of expected sales, and such expected sales may not occur.

We rely on third-party suppliers, manufacturers, distributors and other vendors, and they may not continue to produce products or provide services that are consistent with our standards or applicable regulatory requirements, which could harm our brand, cause consumer dissatisfaction, and require us to find alternative suppliers of our products or services.

We do not own or operate any manufacturing facilities. We use multiple third-party suppliers and manufacturers based primarily in China and, to a lesser extent, the United States and India to source and manufacture all of our products under our owned brands. We engage our third-party suppliers and manufacturers on a purchase order basis and are not party to long-term contracts with any of them. The ability of these third parties to supply and manufacture our products may be affected by competing orders placed by other customers and the demands of those customers. If we experience significant increases in demand, or need to replace a significant number of existing suppliers or manufacturers, there can be no assurance that additional supply and manufacturing capacity will be available when required on terms that are acceptable to us, or at all, or that any supplier or manufacturer will allocate sufficient capacity to us in order to meet our requirements.

In addition, quality control problems, such as the use of materials and delivery of products that do not meet our quality control standards and specifications or comply with applicable laws or regulations, could harm our business. In the past, we have experienced negative press and government enforcement actions as a result of our vendors’ failure to comply with certain applicable laws and regulations, and may experience similar negative press as a result of any future non-compliance by our vendors. We do not regularly inspect these vendors and quality control problems could result in regulatory action, such as restrictions on importation, products of inferior quality or product stock outages or shortages, harming our sales and creating inventory write-downs for unusable products.

We have also outsourced portions of our distribution process, as well as certain technology-related functions, to third-party service providers. Specifically, we rely on third parties in a number of foreign countries

 

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and territories, we are dependent on third-party vendors for credit card processing, and we use third-party hosting and networking providers to host our sites. The failure of one or more of these entities to provide the expected services on a timely basis, or at all, or at the prices we expect, or the costs and disruption incurred in changing these outsourced functions to being performed under our management and direct control or that of a third party, may have a material adverse effect on our business, financial condition and results of operations. We are not party to long-term contracts with some of our distributors, and upon expiration of these existing agreements, we may not be able to renegotiate the terms on a commercially reasonable basis, or at all.

Further, our third-party manufacturers, suppliers and distributors may:

 

   

have economic or business interests or goals that are inconsistent with ours;

 

   

take actions contrary to our instructions, requests, policies or objectives;

 

   

be unable or unwilling to fulfill their obligations under relevant purchase orders, including obligations to meet our production deadlines, quality standards, pricing guidelines and product specifications, and to comply with applicable regulations, including those regarding the safety and quality of products;

 

   

have financial difficulties;

 

   

encounter raw material or labor shortages;

 

   

encounter increases in raw material or labor costs which may affect our procurement costs;

 

   

disclose our confidential information or intellectual property to competitors or third parties;

 

   

engage in activities or employ practices that may harm our reputation; and

 

   

work with, be acquired by, or come under control of, our competitors.

Shipping is a critical part of our business and any changes in our shipping arrangements or any interruptions in shipping could adversely affect our operating results.

We primarily rely on two major vendors for our shipping. If we are not able to negotiate acceptable pricing and other terms with these entities or they experience performance problems or other difficulties, it could negatively impact our operating results and our customer experience. In addition, our ability to receive inbound inventory efficiently and ship merchandise to customers may be negatively affected by inclement weather, fire, flood, power loss, earthquakes, labor disputes, acts of war or terrorism, trade embargoes and similar factors. For example, strikes at major international shipping ports have in the past impacted our supply of inventory from our vendors, and the escalating trade dispute between the United States and China could lead to increased tariffs on our goods and restrict the flow of the goods between the United States and China. We are also subject to risks of damage or loss during delivery by our shipping vendors. If our merchandise is not delivered in a timely fashion or is damaged or lost during the delivery process, our customers could become dissatisfied and cease shopping on our sites, which would adversely affect our business and operating results.

Our failure to adequately and effectively staff our fulfillment centers, through third parties or with our own employees, could adversely affect our customer experience and operating results.

We currently receive and distribute merchandise at fulfillment centers in the United States, none of which are operated by a third party. If we are unable to adequately staff our fulfillment centers to meet demand or if the cost of such staffing is higher than historical or projected costs due to mandated wage increases, regulatory changes, international expansion or other factors, our operating results could be harmed. In addition, operating fulfillment centers comes with potential risks, such as workplace safety issues and employment claims for the failure or alleged failure to comply with labor laws or laws respecting union organizing activities. Any such issues may result in delays in shipping times or packing quality, and our reputation and operating results may be harmed.

 

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Any failure by us or our vendors to comply with product safety, labor or other laws, or to provide safe conditions for our or their workers may damage our reputation and brand and harm our business.

The merchandise we sell to our customers is subject to regulation by the Federal Consumer Product Safety Commission, the Federal Trade Commission and similar state and international regulatory authorities. As a result, such merchandise could be in the future subject to recalls and other remedial actions. Product safety, labeling and licensing concerns, including consumer disclosure and warning regarding chemical exposure, may require us to voluntarily remove selected merchandise from our inventory. Such recalls or voluntary removal of merchandise can result in, among other things, lost sales, diverted resources, potential harm to our reputation and increased customer service costs and legal expenses, which could have a material adverse effect on our operating results.

We purchase our merchandise from numerous domestic and international vendors. Failure of our vendors to comply with applicable laws and regulations and contractual requirements could lead to litigation against us, resulting in increased legal expenses and costs. In addition, the failure of any such vendors to provide safe and humane factory conditions and oversight at their facilities could damage our reputation with customers or result in legal claims against us.

If our suppliers fail to use ethical business practices and fail to comply with changing laws and regulations, our brand image could be harmed due to negative publicity.

Our core values, which include developing the highest quality products while operating with integrity, are an important component of our brand image, which makes our reputation sensitive to allegations of unethical or improper business practices, whether real or perceived. We do not control our suppliers and manufacturers or their business, and they may not comply with our guidelines or the law. A lack of compliance could lead to reduced sales or recalls or damage to our brand or cause us to seek alternative suppliers, which could increase our costs and result in delayed delivery of our products, product shortages or other disruptions of our operations. In addition, we rely on our manufacturers’ and suppliers’ compliance reporting in order to comply with regulations applicable to our products. This is further complicated by the fact that expectations of ethical business practices continually evolve and may be substantially more demanding than applicable legal requirements. Ethical business practices are also driven in part by legal developments and by diverse groups active in publicizing and organizing public responses to perceived ethical shortcomings. Accordingly, we cannot predict how such regulations or expectations might develop in the future and cannot be certain that our guidelines or current practices would satisfy all parties who are active in monitoring our products or other business practices worldwide.

Certain of our key operating metrics are subject to inherent challenges in measurement, and real or perceived inaccuracies in such metrics may harm our reputation and negatively affect our business.

We track certain key operating metrics using internal data analytics tools, which have certain limitations. In addition, we rely on data received from third parties, including third-party platforms, to track certain performance indicators. Data from both such sources may include information relating to fraudulent accounts and interactions with our sites or the social media accounts of our influencers (including as a result of the use of bots, or other automated or manual mechanisms to generate false impressions that are delivered through our sites or their accounts). We have only a limited ability to verify data from our sites or third parties, and perpetrators of fraudulent impressions may change their tactics and may become more sophisticated, which would make it still more difficult to detect such activity.

Our methodologies for tracking metrics may also change over time, which could result in changes to the metrics we report. If we undercount or overcount performance due to the internal data analytics tools we use or issues with the data received from third parties, or if our internal data analytics tools contain algorithmic or other technical errors, the data we report may not be accurate or comparable with prior periods. In addition, limitations, changes or errors with respect to how we measure data may affect our understanding of certain details of our business, which could affect our longer-term strategies.

 

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If our performance metrics are not accurate representations of the reach or monetization of our network, if we discover material inaccuracies in our metrics or the data on which such metrics are based, or if we can no longer calculate any of our key performance metrics with a sufficient degree of accuracy and cannot find an adequate replacement for the metric, our business, financial condition and operating results could be adversely affected.

Increases in labor costs, including wages, could adversely affect our business, financial condition and results of operations.

Labor is a significant portion of our cost structure and is subject to many external factors, including unemployment levels, prevailing wage rates, minimum wage laws, potential collective bargaining arrangements, health insurance costs and other insurance costs and changes in employment and labor legislation or other workplace regulation. From time to time, legislative proposals are made to increase the federal minimum wage in the United States, as well as the minimum wage in California and a number of other states and municipalities, and to reform entitlement programs, such as health insurance and paid leave programs. As minimum wage rates increase or related laws and regulations change, we may need to increase not only the wage rates of our minimum wage employees, but also the wages paid to our other hourly or salaried employees. Any increase in the cost of our labor could have an adverse effect on our business, financial condition and results of operations or if we fail to pay such higher wages we could suffer increased employee turnover. Increases in labor costs could force us to increase prices, which could adversely impact our sales. If competitive pressures or other factors prevent us from offsetting increased labor costs by increases in prices, our profitability may decline and could have a material adverse effect on our business, financial condition and results of operations. In particular, the job market in Southern California, where our principal offices and fulfillment centers as well as the majority of our employees are located, is very competitive.

Developments in labor and employment law and any unionizing efforts by employees could have a material adverse effect on our results of operations.

We face the risk that Congress, federal agencies or one or more states could approve legislation or regulations significantly affecting our businesses and our relationship with our employees, such as the previously proposed federal legislation referred to as the Employee Free Choice Act, which would have substantially liberalized the procedures for union organization. None of our domestic employees are currently covered by a collective bargaining agreement, but any attempt by our employees to organize a labor union could result in increased legal and other associated costs. Additionally, given the National Labor Relations Board’s “speedy election” rule, our ability to timely and effectively address any unionizing efforts would be difficult. If we enter into a collective bargaining agreement with our domestic employees, the terms could materially adversely affect our costs, efficiency and ability to generate acceptable returns on the affected operations.

Additionally, the Department of Labor issued a final rule in 2016 raising the minimum salary basis exemption from overtime payments for executive, administrative and professional employees. The rule increases the minimum salary from the current amount of $23,660 to $47,476 and up to 10% of non-discretionary bonus, commission and other incentive payments can be counted towards the minimum salary requirement. The rule was scheduled to go into effect on December 1, 2016. The rule was temporarily enjoined from going into effect in November 2016, and later invalidated in August 2017, after several states and business groups filed separate lawsuits against the Department of Labor challenging the rule. However, any future rule similar to this rule that impacts the way we classify certain positions, increases our payment of overtime wages or increases the salaries we are required to pay to currently exempt employees to maintain their exempt status may have a material adverse effect on our business, financial condition and results of operations.

 

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If sensitive information about our customers is disclosed, or if we or our third-party providers are subject to real or perceived cyberattacks, our customers may curtail use of our platform, we may be exposed to liability and our reputation would suffer.

We collect, transmit and store personal and financial information provided by our customers, such as names, email addresses, the details of transactions and credit card and other financial information. Some of our third-party service providers, such as identity verification and payment processing providers, also regularly have access to customer data. In an effort to protect sensitive information, we rely on a variety of security measures, including encryption and authentication technology licensed from third parties. However, advances in computer capabilities, increasingly sophisticated tools and methods used by hackers and cyber terrorists, new discoveries in the field of cryptography or other developments may result in our failure or inability to adequately protect sensitive information.

Like other online services, we are also vulnerable to computer viruses, unauthorized access, phishing or social engineering attacks, ransomware attacks, denial-of-service attacks and other real or perceived cyberattacks. Any of these incidents could lead to interruptions or shutdowns of our platform, loss or corruption of data, or unauthorized access to or disclosure of personal data or other sensitive information. Cyberattacks could also result in the theft of our intellectual property. We have been subject to attempted cyber, phishing or social engineering attacks in the past and may continue to be subject to such attacks in the future. If we gain greater visibility, we may face a higher risk of being targeted by cyberattacks. Advances in computer capabilities, new technological discoveries or other developments may result in cyberattacks becoming more sophisticated and more difficult to detect. We and our third-party service providers may not have the resources or technical sophistication to anticipate or prevent all such cyberattacks. Moreover, techniques used to obtain unauthorized access to systems change frequently and may not be known until launched against us or our third-party service providers. Security breaches can also occur as a result of non-technical issues, including intentional or inadvertent actions by our employees, our third-party service providers, or their personnel.

We and our third-party service providers regularly experience cyberattacks aimed at disrupting our and their services. If we or our third-party service providers experience, or are believed to have experienced, security breaches that result in marketplace performance or availability problems or the loss or corruption of, or unauthorized access to or disclosure of, personal data or confidential information, people may become unwilling to provide us the information necessary make purchases on our sites. Existing customers may also decrease their purchases or close their accounts altogether. We could also face potential liability and litigation, which may not be adequately covered by insurance. Any of these results could harm our growth prospects, our business and our reputation.

Failure to comply with federal, state and international laws and regulations and our contractual obligations relating to privacy, data protection and consumer protection, or the expansion of current or the enactment of new laws or regulations relating to privacy, data protection and consumer protection, could adversely affect our business and our financial condition.

We collect and maintain significant amounts of personal data and other data relating to our customers and employees. A variety of federal, state and international laws and regulations, and certain industry standards, govern or apply to our collection, use, retention, sharing and security of consumer data. We are subject to certain laws, regulations, contractual obligations and industry standards (including, for example, the Payment Card Industry Data Security Standard, or PCI-DSS) relating to privacy, data protection, information security and consumer protection, including California’s Consumer Legal Remedies Act and unfair competition and false advertising laws, which are evolving and subject to potentially differing interpretations. These requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another or may conflict with other rules or our practices. As a result, our practices likely have not complied or may not comply in the future with all such laws, regulations, requirements and obligations. Any failure, or perceived failure, by us to comply with our privacy policies or with any federal, state or international laws, regulations, industry self-regulatory principles, industry standards or codes of conduct, regulatory guidance, orders to which we may be subject or

 

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other legal or contractual obligations relating to privacy, data protection, information security or consumer protection could adversely affect our reputation, brand and business, and may result in claims, proceedings or actions against us by governmental entities or others or other liabilities or require us to change our operations and/or cease or modify our use of certain data sets. Any such claim, proceeding or action could hurt our reputation, brand and business, force us to incur significant expenses in defense of such proceedings, distract our management, increase our costs of doing business, result in a loss of customers and suppliers or an inability to process credit card payments and may result in the imposition of monetary penalties. We may also be contractually required to indemnify and hold harmless third parties from the costs or consequences of non-compliance with any laws, regulations or other legal obligations relating to privacy or consumer protection or any inadvertent or unauthorized use or disclosure of data that we store or handle as part of operating our business.

Federal, state and international governmental authorities continue to evaluate the privacy implications inherent in the use of third-party “cookies” and other methods of online tracking for behavioral advertising and other purposes. U.S. and foreign governments have enacted, have considered or are considering legislation or regulations that could significantly restrict the ability of companies and individuals to engage in these activities, such as by regulating the level of consumer notice and consent required before a company can employ cookies or other electronic tracking tools or the use of data gathered with such tools. Additionally, some providers of consumer devices and web browsers have implemented, or announced plans to implement, means to make it easier for Internet users to prevent the placement of cookies or to block other tracking technologies, which could if widely adopted result in the use of third-party cookies and other methods of online tracking becoming significantly less effective. Regulation of the use of these cookies and other online tracking and advertising practices, or a loss in our ability to make effective use of services that employ such technologies, could increase our costs of operations and limit our ability to track trends, optimize our product assortment or acquire new customers on cost-effective terms and consequently, materially adversely affect our business, financial condition and operating results.

Foreign laws and regulations relating to privacy, data protection, information security, and consumer protection often are more restrictive than those in the United States. The European Union, for example, traditionally has imposed stricter obligations under its laws and regulations relating to privacy, data protection and consumer protection than the United States. In May 2018 the European Union’s new regulation governing data practices and privacy called the General Data Protection Regulation, or GDPR, became effective and substantially replaced the data protection laws of the individual European Union member states. The law requires companies to meet more stringent requirements regarding the handling of personal data of individuals in the EU than were required under predecessor EU requirements. In the United Kingdom, a Data Protection Bill that substantially implements the GDPR also became law in May 2018. The law also increases the penalties for non-compliance, which may result in monetary penalties of up to 20.0 million Euros or 4% of a company’s worldwide turnover, whichever is higher. The GDPR and other similar regulations require companies to give specific types of notice and in some cases seek consent from consumers and other data subjects before collecting or using their data for certain purposes, including some marketing activities. Outside of the European Union, many countries and territories have laws, regulations, or other requirements relating to privacy, data protection, information security, and consumer protection, and new countries and territories are adopting such legislation or other obligations with increasing frequency. Many of these laws may require consent from consumers for the use of data for various purposes, including marketing, which may reduce our ability to market our products. There is no harmonized approach to these laws and regulations globally. Consequently, we would increase our risk of non-compliance with applicable foreign data protection laws by expanding internationally. We may need to change and limit the way we use personal information in operating our business and may have difficulty maintaining a single operating model that is compliant. In addition, various federal, state and foreign legislative and regulatory bodies, or self-regulatory organizations, may expand current laws or regulations, enact new laws or regulations or issue revised rules or guidance regarding privacy, data protection, information security and consumer protection. For example, California recently enacted the California Consumer Privacy Act, or CCPA, which will, among other things, require new disclosures to California consumers and afford such consumers new

 

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abilities to opt out of certain sales of personal information, when it goes into effect on January 1, 2020. Legislators have stated that they intend to propose amendments to the CCPA before it goes into effect, and it remains unclear what, if any, modifications will be made to this legislation or how it will be interpreted. The effects of the CCPA potentially are significant, however, and may require us to modify our data processing practices and policies and to incur substantial costs and expenses in an effort to comply. As a general matter, compliance with laws, regulations, and any applicable rules or guidance from self-regulatory organizations relating to privacy, data protection, information security and consumer protection, may result in substantial costs and may necessitate changes to our business practices, which may compromise our growth strategy, adversely affect our ability to acquire customers, and otherwise adversely affect our business, financial condition and operating results.

System interruptions that impair customer access to our sites or other performance failures in our technology infrastructure could damage our business, reputation and brand and substantially harm our business and results of operations.

The satisfactory performance, reliability and availability of our sites, transaction-processing systems and technology infrastructure are critical to our reputation and our ability to acquire and retain customers, as well as maintain adequate customer service levels.

We currently use two redundant third-party data center hosting facilities in Los Angeles County, California. If the facilities where the computer and communications hardware are located fail, or if we suffer an interruption or degradation of services at our main facility, we could lose customer data and miss order fulfillment deadlines, which could harm our business. Our systems and operations are vulnerable to damage or interruption from fire, flood, power loss, telecommunications failure, terrorist attacks, cyberattacks, data loss, acts of war, break-ins, earthquake and similar events. For example, in September 2018 a distributed denial of service, or DDoS, attack caused our sites to be down for several hours, and we could be the subject of similar attacks in the future. In the event of a failure of our main facility, the failover to our back-up facility could take substantial time, during which time our sites could be completely shut down. Our back-up facility is designed to support transaction volume at a level slightly above our average daily sales, but is not adequate to support spikes in demand. The back-up facility may not process effectively during time of higher traffic to our sites and may process transactions more slowly and may not support all of our sites’ functionality.

