Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I would like to welcome everyone to Revolve's Fourth Quarter and Full Year 2020 Earnings Conference Call [Operator Instructions]. At this time, I'd like to turn the conference over to Erik Randerson, Vice President of Investor Relations at Revolve. Thank you. You may begin.

Good afternoon, everyone. And thanks for joining us to discuss Revolve's fourth quarter and full year 2020 results. Before we begin, I'd like to mention that we have posted a presentation containing Q4 and full year financial highlights to our Investor Relations Web site located at investors.revolve.com. I would also like to remind you that this conference call will include forward-looking statements. These statements include our current expectations regarding the continued impact of the COVID-19 pandemic on our business, operations and financial results and our outlook for operating expenses and capital expenditures for the first quarter of 2021. These statements are subject to various risks, uncertainties and assumptions that could cause our actual results to differ materially from these statements, including the risks mentioned in this afternoon's press release as well as other risks and uncertainties disclosed under the caption Risk Factors in our filings with the Securities and Exchange Commission, including, without limitation, our annual report on Form 10-K for the year ended December 31, 2019, and our subsequent quarterly reports on Form 10-Q, all of which can be found on our Web site at investors.revolve.com. We undertake no obligation to revise or update any forward-looking statements or information except as required by law. During our call today, we will also reference certain non-GAAP financial information, including adjusted EBITDA, adjusted EBITDA margin and free cash flow. We will use non-GAAP measures for some of our financial discussions as we believe they more closely represent the true operational performance and underlying results of the business. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to, the financial information prepared and presented in accordance with GAAP. And our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliations of non-GAAP measures to GAAP measures as well as the definitions of each measure, their limitations and our rationale for using them, can be found in this afternoon's press release and in our SEC filings. Joining me on the call today are our Co-Founders and co-CEOs, Mike Karanikolas and Michael Mente; as well as Jesse Timmermans, our CFO. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn the call over to Mike.

Good afternoon, everyone, and thanks for joining us today. We delivered another quarter of outstanding results in what remains a challenging and volatile environment. Our results are highlighted by 3 points of gross margin expansion that helps drive a more than doubling of earnings per share and 37% increase in adjusted EBITDA year-over-year. The strong fourth quarter capped off a year unlike any in our 18 year history. I'm proud of our team for operating with agility, discipline and strength to deliver record profitability for both the fourth quarter and the full year. There are three key themes I want to focus your attention on. First, we are primed and ready for the reopening of the economy. As millions of people are getting vaccinated against COVID every day across our markets, trends are already slightly better than the first quarter year-over-year. We see an exciting opportunity for Revolve in the months ahead as more people are finally able to get back to enjoying all the social occasions they've been missing out on for the past year. Second, in 2020, we delivered record profitability and free cash flow that significantly strengthened our balance sheet, positioning us well to invest in future growth opportunities. Such strong performance during a downturn gives me even more confidence in our long term potential when the wind is at our backs once again. Third, we accelerated plans to expand into adjacent product categories, enabling us to serve more of our customers' needs and touch more aspects of her life. In 2020, we significantly increased our sales penetration in emerging product categories like beauty, activewear and intimates. Our expanded marketing playbook enabled us to stay connected with our customer and helped drive our early success in the emerging product categories outside of our traditional offerings, which now…

Thanks, Mike. I'm very excited to be here today to share our thoughts on the business and the opportunities ahead. The competitive advantages that drove our success during the first 17 years of building Revolve carried through 2020 and enabled us to not just manage through the most challenging year in our history, but also put us in a position of strength as we enter 2021. With this strong positioning, we are excited to play offense and start investing again as we look forward to reopening. It starts with great merchandise, an area where we've started to reinvest already in the back half of 2020, our strong team centered around our data driven approach and read and react strategy enabled us to react fast to align with the shift in consumer preferences induced by COVID. Our ability to adapt so quickly help drive the strong financial results in 2020 and accelerated the diversification of our assortment to address more aspects of our customers' life. Early success of new product categories opens up setting opportunities to further expand our collection of styles across both third party and owned brands, capturing more share of her wallet over the long term. Own brands continues to be core to our long term strategy. Our own brands are true brands in the eyes of the consumer. They drive traffic, attract new customers, generally have higher gross margins than comparative third party products and add to the uniqueness of our merchandise offering. The combination of our own brands and emerging third party brands establishes an assortment with very low overlap with other retailers. As we shared previously, we temporarily dialed back owned brands in 2020 after the onset of COVID-19, largely to allow us to make shallower inventory buys across a wider range of styles. We…