We use complex custom-built proprietary software in our technology infrastructure, which we seek to continually update and improve. We may not always be successful in executing these upgrades and improvements, and the operation of our systems may be subject to failure. In particular, we have in the past and may in the future experience slowdowns or interruptions in some or all of our sites when we are updating them, and new technologies or infrastructures may not be fully integrated with existing systems on a timely basis, or at all. Additionally, if we expand our use of third-party services, including cloud-based services, our technology infrastructure may be subject to increased risk of slowdown or interruption as a result of integration with such services and/or failures by such third parties, which are out of our control. Our net sales depend on the number of visitors who shop on our sites and the volume of orders we can handle. Unavailability of our sites or reduced order fulfillment performance would reduce the volume of goods sold and could also materially adversely affect consumer perception of our brand. We may experience periodic system interruptions from time to time. In addition, continued growth in our transaction volume, as well as surges in online traffic and orders associated with promotional activities or seasonal trends in our business, place additional demands on our technology platform and could cause or exacerbate slowdowns or interruptions. If there is a substantial increase in the volume of traffic on our sites or the number of orders placed by customers, we will be required to further expand, scale and upgrade our technology, transaction processing systems and network infrastructure. There can be no assurance that we will be able to accurately project the rate or timing of increases, if any, in the use of our sites or expand, scale and upgrade our technology, systems and infrastructure to accommodate such increases on a timely basis. In order to remain competitive, we must continue to enhance and improve the responsiveness, functionality and features of our sites, which is particularly challenging given the rapid rate at which new technologies,

 

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customer preferences and expectations and industry standards and practices are evolving in the eCommerce industry. Accordingly, we redesign and enhance various functions on our sites on a regular basis, and we may experience instability and performance issues as a result of these changes.

Any slowdown or failure of our sites and the underlying technology infrastructure could harm our business, reputation and our ability to acquire, retain and serve our customers, which could materially adversely affect our results of operations and our business interruption insurance may not be sufficient to compensate us for the losses that could occur.

We are increasingly dependent on information technology, and if we are unable to protect against service interruptions, data corruption, cyber-based attacks or network security breaches, our operations could be disrupted.

We rely on information technology networks and systems to market and sell our products, to process, transmit and store electronic and financial information, to manage a variety of business processes and activities and to comply with regulatory, legal and tax requirements. We are increasingly dependent on a variety of information systems to effectively process customer orders. We depend on our information technology infrastructure for digital marketing activities and for electronic communications among our personnel, customers, manufacturers and suppliers around the world. These information technology systems, some of which are managed by third parties, may be susceptible to damage, disruptions or shutdowns due to failures during the process of upgrading or replacing software, databases or components, power outages, hardware failures, computer viruses, attacks by computer hackers, telecommunication failures, user errors or catastrophic events. Any material disruption of our systems, or the systems of our third-party service providers, could disrupt our ability to track, record and analyze the products that we sell and could negatively impact our operations, shipment of goods, ability to process financial information and transactions, and our ability to receive and process retail customers and eCommerce orders or engage in normal business activities. If our information technology systems suffer damage, disruption or shutdown and we do not effectively resolve the issues in a timely manner, our business, financial condition and results of operations may be materially and adversely affected, and we could experience delays in reporting our financial results.

Our eCommerce operations are important to our business. Our website serves as an effective extension of our marketing strategies by exposing potential new consumers to our brand, product offerings and enhanced content. Due to the importance of our website and eCommerce operations, we are vulnerable to website downtime and other technical failures. Our failure to successfully respond to these risks could reduce eCommerce sales and damage our brand’s reputation.

We must successfully maintain, scale and upgrade our information technology systems, and our failure to do so could have a material adverse effect on our business, financial condition and results of operations.

We have identified the need to significantly expand, scale and improve our information technology systems and personnel to support recent and expected future growth. As such, we are in process of implementing, and will continue to invest in and implement, significant modifications and upgrades to our information technology systems and procedures, including replacing legacy systems with successor systems, making changes to legacy systems or acquiring new systems with new functionality, hiring employees with information technology expertise and building new policies, procedures, training programs and monitoring tools. These types of activities subject us to inherent costs and risks associated with replacing and changing these systems, including impairment of our ability to leverage our eCommerce channels, fulfill customer orders, potential disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, acquisition and retention of sufficiently skilled personnel to implement and operate the new systems, demands on management time, the introduction of errors or vulnerabilities and other risks and costs of delays or difficulties in transitioning to or integrating new systems into our current systems. These implementations, modifications and

 

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upgrades may not result in productivity improvements at a level that outweighs the costs of implementation, or at all. Additionally, difficulties with implementing new technology systems, delays in our timeline for planned improvements, significant system failures, or our inability to successfully modify our information systems to respond to changes in our business needs may cause disruptions in our business operations and have a material adverse effect on our business, financial condition and results of operations.

Some of our software and systems contain open source software, which may pose particular risks to our proprietary applications.

We use open source software in the applications we have developed to operate our business and will use open source software in the future. We may face claims from third parties demanding the release or license of the open source software or derivative works that we developed from such software (which could include our proprietary source code) or otherwise seeking to enforce the terms of the applicable open source license. These claims could result in litigation and could require us to purchase a costly license, publicly release the affected portions of our source code, or cease offering the implicated solutions unless and until we can re-engineer them to avoid infringement. In addition, our use of open source software may present additional security risks because the source code for open source software is publicly available, which may make it easier for hackers and other third parties to determine how to breach our website and systems that rely on open source software. Any of these risks could be difficult to eliminate or manage and, if not addressed, could have an adverse effect on our business and operating results.

Our software is highly complex and may contain undetected errors.

The software underlying our sites is highly complex and may contain undetected errors or vulnerabilities, some of which may only be discovered after the code has been released. We rely heavily on a software engineering practice known as “continuous deployment,” meaning that we typically release software code multiple times per day. This practice may result in the more frequent introduction of errors or vulnerabilities into the software underlying our platform. Any errors or vulnerabilities discovered in our code after release could result in damage to our reputation, loss of customers, disruption to our eCommerce channels, loss of revenue or liability for damages, any of which could adversely affect our growth prospects and our business.

Our business may be adversely affected if we are unable to provide our customers a cost-effective shopping platform that is able to respond and adapt to rapid changes in technology.

The number of people who access the Internet through devices other than personal computers, including mobile phones, smartphones, handheld computers such as notebooks and tablets, video game consoles, and television set-top devices, has increased dramatically in the past few years. The smaller screen size, functionality, and memory associated with some alternative devices may make the use of our sites and purchasing our products more difficult. The versions of our sites developed for these devices may not be compelling to consumers. In addition, it is time consuming and costly to keep pace with rapidly changing and continuously evolving technology. We launched our mobile applications for REVOLVE and FORWARD in 2013, and all of our North American sites and a majority of our international sites are mobile-optimized. In 2018, 49.3% of orders were placed from a mobile device. However, we cannot be certain that our mobile applications or our mobile-optimized sites will be successful in the future.

As existing mobile devices and platforms evolve and new mobile devices and platforms are released, it is difficult to predict the problems we may encounter in adjusting and developing applications for changed and alternative devices and platforms, and we may need to devote significant resources to the creation, support and maintenance of such applications. If we are unable to attract consumers to our websites through these devices or are slow to develop a version of our websites that is more compatible with alternative devices or a mobile application, we may fail to capture a significant share of consumers in the fashion retail market, which could materially and adversely affect our business.

 

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Further, we continually upgrade existing technologies and business applications, and we may be required to implement new technologies or business applications in the future. The implementation of upgrades and changes requires significant investments. Our results of operations may be affected by the timing, effectiveness and costs associated with the successful implementation of any upgrades or changes to our systems and infrastructure. In the event that it is more difficult for our customers to buy products from us on their mobile devices, or if our customers choose not to buy products from us on their mobile devices or to use mobile products that do not offer access to our websites, our customer growth could be harmed and our business, financial condition and operating results may be materially adversely affected.

Government regulation of the Internet and eCommerce is evolving, and unfavorable changes or failure by us to comply with these regulations could substantially harm our business and results of operations.

We are subject to general business regulations and laws as well as regulations and laws specifically governing the Internet and eCommerce. Existing and future regulations and laws could impede the growth of the Internet, eCommerce or mobile commerce. These regulations and laws may involve taxes, tariffs, privacy, data protection, data security, anti-spam, content protection, electronic contracts and communications, consumer protection, website accessibility, Internet neutrality and gift cards. It is not clear how existing laws governing issues such as property ownership, sales and other taxes and consumer privacy apply to the Internet as many of these laws were adopted prior to the advent of the Internet and do not contemplate or address the unique issues raised by the Internet or eCommerce. It is possible that general business regulations and laws, or those specifically governing the Internet or eCommerce, may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another and may conflict with other rules or our practices. We cannot be sure that our practices have complied, comply or will comply fully with all such laws and regulations. Any failure, or perceived failure, by us to comply with any of these laws or regulations could result in damage to our reputation, a loss in business and proceedings or actions against us by governmental entities or others. Any such proceeding or action could hurt our reputation, force us to spend significant amounts in defense of these proceedings, distract our management, increase our costs of doing business, decrease the use of our sites by consumers and suppliers and may result in the imposition of monetary liability. We may also be contractually liable to indemnify and hold harmless third parties from the costs or consequences of non-compliance with any such laws or regulations. In addition, it is possible that governments of one or more countries or territories may seek to censor content available on our sites or may even attempt to completely block access to our sites. Adverse legal or regulatory developments could substantially harm our business. In particular, in the event that we are restricted, in whole or in part, from operating in one or more countries or territories, our ability to retain or increase our customer base may be adversely affected, and we may not be able to maintain or grow our net sales and expand our business as anticipated.

If we cannot successfully protect our intellectual property, our business would suffer.

We rely on trademark, copyright, trade secrets, confidentiality agreements and other practices to protect our brands, designs, proprietary information, technologies and processes. Our principal trademark assets include the registered trademarks “REVOLVE,” “FORWARD BY ELYSE WALKER” and multiple owned brand names and our logos and taglines. Our trademarks are valuable assets that support our brand and consumers’ perception of our services and merchandise. We also hold the rights to the “revolve.com” and “fwrd.com” Internet domain names and various other related domain names, which are subject to Internet regulatory bodies and trademark and other related laws of each applicable jurisdiction. We have copyrights and other proprietary rights associated with our owned brands’ apparel and other products.

If we are unable to protect our trademarks or domain names in the United States or in other jurisdictions in which we may ultimately operate, our brand recognition and reputation would suffer, we would incur significant expense establishing new brands and our operating results would be adversely impacted. We expend substantial resources in the development of new high-quality products but are susceptible to counterfeiting, which may harm our reputation for producing such products and force us to incur expenses in enforcing our intellectual property

 

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rights. Counterfeiting of our products may be difficult or costly to detect and any related claims or lawsuits to enforce our rights can be expensive to resolve, require management time and resources, and may not provide a satisfactory or timely result. Despite our efforts to enforce our intellectual property rights, counterfeiters may continue to violate our intellectual property rights by using our trademarks or imitating or copying our products, which could harm our brand, reputation and financial condition. Since our products are sold internationally, we are also dependent on the laws of a range of countries and territories to protect and enforce our intellectual property rights.

We currently have no registered copyrights, applications for copyright registrations, patents issued or applications pending in the United States or internationally. Any registered copyrights or patents that may be issued in the future may not provide us with any competitive advantages or may be challenged by third parties, and future registered copyrights or patent applications may never be granted. Even if issued, there can be no assurance that these registered copyrights or patents will adequately protect our intellectual property or survive a legal challenge, as the legal standards relating to the validity, enforceability and scope of protection of registered copyright, patent and other intellectual property rights are uncertain. Our limited registered copyright and patent protection may restrict our ability to protect our technologies and processes from competition. We primarily rely on unregistered copyrights to protect our designs and products and on trade secret laws to protect our technologies and processes, including the algorithms we use throughout our business. Others may independently develop the same or similar designs, products, technologies and processes, or may improperly acquire and use information about our technologies and processes, which may allow them to provide products or services similar to ours, which could harm our competitive position.

We may be required to spend significant resources to monitor and protect our intellectual property rights, and the efforts we take to protect our proprietary rights may not be sufficient.

The inability to acquire, use or maintain our marks and domain names for our sites could substantially harm our business, financial condition and operating results.

We currently are the registrant of marks for our brands in numerous jurisdictions and are the registrant of the Internet domain name for the websites of revolve.com and fwrd.com and our other sites, as well as various related domain names. However, we have not registered our marks or domain names in all major international jurisdictions. Domain names generally are regulated by Internet regulatory bodies. As our business grows we may incur material costs in connection with the registration, maintenance, and protection of our marks. If we do not have or cannot obtain on reasonable terms the ability to use our marks in a particular country, or to use or register our domain name, we could be forced either to incur significant additional expenses to market our products within that country, including the development of a new brand and the creation of new promotional materials and packaging, or to elect not to sell products in that country. Either result could materially adversely affect our business, financial condition and operating results.

Furthermore, the regulations governing domain names and laws protecting marks and similar proprietary rights could change in ways that block or interfere with our ability to use relevant domains or our current brand. Also, we might not be able to prevent third parties from registering, using or retaining domain names that interfere with our consumer communications or infringe or otherwise decrease the value of our marks, domain names and other proprietary rights. Regulatory bodies also may establish additional generic or country-code top-level domains or may allow modifications of the requirements for registering, holding or using domain names. As a result, we might not be able to register, use or maintain the domain names that use the name REVOLVE, FORWARD, superdown or our brands in all of the countries and territories in which we currently or intend to conduct business.

We may be accused of infringing intellectual property or other proprietary rights of third parties.

We are also at risk of claims by others that we have infringed their copyrights, trademarks or patents, or improperly used or disclosed their trade secrets, or otherwise infringed or violated their proprietary rights, such

 

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as the right of publicity. The costs of supporting any litigation or disputes related to these claims can be considerable, and we cannot assure you that we will achieve a favorable outcome of any such claim. If any such claim is valid, we may be compelled to cease our use of such intellectual property or other proprietary rights and pay damages, which could adversely affect our business. Even if such claims were not valid, defending them could be expensive and distracting, adversely affecting our operating results.

We are subject to payment-related risks.

We accept payments using a variety of methods, including credit card, gift cards, debit card, PayPal and other third-party payment vendors, which subjects us to certain regulations and the risk of fraud, and we may in the future offer new payment options to customers that would be subject to additional regulations and risks. We pay interchange and other fees in connection with credit card payments, which may increase over time and adversely affect our operating results. While we use a third party to process payments, we are subject to payment card association operating rules and certification requirements, including the PCI-DSS and rules governing electronic funds transfers. If we fail to comply with applicable rules and regulations, we may be subject to fines or higher transaction fees and may lose our ability to accept online payments or other payment card transactions. If any of these events were to occur, our business, financial condition and operating results could be adversely affected.

We may incur significant losses from fraud.

We have in the past incurred and may in the future incur losses from various types of fraud, including stolen credit card numbers, claims that a customer did not authorize a purchase, merchant fraud and customers who have closed bank accounts or have insufficient funds in open bank accounts to satisfy payments. Although we have measures in place to detect and reduce the occurrence of fraudulent activity in our marketplace, those measures may not always be effective. In addition to the direct costs of such losses, if the fraud is related to credit card transactions and becomes excessive, it could potentially result in us paying higher fees or losing the right to accept credit cards for payment. In addition, under current credit card practices, we are liable for fraudulent credit card transactions because we do not obtain a cardholder’s signature. Our failure to adequately prevent fraudulent transactions could damage our reputation, result in litigation or regulatory action and lead to expenses that could substantially impact our operating results.

We have identified a material weakness in our internal control over financial reporting and if we have failed to remediate this weakness and maintain proper and effective internal controls, our ability to produce accurate and timely consolidated financial statements could be impaired, which could harm our operating results, our ability to operate our business and investors’ views of us.

Ensuring that we have adequate internal financial and accounting controls and procedures in place so that we can produce accurate consolidated financial statements on a timely basis is a costly and time-consuming effort that needs to be evaluated frequently. As a private company, we have not historically prepared public company financial statements. In connection with the audit of our 2017 consolidated financial statements, we have identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim consolidated financial statements will not be prevented or detected on a timely basis.

In connection with the audit of our 2017 consolidated financial statements, we and our independent registered public accounting firm identified a material weakness in our internal controls in 2017 related to the lack of resources necessary to perform adequate review of our financial information. To remediate such material weakness, we hired additional personnel with requisite skills in both technical accounting and internal control over financial reporting. In addition, we engaged external advisors that provided financial accounting assistance and evaluated and documented the design and operating effectiveness of our internal controls and assisted with

 

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the remediation and implementation of our internal controls as required. We will continue to evaluate the longer-term resource needs of our various financial functions. While we have fully implemented our remediation plan with respect to this material weakness, we cannot assure you we will have addressed the underlying causes of the material weakness or that we will not identify other control deficiencies in the future.

Implementing any appropriate changes to our internal controls and continuing to update and maintain our internal controls may distract our officers and employees, entail substantial costs to implement new processes and modify our existing processes and take significant time to complete. If we fail to enhance our internal control over financial reporting to meet the demands that will be placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act of 2002 or the Sarbanes-Oxley Act, we may be unable to report our financial results accurately or in a timely manner, which could increase operating costs and harm our business, including our investors’ perception of our business and our share price. The actions we plan to take are subject to continued management review supported by confirmation and testing, as well as audit committee oversight. While we expect to fully remediate the material weakness, we cannot assure you that we will be able to do so in a timely manner, which could impair our ability to report our financial position.

If our internal control over financial reporting or our disclosure controls and procedures are not effective, we may not be able to accurately report our financial results, prevent fraud or file our periodic reports in a timely manner, which may cause investors to lose confidence in our reported financial information and may lead to a decline in our stock price.

We have been a private company for 16 years, and as such, we have not had the internal control and financial reporting requirements that are required of a publicly traded company. We are required to comply with the requirements of the Sarbanes-Oxley Act, following the later of the date we are deemed to be an “accelerated filer” or a “large accelerated filer,” each as defined in the Securities Exchange Act of 1934, as amended, or the Exchange Act, or the date we are no longer an “emerging growth company,” as defined in the JOBS Act, which could be as early as our first fiscal year beginning after the effective date of this offering. The Sarbanes-Oxley Act requires that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluation, document our controls and perform testing of our key controls over financial reporting to allow management and our independent registered public accounting firm to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses. If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock would likely decline and we could be subject to lawsuits, sanctions or investigations by regulatory authorities, which would require additional financial and management resources.

We continue to invest in more robust technology and in more resources in order to manage those reporting requirements. Implementing the appropriate changes to our internal controls and remediating our material weakness may distract our officers and employees, result in substantial costs to implement new processes or modify our existing processes and require significant time to complete. Any difficulties or delays in implementing the system could impact our ability to timely report our financial results. In addition, we currently rely on a manual process in some areas which increases our exposure to human error or intervention in reporting our financial results. For these reasons, we may encounter difficulties in the timely and accurate reporting of our financial results, which would impact our ability to provide our investors with information in a timely manner. As a result, our investors could lose confidence in our reported consolidated financial information, and our stock price could decline.

In addition, any such changes do not guarantee that we will be effective in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy could prevent us from accurately reporting our financial results.

 

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Customer growth and activity on mobile devices depends upon effective use of mobile operating systems, networks and standards that we do not control.

Purchases using mobile devices by consumers generally, and by our customers specifically, have increased significantly, and we expect this trend to continue. To optimize the mobile shopping experience, we are dependent on our customers downloading our specific mobile applications for their particular device or accessing our sites from an Internet browser on their mobile device. As new mobile devices and platforms are released, it is difficult to predict the problems we may encounter in developing applications for these alternative devices and platforms, and we may need to devote significant resources to the creation, support and maintenance of such applications. In addition, our future growth and our results of operations could suffer if we experience difficulties in the future in integrating our mobile applications into mobile devices, if problems arise with our relationships with providers of mobile operating systems or mobile application download stores, such as those of Apple Inc. or Google Inc., if our applications receive unfavorable treatment compared to competing applications, such as the order of our products in the Apple App Store, or if we face increased costs to distribute or have customers use our mobile applications. We are further dependent on the interoperability of our sites with popular mobile operating systems that we do not control, such as iOS and Android, and any changes in such systems that degrade the functionality of our sites or give preferential treatment to competitive products could adversely affect the usage of our sites on mobile devices. In the event that it is more difficult for our customers to access and use our sites on their mobile devices, or if our customers choose not to access or to use our sites on their mobile devices or to use mobile products that do not offer access to our sites, our customer growth could be harmed and our business, financial condition and operating results may be materially and adversely affected.

We may expand our business through acquisitions of other businesses, which may divert management’s attention and/or prove to be unsuccessful.

We acquired Alliance, Inc. in 2014 and may acquire additional businesses or technologies in the future. Acquisitions may divert management’s time and focus from operating our business. Acquisitions also may require us to spend a substantial portion of our available cash, incur debt or other liabilities, amortize expenses related to intangible assets or incur write-offs of goodwill or other assets. In addition, integrating an acquired business or technology is risky. Completed and future acquisitions may result in unforeseen operational difficulties and expenditures associated with:

 

   

incorporating new businesses and technologies into our infrastructure;

 

   

consolidating operational and administrative functions;

 

   

coordinating outreach to our community;

 

   

maintaining morale and culture and retaining and integrating key employees;

 

   

maintaining or developing controls, procedures and policies (including effective internal control over financial reporting and disclosure controls and procedures); and

 

   

identifying assuming liabilities related to the activities of the acquired business before the acquisition, including liabilities for violations of laws and regulations, intellectual property issues, commercial disputes, taxes and other matters.

Moreover, we may not benefit from our acquisitions as we expect, or in the time frame we expect. We also may issue additional equity securities in connection with an acquisition, which could cause dilution to our stockholders. Finally, acquisitions could be viewed negatively by analysts, investors or our customers.

If we fail to attract and retain key personnel, or effectively manage succession, our business, financial condition and operating results could be adversely affected.

Our success, including our ability to anticipate and effectively respond to changing style trends, depends in part on our ability to attract and retain key personnel on our executive team, particularly our co-chief executive

 

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officers, and in our merchandising, data science, engineering, marketing, design and other organizations. Competition for key personnel is strong, and we cannot be sure that we will be able to attract and retain a sufficient number of qualified personnel in the future, or that the compensation costs of doing so will not adversely affect our operating results. We do not have long-term employment or non-competition agreements with any of our personnel. If we are unable to retain, attract and motivate talented employees with the appropriate skills at cost-effective compensation levels, or if changes to our business adversely affect morale or retention, we may not achieve our objectives and our business and operating results could be adversely affected. In addition, the loss of one or more of our key personnel or the inability to promptly identify a suitable successor to a key role could have an adverse effect on our business. In particular, our co-chief executive officers have unique and valuable experiences leading our company from its inception through today. If either of them were to depart or otherwise reduce their focus on our company, our business may be disrupted. We do not currently maintain key-person life insurance policies on any member of our senior management team or other key employees.

Adverse litigation judgments or settlements resulting from legal proceedings in which we may be involved could expose us to monetary damages or limit our ability to operate our business.

We have in the past and may in the future become involved in private actions, collective actions, investigations and various other legal proceedings by customers, employees, suppliers, competitors, government agencies or others. The results of any such litigation, investigations and other legal proceedings are inherently unpredictable and expensive. Any claims against us, whether meritorious or not, could be time-consuming, result in costly litigation, damage our reputation, require significant amounts of management time and divert significant resources. If any of these legal proceedings were to be determined adversely to us, or we were to enter into a settlement arrangement, we could be exposed to monetary damages or limits on our ability to operate our business, which could have an adverse effect on our business, financial condition and operating results.

Expansion of our operations internationally will require management attention and resources, involves additional risks and may be unsuccessful.

Notwithstanding that 17.9% of our total net sales in 2018 was derived from customers outside of the United States, we have limited experience with operating internationally and selling our merchandise outside of the United States and do not have physical operations outside of the United States. If we choose to expand internationally we would need to adapt to different local cultures, standards and policies. The business model we employ and the merchandise we currently offer may not have the same appeal to consumers outside of the United States. Furthermore, to succeed with customers in international locations, it likely will be necessary to locate fulfillment centers in foreign markets and hire local employees in those international centers, and we may have to invest in these facilities before proving we can successfully run foreign operations. We may not be successful in expanding into international markets or in generating revenue from foreign operations for a variety of reasons, including:

 

   

localization of our merchandise offerings, including translation into foreign languages and adaptation for local practices;

 

   

navigating shipping and returns in a more fragmented geography, particularly if the European Union were to lose members or change its policies regarding the flow of goods across country borders;

 

   

different consumer demand dynamics, which may make our model and the merchandise we offer less successful compared to the United States;

 

   

competition from local incumbents that understand the local market and may operate more effectively;

 

   

regulatory requirements, taxes, trade laws, trade sanctions and economic embargoes, tariffs, export quotas, custom duties or other trade restrictions or any unexpected changes thereto;

 

   

laws and regulations regarding anti-bribery and anti-corruption compliance;

 

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differing labor regulations where labor laws may be more advantageous to employees as compared to the United States and increased labor costs;

 

   

more stringent regulations relating to privacy and data security and access to, or use of, commercial and personal information, particularly in Europe;

 

   

changes in a specific country’s or region’s political or economic conditions; and

 

   

risks resulting from changes in currency exchange rates.

If we invest substantial time and resources to establish and expand our operations internationally and are unable to do so successfully and in a timely manner, our operating results would suffer.

We have operations in China, which exposes us to risks inherent in doing business there.

We use multiple third-party suppliers and manufacturers based primarily in China. With the rapid development of the Chinese economy, the cost of labor has increased and may continue to increase in the future. Furthermore, pursuant to Chinese labor laws, employers in China are subject to various requirements when signing labor contracts, paying remuneration, determining the term of employees’ probation and unilaterally terminating labor contracts. Our results of operations will be materially and adversely affected if the labor costs of our third-party suppliers and manufacturers increase significantly. In addition, we and our manufacturers and suppliers may not be able to find a sufficient number of qualified workers due to the intensely competitive and fluid market for skilled labor in China.

Operating in China exposes us to political, legal and economic risks. In particular, the political, legal and economic climate in China, both nationally and regionally, is fluid and unpredictable. Our ability to operate in China may be adversely affected by changes in U.S. and Chinese laws and regulations such as those related to, among other things, taxation, import and export tariffs, environmental regulations, land use rights, intellectual property, currency controls, network security, employee benefits, hygiene supervision and other matters. In addition, we may not obtain or retain the requisite legal permits to continue to operate in China, and costs or operational limitations may be imposed in connection with obtaining and complying with such permits. In addition, Chinese trade regulations are in a state of flux, and we may become subject to other forms of taxation, tariffs and duties in China. Furthermore, the third parties we rely on in China may disclose our confidential information or intellectual property to competitors or third parties, which could result in the illegal distribution and sale of counterfeit versions of our products. If any of these events occur, our business, financial condition and results of operations could be materially and adversely affected. See also “—Recent and potential tariffs imposed by the U.S. government or a global trade war could increase the cost of our products, which could have a material adverse effect on our business, financial condition and results of operations.”

Our reliance on overseas manufacturing and supply partners, including vendors located in jurisdictions presenting an increased risk of bribery and corruption, exposes us to legal, reputational, and supply chain risk through the potential for violations of federal and international anti-corruption law.

We derive a significant portion of our merchandise for our owned brands from third-party manufacturing and supply partners in foreign countries and territories, including countries and territories perceived to carry an increased risk of corrupt business practices. The U.S. Foreign Corrupt Practices Act, or the FCPA, prohibits U.S. corporations and their representatives from offering, promising, authorizing or making payments to any foreign government official, government staff member, political party or political candidate in an attempt to obtain or retain business abroad. Notwithstanding our efforts to conduct our operations in material compliance with the FCPA, our international vendors could be determined to be our “representatives” under the FCPA, which could expose us to potential liability for the actions of these vendors under the FCPA. If we or our vendors were determined to have violated the FCPA, the U.K. Bribery Act of 2010, or any of the anti-corruption and anti-bribery laws in the countries and territories where we and our vendors do business, we could suffer severe fines

 

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and penalties, profit disgorgement, injunctions on future conduct, securities litigation, bans on transacting certain business, and other consequences that may have a material adverse effect on our business, financial condition and results of operations. In addition, the costs we may incur in defending against any anti-corruption investigations stemming from our or our vendors’ actions could be significant. Moreover, any actual or alleged corruption in our supply chain could carry significant reputational harms, including negative publicity, loss of good will, and decline in share price.

Recent and potential tariffs imposed by the U.S. government or a global trade war could increase the cost of our products, which could have a material adverse effect on our business, financial condition and results of operations.

The U.S. government has recently imposed increased tariffs on certain imports from China. While the current tariffs only affect a small portion of the products that we currently import from China, specifically handbags and makeup, the current U.S. administration has increased the tariff rate from 10% to 25% and indicated that the higher tariffs may be imposed on additional imports from China, including finished goods apparel and shoes, which, if imposed, would include a predominant portion of the products that we import from China. In retaliation for the current and proposed tariffs, China has already implemented, and announced a plan to impose additional tariffs on a wide range of American products. There is also a concern that the imposition of additional tariffs by the United States could result in the adoption of tariffs by other countries as well, leading to a global trade war. Such tariffs could have a significant impact on our business, particularly the REVOLVE segment and owned brands. While we may attempt to renegotiate prices with suppliers or diversify our supply chain in response to tariffs, such efforts may not yield immediate results or may be ineffective. We might also consider increasing prices to the end consumer; however, this could reduce the competitiveness of our products and adversely affect net sales. If we fail to manage these dynamics successfully, gross margins and profitability could be adversely affected. As of the date of this prospectus, tariffs have not had a material impact on our business, but increased tariffs or trade restrictions implemented by the United States or other countries in connection with a global trade war could have a material adverse effect on our business, financial condition and results of operations.

We may experience fluctuations in our tax obligations and effective tax rate, which could adversely affect our operating results.

We are subject to taxes in the United States and the United Kingdom. We record tax expense based on current tax liabilities and our estimates of future tax liabilities, which may include reserves for estimates of probable settlements of tax audits. At any one time, multiple tax years are subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues. As a result, we expect that throughout the year there could be ongoing variability in our quarterly tax rates as taxable events occur and exposures are re-evaluated. Further, our effective tax rate in a given financial statement period may be materially impacted by changes in tax laws, changes in the mix and level of earnings by taxing jurisdictions, or changes to existing accounting rules or regulations. An example is the recently enacted legislation referred to as the Tax Cuts and Jobs Act, or the 2017 Tax Act. Foreign governments may enact tax laws in response to the 2017 Tax Act that could result in further changes to global taxation. There are numerous factors that could affect our tax rate. These may include, among other factors, intercompany transactions, losses incurred in jurisdictions for which we are not able to realize the related tax benefits, and entry into new businesses and geographies. Fluctuations in our tax obligations and effective tax rate could adversely affect our business, financial condition and operating results.

The enactment of tax reform legislation, including legislation implementing changes in taxation of international business activities, could materially impact our financial position and results of operations.

Legislation or other changes in tax laws could increase our liability and adversely affect our after-tax profitability. For example, the Tax Cuts and Jobs Act, or the Tax Act, was enacted in the United States on December 22, 2017. The Tax Act could have a significant impact on our effective tax rate, cash tax expenses and

 

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net deferred tax assets. The Tax Act reduces the U.S. corporate statutory tax rate, eliminates or limits the deduction of several expenses that were previously deductible, imposes a mandatory deemed repatriation tax on undistributed historic earnings of foreign subsidiaries, requires a minimum tax on earnings generated by foreign subsidiaries and permits a tax-free repatriation of foreign earnings through a dividends received deduction (subject to certain exceptions). We have completed our evaluation of the overall impact of the Tax Act on our effective tax rate and balance sheet through fiscal year 2018 and reflected the amounts in our financial statements. The Tax Act may have significant impacts in future periods.

We could be required to collect additional sales taxes or be subject to other tax liabilities that may increase the costs our customers would have to pay for our offering and adversely affect our operating results.

On June 21, 2018, the U.S. Supreme Court held in South Dakota v. Wayfair, Inc. that states could impose sales tax collection obligations on out-of-state retailers even if those retailers lack any physical presence within the states imposing sales taxes. Under Wayfair, a person requires only a “substantial nexus” with the taxing state before the state may subject the person to sales tax collection obligations therein. An increasing number of states, both before and after the Supreme Court’s ruling, have considered or adopted laws that attempt to impose sales tax collection obligations on out-of-state retailers. The Supreme Court’s Wayfair decision has removed a significant impediment to the enactment of these laws, and it is possible that states may seek to tax out-of-state retailers, including for prior tax years. Although we believe that we currently collect sales taxes in all states that have adopted laws imposing sales tax collection obligations on out-of-state retailers since Wayfair was decided, a successful assertion by one or more states requiring us to collect sales taxes where we presently do not do so, or to collect more taxes in a jurisdiction in which we currently do collect some sales taxes, could result in substantial tax liabilities, including taxes on past sales, as well as penalties and interest. The imposition 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, could also create additional administrative burdens for us, put us at a competitive disadvantage if they do not impose similar obligations on our competitors and decrease our future sales, which could have a material adverse impact on our business and operating results.

We may require additional capital to support business growth, and this capital might not be available or may be available only by diluting existing stockholders.

We intend to continue making investments to support our business growth and may require additional funds to support this growth and respond to business challenges, including the need to develop our services, expand our inventory, enhance our operating infrastructure, expand the markets in which we operate and potentially acquire complementary businesses and technologies. Accordingly, we may need to engage in equity or debt financings to secure additional funds. If we raise additional funds through further issuances of equity or convertible debt securities, our existing stockholders could suffer significant dilution, and any new equity securities we issue could have rights, preferences and privileges superior to those of holders of our Class A common stock. Any debt financing secured by us in the future could involve restrictive covenants relating to our capital-raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities. In addition, we may not be able to obtain additional financing on terms favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to us, when we require it, our ability to continue to support our business growth and to respond to business challenges could be significantly limited, and our business and prospects could fail or be adversely affected.

Operating as a public company will require us to incur substantial costs and will require substantial management attention. In addition, our management team has limited experience managing a public company.

As a public company, we will incur substantial legal, accounting and other expenses that we did not incur as a private company. For example, we will be subject to the reporting requirements of the Exchange Act, the applicable requirements of the Sarbanes-Oxley Act and the Dodd-Frank Wall Street Reform and Consumer

 

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Protection Act, or the Dodd-Frank Act, and the rules and regulations of the Securities and Exchange Commission, or the SEC. The rules and regulations of NYSE will also apply to us following this offering. As part of these new requirements, we will need to establish and maintain effective disclosure and financial controls and make changes to our corporate governance practices. We expect that compliance with these requirements will increase our legal and financial compliance costs and will make some activities more time-consuming.

Most of our management and other personnel have little experience managing a public company and preparing public filings. In addition, we expect that our management and other personnel will need to divert attention from other business matters to devote substantial time to the reporting and other requirements of being a public company. In particular, we expect to incur significant expense and devote substantial management effort to complying with the requirements of Section 404 of the Sarbanes-Oxley Act. We may need to hire additional accounting and financial staff with appropriate public company experience and technical accounting knowledge.

Our credit facility contains restrictive covenants that may limit our operating flexibility.

Our credit facility contains restrictive covenants that limit our ability to transfer or dispose of assets, merge with other companies or consummate certain changes of control, acquire other companies, incur additional indebtedness and liens and enter into new businesses. We therefore may not be able to engage in any of the foregoing transactions unless we obtain the consent of the lender or terminate the credit facility, which may limit our operating flexibility. In addition, our credit facility is secured by all of our assets, including our intellectual property, and requires us to satisfy certain financial covenants. There is no guarantee that we will be able to generate sufficient cash flow or sales to meet these financial covenants or pay the principal and interest on any debt under our facility. Furthermore, there is no guarantee that future working capital, borrowings or equity financing will be available to repay or refinance any such debt. Any inability to make scheduled payments or meet the financial covenants on our credit facility would adversely affect our business.

Our operating results could be adversely affected by natural disasters, public health crises, political crises or other catastrophic events.

Our principal offices, data centers and our fulfillment centers are located in Southern California, an area which has a history of earthquakes, and are thus vulnerable to damage. Natural disasters, such as earthquakes, wildfires, hurricanes, tornadoes, floods and other adverse weather and climate conditions; unforeseen public health crises, such as pandemics and epidemics; political crises, such as terrorist attacks, war and other political instability; or other catastrophic events, whether occurring in the United States or internationally, could disrupt our operations in any of our offices and fulfillment centers or the operations of one or more of our third-party providers or vendors. In particular, these types of events could impact our merchandise supply chain, including our ability to ship merchandise to customers from or to the impacted region, and could impact our ability or the ability of third parties to operate our sites and ship merchandise. In addition, these types of events could negatively impact consumer spending in the impacted regions. To the extent any of these events occur, our business and operating results could be adversely affected.

Risks Relating to Our Class A Common Stock and this Offering

The market price of our Class A common stock may be volatile or may decline steeply or suddenly regardless of our operating performance, and we may not be able to meet investor or analyst expectations. You may not be able to resell your shares at or above the initial public offering price and may lose all or part of your investment.

The initial public offering price for our Class A common stock was determined through negotiations between the underwriters and us, and may vary from the market price of our Class A common stock following this offering. If you purchase shares of our Class A common stock in this offering, you may not be able to resell those shares at or above the initial public offering price. We cannot assure you that the market price following this offering will equal or exceed prices in privately negotiated transactions of our shares that have occurred from

 

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time to time before this offering. The market price of our Class A common stock may fluctuate or decline significantly in response to numerous factors, many of which are beyond our control, including:

 

   

actual or anticipated fluctuations in our customer base, the level of customer engagement, net sales or other operating results;

 

   

variations between our actual operating results and the expectations of securities analysts, investors and the financial community;

 

   

any forward-looking financial or operating information we may provide to the public or securities analysts, any changes in this information or our failure to meet expectations based on this information;

 

   

actions of securities analysts who initiate or maintain coverage of us, changes in financial estimates by any securities analysts who follow our company or our failure to meet these estimates or the expectations of investors;

 

   

whether investors or securities analysts view our stock structure unfavorably, particularly our dual-class structure and the significant voting control of our executive officers, directors and their affiliates;

 

   

additional shares of our Class A common stock being sold into the market by us or our existing stockholders, or the anticipation of such sales, including if existing stockholders sell shares into the market when applicable “lock-up” periods end;

 

   

announcements by us or our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;

 

   

changes in operating performance and stock market valuations of companies in our industry, including our vendors and competitors;

 

   

price and volume fluctuations in the overall stock market, including as a result of trends in the economy as a whole;

 

   

lawsuits threatened or filed against us;

 

   

developments in new legislation and pending lawsuits or regulatory actions, including interim or final rulings by judicial or regulatory bodies; and

 

   

other events or factors, including those resulting from war or incidents of terrorism, or responses to these events.

In addition, extreme price and volume fluctuations in the stock markets have affected and continue to affect many eCommerce and other technology companies’ stock prices. Often, their stock prices have fluctuated in ways unrelated or disproportionate to the companies’ operating performance. In the past, stockholders have filed securities class action litigation following periods of market volatility. If we were to become involved in securities litigation, it could subject us to substantial costs, divert resources and the attention of management from our business and seriously harm our business.