Thanks, Michael. I'm truly encouraged by how well our teams executed throughout 2020, putting us in a position of strength as we look ahead to the post COVID era. Our fourth quarter results capped off record performance in 2020 for net income, adjusted EBITDA and free cash flow, significantly strengthening our balance sheet. We started to tap into our strong balance sheet in the fourth quarter to reinvest in inventory and marketing, shifting back into a mode of playing offense with the vaccine distribution moving forward, and we will continue to make investments in 2021. Now starting with the fourth quarter results. Note that all of the comparisons I will discuss will be on a year-over-year basis, unless otherwise stated. Net sales decreased 5%, an improvement from the October net sales results we shared on our Q3 investor conference call. By territory, international net sales increased 24%, meaningfully outperforming the 10% decline in net sales in the US. The international strength was broad based, with Australia, Canada, Greater China and the Middle East as key contributors. Looking at consumer demand, very strong growth in at-home categories like beauty, intimates and activewear, continue to be offset by headwinds in occasion wear categories like dresses and skirts. We are optimistic about the opportunity for recovery in occasion wear trends as we anniversary the COVID outbreak in March, and even more so as consumers around the world are vaccinated in the coming months and start socializing in person again. By segment, REVOLVE segment net sales decreased 5% and FORWARD’s [Technical Difficulty] active customers were $1.5 million, a decrease of 1% [Technical Difficulty] consistent with our commentary last quarter to expect further deceleration in active customers in the near term. Keep in mind that since the customer metric captures a larger number of quarterly…

[Operator Instructions] Our first question is from Michael Binetti with Crédit Suisse.

First off, Jesse, could you help us think about how much marketing you could be investing in ahead of reacceleration in the first quarter?

As we commented on in the script, we want to be primed and ready for the reopening. So if you look at the Q4 marketing investment of about 14.8%, that's a good indicator of where we're going. In the first quarter, we'll continue to invest. And then we're just trying to highlight for everybody that we do want to invest ahead and during this reopening. So it could exceed historical levels during 2021 and specifically, on a quarter-by-quarter basis, it's likely going to be volatile in a good way.

And then Mike, I know you talked about investing in forward. I'm curious how are you internally evaluating that business with the strength of the luxury category being very, very strong. I know you guys pulled back on some inventory. But I'm curious, you reset that business a bit a few years ago, great growth in 2019. This year, very hard to judge what we're seeing from it. But I'd like to know what you think are some of the internal metrics that you'd like to see as you reinvest in that business forward? It seems like a good opportunity, but it's also getting, I think, a little bit competitive in that category as well.

So as you mentioned, FORWARD does have kind of more crowding from competitors than our REVOLVE segment, which we feel has a lot of white space around it. With FORWARD, we think there's a great opportunity to drive substantial growth this year and some big opportunities we're focused on. Number one, I'd say, is the overlap with the REVOLVE business and the REVOLVE customer. We're really looking to bring those businesses much more closely together. We know the REVOLVE customers comes a significant portion of her handbag and accessory and key budget on [indiscernible] FORWARD carriers. So that's going to be a big initiative for us. China is -- second thing that's a big opportunity for us, we've had a lot of success in China in recent periods that's continuing to trend well, and we think that's something that we can really look. We have got some exciting marketing initiatives there. And then the third thing is from a brand marketing perspective and kind of a brand building perspective, we historically have not focused as much on building the FORWARD brand as the REVOLVE brand. Yet, as you know, that's one of our core competencies is brand strength and brand building. And so that's something that we're excited about potential opportunities to invest there in a bigger way this year.

Our next question is from Aaron Kessler with Raymond James.

Couple of questions, maybe first you mentioned kind of the gross margins that we shouldn't assume that, that rate is not sustainable here. Any maybe headwinds you would call out for 2021 that would take gross margins back down? And then maybe on the own brand strategy, you talked about that a little bit. Maybe just where are you most optimistic on the owned brands for 2021 or '22 outside of the dresses category? Thank you.

I'll start with the first part of that and then kick it over. On gross margin, we feel really good about the gross margin as we exited the year with that strong full price sell through. And then even on the markdown component, having really strong markdown margin. So we didn't have to go as deep on the markdowns as we historically have. And that's a reflection of the healthy inventory balance. We expect that to continue through, especially in the first part of the year, we'll start to comp to really strong gross margin we had this year as we get into the back half of '21. But again, with the healthy inventory balance at strong full price, really good tailwinds there. Now to your question, we do anticipate headwinds on the owned brand front. So own brands typically carry meaningfully higher margin than a third party. And that mix of owned brands has meaningfully compressed in the fourth quarter and that will continue through the first half of 2021 before we start to reaccelerate on the own brands. So there will be some headwinds from that owned brand, but we feel really good about the underlying metrics there on that component of the sales. And then, again, the strong full price and the health of the inventory as we head into the year.

And with regarding own brand expansion, I think it's quietly -- there's a lot of exciting things going on. Of course, penetration is down with our pullback, but we're making a lot of investments. I mean, not on the CapEx side, but just time and energy. So as we exit out of this kind of social business world, we'll be seeing a lot of expansion into own brands across a lot more categories when times past. Our historic strength has been dresses and tops, most notably the woven category or the woven kind of manufacturing technique [Technical Difficulty] into and definitely, early 2022, there's going to be a lot of expansion into other categories with continued expansion in denim, activewear, the investments from shoes, jewelry, sustainable across the board. So I think you'll see a lot more robust own brand offering [Technical Difficulty] quarter after quarter over the long term. So feeling really excited about that.

Our next question is from Aaron Murphy with Piper Sandler.

[Technical Difficulty] first on your marketing tool chest, I'm curious if you think it looks a little bit different in a post-COVID world versus pre-COVID. Just trying [Technical Difficulty] events or learnings that you'll continue to execute on, or is it just going to go back to kind of full physical in a post COVID world [Technical Difficulty] and then I have a follow-up.

Yes, I think there's a parallel there with kind of our merchandise as well as our marketing. We're going to be able to go back to our core of dresses and [Technical Difficulty] going out cloths, things with travel as well as events that you’ll go, that naturally fit with there, kind of like REVOLVE Festival and kind of REVOLVE around the world, and a couple of things that we have in the works which we're excited to share in upcoming quarters. But also we're definitely going to be able to expand to new zones, I think -- and of course, as we talked about in the previous two calls, our active social media engagement, our live stream ended up being like a big hit. So we're going to see even more balanced portfolio. A deeper and kind of broader arsenal in terms of marketing, activation and tactics. So this will allow us to really touch all of her points of lifestyle even more so than kind of what we were historically known for. So even though it's been a period of awesome profitability over the past few quarters, it's also been a period of a lot of development and investment internally. So coming out of this pandemic, we're going to be more balanced and stronger across the board. So very excited.

And then my follow-up is on the beauty business. I'd love if you could help dimensionalize that for us. And then is it helping bring in a new customer? Is it building the basket when the customer is on your Web site? And then how has the response been from the vendor community? Thank you.

Overall, beauty has been super awesome. We know that our customer, of course, spends a lot of beauty, spends a lot of her budget on beauty and we touch across the whole entire segment. Obviously, make up a little bit less in times when you're not going out as much, but in a time of kind of self care, skin care, hair care, a lot of that category has been awesome for us. So long term lines, we'll continue to invest. It's a natural fit and also leverages our strength in brand marketing. So that social media kind of engagement has been strong there as well. So we see the introduction of a lot of new customers, whether they come in at a lower AOV but then develop into core REVOLVE customers. We're also seeing the core REVOLVE customers really expand this zone. So it's really kind of the best of both worlds. Attracting new customers that weren't necessarily connected with us on our fashion kind of marketing and like fashion brand, but discovering us that way as well as working with our existing customers and expanding and broadening her lifestyle. So I think that's a big theme that seems to be coming up a lot for us as that we're able to touch our customer in a lot of different areas than we were in times past. It's been important for us and COVID has really accelerated that.

Our next question is from Rick Patel with Needham.

What are your expectations for AOV this year? With the core business doing potentially better as the year goes on, I'm assuming that this goes back up. But you've also made good progress on emerging categories like beauty. So what does this mean for AOV as we think about the year? And just, holistically, does it settle below the pre pandemic level? I'm curious if there's anything we should keep in mind as we think about the REVOLVE segment versus FORWARD?