Moreover, because of these fluctuations, comparing our operating results on a period-to-period basis may not be meaningful. You should not rely on our past results as an indication of our future performance. This variability and unpredictability could also result in our failing to meet the expectations of industry or financial analysts or investors for any period. If our revenue or operating results fall below the expectations of analysts or investors or below any forecasts we may provide to the market, or if the forecasts we provide to the market are below the expectations of analysts or investors, the price of our Class A common stock could decline substantially. Such a stock price decline could occur even when we have met any previously publicly stated revenue or earnings forecasts that we may provide.

An active trading market for our Class A common stock may never develop or be sustained.

We have been approved to list our Class A common stock on the New York Stock Exchange, or NYSE, under the symbol “RVLV.” However, we cannot assure you that an active trading market for our Class A

 

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common stock will develop on that exchange or elsewhere or, if developed, that any market will be sustained. Accordingly, we cannot assure you of the likelihood that an active trading market for our Class A common stock will develop or be maintained, the liquidity of any trading market, your ability to sell your shares of our Class A common stock when desired, or the prices that you may obtain for your shares. Further, our directors, executive officers and employees, as well as friends and family members of our executive officers and certain members of senior management, and persons with whom we have a business relationship, have the opportunity to purchase up to 588,235 shares of our Class A common stock, or 5% of the shares offered by this prospectus, at the initial public offering price through a directed share program. To the extent any of our executive officers, directors or employees purchase shares in this offering, fewer shares may be actively traded in the public market because these stockholders will be restricted from selling the shares by a 180-day lock-up restriction, which would reduce the liquidity of the market for our Class A common stock.

Future sales of shares by existing stockholders could cause our stock price to decline.

If our existing stockholders, including employees and service providers who obtain equity, sell or indicate an intention to sell, substantial amounts of our Class A common stock in the public market after the lock-up and legal restrictions on resale discussed in this prospectus lapse, the trading price of our Class A common stock could decline. Based on shares outstanding as of March 31, 2019, upon the completion of this offering, we will have outstanding a total of 11,764,706 shares of Class A common stock and 56,664,523 shares of Class B common stock. This assumes no exercise of outstanding options and gives effect to the Corporate Conversion, the repurchase of an aggregate of 2,400,960 shares of Class B common stock from TSG and Capretto, and the issuance of 11,764,706 shares of Class A common stock on the completion of this offering. Of these shares, only the shares of Class A common stock sold in this offering will be freely tradable, without restriction, in the public market immediately after the offering. Each of our directors, executive officers and other holders of substantially all our outstanding shares have entered into lock-up agreements with the underwriters that restrict their ability to sell or transfer their shares for a period of 180 days after the date of this prospectus. However, Morgan Stanley & Co. LLC and Credit Suisse Securities (USA) LLC may, in their sole discretion, waive the contractual lock-up before the lock-up agreements expire. After the lock-up agreements expire, 56,664,523 shares outstanding as of March 31, 2019 (assuming the closing of the offering) will be eligible for sale in the public market, of which 54,803,633 shares are held by directors, executive officers and other affiliates and will be subject to volume limitations under Rule 144 of the Securities Act of 1933, as amended, or the Securities Act, and various vesting agreements. Sales of a substantial number of such shares upon expiration of the lock-up and market stand-off agreements, the perception that such sales may occur or early release of these agreements, could cause our market price to fall or make it more difficult for you to sell your Class A common stock at a time and price that you deem appropriate.

In addition, after giving effect to the Corporate Conversion, 5,130,502 shares of Class B common stock were subject to outstanding stock options as of March 31, 2019. These shares will become eligible for sale in the public market to the extent permitted by the provisions of various vesting agreements, the lock-up agreements and Rules 144 and 701 of the Securities Act. We intend to file a registration statement on Form S-8 under the Securities Act covering all the shares of Class A common stock subject to stock options outstanding and reserved for issuance under our stock plans. That registration statement will become effective immediately on filing, and shares covered by that registration statement will be eligible for sale in the public markets, subject to Rule 144 limitations applicable to affiliates and the lock-up agreements described above. If these additional shares are sold, or if it is perceived that they will be sold in the public market, the trading price of our Class A common stock could decline.

The dual class structure of our common stock will have the effect of concentrating voting control with our executive officers, directors and their affiliates, and it may depress the trading price of our Class A common stock.

Our Class B common stock has ten votes per share and our Class A common stock, which is the stock we are offering in this offering, has one vote per share. Our existing stockholders, all of which hold shares of Class B

 

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common stock, will collectively own shares representing approximately 98% of the voting power of our outstanding capital stock following the completion of this offering. MMMK Development, Inc., an entity controlled by our co-chief executive officers, will control approximately 67% of the voting power of our outstanding capital stock following the completion of this offering and therefore will be able to control all matters submitted to our stockholders for approval, including the election of directors and approval of significant corporate transactions, such as a merger or other sale of our company or our assets, even if their stock holdings represent less than 50% of the outstanding shares of our capital stock. Our co-chief executive officers may have interests that differ from yours and may vote in a way with which you disagree and which may be adverse to your interests. This concentration of ownership will limit the ability of other stockholders to influence corporate matters and may cause us to make strategic decisions that could involve risks to you or that may not be aligned with your interests.

This control may also adversely affect the market price of our Class A common stock. In July 2017, FTSE Russell and Standard & Poor’s announced that they would cease to allow most newly public companies utilizing dual or multi-class capital structures to be included in their indices. Affected indices include the Russell 2000 and the S&P 500, S&P MidCap 400 and S&P SmallCap 600, which together make up the S&P Composite 1500. Under the announced policies, our dual class capital structure would make us ineligible for inclusion in any of these indices, and as a result, mutual funds, exchange-traded funds and other investment vehicles that attempt to passively track these indices will not be investing in our stock. These policies are new and it is unclear what effect, if any, they will have on the valuations of publicly traded companies excluded from the indices, but it is possible that they may depress these valuations compared to those of other similar companies that are included in the indices.

We may invest or spend the proceeds of this offering in ways with which you may not agree or in ways that may not yield a return.

We currently intend to use $40.8 million of the net proceeds to us from this offering to repurchase an aggregate of 2,400,960 shares of Class B common stock from TSG and Capretto following the Corporate Conversion, and the remainder of the net proceeds to us from this offering primarily for general corporate purposes. We may also use a portion of the net proceeds from this offering for the acquisition of, or investment in, brands or businesses that complement our business, although we have no present commitments or agreements to enter into any such acquisition or investment. Our management will have considerable discretion in the application of the net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. The net proceeds may be used for purposes that do not increase the value of our business or increase the risks to you, which could cause the price of our Class A common stock to decline. Until net proceeds are used, they may be placed in investments that do not produce significant income or that may lose value.

If securities or industry analysts either do not publish research about us or publish inaccurate or unfavorable research about us, our business or our market, or if they adversely change their recommendations regarding our Class A common stock, the trading price or trading volume of our Class A common stock could decline.

The trading market for our Class A common stock will be influenced in part by the research and reports that securities or industry analysts may publish about us, our business, our market or our competitors. If one or more of the analysts initiate research with an unfavorable rating or downgrade our Class A common stock, provide a more favorable recommendation about our competitors or publish inaccurate or unfavorable research about our business, our Class A common stock price would likely decline. If any analyst who may cover us were to cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the trading price or trading volume of our Class A common stock to decline.

 

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We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our Class A common stock less attractive to investors.

We are an emerging growth company, and for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to “emerging growth companies,” including:

 

   

not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act;

 

   

reduced disclosure obligations regarding executive compensation in our periodic reports and annual report on Form 10-K; and

 

   

exemptions from the requirements of holding non-binding advisory votes on executive compensation and stockholder approval of any golden parachute payments not previously approved.

We could be an emerging growth company for up to five years following the completion of this offering, although we expect to not be an emerging growth company sooner. Our status as an emerging growth company will end as soon as any of the following takes place:

 

   

the last day of the fiscal year in which we have more than $1.07 billion in annual revenue;

 

   

the date we qualify as a “large accelerated filer,” with at least $700.0 million of equity securities held by non-affiliates;

 

   

the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; or

 

   

the last day of the fiscal year ending after the fifth anniversary of the completion of this offering.

We cannot predict if investors will find our Class A common stock less attractive if we choose to rely on any of the exemptions afforded emerging growth companies. If some investors find our Class A common stock less attractive because we rely on any of these exemptions, there may be a less active trading market for our Class A common stock and the market price of our Class A common stock may be more volatile.

Under the JOBS Act, emerging growth companies can also delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to take advantage of this extended transition period, and as a result, our financial statements may not be comparable with similarly situated public companies.

We have elected to take advantage of the “controlled company” exemption to the corporate governance rules for NYSE-listed companies, which could make our Class A common stock less attractive to some investors or otherwise harm our stock price.

Because we qualify as a “controlled company” under the corporate governance rules for NYSE-listed companies, we are not required to have a majority of our board of directors be independent, nor are we required to have a compensation committee or an independent nominating function. In light of our status as a controlled company, in the future we could elect not to have a majority of our board of directors be independent or not to have a compensation committee or nominating and corporate governance committee. Accordingly, should the interests of our management and MMMK Development, Inc., an entity controlled by our co-chief executive officers, differ from those of other stockholders, the other stockholders may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance rules for NYSE-listed companies. Our status as a controlled company could make our Class A common stock less attractive to some investors or otherwise harm our stock price.

 

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Future securities issuances could result in significant dilution to our stockholders and impair the market price of our Class A common stock.

Future issuances of shares of our Class A common stock or the conversion of a substantial number of shares of our Class B common stock, or the perception that these sales or conversions may occur, could depress the market price of our Class A common stock and result in dilution to existing holders of our Class A common stock. Also, to the extent outstanding options and warrants to purchase our shares of our Class A or Class B common stock are exercised or options or other equity-based awards are issued or become vested, there will be further dilution. The amount of dilution could be substantial depending upon the size of the issuances or exercises. Furthermore, we may issue additional equity securities that could have rights senior to those of our Class A common stock. As a result, purchasers of our Class A common stock in this offering bear the risk that future issuances of debt or equity securities may reduce the value of our Class A common stock and further dilute their ownership interest.

As of March 31, 2019, there were 5,130,502 shares of Class B common stock subject to outstanding options, after giving effect to the Corporate Conversion. In connection with this offering, all of the shares of Class A common stock issuable upon the conversion of shares of Class B common stock subject to outstanding options will be registered for public resale under the Securities Act. Accordingly, these shares will be able to be freely sold in the public market upon issuance as permitted by any applicable vesting requirements, and subject to compliance with applicable securities laws.

In addition, following the closing of this offering, the holders of all of our Class B common stock will have rights, subject to certain conditions, to require us to file registration statements for the public resale of the shares of Class A common stock issuable upon conversion of their shares of Class B common stock, or to include such shares in registration statements that we may file.

The requirements of being a public company may strain our resources, result in more litigation and divert management’s attention.

As a public company, we will be subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Act, the listing requirements of the NYSE and other applicable securities rules and regulations. Complying with these rules and regulations has increased and will increase our legal and financial compliance costs, make some activities more difficult, time consuming or costly and increase demand on our systems and resources. To address these challenges, we recently expanded our finance and accounting teams. The Exchange Act requires, among other things, that we file annual, quarterly and current reports with respect to our business and operating results. The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls and procedures and internal control over financial reporting. We are required to disclose changes made in our internal control and procedures on a quarterly basis. In order to maintain and, if required, improve our disclosure controls and procedures and internal control over financial reporting to meet this standard, significant resources and management oversight may be required. As a result, management’s attention may be diverted from other business concerns, which could adversely affect our business and operating results. We may need to hire additional employees or engage outside consultants to comply with these requirements, which will increase our costs and expenses.

In addition, changing laws, regulations and standards relating to corporate governance and public disclosure are creating uncertainty for public companies, increasing legal and financial compliance costs and making some activities more time consuming. These laws, regulations and standards are subject to varying interpretations, in many cases due to their lack of specificity, and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. This could result in continuing uncertainty regarding compliance matters and higher costs necessitated by ongoing revisions to disclosure and governance practices. We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of management’s time

 

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and attention from revenue-generating activities to compliance activities. If our efforts to comply with new laws, regulations and standards differ from the activities intended by regulatory or governing bodies due to ambiguities related to their application and practice, regulatory authorities may initiate legal proceedings against us and our business may be adversely affected.

These new rules and regulations may make it more expensive for us to obtain director and officer liability insurance, and in the future, we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of our board of directors, particularly to serve on our audit committee and compensation committee, and qualified executive officers.

By disclosing information in this prospectus and in filings required of a public company, our business and financial condition will become more visible, which we believe may result in threatened or actual litigation, including by competitors and other third parties. If those claims are successful, our business could be seriously harmed. Even if the claims do not result in litigation or are resolved in our favor, the time and resources needed to resolve them could divert our management’s resources and seriously harm our business.

Delaware law and provisions in our certificate of incorporation and bylaws that will be in effect on the completion of this offering could make a merger, tender offer or proxy contest difficult, thereby depressing the trading price of our Class A common stock.

Our certificate of incorporation and bylaws that will be in effect on the completion of this offering contain provisions that could depress the trading price of our Class A common stock by acting to discourage, delay or prevent a change of control of our company or changes in our management that the stockholders of our company may deem advantageous. These provisions include the following:

 

   

permit the board of directors to establish the number of directors and fill any vacancies and newly created directorships;

 

   

require super-majority voting to amend some provisions in our certificate of incorporation and bylaws;

 

   

authorize the issuance of “blank check” preferred stock that our board of directors could use to implement a stockholder rights plan;

 

   

eliminate the ability of our stockholders to call special meetings of stockholders;

 

   

prohibit stockholder action by written consent, which requires all stockholder actions to be taken at a meeting of our stockholders;

 

   

provide that the board of directors is expressly authorized to make, alter or repeal our bylaws;

 

   

restrict the forum for certain litigation against us to Delaware;

 

   

reflect the dual class structure of our common stock; and

 

   

establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings.

Any provision of our certificate of incorporation or bylaws, that will be in effect on the completion of this offering or Delaware law that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to receive a premium for their shares of our common stock, and could also affect the price that some investors are willing to pay for our Class A common stock. For information regarding these and other provisions, see the section captioned “Description of Capital Stock—Anti-Takeover Provisions.”

 

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Our bylaws that will be in effect on the completion of this offering will provide that the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware) will be the exclusive forums for substantially all disputes between us and our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.

Our bylaws that will be in effect on the completion of this offering will provide that the Court of Chancery of the State of Delaware (or, if the Court of Chancery does not have jurisdiction, the federal district court for the District of Delaware) is the exclusive forum for:

 

   

any derivative action or proceeding brought on our behalf;

 

   

any action asserting a breach of fiduciary duty;

 

   

any action asserting a claim against us arising under the Delaware General Corporation Law, our certificate of incorporation or our bylaws; and

 

   

any action asserting a claim against us that is governed by the internal-affairs doctrine.

These exclusive-forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage lawsuits against us and our directors, officers and other employees. If a court were to find the exclusive-forum provision in our bylaws that will be in effect on the completion of this offering to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving the dispute in other jurisdictions, which could seriously harm our business. These exclusive-forum provisions do not apply to claims under the Securities Act or the Exchange Act.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that are based on our management’s beliefs and assumptions and on information currently available to our management. Some of the statements under “Prospectus Summary,” “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” and elsewhere in this prospectus contain forward-looking statements. In some cases, you can identify forward-looking statements by the following words: “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of these terms or other comparable terminology, although not all forward-looking statements contain these words.

These statements involve risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking statement contained in this prospectus, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Forward-looking statements in this prospectus include, but are not limited to, statements about:

 

   

our ability to effectively manage or sustain our growth and to effectively expand our operations;

 

   

our ability to retain our existing customers and acquire new customers;

 

   

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;

 

   

our ability to respond to consumer demand, spending and tastes, and our ability to accurately and effectively engage in predictive analytics;

 

   

general economic conditions and their impact on consumer demand;

 

   

our ability to maintain and enhance our brand;

 

   

our ability to optimize, operate, manage and expand our network infrastructure and our fulfillment centers and delivery channels;

 

   

the growth of the market for premium lifestyle and luxury products, and the online market for premium lifestyle and luxury products in particular;

 

   

seasonal sales fluctuations;

 

   

the impact of the launch of superdown in 2019; and

 

   

our ability to expand our product offerings, including our owned brands.

You should refer to the “Risk Factors” section of this prospectus for a discussion of other important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this prospectus, and although we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted a thorough

 

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inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. 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.

 

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MARKET, INDUSTRY AND OTHER DATA

This prospectus contains statistical data, estimates and forecasts that are based on independent industry publications, such as those published by Euromonitor International Limited, or Euromonitor, or other publicly available information, as well as other information based on our internal sources. This information involves many assumptions and limitations, and you are cautioned not to give undue weight to these estimates. We have not independently verified the accuracy or completeness of the data contained in these industry publications and other publicly available information. The industry data presented in this prospectus related to the size of the U.S. apparel and footwear, accessories and beauty markets is based on data from Euromonitor, Apparel and Footwear, 2018 edition, Personal Accessories, 2019 edition and Beauty and Personal Care, 2018 edition. All market sizing data is based on Retail Value RSP (retail selling price), current terms, and a fixed exchange rate. Market sizing data for the global online apparel and footwear, accessories and beauty markets represents Retail Value RSP inclusive of Sales Tax. None of the industry publications referred to in this prospectus were prepared on our or on our affiliates’ behalf or at our expense. While we are not aware of any misstatements regarding any third-party information presented in this prospectus, Euromonitor’s figures are based in part on official statistics, trade associations, trade press, company research, trade interviews and trade services, and as such have not been independently verified by Euromonitor in each case. The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in the section titled “Risk Factors,” that could cause results to differ materially from those expressed in these publications and other publicly available information.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from this offering will be approximately $43.0 million after deducting underwriting discounts and commissions and estimated offering expenses payable by us, assuming an initial offering price of $17.00 per share, which is the midpoint of the price range set forth on the cover page of this prospectus. If the underwriters exercise their option to purchase additional shares in full, we estimate that the net proceeds to be received by us will be approximately $50.0 million, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.

Each $1.00 increase (decrease) in the assumed initial public offering price of $17.00 per share would increase (decrease) the net proceeds to us from this offering by approximately $2.8 million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We will not receive any proceeds from the sale of shares of our Class A common stock by the selling stockholders.

We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) the net proceeds to us from this offering by approximately $15.9 million, assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. We do not expect that a change in the initial public offering price or the number of shares by these amounts would have a material effect on our uses of the proceeds from this offering, although it may accelerate the time when we need to seek additional capital.

The principal purposes of this offering are to increase our financial flexibility, create a public market for our Class A common stock and improve our brand awareness. We intend to use $40.8 million of the net proceeds from this offering to repurchase an aggregate of 2,400,960 shares of Class B common stock from TSG and Capretto following the Corporate Conversion. We expect to use the remainder of the net proceeds from this offering for working capital and other general corporate purposes, which we currently expect will include continued investment to support our growth, increased investment in owned brands, as well as overall growth in our international operations. However, we do not currently have specific planned uses for the proceeds. We may also use a portion of our net proceeds to acquire or invest in complementary brands or businesses; however, we currently have no agreements or commitments to complete any such transactions.

Because we expect to use the net proceeds from this offering for working capital and other general corporate purposes, our management will have broad discretion over the use of the net proceeds from this offering. As of the date of this prospectus, we intend to invest the net proceeds that are not used as described above in capital-preservation investments, including short-term interest-bearing investment-grade securities, certificates of deposit or U.S. government backed securities.