So there's a few things to unpack there. Number one, you can see the sequential improvement from where we bottomed out in Q2 at that just over $200 and then exiting at $256. We see that continuing through 2021 as full price remains strong. To your point, we do see some pressure from the lower price point units, and also there's a component of lower units per order. And the other thing to keep in mind on this AOV is that it is a gross metric. So even though the AOV is declining, if you look at that on a net basis, it's actually up year-on-year, and that's due in part to the meaningfully reduced return rate. So as mix has shifted from that -- our largest category historically of dresses into those lower price points, those lower price points have much lower return rates. So net-net, at the end of the day, we're at a higher net AOV. So as we exit into the post pandemic world, we do expect mix to shift back into those historically strong categories like dresses, which will likely come with a higher return rate and a higher AOV.

A question on international markets where the recovery is a little bit further ahead, like Australia. Are consumers [Technical Difficulty] that were strong pre-pandemic [Technical Difficulty] the performance been for COVID categories like beauty, are you still seeing outsized growth there on the smaller base and what does that inform you about how to approach the US?

Yes, we're watching those key markets very closely. And what's great to see is that we're seeing continued strength in the categories that we really accelerated during COVID, but then we are seeing, particularly in Q1, the Q1 trends to date, some strong recovery in those historical categories. Australia, in particular, Q1 to date trends, we're seeing growth overall in excess of [50%]. Other key potentially indicating countries like Israel, we're also seeing growth in excess of 50%. So international regions can be volatile individually, but both of those are top five international countries for us on the REVOLVE side. And it's really nice to see really nice growth in those regions and certainly gives us hope for the months to come.

Our next question is from Oliver Chen with Cowen.

Regarding new customers and what you're seeing overall, what's some of the data telling you about retention of new customers? And how your assortment may or may not change with retention and acquisition of new customers? And as we think about the recovery ahead, how are you thinking about inventory plans with the going out/dresses category? And what you should do there in terms of managing in a dynamic environment that's getting better as well?

So in terms of the retention trends, COVID has been a headwind to our business from a revenue standpoint, although, we really delivered nicely on the earnings and efficiency side. But it has been a headwind and that's both on the new customer acquisition side with our marketing being really crimped in terms of what we can do and as well those even though [Technical Difficulty] dresses and tops where they're going out and socializing, looking and feeling good about. So it's been a bit of a headwind there. But what we're really excited about is we think that's a really strong opportunity that we believe should bounce back as the world gets back to normal, as our customers can socialize again, as they can live their best life, looking and feel great. And we believe the inroads that we've made in these other categories that hopefully those inroads should be sticky, and we have optimism that we'll expand there. So you know as the year unfolds, we feel really good about how our retention trends should progress and unpack. From an inventory standpoint, we definitely want to invest and get ahead of the reopening and make sure we're there for our customer when she needs us. At the same time, there's going to be a balance to it as there's always a balance to everything that we do, where we don't want to overcommit ourselves. But we want to make sure we're ready to take advantage of what we think can be a tremendous opportunity for our brand. Customers have been pent-up for onwards of a year now, not being able to go out and be free and socialize and have fun and party, and all the things they love to do. And we think when that moment unfolds and unpacks, it's going to be a perfect moment for our brand.

Our next question is from Mark Altschwager with Baird.

Congrats on the solid performance through a really tough year. Following up on the inventory topic there. I'm just curious if you could expand on that a little further. I'm wondering what the makeup of the inventory looks like compared to a typical spring season, given some of the continued uncertainties here. And also just if you could talk about your ability to chase. Should we see a big acceleration in the coming months? The inventory is up nicely sequentially, but still down year-over-year. So just trying to think through that.

Our inventory position is definitely swung from one end of the pendulum, right when the crisis started, gearing up for the warm weather season, gearing up for REVOLVE Festival and really gearing up for the old world and the old lifestyle. And then we've swung to the complete stay at home lifestyle, cold weather and such and we're swinging back, kind of, as Mike just mentioned, we'll be incrementally going back to more of the categories that we have quickly responded to get away from kind of going out and dresses, but definitely not all the way back there. I think we'll be seeing -- our current kind of plan expectation is that the recovery will be steady. So sequentially quarter-over-quarter, we'll be ramping up. So right now, we're currently more dress going out oriented than we were in the depths, but nowhere near where we would have been a year ago. And I think that's kind of will be effective as things improve.

Our next question is from Camilo Lyon with BTIG.

I wanted to get your thoughts on how you're thinking about return rates and where they should settle out as buying habits normalize? Can you maintain some of the gains you made or should we expect you return to that low 50s rate pre-pandemic?

That's one thing we really want to highlight among a lot of other things. But we have received a meaningful benefit from the return rates during COVID. Part of that is the mix shift, but there is also a part of that that we believe is due to just a change in consumer buying habits. So we're optimistic. And it's hard to forecast what it will look like, but we're optimistic that with a more diversified inventory assortment, and we're optimistic that some of these consumer buying habits will continue on in a post-COVID world that we won't necessarily return to that 55% at the peak of 2019, but it will go up from where we're at now. But again, it has yet to be seen but we're optimistic that we'll pocket at some of these return rates. And then the things in our control, we continue to optimize for the customer experience and really make it easy for her to return. The home is the dressing room that's been there since day one. There's also an element of international as we make it easier and easier for international customers to return, there will be an increase in return rate there. But at the end of the day, a more meaningful increase in net sales due to the convenience and the experience for that international customer.

And then my follow-up is related to logistics. It sounded like your team, during the quarter, did a very good job of managing some headwinds -- many headwinds that a lot of brands have been facing in terms of supply chain and logistics side. Is there anything that we should contemplate in the first half as a lot of the log jams continue to exist throughout the supply chain that may hinder some of the inventory deliveries or receipts that you're planning?

So we think our internal team did a really great job of managing the challenges in the fourth quarter, and then there were many. So I think it's a credit to how nimble and agile the team was. They're able to shift volume from carrier to carrier depending on where we can get the right rates without kind of the over surcharges while optimizing experience for the customer. So I think it's a real credit to the execution of the team in the fourth quarter. And then in the first quarter, there's certainly still headwinds and the team needs to continue to execute and be nimble. But I'd like to think we're past the worst of things on the logistics side. And so we feel good about our ability to deliver efficiencies on the outside in terms of not having to do the surcharges in the first half of the year, as well as meeting our historical commitments to the customers as far as getting them back is on time.

Our next question is from Ed Yruma with KeyBanc Capital Markets.

I guess, first a housekeeping question. Could you just give us a little bit of insight into the intra quarter trends back in the first quarter of '20, just so we can kind of understand how the March compare is versus kind of what you've seen quarter-to-date? And then second, kind of a bigger picture question. With some of these markets that have reopened and are seeing higher activity, are you seeing signs of an incremental fashion shift that maybe gives you confidence that you could have kind of a sustained period of strong demand for apparel? Thank you.

Maybe I'll take the first one, thanks for the question, and then I'll pass it over to Mike and Michael. The intra quarter dynamics, last year, we started out really strong, 20% across the board for January and February. We partnered with the Bachelor in January. We had tremendous inbound traffic to the site. So started off the year really strong. And then kind of in that mid to late March is when the restrictions really started to hit and that's when we saw sales decline almost overnight. So there is definitely an intra quarter dynamic to be aware of in 2021. And then year-to-date, this quarter, just to hit on that just really quick. Coming out of the high single digit decline that we had communicated for October back in Q4 and then closing out the quarter at minus 5%, you can see that sequential improvement. And then that continued into the first seven weeks of this quarter with that low single digit in positive territory, and exciting positive territory across the board, domestic, international REVOLVE, FORWARD. So feel good so far but still very cautious on what the future holds with all the uncertainty.

And then in terms of kind of dissecting trends on the international side, it's definitely an area where we're looking too closely. As I mentioned, we feel good about the trends that we're seeing there, and those trends make us very optimistic for how things could unfold in the US as things continue to recover from COVID [Technical Difficulty] where there's been a lot more recovery in areas like Australia and Israel [Technical Difficulty] and also China and the Greater China region, we're seeing some nice growth in that region as well on the REVOLVE side. In China, we're seeing quarter-to-date some of the best growth that we've seen in several years [Technical Difficulty] same time, we want to caution that the environment remains uncertain. We think the world will reopen. We think it's going to be a great time for REVOLVE. But the timing of how that unfolds and the exact impact to our business are still to be determined.

Our next question is from Kimberly Greenberger with Morgan Stanley.