 

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DIVIDEND POLICY

We have never declared or paid any cash dividends on our capital stock, and we do not currently intend to pay any cash dividends on our capital stock in the foreseeable future. We currently intend to retain all available funds and any future earnings to support operations and to finance the growth and development of our business. Any future determination to pay dividends will be made at the discretion of our board of directors subject to applicable laws and will depend upon, among other factors, our results of operations, financial condition, contractual restrictions and capital requirements. 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.

 

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CORPORATE CONVERSION

We currently operate as a Delaware limited liability company under the name Revolve Group, LLC. Prior to the effectiveness of the registration statement of which this prospectus forms a part, Revolve Group, LLC will convert into a Delaware corporation pursuant to a statutory conversion and change its name to Revolve Group, Inc. In this prospectus, we refer to all of the transactions related to our conversion to a corporation described above as the Corporate Conversion.

In conjunction with the Corporate Conversion, all of the outstanding Class T and Class A Units of Revolve Group, LLC will be converted into an aggregate of 67,889,013 shares of our Class B common stock. The holders of Class T Units will first receive an aggregate of 2,400,960 shares of our Class B common stock, representing the total preference amount for the Class T Units. The remaining 65,488,053 shares of our Class B common stock will be allocated pro rata to the Class T and Class A unitholders based on the number of units held by each holder.

Following the conversion of the Class T and Class A Units into shares of our Class B common stock, we will use $40.8 million of the net proceeds to us from this offering to repurchase an aggregate of 2,400,960 shares of Class B common stock held by TSG and Capretto, at a price per share equal to the initial public offering price per share of Class A common stock in this offering less the underwriting discounts and commissions.

In connection with the Corporate Conversion, Revolve Group, Inc. will continue to hold all property and assets of Revolve Group, LLC and will assume all of the debts and obligations of Revolve Group, LLC. Revolve Group, Inc. will be governed by a certificate of incorporation filed with the Delaware Secretary of State and bylaws, the material portions of which are described in the section captioned “Description of Capital Stock.” On the effective date of the Corporate Conversion, the members of the board of managers of Revolve Group, LLC will become the members of the board of directors of Revolve Group, Inc. and the officers of Revolve Group, LLC will become the officers of Revolve Group, Inc.

The purpose of the Corporate Conversion is to reorganize our corporate structure so that the top-tier entity in our corporate structure—the entity that is offering Class A common stock to the public in this offering—is a corporation rather than a limited liability company and so that our existing investors will own our common stock rather than membership units in a limited liability company.

Except as otherwise noted herein, the consolidated financial statements included elsewhere in this prospectus are those of Revolve Group, LLC and its consolidated operations. We do not expect that the Corporate Conversion will have a material effect on the results of our core operations.

 

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CAPITALIZATION

The following table summarizes our cash and capitalization as of March 31, 2019:

 

   

on an actual basis;

 

   

on a pro forma basis to give effect to the Corporate Conversion;

 

   

on a pro forma as adjusted basis to reflect (1) the sale and issuance by us of 2,941,176 shares of Class A common stock in this offering and the receipt of the net proceeds from our sale of these shares at an assumed initial public offering price of $17.00 per share, the midpoint of the range reflected on the cover of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses, (2) the sale of 8,823,530 shares of Class A common stock by the selling stockholders and (3) the repurchase by us of an aggregate of 2,400,960 shares of Class B common stock from TSG and Capretto.

You should read the information in this table together with our consolidated financial statements and related notes to those statements, as well as the sections captioned “Selected Consolidated Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” appearing elsewhere in this prospectus.

 

     As of March 31, 2019  
     Actual      Pro Forma      Pro Forma
As Adjusted(1)
 
     (in thousands, except unit and share data)  

Cash

   $ 27,201      $ 27,201      $ 29,346  
  

 

 

    

 

 

    

 

 

 

Members’ equity:

        

Class T preferred units, no par value: 23,551,834 units authorized, issued and outstanding, actual; no units authorized, issued or outstanding, pro forma or pro forma as adjusted

   $ 15,000      $      $  

Class A common units, no par value, 41,936,219 units authorized, issued and outstanding, actual; no units authorized, issued or outstanding, pro forma or pro forma as adjusted

     4,059                

Accumulated members’ equity

     66,661                

Stockholders’ equity:

        

Preferred stock, $0.001 par value; no shares authorized, issued or outstanding, actual; 10,000,000 shares authorized and no shares issued or outstanding, pro forma or pro forma as adjusted

                    

Class A common stock, $0.001 par value; no shares authorized, issued or outstanding, actual; 1,000,000,000 shares authorized and no shares issued or outstanding pro forma; 1,000,000,000 shares authorized and 11,764,706 shares issued and outstanding pro forma as adjusted

                   12  

Class B common stock, $0.001 par value; no shares authorized, issued or outstanding, actual; 125,000,000 shares authorized and 67,889,013 shares issued and outstanding pro forma; 125,000,000 shares authorized and 56,664,523 shares issued and outstanding pro forma as adjusted

            68        57  

Additional paid-in capital

            18,991       
21,135
 

Retained earnings

            66,661        66,661  
  

 

 

    

 

 

    

 

 

 

Total equity

     85,720        85,720        87,865  
  

 

 

    

 

 

    

 

 

 

Total capitalization

   $ 85,720      $ 85,720      $ 87,865  
  

 

 

    

 

 

    

 

 

 

 

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(1)

Each $1.00 increase (decrease) in the assumed initial public offering price of $17.00 per share, the midpoint of the range reflected on the cover page of this prospectus, would increase (decrease) each of total equity and total capitalization by approximately $2.8 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) each of total equity and total capitalization by approximately $15.9 million, assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing.

The number of shares of our common stock outstanding immediately after this offering is based on 11,764,706 shares of Class A common stock and 56,664,523 shares of Class B common stock outstanding as of March 31, 2019, after giving effect to the Corporate Conversion, and excludes:

 

   

5,130,502 shares of our Class B common stock issuable upon the exercise of outstanding stock options, as of March 31, 2019, having a weighted-average exercise price of $6.21;

 

   

4,500,000 shares of Class A common stock reserved for future issuance under our 2019 Equity Incentive Plan, which will become effective immediately prior to the effectiveness of the registration statement of which this prospectus forms a part; and

 

   

1,400,000 shares of Class A common stock reserved for future issuance under our 2019 Employee Stock Purchase Plan, which will become effective immediately prior to the effectiveness of the registration statement of which this prospectus forms a part.

 

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DILUTION

If you invest in our Class A common stock you will experience immediate and substantial dilution in the pro forma net tangible book value of your shares of Class A common stock. Dilution in pro forma as adjusted net tangible book value represents the difference between the price to public per share of our Class A common stock and the pro forma as adjusted net tangible book value per share, as adjusted to give effect to this offering.

After giving effect to the Corporate Conversion, pro forma net tangible book value as of March 31, 2019 was $83.2 million, or $1.23 per share, based on 67,889,013 shares of our common stock outstanding. After giving effect to the repurchase by us of an aggregate of 2,400,960 shares of Class B common stock from TSG and Capretto, the sale and issuance of 11,764,706 shares of Class A common stock in this offering at the assumed initial public offering price of $17.00 per share, the midpoint of the range reflected on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2019 would have been approximately $85.3 million, or $1.25 per share. This represents an immediate dilution of $15.75 per share to new investors purchasing Class A common stock in this offering.

The following table illustrates this dilution on a per share basis to new investors:

 

Assumed initial public offering price per share

      $ 17.00  

Pro forma net tangible book value per share before this offering

   $ 1.23     

Increase in pro forma net tangible book value per share attributable to investors participating in the offering

   $ 0.02     
  

 

 

    

Pro forma as adjusted net tangible book value per share, as adjusted to give effect to this offering

      $ 1.25  
     

 

 

 

Dilution per share to investors participating in this offering

      $ 15.75  
     

 

 

 

Each $1.00 increase (decrease) in the assumed initial public offering price of $17.00 per share would increase (decrease) our pro forma as adjusted net tangible book value by approximately $2.8 million, or approximately $0.04 per share, and increase (decrease) the dilution per share to investors participating in this offering by approximately $0.96 per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase of 1,000,000 in the number of shares offered by us would increase our pro forma as adjusted net tangible book value by approximately $15.9 million, or $0.21 per share, and the dilution per share to investors participating in this offering would be $15.54 per share, assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, a decrease of 1,000,000 shares in the number of shares offered by us would decrease our pro forma as adjusted net tangible book value by approximately $15.9 million, or $0.22 per share, and the dilution per share to investors participating in this offering would be $15.97 per share, assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us. The pro forma as adjusted information discussed above is illustrative only and will change based on the actual initial public offering price and other terms of this offering determined at pricing.

If the underwriters exercise their option in full to purchase 1,764,705 additional shares of Class A common stock in this offering, the pro forma as adjusted net tangible book value per share after the offering would be $1.32 per share, the increase in the pro forma net tangible book value per share to existing stockholders would be $0.07 per share, and the pro forma as adjusted dilution to new investors purchasing Class A common stock in this offering would be $15.68 per share.

 

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The following table summarizes, on a pro forma as adjusted basis to give effect to this offering, as of March 31, 2019, the differences between the number of shares of common stock purchased from us, the total consideration and the weighted-average price per share paid by existing stockholders and by investors participating in this offering at the assumed initial public offering price of $17.00 per share, the midpoint of the price range set forth on the cover page of this prospectus, before deducting underwriting discounts and commissions and estimated offering expenses (in thousands, except per share amounts and percentages):

 

     Shares Purchased     Total Consideration     Average
Price Per
Share
 
     Number      Percent     Amount      Percent  

Existing stockholders before this offering

     65,488,053        84.8     15,050,000        7.0   $ 0.23  

Investors participating in this offering

     11,764,706        15.2       200,000,002        93.0       17.00  
  

 

 

    

 

 

   

 

 

    

 

 

   

Total

     77,252,759        100.0       215,050,002        100.0       2.78  
  

 

 

    

 

 

   

 

 

    

 

 

   

Sales by the selling stockholders in this offering will cause the number of shares held by existing stockholders to be reduced to 56,664,523 shares, or 83% of the total number of shares of our common stock outstanding after this offering, and will increase the number of shares held by new investors to 11,764,706 shares, or 17% of the total number of shares of our common stock outstanding after this offering.

Each $1.00 increase (decrease) in the assumed initial public offering price of $17.00 per share would increase (decrease) total consideration paid by new investors by approximately $11.0 million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase (decrease) of 1,000,000 in the number of shares offered by us would increase (decrease) total consideration paid by new investors, by $15.9 million, assuming that the assumed initial public offering price remains the same, and after deducting the underwriting discounts and commissions and estimated offering expenses payable by us.

The number of shares of our common stock outstanding immediately after this offering is based on 11,764,706 shares of Class A common stock and 56,664,523 shares of Class B common stock outstanding as of March 31, 2019, after giving effect to the Corporate Conversion, and excludes:

 

   

5,130,502 shares of our Class B common stock issuable upon the exercise of outstanding stock options, as of March 31, 2019, having a weighted-average exercise price of $6.21;

 

   

4,500,000 shares of Class A common stock reserved for future issuance under our 2019 Equity Incentive Plan, which will become effective immediately prior to the effectiveness of the registration statement of which this prospectus forms a part; and

 

   

1,400,000 shares of Class A common stock reserved for future issuance under our 2019 Employee Stock Purchase Plan, which will become effective immediately prior to the effectiveness of the registration statement of which this prospectus forms a part.

 

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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included within this prospectus. The consolidated statements of income and cash flows data for the years ended December 31, 2017, and 2018 and the consolidated balance sheet data as of December 31, 2017 and 2018 have been derived from our audited consolidated financial statements and related notes included elsewhere in this prospectus. The consolidated statements of income and cash flows data for the year ended December 31, 2016 are derived from our audited consolidated financial statements and related notes not included elsewhere in this prospectus. The consolidated statements of income and cash flows data for the three months ended March 31, 2018 and 2019 and the consolidated balance sheet data as of March 31, 2019 have been derived from our unaudited consolidated financial statements that are also included in this prospectus. Our historical results are not necessarily indicative of our future results, and the results of operations for the three months ended March 31, 2019 are not necessarily indicative of results for the full year. The selected consolidated financial data in this section are not intended to replace our consolidated financial statements and the related notes, and are qualified in their entirety by the consolidated financial statements and related notes included elsewhere in this prospectus.

Consolidated Statements of Income Data:

 

     Years Ended
December 31,
     Three Months
Ended

March 31,
 
     2016      2017      2018      2018      2019  
     (in thousands, except per unit and per share data)  
                          (unaudited)  

Net sales

   $ 312,082      $ 399,597      $ 498,739      $ 113,305      $ 137,343  

Cost of sales

     166,707        205,907        233,433        56,872        66,589  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     145,375        193,690        265,306        56,433        70,754  

Operating expenses:

              

Fulfillment

     8,618        9,458        13,292        2,782        4,495  

Selling and distribution

     42,114        50,766        70,621        15,853        20,591  

Marketing

     39,000        55,476        74,394        15,353        19,498  

General and administrative

     50,102        57,468        65,201        14,940        19,269  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     139,834        173,168        223,508        48,928        63,853  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

     5,541        20,522        41,798        7,505        6,901  

Other expense, net

     895        1,431        631        197        216  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     4,646        19,091        41,167        7,308        6,685  

Provision for income tax

     2,448        14,091        10,529        1,976        1,723  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

     2,198        5,000        30,638        5,332        4,962  

Less: Net loss attributable to non-controlling interest

     205        347        47        47         
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to Revolve Group, LLC

   $ 2,403      $ 5,347      $ 30,685      $ 5,379      $ 4,962  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income per unit attributable to common unit holders:

              

Basic

   $ 0.04      $ 0.08      $ 0.47      $ 0.08      $ 0.08  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ 0.04      $ 0.08      $ 0.44      $ 0.08      $ 0.07  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common units outstanding:

              

Basic

     41,936        41,936        41,936        41,936        41,936  

Diluted

     43,786        44,044        44,584        44,183        44,821  

Pro forma earnings per share attributable to common stockholders (unaudited)(1):

              

Basic

         $ 0.45         $ 0.07  
        

 

 

       

 

 

 

Diluted

         $ 0.44         $ 0.07  
        

 

 

       

 

 

 

Pro forma weighted average common shares outstanding (unaudited)(1):

              

Basic

           67,627           67,889  

Diluted

           70,276           70,776  

 

(1)

See Note 12 to our consolidated financial statements for an explanation of the calculations of our pro forma basic and diluted earnings per share attributable to common stockholders and the pro forma weighted-average common shares used in the computation of the per share amounts.

 

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Consolidated Statement of Cash Flows Data:

 

     Years Ended
December 31,
    Three Months Ended
March 31,
 
     2016     2017     2018     2018     2019  
     (in thousands)  
                       (unaudited)  

Net cash (used in) provided by:

          

Operating activities

   $ (1,490   $ 16,479     $ 26,655     $ 12,156     $ 15,924  

Investing activities

     (3,026     (2,262     (3,045     (440     (4,987

Financing activities

     5,142       (15,086     (17,621     (15,100     (248

Other Financial and Operating Data:

 

     Years Ended
December 31,
    Three Months Ended
March 31,
 
         2016             2017             2018             2018             2019      
     (in thousands, except average order value and percentages)  
                       (unaudited)  

Gross margin(1)

     46.6     48.5     53.2     49.8     51.5

Adjusted EBITDA(2)

   $ 9,520     $ 28,428     $ 46,495     $ 8,697     $ 8,549  

Free cash flow(3)

   $ (4,516   $ 14,217     $ 23,610     $ 11,716     $ 10,937  

Active customers(4)

     712       842       1,175       904       1,262  

Total orders placed(5)

     1,999       2,552       3,710       817       1,135  

Average order value(6)

   $ 293     $ 304     $ 279     $ 282     $ 259  

Consolidated Balance Sheet Data:

 

     Years Ended
December 31,
     Three Months
Ended

March 31,
 
     2017      2018      2019  
     (in thousands)  
                   (unaudited)  

Cash

   $ 10,588      $ 16,369      $ 27,201  

Working capital(7)

     29,530        56,897        57,890  

Total assets

     123,976        162,074        191,522  

Total liabilities

     75,988        82,256        105,802  

Total equity

     47,988        79,818        85,720  

 

(1)

Gross margin is gross profit as a percentage of our net sales. Gross profit is equal to our net sales less cost of sales.

(2)

To provide investors with additional information regarding our financial results, we have disclosed in the table above and elsewhere in this prospectus Adjusted EBITDA, a non-GAAP financial measure that we calculate as net income before other expense, net, taxes, depreciation and amortization, adjusted to exclude the effects of equity-based compensation expense, and certain one-time expenses. We have provided a reconciliation below of Adjusted EBITDA to net income, the most directly comparable GAAP financial measure.

We have included Adjusted EBITDA in this prospectus 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;

 

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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 one-time expenses 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. One-time expenses in 2016 included one-time legal fees and a one-time employee severance. One-time expenses in 2017 included one-time expenses related to our entity restructuring as well as one-time bonuses to certain employees. The expenses related to our entity restructuring carried into 2018. One-time expenses for the three months ended March 31, 2019 primarily relate to one-time legal settlements.

A reconciliation of non-GAAP adjusted EBITDA to net income is as follows:

 

     Years Ended
December 31,
     Three Months
Ended
March 31,
 
     2016      2017      2018      2018      2019  
     (in thousands)  
                          (unaudited)  

Net income

   $ 2,198      $ 5,000      $ 30,638      $ 5,332      $ 4,962  

Excluding:

              

Other expense, net

     895        1,431        631        197        216  

Provision for income tax

     2,448        14,091        10,529        1,976        1,723  

Depreciation and amortization

     2,367        2,849        2,867        729        695  

Equity-based compensation

     20        911        1,400        109        511  

One-time expenses

     1,592        4,146        430        354        442  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 9,520      $ 28,428      $ 46,495      $ 8,697      $ 8,549  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(3)

To provide investors with additional information regarding our financial results, we have also disclosed in the table above and elsewhere in this prospectus free cash flow, a non-GAAP financial measure that we calculate as net cash provided by (used in) operating activities less cash used in purchases of property and equipment. We have provided a reconciliation of free cash flow to net cash provided by (used in) operating activities, the most directly comparable GAAP financial measure.

We have included free cash flow in this prospectus because it is a key measure used by our management and board of directors, which we believe is an important indicator of our liquidity because it measures the amount of cash we generate. Free cash flow also reflects changes in working capital. Accordingly, we believe that free cash flow provides useful information to investors and others in understanding and evaluating our operating results in the same manner as our management and board of directors.

Free cash flow has limitations as an analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results as reported under GAAP. There are limitations to using non-GAAP financial measures, including that other companies, including companies in our industry, may calculate free cash flow differently. Because of these limitations, you should consider free cash flow alongside other financial performance measures, including net cash provided by (used in) 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 (used in) provided by operating activities, as well as information regarding net cash used in investing activities and net cash provided by (used in) financing activities, for each of the periods indicated:

 

     Years Ended
December 31,
    Three Months
Ended

March 31,
 
     2016     2017     2018     2018     2019  
     (in thousands)  
                       (unaudited)  

Net cash (used in) provided by operating activities

   $ (1,490   $ 16,479     $ 26,655     $ 12,156     $ 15,924  

Purchases of property and equipment

     (3,026     (2,262     (3,045     (440     (4,987
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow

   $ (4,516   $ 14,217     $ 23,610     $ 11,716     $ 10,937  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities(8)

   $ (3,026   $ (2,262   $ (3,045   $ (440   $ (4,987

Net cash provided by (used in) financing activities

     5,142       (15,086     (17,621     (15,100     (248

 

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(4)

We define an active customer as an individual customer who has purchased from us at least once in the preceding 12-month period. In any particular period, we determine our number of active customers by counting the total number of unique customers who have made at least one purchase in the preceding 12-month period, measured from the last date of such period.