I just wanted to ask about the marketing spend in the fourth quarter and looking out to 2021. Are you seeing higher rates for purchasing the same sort of composition and type of marketing and is that driving the higher marketing, or are you actually able to hit more eyeballs with higher marketing spend? In other words, it's a question, I guess, on marketing spend productivity. And if you can share any KPIs or how would you measure that? Is marketing just simply more expensive because there's greater demand for digital marketing and therefore, the price goes up, or is it that you're actually hitting more people? And then if you could just sort of step back and look at the competitive environment and just help us understand what you're seeing in the competitive landscape? And in particular, if you've noticed a company called SheIn, I'd be interested in hearing your perspective on that, and just how you try to stay differentiated relative to the competition? Thanks so much.

So on the marketing side, in digital market, in particular, we touched on some of the trends that we were seeing in the middle of last quarter. One thing I’d talk on digital marketing is it can shift and fluctuate a lot from quarter-to-quarter. Certainly, there's longer term trends influenced by a number of factors. So kind of what we saw specifically on the digital marketing side is the middle of last quarter, rates had gotten quite expensive, which was putting pressure on us from our ability to kind of market in the way that we'd like to. We did start to see a reversal of those trends towards the back half of the quarter. And things are heading in a much more positive direction on that side from what we can see. So things will fluctuate quarter-to-quarter. There may be some longer term trends going on, but what we're seeing right now is kind of much better rates on the digital marketing side and we're seeing back in the fourth quarter. I think in terms of the broader question, why do we expect marketing to go up? It's not about that those rates that we're seeing on the digital marketing side, whether they’re cheap or expensive. And in general, when they're expensive, we tend to actually back off. It's more about that we think the reopening is going to be really good for the REVOLVE brand and the REVOLVE brand is perfect for the reopening. And we know that we need to invest ahead of that, particularly on the brand marketing side, where the impact of the brand marketing can pay off over a long term period. And so we pulled back a little bit in the pandemic. It wasn't quite the right time for the REVOLVE brand to be top of consumers' minds. We think the time is coming up, where we can have a real impact and get real efficiencies from our message as consumers look to get back to socializing and out and having fun. And so that's where the commentary on the marketing side goes that we're building for the long term. We like to be efficient and disciplined, but we think part of the long term build, it's the right time for our brand to be out there in top of consumers' minds. And then finally, to the last part of your question with regards to SheIn, on that -- you're talking about the Chinese company, right? I'm not sure how to pronounce it, S-H-E-I-N. So assuming you're talking about that company, we think we're very differentiated. Certainly, they've had a lot of success in the marketplace, they operate at a much different price point than we view, the type of product that produces much different than the type of product that we produce, and we're ultimately going after, we think very different consumers.

Our next question is from Susan Anderson with B. Riley.

Nice job managing through the year. I guess I'm curious as we look to the back half and you start to ramp your own brands again. What do you think you're looking at differently this time with the own brands versus -- I think there was a little bit of issue at the end of -- or in 2019 with the inventory growth maybe growing too fast there?

Yes, I think the primary thing that we're seeing -- we're thinking differently is diversity. I think there's multi dimensions of diversity, both from a traditional category, expanding, diversifying out of dresses and tops into all of the other categories. Also diversifying in type of manufacturing techniques. We were heavily weighted in wovens, and I think there's a lot of other zones, jersey, fleece, knits and beyond that, I think, will be very, very important. I think also diversity on price point. I think we went after a very, very focused price point that is really core to our customer. And exiting out of the pandemic, we will have diversity across price point as well. So that's been quietly one of the big themes that we've been investing into in this year, and we're very excited to show you the results in the upcoming quarters and upcoming years.

And then if I could just add one follow-up on REVOLVE warehouse automation. I think you mentioned it as a positive for fulfillment, selling and distribution. I'm curious if you could quantify how much that helps that line item? And then also, do you expect that to continue into 2021?

And that automation, just back up and give some context, just as a reminder to you. We started to invest there in 2019, that was the biggest investment. And then we made some additional investments in the first half of 2020 and really started to see those efficiencies come through in 2020. We expect those to continue. I'll call out, however, that there is also a positive impact from return rate on that fulfillment line item. So we're getting kind of a double benefit on fulfillment. If I had to break it out, it's probably a third automation and two thirds return rate, but that one very definitely continuing on into the future. The other thing to call out as well is that we moved into this warehouse in 2019 with capacity, call it, for plus or minus five years. So as we grow into that capacity, there's also a natural efficiency to be gained over time. And then you mentioned selling and distribution. The automation is really isolated to that fulfillment line item. Selling and distribution is -- lion share of that is the shipping and freight. So on that line item, the efficiencies we get, some operational efficiencies and just optimizing carriers, but also return rate benefit there, but not related to automation.