(5)

We define total orders placed as the total number of customer orders placed by our customers in any period.

(6)

We define average order value as the sum of the total gross sales from orders on our sites in a given period divided by the total orders placed in that period.

(7)

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

(8)

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.

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with the consolidated financial statements and related notes that are included elsewhere in this prospectus. This discussion contains forward-looking statements based upon current plans, expectations and beliefs that involve risks and uncertainties. See “Special Note Regarding Forward-Looking Statements and Industry Data.” Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth in the section captioned “Risk Factors” and in other parts of this prospectus. Our fiscal year ends on December 31.

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 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 16 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. Since inception, our business has evolved across multiple dimensions and achieved the following significant milestones:

 

   

In 2009, we established our first blogger collaboration, beginning our social and influencer marketing leadership.

 

   

In 2012, our first and only outside investor, TSG Consumer Partners, invested $15.0 million of primary capital to accelerate growth in our business;

 

   

In 2012, we also re-launched FORWARD by Elyse Walker, our segment that caters to an affluent customer looking for the latest luxury styles.

 

   

In 2013, we hosted our first #REVOLVEaroundtheworld events.

 

   

In 2014, we acquired Alliance Apparel Group to vertically integrate and launch our owned brand platform.

 

   

In 2015, we hosted our first #REVOLVEfestival in the Coachella Valley.

 

   

In 2016, we introduced our next-generation retail experience with our LA-based Social Club and launched REVOLVE beauty.

 

   

In 2017, we hosted our first ever #REVOLVEAwards.

 

   

In 2018, we launched a localized customer experience in the United Kingdom, Europe and Australia.

 

   

In 2019, we launched superdown, a dedicated lower price point site and offering targeting the Gen-Z consumer.

We sell merchandise through two differentiated segments, REVOLVE and FORWARD, that leverage one platform. In 2018, we generated 87% of net sales through REVOLVE, which offers a highly curated assortment of full-price premium apparel and footwear, accessories and beauty products from emerging, established and owned brands. In 2018, we generated 13% of our net sales through FORWARD which offers 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. The average order value for REVOLVE and FORWARD in 2018 was approximately $258 and $653, respectively, reflecting the premium and luxury offering of these segments.

 

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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. Our current portfolio of owned brands consists of 21 brands, each with its own unique aesthetic, brand equity and consumer following. In 2018, emerging third-party brand, owned brand, established third-party brand, and other net sales contributed 42%, 31%, 26%, and 1% of net sales through the REVOLVE segment, respectively. The focus on emerging and owned brands minimizes our assortment overlap with other retailers, supporting marketing efficiency, conversion and sales at full price. We are focused on increasing the percentage of net sales from owned brands given the attractive margin profile associated with them. Leveraging our existing platform, we also intend to expand into and increase our presence in additional categories and price points.

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 16 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 minimize 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. As of March 31, 2019, we had a global network of over 3,500 social media influencers. We believe we are a preferred partner for influencers, as their association with REVOLVE enhances our influencers’ personal brands. We complement our social media efforts through a variety of brand marketing campaigns and events, including the #REVOLVEfestival in the Coachella Valley, our series of #REVOLVEaroundtheworld events, and the #REVOLVEAwards, which generate a constant flow of authentic content. These efforts generate social media posts, articles and features that mention REVOLVE, FORWARD and REVOLVE’s owned brands that have the potential to reach all of the followers of the social media account or viewership or readership associated with the outlet. While social media and influencer marketing are key components of our strategy, 75% of our marketing expenses is devoted to performance marketing efforts. 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 shipping and returns to our customers in the United States. As of March 31, 2019 we had leased six fulfillment centers encompassing over 390,000 square feet of space, supported by approximately 477 full-time employees. On September 20, 2018, we entered into a five-year lease for approximately 281,000 square feet of fulfillment and office space located in Cerritos, California. In the first quarter of 2019, we consolidated substantially all of our fulfillment activities into this centralized facility. 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 approximately 94% of orders on the same or next business day. With the capacity added under the new lease signed in September 2018, we believe our fulfillment capabilities will support growth beyond 2023. We will continue our disciplined approach to investment and incrementally expand our footprint consistent with our past track record, or potentially consolidate facilities which may yield certain efficiencies.

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, for customers in the United Kingdom and the European Union in May 2018

 

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and in Australia in late 2018. For 2017 and 2018, and the three months ended March 31, 2018 and 2019, we generated $75.0 million, $89.4 million, $22.1 million, and $21.9 million, respectively, in net sales shipped to customers internationally, or 18.8%, 17.9%, 19.5% and 16.0% of total net sales, respectively. 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.

In 2018, we reported $498.7 million in net sales, $30.6 million in net income and $46.5 million in Adjusted EBITDA, representing growth of 24.8%, 512.8% and 63.7%, respectively, from 2017. For the three months ended March 31, 2019, we reported $137.3 million in net sales, $5.0 million in net income and $8.5 million in Adjusted EBITDA, representing growth of 21.2%, and decreases of 6.9% and 1.7%, respectively, from the three months ended March 31, 2018. 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 the section captioned “Selected Consolidated Financial and Other Data—Other Financial and Operating Data.”

We have been profitable on a taxable income basis for 15 years out of our 16 year operating history and we believe we have a strong balance sheet despite having only raised $15.0 million of primary outside equity capital. We generated cash flows from operations of $16.5 million, $26.7 million and $15.9 million and free cash flow was $14.2 million, $23.6 million, and $10.9 million for 2017 and 2018 and the three months ended March 31, 2019, respectively. We intend to use free cash flow to further bolster our balance sheet and invest further in our business. For further information about how we calculate free cash flow, limitations of its use and a reconciliation of free cash flow to net cash provided by operating activities, see the section captioned “Selected Consolidated Financial and Other Data—Other Financial and Operating Data.”

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.

 

     Years Ended
December 31,
    Three Months Ended
March 31,
 
     2017     2018     2018     2019  
     (in thousands, except average order value and
percentages)
 
                 (unaudited)  

Gross margin

     48.5     53.2     49.8     51.5

Adjusted EBITDA

   $ 28,428     $ 46,495     $ 8,697     $ 8,549  

Free cash flow

   $ 14,217     $ 23,610     $ 11,716     $ 10,937  

Active customers

     842       1,175       904       1,262  

Total orders placed

     2,552       3,710       817       1,135  

Average order value

   $ 304     $ 279     $ 282     $ 259  

Adjusted EBITDA and free cash flow are non-GAAP measures. See the section captioned “Selected Consolidated Financial and Other Data—Other Financial and Operating Data” 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 the purchase price of merchandise sold to customers and includes import duties and other taxes, freight in, defective merchandise returned from customers, receiving costs, inventory write-offs, and other miscellaneous shrinkage.

 

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Gross margin is impacted by the mix of brands that we sell on our sites. Gross margin on sales of owned brands is higher than that for third-party brands. Owned brands represent an increasing percentage of our net sales, with 20.2% and 30.9%, and 35.8% of our total net sales for the REVOLVE segment in the years ended December 31, 2017 and 2018 and three months ended March 31, 2019, respectively. For the 12 months ended March 31, 2019, owned brands represented 32.6% of total net sales for the REVOLVE segment, with owned brand net sales increasing 45.3% over the same period. 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 FORWARD segment, which consists primarily of established third-party brands. Gross margin may be affected by the launch of superdown, our lower price point offering in 2019, although we believe it will allow us to appeal to additional customers and increase our market share. While merchandise mix will vary from period to period, one of our strategies is to increase the percentage of net sales from owned brands given the attractive margin profile associated with them.

We review our inventory levels on an ongoing basis to identify slow-moving merchandise and use product markdowns to efficiently sell these products. We monitor the percentage of sales that occur at full price, which we believe reflects customer acceptance of our merchandise and the sense of urgency we create through frequent product introductions in limited quantities. In 2018, the percentage of full-price sales as a percentage of total net sales was approximately 79%.

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

Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income before other expense, net, taxes, depreciation and amortization, adjusted to exclude the effects of equity-based compensation expense, and certain one-time expenses. Adjusted EBITDA is a key measure used by management 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. See the section captioned “Selected Consolidated Financial and Other Data” for information regarding our use of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP measurement, for the periods presented.

Free Cash Flow

Free cash flow is a non-GAAP financial measure that we calculate as net cash provided by (used in) operating activities less net cash used in capital expenditures. We view free cash flow as an important indicator of our liquidity because it measures the amount of cash we generate. Free cash flow also reflects changes in working capital. See the section captioned “Selected Consolidated Financial and Other Data” for information regarding our use of free cash flow and a reconciliation of free cash flow to net cash provided by (used in) operating activities, the most directly comparable GAAP measurement, for the periods presented.

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. In any particular period, we determine our number of active customers by counting the total number of customers who have made at least one purchase in the preceding 12-month period, measured from the last date of such period. We view the number of active customers as a key indicator of our growth, the reach of our sites, the value proposition and consumer awareness of our brand, the continued use of our sites by our customers and their desire to purchase our products. Our number of active customers drives both net sales and our appeal to vendors.

 

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Total Orders Placed

We define total orders placed as the total number of customer orders placed by our customers across our platform in any period. We view total orders placed as a key indicator of the velocity of our business and an indication of the desirability of our products and sites to our customers. Total orders placed, together with average order value, is an indicator of the net sales we expect to recognize in a given period. Total orders placed and total orders delivered in any given period may differ slightly due to orders that are in transit at the end of any particular period.

Average Order Value

We define average order value as the sum of the total gross sales from our sites in a given period divided by the total orders placed in that period. We believe our high average order value demonstrates the premium nature of our product. Average order value varies depending on the site through which we sell merchandise. In 2018, average order value for merchandise sold through the REVOLVE and FORWARD segments was approximately $258 and $653, respectively, reflecting the brands sold and typical profile of the shoppers on such sites. Average order value may also fluctuate as we expand into and increase our presence in additional product categories and price points, including the launch of superdown in 2019.

Factors Affecting Our Performance

Overall Economic Trends

The overall economic environment and related changes in consumer behavior have a significant impact on our business. In general, positive conditions in the broader economy promote customer spending on our sites, while economic weakness, which generally results in a reduction of customer spending, may have a more pronounced negative effect on spending on our sites. Macroeconomic factors that can affect customer spending patterns, and thereby our results of operations, include employment rates, business conditions, changes in the housing market, the availability of credit, interest rates and fuel and energy costs. In addition, during periods of low unemployment, we generally experience higher labor costs.

Growth in Brand Awareness and Site Visits

We intend to continue investing in our brand marketing efforts, with a specific focus on increasing REVOLVE brand awareness. Our aided brand awareness among 18- to 44-year-old women who purchased fashion apparel in the past 12 months was 36% in July 2018 according to ResearchNow, a market research firm. Since 2013 we have made significant investments to strengthen the REVOLVE brand through a series of high profile events and expansion of our social media presence. If we fail to cost-effectively promote our brand or convert impressions into new customers, our net sales growth and profitability would be adversely effected.

Customer Acquisition

To continue to grow our business profitably, we intend to acquire new customers and retain our existing customers at a reasonable cost. We invest significant resources in marketing and use a variety of brand and performance marketing channels to acquire new customers. It is important to maintain reasonable costs for these marketing efforts relative to the net sales and profit we expect to derive from customers. Failure to effectively attract customers on a cost-efficient basis would adversely impact our profitability and operating results.

To measure the effectiveness of our marketing spend, we analyze customer acquisition cost, or CAC, and customer lifetime value, or LTV. We define CAC as all of our brand and performance marketing expenses, including marketing team costs, attributable to acquiring new customers divided by the number of customers who placed their first order in the relevant period. We manage CAC methodically, continually using data and internal

 

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return on advertising spend targets to optimize our acquisition strategy. We define LTV as the cumulative contribution profit attributable to a particular customer cohort, which we define as all of our customers who made their initial purchase between January 1 and December 31 of the cohort year. We define contribution profit as gross profit less fulfillment, selling and distribution expenses and the portion of marketing expenses attributable to the retention of the particular customer cohort, including marketing team costs. We measure how profitably we acquire new customers by comparing the LTV of a particular customer cohort with the CAC attributable to such cohort. There are different customer acquisition dynamics between the REVOLVE and FORWARD segments driven by the significantly higher average order value for the FORWARD segment. Given the REVOLVE segment represented 87% of 2018 net sales and, as a percentage of sales, has similar marketing expense to FORWARD, we focus our internal measurements of LTV and CAC on the REVOLVE segment.

To illustrate our successful customer acquisition strategy, we have included the following disclosures that compare the LTV of the 2014 cohort to the CAC for those customers. While performance may vary across cohorts, we chose the 2014 cohort because it provides the broadest amount of historical data while reflecting a significant increase in marketing investments initiated in 2013 to promote REVOLVE brand awareness. In 2014, we spent approximately $7.2 million in acquisition marketing to acquire 242,318 new customers in the 2014 cohort, resulting in an approximately $30 CAC for that cohort. As illustrated in the chart below, this cohort generated a contribution profit of approximately $43 per customer on the first order, which demonstrates our ability to achieve rapid payback and profitability. Furthermore, the LTV of the 2014 cohort has increased over time driven by repeat purchases and rising contribution margins. As a result, the LTV of the REVOLVE segment’s 2014 customer cohort was approximately $188 after four years, 6.3 times the $30 cost of acquiring those customers, which is a testament to our ability to acquire customers efficiently and profitably.

 

 

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We have also compared the LTV to CAC ratio for the 2014, 2015, 2016 and 2017 cohorts across one-year, two-year, three-year, and four-year periods below to illustrate the effectiveness of our customer acquisition marketing in more recent periods. We believe that the trends reflected by these cohorts are illustrative of the value of our customer base. As we increase our active customer base, however, we expect to spend more in marketing costs to acquire new customers, and we may experience changes in customer retention or purchasing patterns, any of which could have a significant negative impact on our net sales and operating results.

 

     LTV/CAC  
     1 Year      2 Years      3 Years      4 Years  

2014 Cohort

     2.6x        3.7x        4.9x        6.3x  

2015 Cohort

     2.3x        3.3x        4.6x     

2016 Cohort

     2.1x        3.2x        

2017 Cohort

     2.2x           

 

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Our annual CAC remained relatively steady from 2014 to 2016 following the significant increase in marketing investments initiated in 2013. In 2017, we deliberately increased our marketing investments in REVOLVE and our higher-margin owned brands, while also focusing on acquiring full-price customers who we believe will have higher LTV. While CAC increased to approximately $38 as a result, we continued to generate a profit on customers’ first orders and drive higher LTV as the result of a higher contribution margin in 2017. This higher margin was due primarily to increased penetration of our owned brands as well as a greater proportion of full-price sales.

Customer Retention

Our success is impacted not only by efficient and profitable customer acquisition, but also by our ability to retain customers and encourage repeat purchases.

We monitor retention across our entire customer base. Existing customers, whom we define as customers in a year who have purchased from us in any prior year, accounted for approximately 33%, 33%, 38%, 41% and 41% of active customers in 2014, 2015, 2016, 2017, and 2018 respectively. Repeat customers, whom we define as customers who have purchased from us at least once before, in the current year or a previous year, accounted for approximately 49%, 51%, 54%, 57% and 58% of active customers in 2014, 2015, 2016, 2017 and 2018, respectively. Existing customers place more orders annually than new customers, resulting in existing customers representing approximately 67% of orders and approximately 70% of net sales in 2018, up from 57% of orders and 58% of net sales in 2014, again having increased in each year. We believe these increasing metrics are reflective of our ability to engage and retain our customers through our differentiated marketing and compelling merchandise offering and shopping experience. The increasing share of our net sales from existing customers reflects our customer loyalty and the net sales retention behavior we see in our cohorts. 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. On a weighted average net sales basis across the 2014, 2015, 2016 and 2017 cohorts, we retained 62% of the cohorts’ net sales from the year in which we acquired the customer, or year 0, to the next year, or year 1, and 102% of the cohorts’ net sales from year 1 to year 2. Furthermore, in the 2014 cohort, consistent with the performance of previous cohorts, we retained more than 100% of net sales from year 2 to year 3. This cohort behavior demonstrates our ability to not only retain customers, but also increase the customers’ spend on our platform as our loyal customers place orders more frequently and at increasing average order values.

 

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We have substantially increased the net sales contribution and retention from existing customer cohorts as our active customer base has grown. The chart below illustrates the spending behavior of our customer cohorts over time. In 2018, we retained 89% of the prior cohorts’ net sales in 2017, which represents an improvement from 84% net sales retention in 2014. We believe that the trends reflected by these cohorts are illustrative of the value of our customer base; however, changes in customer retention and purchasing patterns could have a significant negative impact on our net sales and operating results.

 

 

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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 and owned brands. Our product mix consists primarily of apparel and footwear and accessories. In 2016, we launched beauty products on REVOLVE and expect to offer additional product types in the future. We sell merchandise across a broad range of price points and launched superdown, our lower price point site in 2019 that further broadens our price point offerings.

While changes in our merchandise mix have not caused significant fluctuations in our gross margin to date, brands, product types and price points do have a range of margin profiles. For example, our owned brands have generally contributed higher gross margin as compared to third-party brands. Over time, we are seeking to increase the percentage of net sales from owned brands. Shifts in merchandise mix driven by customer demand may result in fluctuations in our gross margin from period to period.

Inventory Management

We leverage our platform 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 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 minimize 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. We incur inventory write-offs, which impact our gross margins. Moreover, our inventory investments will fluctuate with the needs of our business. For example, entering new categories or adding new fulfillment centers will require additional investments in inventory.

 

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Investment in our Operations and Infrastructure

To grow our client base and enhance our offering, we will incur additional expenses. We intend to leverage our platform and understanding of fashion trends to inform investments in operations and infrastructure. We anticipate that our expenses will increase as we continue to hire additional personnel and further improve our platform. Moreover, we have and will continue to make capital investments in our inventory, fulfillment centers, and logistics infrastructure as we launch new brands, expand internationally and drive operating efficiencies. We expect to increase our spending on these investments in the future and cannot be certain that these efforts will grow our customer base or be cost-effective. However, we believe these strategies will yield positive returns in the long term.

FORWARD Segment Performance

Our financial results are affected by the performance of the FORWARD segment, which represented 13.1% and 10.7% of our net sales in 2018 and the three months ended March 31, 2019, respectively. For 2018 and the three months ended March 31, 2019, FORWARD generated $65.2 million and $14.7 million in net sales, respectively, representing a decline of 5.5% and 9.8% from 2017 and the three months ended March 31, 2018, respectively. The net sales decrease in the three months ended March 31, 2019, as compared to the same period for 2018, was largely due to a decrease in average order value and active customers, partially offset by higher full-price mix. The overall decrease was also partially due to management’s decision to reset FORWARD’s inventory levels. We expect to re-accelerate FORWARD’s growth to historical levels as inventory levels normalize over time and we enhance our product offering. If we are unable to generate revenue and gross profit growth in the FORWARD segment, our financial results would be adversely impacted.

Components of Our Results of Operations

Net Sales

Net sales consist primarily of sales of women’s apparel, footwear and accessories. 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 and other taxes, freight-in, defective merchandise returned from customers, receiving costs, inventory write-offs, and other miscellaneous shrinkage. Cost of sales is primarily driven by growth in 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.

Fulfillment Expenses

Fulfillment expenses represent those costs incurred in operating and staffing the 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 increase in absolute dollars as we continue to scale our business. As a percentage of net sales, we expect a short-term increase as a result of the anticipated expansion of our warehouse facilities, which will lead to short-term inefficiencies. Over the long-term, we expect fulfillment expenses to decrease as a percentage of net sales.

 

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Selling and Distribution Expenses

Selling and distribution expenses consist of customer service, shipping and other transportation costs incurred delivering merchandise to customers and from customers returning merchandise, merchant processing fees and shipping supplies. We expect selling and distribution expenses to increase in absolute dollars as we continue to scale our business. Over the long term, we expect selling and distribution costs to decrease as a percentage of net sales.

Marketing Expenses

Marketing expenses consist primarily of targeted online performance marketing costs, such as retargeting, paid search/product listing ads, affiliate marketing, paid social, search engine optimization, personalized email marketing and mobile “push” communications through our app. Marketing expenses also include our spend on brand marketing channels, including cash compensation to influencers, events and other forms of online and offline marketing. Marketing expenses are primarily related to growing and retaining our customer base, building the REVOLVE and FORWARD brands and building our owned brand presence. We make opportunistic investments in marketing and expect marketing expenses to increase in absolute dollars as we continue to scale our business, but decline modestly over time as a percentage of net sales.

General and Administrative Expenses

General and administrative expenses consist primarily of payroll and related benefit costs and equity-based compensation expense for our employees involved in general corporate functions including merchandising, marketing, studio and technology, as well as costs associated with the use by these functions of facilities and equipment, such as depreciation, rent and other occupancy expenses. General and administrative expenses are primarily driven by increases in headcount required to support business growth and meeting our obligations as a public company. We expect general and administrative expenses to decline as a percentage of net sales as we scale our business and leverage investments in these areas.

Other Expense, Net

Other expense, net consists primarily of interest expense and other fees associated with our line of credit.

 

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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.

 

     Years Ended
December 31,
     Three Months Ended
March 31,
 
     2017      2018      2018      2019  
     (in thousands)  
                   (unaudited)  

Net sales

   $ 399,597      $ 498,739      $ 113,305      $ 137,343  

Cost of sales

     205,907        233,433        56,872        66,589  
  

 

 

    

 

 

    

 

 

    

 

 

 

Gross profit

     193,690        265,306        56,433        70,754  

Operating expenses:

           

Fulfillment expenses

     9,458        13,292        2,782        4,495  

Selling and distribution expenses

     50,766        70,621        15,853        20,591  

Marketing expenses

     55,476        74,394        15,353        19,498  

General and administrative expenses

     57,468        65,201        14,940        19,269  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating expenses

     173,168        223,508        48,928        63,853  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from operations

     20,522        41,798        7,505        6,901  

Other expense, net

     1,431        631        197        216  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before income taxes

     19,091        41,167        7,308        6,685  

Provision for income tax

     14,091        10,529        1,976        1,723  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 5,000      $ 30,638      $ 5,332      $ 4,962  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     Years Ended
December 31,
    Three Months Ended
March 31,
 
     2017     2018     2018     2019  
                 (unaudited)  

Net sales

     100.0     100.0     100.0     100.0

Cost of sales

     51.5       46.8       50.2       48.5  
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     48.5       53.2       49.8       51.5  

Operating expenses:

        

Fulfillment expenses

     2.4       2.7       2.5       3.3  

Selling and distribution expenses

     12.7       14.2       14.0       15.0  

Marketing expenses

     13.9       14.9       13.6       14.2  

General and administrative expenses

     14.4       13.1       13.2       14.0  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     43.4       44.8       43.2       46.5  

Income from operations

     5.1       8.4       6.6       5.0  

Other expense, net

     0.4       0.1       0.2       0.2  

Income before income taxes

     4.8       8.3       6.4       4.9  

Provision for income tax

     3.5       2.1       1.7       1.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     1.3     6.1     4.7     3.6
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Comparison of the Three Months Ended March 31, 2018 and 2019

Net Sales

 

     Three Months Ended
March 31,
     Change  
     2018      2019      $      %  
     (unaudited, dollars in thousands)  

Net sales

   $ 113,305      $ 137,343      $ 24,038        21.2

The overall increase in net sales was primarily due to sales to a larger number of customers, as the number of active customers increased 39.6% in the three months ended March 31, 2019 as compared to the same period in 2018. Additionally, the number of orders placed by customers increased 38.9% in the three months ended March 31, 2019 as compared to the same period in 2018. These increases were partially offset by a decrease in average order value to $259 in the three months ended March 31, 2019 from $282 in the same period in 2018, primarily due to the REVOLVE segment comprising a larger percentage of consolidated net sales as well as lower average order values within each segment.

Net sales in the REVOLVE segment increased 26.4% to $122.7 million in the three months ended March 31, 2019 compared to net sales of $97.0 million in the same period in 2018. Net sales generated from our FORWARD segment decreased 9.8% to $14.7 million in the three months ended March 31, 2019 compared to net sales of $16.3 million in the same period in 2018. The decrease in net sales in the three months ended March 31, 2019 was largely due to a decrease in average order value and active customers, partially offset by higher full-price mix. The overall decrease was also partially due to management’s decision to reset FORWARD’s inventory levels.

Cost of Sales

 

     Three Months Ended
March 31,
    Change  
     2018     2019     $      %  
     (unaudited, dollars in thousands)  

Cost of sales

   $ 56,872     $ 66,589     $ 9,717        17.1

Percentage of net sales

     50.2     48.5     

The increase in cost of sales in the three months ended March 31, 2019 was primarily due to an increase in the volume of merchandise sold. The decrease in cost of sales as a percentage of net sales was due to a favorable mix of merchandise sales. We experienced a higher mix of REVOLVE merchandise sales in 2019 which generally carry a higher margin than that of the FORWARD segment. Further, within the REVOLVE segment, we experienced a favorable increase in the mix of sales related to our owned brands, which generally carry a higher gross margin than that of our third-party brands.

Fulfillment Expenses

 

     Three Months Ended
March 31,
    Change  
         2018             2019         $      %  
     (unaudited, dollars in thousands)  

Fulfillment expenses

   $ 2,782     $ 4,495     $ 1,713        61.6

Percentage of net sales

     2.5     3.3     

Fulfillment expenses increased as a result of an increase in the number of orders shipped as well as the expansion of our fulfillment center infrastructure.

 

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Selling and Distribution Expenses

 

     Three Months Ended
March 31,
    Change  
     2018     2019     $      %  
     (unaudited, dollars in thousands)  

Selling and distribution expenses

   $ 15,853     $ 20,591     $ 4,738        29.9

Percentage of net sales

     14.0     15.0     

Selling and distribution expenses increased as a result of the increase in the number of orders shipped. Shipping and handling costs increased $3.2 million and merchant processing fees increased $1.2 million for the three months ended March 31, 2019 as compared to the same period in 2018. The increase in selling and distribution expenses as a percentage of net sales was due to an increase in shipping and handling costs associated with increased volume, partially offset by lower cost per unit.

Marketing Expenses

 

     Three Months Ended
March 31,
    Change  
     2018     2019     $      %  
     (unaudited, dollars in thousands)  

Marketing expenses

   $ 15,353     $ 19,498     $ 4,145        27.0

Percentage of net sales

     13.6     14.2     

The increase in marketing expenses was primarily due to increased marketing investment to acquire customers and retain existing customers to drive higher net sales. Performance marketing expenses increased $4.5 million for the three months ended March 31, 2019 as compared to the same period in 2018. This increase was partially offset by a decrease of $0.4 million for the three months ended March 31, 2019 as compared to the same period in 2018, in marketing expenses related to REVOLVE branded marketing events. The increase in marketing as a percentage of net sales was due to investments in our core performance marketing channels as well as our REVOLVE branded marketing events to acquire and retain customers.

General and Administrative Expenses

 

     Three Months Ended
March 31,
    Change  
     2018     2019     $      %  
     (unaudited, dollars in thousands)  

General and administrative expenses

   $ 14,940     $ 19,269     $ 4,329        29.0

Percentage of net sales

     13.2     14.0     

The increase in general and administrative expenses for the three months ended March 31, 2019 as compared to the same period in 2018, was due to a $2.3 million increase in salaries and related benefits and equity-based compensation expense related to increases in our headcount across functions to support business growth, an increase of $1.0 million related to increased professional services and other operating costs to support business growth, a $0.5 million increase in occupancy expenses as a result of our business and headcount growth, an increase of $0.4 million related to our studio, sales and design functions, and a $0.1 million increase in travel and entertainment costs. The increase in general and administrative expenses as a percentage of net sales resulted primarily from increases in salaries related to increases in headcount and professional services and other operating costs to support business growth.

 

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Comparison of Years Ended December 31, 2017 and 2018

Net Sales

 

     Years Ended December 31,      Change  
           2017                  2018            $      %  
     (dollars in thousands)  

Net sales

   $ 399,597      $ 498,739      $ 99,142        24.8

The overall increase in net sales was primarily due to sales to a larger number of customers, as the number of active customers increased 39.5% in 2018 compared to the number of active customers in 2017. Additionally, the number of orders placed by customers increased 45.4% in 2018 as compared to 2017. These increases were partially offset by a decrease in average order value to $279 in 2018 from $304 in 2017, primarily due to the REVOLVE segment comprising a larger percentage of consolidated net sales.

Net sales in the REVOLVE segment increased 31.1% to $433.5 million in 2018 compared to net sales of $330.6 million in 2017. Net sales generated from our FORWARD segment decreased 5.5% to $65.2 million in 2018 compared to net sales of $69.0 million in 2017. The decrease in net sales in 2018 was largely due to management’s decision to reset FORWARD’s inventory levels with the goal of increasing FORWARD’s longer-term full-price mix, inventory turnover and gross margin.

Cost of Sales

 

     Years Ended December 31,     Change  
           2017                 2018           $      %  
     (dollars in thousands)  

Cost of sales

   $ 205,907     $ 233,433     $ 27,526        13.4

Percentage of net sales

     51.5     46.8     

The increase in cost of sales in 2018 was primarily due to an increase in the volume of merchandise sold. The decrease in cost of sales as a percentage of net sales was due to a favorable mix of merchandise sales. We experienced a higher mix of REVOLVE merchandise sales in 2018 which generally carry a higher margin than that of the FORWARD segment. Further, within the REVOLVE segment, we experienced a favorable increase in the mix of sales related to our owned brands, which generally carry a higher gross margin than that of our third-party brands.

Fulfillment Expenses

 

     Years Ended December 31,     Change  
           2017                 2018           $      %  
     (dollars in thousands)  

Fulfillment expenses

   $ 9,458     $ 13,292     $ 3,834        40.5

Percentage of net sales

     2.4     2.7     

Fulfillment expenses increased as a result of an increase in the number of orders shipped and an expansion of our fulfillment center infrastructure.

Selling and Distribution Expenses

 

     Years Ended December 31,     Change  
           2017                 2018           $      %  
     (dollars in thousands)  

Selling and distribution expenses

   $ 50,766     $ 70,621     $ 19,855        39.1

Percentage of net sales

     12.7     14.2     

 

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Selling and distribution expenses increased as a result of the increase in the number of orders shipped. Shipping and handling costs increased $16.0 million and merchant processing fees increased $3.6 million. The increase in selling and distribution expenses as a percentage of net sales was due to an increase in shipping and handling costs associated with increased volume and the costs necessary to ship merchandise to our customers.

Marketing Expenses

 

     Years Ended December 31,     Change  
           2017                 2018           $      %  
     (dollars in thousands)  

Marketing expenses

   $ 55,476     $ 74,394     $ 18,918        34.1

Percentage of net sales

     13.9     14.9     

The increase in marketing expenses was primarily due to increased marketing investment to acquire customers and retain existing customers to drive higher net sales. Performance marketing expenses increased $13.2 million. We also experienced an increase of $5.7 million in marketing expenses as a result of investments in our REVOLVE branded marketing events. The increase in marketing as a percentage of net sales was due to investments in our core performance marketing channels as well as our REVOLVE branded marketing events to acquire and retain customers.

General and Administrative Expenses

 

     Years Ended December 31,     Change  
           2017                 2018           $      %  
     (dollars in thousands)  

General and administrative expenses

   $ 57,468     $ 65,201     $ 7,733        13.5

Percentage of net sales

     14.4     13.1     

The increase in general and administrative expenses was due to a $3.2 million increase in salaries and related benefits and equity-based compensation expense related to increases in our headcount across functions to support business growth, an increase of $2.3 million related to increased professional services and other operating costs to support business growth, an increase of $0.8 million related to our studio, sales and design functions, a $0.7 million increase in occupancy expenses as a result of our business and headcount growth, and a $0.7 million increase in travel and entertainment costs. The decrease in general and administrative expenses as a percentage of net sales resulted primarily from an increase in efficiencies gained from scale.

 

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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 the nine quarters ended March 31, 2019, as well as the percentage that each line item represents of net sales. 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 prospectus 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 prospectus. 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.

 

    Three Months Ended  
    March 31,
2017
    June 30,
2017
    September 30,
2017
    December 31,
2017
    March 31,
2018
    June 30,
2018
    September 30,
2018
    December 31,
2018
    March 31,
2019
 
    (unaudited, in thousands)  

Net sales

    $    90,228     $ 107,934     $             99,466     $         101,969     $    113,305     $ 131,802     $           125,909     $         127,723     $   137,343  

Cost of sales

    51,420       53,261       51,833       49,393       56,872       58,470       59,524       58,567       66,589  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    38,808       54,673       47,633       52,576       56,433       73,332       66,385       69,156       70,754  

Operating expenses:

                 

Fulfillment expenses

    2,238       2,458       2,268       2,494       2,782       3,263       3,327       3,920       4,495  

Selling and distribution expenses

    11,176       13,451       12,847       13,292       15,853       18,669       18,305       17,794       20,591  

Marketing expenses

    11,204       15,298       14,383       14,591       15,353       21,161       18,956       18,924       19,498  

General and administrative expenses

    12,397       13,421       13,427       18,223       14,940       16,145       16,280       17,836       19,269  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    37,015       44,628       42,925       48,600       48,928       59,238       56,868       58,474       63,853  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    1,793       10,045       4,708       3,976       7,505       14,094       9,517       10,682       6,901  

Other expense, net

    374       506       256       295       197       123       155       156       216  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

    1,419       9,539       4,452       3,681       7,308       13,971       9,362       10,526       6,685  

Provision for income tax

    1,053       4,260       1,989       6,789       1,976       3,504       2,222       2,827       1,723  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 366     $ 5,279     $ 2,463     $ (3,108   $ 5,332     $ 10,467     $ 7,140     $ 7,699     $ 4,962  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Three Months Ended  
    March 31,
2017
    June 30,
2017
    September 30,
2017
    December 31,
2017
    March 31,
2018
    June 30,
2018
    September 30,
2018
    December 31,
2018
    March 31,
2019
 
    (unaudited)  

Net sales

        100.0     100.0             100.0             100.0         100.0     100.0             100.0             100.0     100.0

Cost of sales

    57.0       49.3       52.1       48.4       50.2       44.4       47.3       45.9       48.5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    43.0       50.7       47.9       51.6       49.8       55.6       52.7       54.1       51.5  

Operating expenses:

                     

Fulfillment expenses

    2.5       2.3       2.3       2.4       2.5       2.5       2.6       3.1       3.3  

Selling and distribution expenses

    12.4       12.5       12.9       13.0       14.0       14.2       14.5       13.9       15.0  

Marketing expenses

    12.4       14.2       14.5       14.3       13.6       16.1       15.1       14.8       14.2  

General and administrative expenses

    13.7       12.4       13.5       17.9       13.2       12.2       12.9       14.0       14.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

    41.0       41.3       43.2       47.7       43.2       44.9       45.2       45.8       46.5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income from operations

    2.0       9.3       4.7       3.9       6.6       10.7       7.6       8.4       5.0  

Other expense, net

    0.4       0.5       0.3       0.3       0.2       0.1       0.1       0.1       0.2  

Income before income taxes

    1.6       8.8       4.5       3.6       6.4       10.6       7.4       8.2       4.9  

Provision for income tax

    1.2       3.9       2.0       6.7       1.7       2.7       1.8       2.2       1.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    0.4     4.9     2.5     (3.0 )%      4.7     7.9     5.7     6.0     3.6
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

    Three Months Ended  
    March 31,
2017
    June 30,
2017
    September 30,
2017
    December 31,
2017
    March 31,
2018
    June 30,
2018
    September 30,
2018
    December 31,
2018
    March 31,
2019
 
    (unaudited, in thousands, except average order value and percentages)  

Other Financial and Operations Data

                 

Gross margin

    43.0         50.7%                   47.9                 51.6     49.8         55.6%                   52.7                 54.1     51.5

Adjusted EBITDA(1)

  $ 2,779     $ 10,739        $ 5,863     $ 9,047     $ 8,697     $ 15,610        $ 10,312     $ 11,876     $ 8,549  

Free cash flow

  $ 8,160     $ 2,961        $ 1,269     $ 1,827     $ 11,716     $ 12,834        $ 1,822     $ (2,762   $ 10,937  

Active customers

    713       746          793       842       904       998          1,080       1,175       1,262  

Total orders placed

    560       686          647       659       817       989          950       954       1,135  

Average order value

  $ 301     $ 309        $ 302     $ 301     $ 282     $ 281        $ 280     $ 274     $ 259  

 

(1)

Adjusted EBITDA is a non-GAAP financial measure that we calculate as net income (loss) before other expense, net, taxes, depreciation and amortization, adjusted to exclude the effects of equity-based compensation expense, and certain one-time expenses. Please see the section of this prospectus captioned “Selected Consolidated Financial and Other Data—Other Financial and Operating Data” for more information. One-time expenses, net include those expenses that are one-time in nature and that we do not consider to be indicative of our core operating performance. One-time expenses, net in the fourth quarter of 2017 included one-time expenses related to our entity restructuring as well as one-time bonuses to certain employees. The costs related to our entity restructuring extended into the first quarter of 2018. One-time expenses in the second and third quarters of 2018 related to our initial public offering. One-time expenses in the first quarter of 2019 included one-time expenses related primarily to legal settlements.

 

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The following table reflects the reconciliation of net income (loss) to Adjusted EBITDA:

 

    Three Months Ended  
    March 31,
2017
    June 30,
2017
    September 30,
2017
    December 31,
2017
    March 31,
2018
    June 30,
2018
    September 30,
2018
    December 31,
2018
    March 31,
2019
 
    (unaudited, in thousands)  

Net income (loss)

  $         366     $     5,279     $              2,463     $ (3,108   $ 5,332     $ 10,467     $             7,140     $             7,699     $         4,962  

Excluding:

                 

Other expense, net

    374       506       256       295       197       123       155       156       216  

Provision for income tax

    1,053       4,260       1,989       6,789       1,976       3,504       2,222       2,827       1,723  

Depreciation and amortization

    659       645       664       881       729       730       750       658       695  

Equity-based compensation

    189       (16     483       255       109       403       352       536       511  

One-time expenses, net

    138       65       8       3,935       354       383       (307           442  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 2,779     $ 10,739     $ 5,863     $           9,047     $       8,697     $ 15,610     $ 10,312     $ 11,876     $ 8,549  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The following table presents a reconciliation of free cash flow, a non-GAAP financial measure, to net cash provided by operating activities, as well as information regarding net cash used in investing activities and net cash used in financing activities:

 

    Three Months Ended  
    March 31,
2017
    June 30,
2017
    September 30,
2017
    December 31,
2017
    March 31,
2018
    June 30,
2018
    September 30,
2018
    December 31,
2018
    March 31,
2019
 
    (unaudited, in thousands)  

Net cash provided by (used in) operating activities

  $       8,978     $     3,555     $             1,849     $             2,097     $     12,156     $ 13,471     $             2,410     $ (1,382   $       15,924  

Purchases of property and equipment

    (818     (594     (580     (270     (440     (637     (588     (1,380     (4,987
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Free cash flow(1)

  $ 8,160     $ 2,961     $ 1,269     $ 1,827     $ 11,716     $ 12,834     $ 1,822     $ (2,762   $ 10,937  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities(2)

  $ (818   $ (594   $ (580   $ (270   $ (440   $ (637   $ (588   $ (1,380   $ (4,987

Net cash used in financing activities

    (5,000     (5,080     (6     (5,000     (15,100           (1,780                     (741     (248

 

(1)

Free cash flow is a non-GAAP financial measure that we calculate as net cash provided by (used in) operating activities less net cash used for purchases of property and equipment. Please see the section of this prospectus captioned “Selected Consolidated Financial and Other Data—Other Financial and Operating Data” 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 does not follow that of traditional retailers, such as typical concentration of net sales in the holiday quarter. We believe our results are impacted by a pattern of increased sales leading up to #REVOLVEfestival in April and during the early summer months, which results in increased sales during the second quarter of each fiscal year. We also believe that we have experienced slower growth in orders placed and active customers during the first quarter of each fiscal year. We expect this seasonality to continue in future years. Our operating income has also been affected by these historical trends because many of our expenses are relatively fixed in the short term. As our growth rates begin to moderate, the impact of these seasonality trends on our results of operations will become more pronounced.

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.

 

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Our quarterly net sales are reflective of the seasonality as discussed above with the second quarter of 2018 reflecting the impact of #REVOLVEfestival and seasonal increases leading up to the early summer months. Net sales increased sequentially from the third quarter of 2017 through the second quarter of 2018, reflecting increased demand for our merchandise from both new and existing customers. Net sales decreased in the third quarter of 2018 and increased in the fourth quarter of 2018 due to seasonality. Net sales increased in the first quarter of 2019 due to continued growth in the business. As noted above, the seasonality of our business has resulted in variability in our total net sales quarter-to-quarter. As a result, we believe that comparisons of net sales and results of operations for a given quarter to net sales and results of operations for the corresponding quarter in the prior fiscal year are generally more meaningful than comparisons of net sales and results of operations for sequential quarters.

Our quarterly gross profit has fluctuated quarter to quarter primarily due to the quarterly fluctuations in net sales. In addition, gross margin has been lower in the first quarter of each year and higher in the second quarter of each year, reflecting the seasonal demand of our merchandise as discussed above.

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 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 increased in the first quarter of 2019, partially as the result of investments in our fulfillment capabilities through the expansion of our facilities.

Marketing expenses vary quarter-to-quarter, primarily due to the timing of our brand marketing events. The second quarters of 2017 and 2018 include increased marketing expense related to #REVOLVEfestival. The third quarters of 2017 and 2018 included increased marketing expense related to #REVOLVEintheHamptons in 2017 and #REVOLVEsummer in 2018. The fourth quarters of 2017 and 2018 included increased marketing expense related to the #REVOLVEawards. Marketing expense will continue to fluctuate quarter-to-quarter, depending on the timing of events.

General and administrative expenses have generally increased sequentially quarter-to-quarter as we have continued to increase our headcount to support business growth. In the fourth quarter of 2017, there were certain one-time expenses related to the restructuring of our entities and one-time bonuses to certain employees.

We had net income for all periods presented except for the fourth quarter of 2017. Our net loss for the fourth quarter was due to one-time expenses related to our entity restructuring and tax expenses as a result of the remeasurement of deferred tax assets and liabilities related to the U.S. Tax Cuts and Jobs Act.

Our business is directly affected by the behavior of consumers. Economic conditions and competitive pressures can significantly impact, both positively and negatively, the level of demand by customers for our products. Consequently, the results of any prior quarterly or annual periods should not be relied upon as indications of our future operating performance.

Liquidity and Capital Resources

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

 

     As of  
     December 31, 2017      December 31, 2018      March 31, 2019  
                   (unaudited)  
     (in thousands)  

Cash

   $ 10,588      $ 16,369      $ 27,201  

Accounts receivable, net

     5,698        5,337        9,487  

Working capital

     29,530        56,897        57,890  

 

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As of March 31, 2019, the majority of our cash was held for working capital purposes. We increased our capital expenditures in the fourth quarter of 2018 and the first quarter of 2019 to support the growth in our business and operations, specifically the expansion of our fulfillment facilities. In September 2018, we entered into a five-year lease for approximately 281,000 square feet of fulfillment and office space located in Cerritos, California. In the first quarter of 2019, we consolidated substantially all of our fulfillment activities into this centralized facility. We believe our fulfillment capabilities will support growth beyond 2023. We expect to fund our near term capital expenditures from cash provided by operating activities. We believe that our existing cash, together with cash generated from operations and 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 of this prospectus captioned “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 or the incurrence of debt. Since inception and as of March 31, 2019, we have raised a total of $15.0 million from the sale of equity units, net of costs and expenses associated with such financings.

Line of Credit

In March 2016, we entered into a line of credit with Bank of America, N.A. that provides us with up to $75.0 million aggregate principal in revolver borrowings. 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%. We are also obligated to pay other customary fees for a credit facility of this size and type, including an unused commitment fee and fees associated with letters of credit. 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 minimum amounts of $5.0 million) at the same maturity, pricing and other terms. As of March 31, 2019, there were no amounts outstanding under the line of credit. Historically, our debt has resulted from the need to help fund our normal operations and working capital needs.

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 covenants as of March 31, 2019.

Historical Cash Flows

 

     Years Ended
December 31,
    Three Months Ended
March 31,
 
     2017     2018     2018     2019  
     (in thousands)  
                 (unaudited)  

Net cash provided by operating activities

   $ 16,479     $ 26,655     $ 12,156     $ 15,924  

Net cash used in investing activities

     (2,262     (3,045     (440     (4,987

Net cash used in financing activities

     (15,086     (17,621     (15,100     (248

 

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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.

In the three months ended March 31, 2019, net cash provided by operating activities was $15.9 million and consisted of net income of $5.0 million, changes in operating assets and liabilities of $10.3 million and non-cash items of $0.6 million. Net cash provided by operating activities related to changes in operating assets and liabilities was due to an increase in accounts payable of $10.9 million, an increase in our reserve for expected returns of $8.0 million, an increase in accrued expenses of $2.5 million, an increase in income taxes payable of $2.3 million, and an increase in other current liabilities of $0.6 million, partially offset by an increase in inventory of $8.4 million, an increase in accounts receivable, net of $4.2 million and an increase in prepaid expenses and other current assets of $1.4 million.

In 2018, net cash provided by operating activities was $26.7 million and consisted of net income of $30.6 million, changes in operating assets and liabilities of $4.5 million and non-cash items of $0.5 million. Net cash provided by operating activities related to changes in operating assets and liabilities was due to an increase in inventory of $26.0 million and an increase in prepaid expenses, other current assets of $3.4 million and other assets of $0.5 million, partially offset by an increase in our reserve for expected returns of $10.2 million, an increase in accrued expenses of $5.6 million, a decrease in income taxes receivable of $3.7 million, an increase in accounts payable of $2.4 million, an increase in other current liabilities of $2.3 million, an increase in income taxes payable of $0.9 million and a decrease in accounts receivable, net of $0.4 million.

In 2017, net cash provided by operating activities was $16.5 million and consisted of changes in operating assets and liabilities of $4.1 million, net income of $5.0 million, and non-cash items of $7.4 million. Net cash provided by operating activities related to changes in operating assets and liabilities was due primarily to an increase in accrued expenses of $6.3 million, an increase in our reserve for expected returns of $5.8 million, and an increase in other current liabilities of $4.2 million, partially offset by an increase in inventory of $7.0 million, an increase in prepaid expenses of $3.1 million and an increase in income taxes receivable of $3.4 million.

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 timing of the expansion of our operations.

In the three months ended March 31, 2019, net cash used in investing activities was $5.0 million. This was attributable to capital expenditures relating to equipment for our fulfillment centers, software purchases, internally developed software and hardware purchases for employees and general operations.

In 2018, net cash used in investing activities was $3.0 million. This was attributable to capital expenditures relating to equipment for our fulfillment centers, software purchases, internally developed software and hardware purchases for employees and general operations.

In 2017, net cash used in investing activities was $2.3 million. This was attributable to capital expenditures relating to equipment for our fulfillment centers, software purchases, internally developed software and hardware purchases for employees and general operations.

Net Cash Used in Financing Activities

Financing activities consist primarily of borrowings and repayments related to the existing line of credit.

 

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In the three months ended March 31, 2019, net cash used in financing activities was $0.2 million, which was attributable to the payment of deferred offering costs of $0.2 million in connection with our initial public offering.

In 2018, net cash used in financing activities was $17.6 million, which was attributable to repayments made on our line of credit of $15.1 million and the payment of deferred offering costs of $2.5 million in connection with our initial public offering.

In 2017, net cash used in financing activities was $15.1 million, which was attributable to repayments made on our line of credit.

Off Balance Sheet Arrangements

We did not have any off balance sheet arrangements in 2017, 2018, or the three months ended March 31, 2019, except for operating leases as discussed below.

Contractual Obligations

As of December 31, 2018, we leased various office and fulfillment facilities, including our corporate headquarters in Los Angeles County, California under operating lease agreements that expire from 2019 to 2023. The terms of the lease agreements provide for rental payments on a graduated basis. We recognize rent expense on a straight-line basis over the lease periods. We do not have any debt or material capital lease obligations and most of our property, equipment and software have been purchased with cash. We have no material long-term purchase obligations outstanding with any vendors or third parties. Our future minimum payments under non-cancelable operating leases for equipment and office facilities are as follows as of December 31, 2018:

 

     Payments Due by Period  
     Total      Less Than
1 Year
     1 - 3
Years
     3 - 5
Years
     More Than
5 Years
 
     (in thousands)  

Operating lease obligations

   $ 21,627      $ 5,282      $ 9,950      $ 6,395         

The contractual commitment amounts in the table above are associated with agreements that are enforceable and legally binding.

In September 2018, we entered into a five-year lease for approximately 281,000 square feet of fulfillment and office space located in Cerritos, California. Under the terms of the lease, we began paying a monthly rent expense of $0.2 million in November, 2018. In the first quarter of 2019, we consolidated substantially all of our fulfillment activities into this centralized facility and effective March 2019 we have terminated the lease of our distribution facility in Buena Park. Beginning May 2019, we will sublet all 28,200 square feet of one of our existing fulfillment centers lasting through its remaining lease term of February 28, 2021. We are still in the process of consolidating certain facilities, which may include subleasing and/or terminating additional existing facilities.

Critical Accounting Policies

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.

 

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We believe that the assumptions and estimates associated with revenue recognition, inventory, and income taxes 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 of the accompanying notes to our consolidated financial statements.

Net Sales

Revenue is primarily derived from the sale of apparel merchandise through our sites and, when applicable, shipping revenue. Prior to the adoption of Accounting Standards Codification, or ASC, 606, Revenues from Contracts with Customers, on January 1, 2019, revenue was recognized when all of the following criteria were satisfied in accordance with the then applicable accounting literature: (1) persuasive evidence of an arrangement existed; (2) the sales price was fixed or determinable; (3) collectability was reasonably assured; and (4) the product had been shipped and title passed to the customer. These criteria were met when the customer ordered an item, the customer’s credit card had been charged, and the item was fulfilled and shipped to the customer. In accordance with ASC 606, we now 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.

In accordance with our return policy, 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. 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.

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, net of breakage, and recognized as revenue when the store credit or gift cards are redeemed or, as a result of the adoption of ASC 606, Revenues from Contracts with Customers, 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, 2019 (unaudited) was $0.2 million. We did not recognize any revenue related to unredeemed gift cards or store credits for the years ended December 31, 2017 and 2018 and the three months ended March 31, 2018 (unaudited).

Results for reporting periods beginning January 1, 2019 and thereafter are presented under ASC 606, while prior period amounts have not been adjusted and continue to be reported in accordance with ASC 605. For more information on the transitional impact of adopting ASC 606, please see the section entitled, “Recent Accounting Pronouncements” in Note 2 to our consolidated financial statements included in this prospectus.

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 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

 

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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.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are recorded net on the face of the balance sheet. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We recognize the effect of income tax positions only if those positions are more-likely than-not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

Deferred tax assets are recognized to the extent it is believed that these assets are more-likely than-not to be realized. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), projected future taxable income, and tax-planning strategies in making this assessment. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more-likely than-not that we will realize the benefits of these deductible differences, net of the valuation allowance. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced.

Internal Control over Financial Reporting

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our financial statements will not be prevented or detected on a timely basis. In connection with the audit of our 2017 consolidated financial statements, we and our independent registered public accounting firm identified a material weakness in our internal controls in 2017 related to the lack of resources necessary to perform adequate review of our financial information. During 2018, we took steps to address the material weakness, which we believe has addressed the underlying causes of this material weakness. We hired additional personnel with requisite skills in both technical accounting and internal control over financial reporting. In addition, we engaged external advisors that provided financial accounting assistance in the short term and evaluated and documented the design and operating effectiveness of our internal controls and assisted with the remediation and implementation of our internal controls as required. We will continue to evaluate the longer-term resource needs of our various financial functions.

Please see in section captioned “Risk Factors—We have identified a material weakness in our internal control over financial reporting and if we have failed to remediate this weakness and maintain proper and effective internal controls, our ability to produce accurate and timely consolidated financial statements could be impaired, which could harm our operating results, our ability to operate our business and investors’ views of us” for additional information.

 

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Quantitative and Qualitative Disclosures about Market Risk

We have operations both within the United States and internationally, and we are exposed to market risks in the ordinary course of our business, including the effects of foreign currency fluctuations, interest rate changes and inflation. Information relating to quantitative and qualitative disclosures about these market risks is set forth below.

Interest Rate Sensitivity

Cash were held primarily in cash deposits. The fair value of our cash would not be significantly affected by either an increase or decrease in interest rates due mainly to the short-term nature of these instruments. Interest on any line of credit borrowings incurred pursuant to the credit described above would accrue at a floating rate based on a formula tied to certain market rates at the time of incurrence; however, we do not expect that any change in prevailing interest rates will have a material impact on our results of operations.

Foreign Currency Risk

Most of our sales are denominated in U.S. dollars, and therefore, our net sales are not currently subject to significant foreign currency risk. Our operating expenses are denominated in the currencies of the countries and territories in which our operations are located, and may be subject to fluctuations due to changes in foreign currency exchange rates, particularly changes in the British Pound and European Euro. Fluctuations in foreign currency exchange rates may cause us to recognize transaction gains and losses in our consolidated statements of income. To date, foreign currency transaction gains and losses have not been material to our consolidated financial statements, and we have not engaged in any foreign currency hedging transactions.

Inflation

We do not believe that inflation has had a material effect on our business, financial condition or results of operations. We continue to monitor the impact of inflation in order to minimize its effects through pricing strategies, productivity improvements and cost reductions. If our costs were to become subject to significant inflationary pressures, we may not be able to fully offset such higher costs through price increases. Our inability or failure to do so could harm our business, financial condition and results of operations.

Emerging Growth Company Status

Section 107 of the JOBS Act provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. Section 107 of the JOBS Act provides that any decision to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable. We have elected to use this extended transition period under the JOBS Act.

Recent Accounting Pronouncements

See Note 2 to our consolidated financial statements included elsewhere in this prospectus for additional information regarding recent accounting pronouncements.

 

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BUSINESS

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 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 16 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 2018, approximately 79% of our net sales were at full price, which we define as sales at not less than 95% of the full retail price, an increase from 75% in 2017.

Our powerful brand and innovative marketing strategy connects with the increasingly important Millennial and Generation Z demographics. 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 3,500 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.

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 21 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 March 31, 2019, our owned brands represented eight out of our top 10 brands, 32.6% of the REVOLVE segment’s net sales, and four out of the top

 

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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. Today, through our innovative technology, merchandise, and marketing strategies, we believe we have become a leading online retail destination targeted towards Millennials seeking premium fashion, and are redefining fashion retail for the 21st century. Our platform connects consumers, brands, and influencers in a powerful way that we believe has strong network effects that will make us even stronger over time. We believe our offering is resonating with our target consumers, as evidenced by our strong customer loyalty and revenue retention, and our rapidly growing revenue and profits. In 2018, we:

 

   

had an average of 9.4 million unique visitors per month;

 

   

delivered approximately 79% of net sales at full price;

 

   

retained 89% of net sales from the prior year’s customers;

 

   

had an average order value of $279; and

 

   

delivered gross margin of 53.2%.

In 2018, we reported $498.7 million in net sales, $30.6 million in net income and $46.5 million in Adjusted EBITDA, representing growth of 24.8%, 512.8% and 63.7%, respectively, from 2017. For the three months ended March 31, 2019, we reported $137.3 million in net sales, $5.0 million in net income and $8.5 million in Adjusted EBITDA, representing growth of 21.2%, and decreases of 6.9% and 1.7%, respectively, from the three months ended March 31, 2018. 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 15 out of our 16-year operating history.

 

Net Sales ($MM)   Gross Margin   Net Income ($MM)  

Adjusted EBITDA ($MM)

Adjusted EBITDA Margin (%)

 

LOGO

       LOGO        LOGO   LOGO

 

(1)

Twelve months ended March 31, 2019

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:

 

   

The global apparel and footwear, accessories and beauty market was $2.9 trillion in 2018 and is expected to reach $3.4 trillion in 2021, growing at a compound annual growth rate, or CAGR, of 5.3%.

 

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The U.S. apparel and footwear, accessories and beauty market was $564 billion in 2018 and is expected to reach $622 billion in 2021, growing at a CAGR of 3.3%.

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:

 

   

The global online apparel and footwear, accessories and beauty market was $520 billion in 2018 and is expected to reach $740 billion in 2021, growing at a CAGR of 12.5%.

 

   

The U.S. online apparel and footwear, accessories and beauty market was $117 billion in 2018 and is expected to reach $170 billion in 2021, growing at a CAGR of 13.2%.

 

   

Online penetration in apparel and footwear, accessories and beauty has increased from 4.1% to 18.0% globally and 6.9% to 20.8% in the United States from 2009 to 2018. Online penetration is expected to reach 22.0% globally and 27.4% in the United States by 2021.

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:

 

   

Mobile commerce discretionary spending grew 40% year-over-year for the fourth quarter of 2017.

 

   

Mobile commerce represented 24% of U.S. digital commerce dollars for the fourth quarter of 2017, compared to 13% for the fourth quarter of 2014.

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 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 Statistics, people born after 1981,

 

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including Millennials and Generation Z, accounted for approximately $1.7 trillion or 22% of the nation’s total consumer expenditure in 2017. 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 2018, we generated $498.7 million in net sales, served approximately 1,175,000 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 $279 in 2018, 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 March 31, 2019, we generated, on average, 9.8 million unique visitors per month, compared to 7.8 million unique visitors per month during the 12 months ended March 31, 2018, 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 create a sense of urgency for our customers. As a result, in 2018, sales of products at full retail price represented approximately 79% 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 2018, approximately 57% 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.

 

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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 5.5 million Instagram followers as of March 31, 2019 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 3,500 influencers and buzzworthy social events. In the 12 months ended March 31, 2019, we drove 56% of traffic for REVOLVE from free and low-cost sources, as measured by the visitors that landed on the REVOLVE website or mobile application 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 tightly integrate our marketing messaging into the shopping experience through