Our next question is from Simeon Siegel with BMO Capital Markets.

Nice way to end the year. Just recognizing the trailing 12-month basis, anyway to offer context or just isolate fourth quarter's impact to the active customer drop, and I guess, thoughts on trajectory there? And then Jesse, and I don't know if this is a better offline question. But the net AOV comment you made was interesting. Could you elaborate at all there? If the product mix impacts the return rates, I guess, would you think that net AOV, after returns, would be more consistent? So I don't know if there's any color you can help there. Thanks.

On the first one on active customers, to your point, that is a trailing 12 month number and you could see the sequential decline. We started off the year there at a plus 20-ish percent and then plus 13% in Q2, plus 5% in Q3. And then closed the year out of a minus 1. So you can kind of back into the quarterly impact there of just what COVID is doing on that metric. So on a quarterly basis, we're definitely seeing pressure there. And that will continue as we roll in more quarters of COVID, and it takes a little while to roll out of those COVID quarters. So not expecting growth in that number for another several quarters as we cycle out of the COVID era. And then the growth versus net AOV, there's puts and takes there. We're definitely seeing an impact from the shift in mix from the higher price point dresses to the lower price point, for example, beauty. Partially offset there, if you look at it on a combined basis, FORWARD has been strong relative to REVOLVE. So there's a slight offset. And then units per order, units per order and return rate kind of go hand in hand. So fewer units per order on that gross basis because she's not going in and buying two or three dresses for that occasion, knowing that she's only going to keep one. So those maybe don't 100% wash but there's kind of an offsetting impact between the units per order and the lower return rate.

Our next question is from Matt Koranda with Roth Capital.

Just following up on some of the active customer discussion here. Any updates on customer acquisition costs and then just thoughts around how that trends as you lean into marketing a bit more as we reopen?

So in the fourth quarter, we did see an increase in customer acquisition costs. As we mentioned, there were some headwinds there in terms of competition within the digital marketing front. And then I think, as you see the year unfold my expectation would be, initially, you may see those costs go up because a lot of the marketing that we do, particularly on the brand side, is more longer term marketing. And so you take the expense immediately but the benefits pay out over time. So we would expect to see some increases on that front. And then I hope to see those increases moderate and go in a positive direction for us as things unfold and as consumers really embrace a back to normal lifestyle and the reopening and the remodel [Technical Difficulty].

And we have time for one more question. Our last question is from Ross Sandler with Barclays.

Just going back to the international topic. So now that's over 20% of revenue, it's coming from a lot of different countries, spread widely across the globe. So I guess the first question is, I think you’re running all the operations still out of California. Is that the case? And as that international number gets bigger, what happens to the the back end of your business, or you're going to have to use three PLS or are you already doing that in some places? And then, Mike, I guess, for these events that you're going to be doing in Australia. How does the influencer marketing travel across border? Did you do an event there with a global influencer, do people in the US see that and respond and start buying? Do people in China do the same? How does these events that you're going to start rolling out travel across borders? Thanks a lot.

So starting with the first part of your question on the international side. We feel really good about our ability to deliver great service levels in international market operating out of Los Angeles and California. More than 80% of our markets were able to get with two to three day shipping at fairly reasonable cost out of Los Angeles. At the same time, it is an area of longer term opportunity as those markets grow. So it's something that we're certainly starting to think about, but I think we're ways off from any substantial on the ground international presence, but we could start to explore some plans for portions of our inventory or kind of sub opportunities as a way to kind of test out further expansion.

Yes, as far as the international events, it's -- unfortunately, well, I guess it works in different ways, but Australia has been very close. So we're working with a large network of Australian influencers. We were in Australia, I believe, two years ago, and it's in a very important region, so it's been one of our top regions for many years. So we kind of have deep relationships there. So there's definitely a big plan towards Australia, but for sure, that social media knows no borders, except potentially sometimes in China. So we definitely will see a lot of the eyeballs impressions with a lot of on brand REVOLVE growth that touch customers around the world. So there's definitely a slant to Australia, but we'll definitely see impact within eyeballs and impressions to all of our core customers across the globe.

This does conclude the Q&A. I will now turn the call back over to management for closing remarks.

So I think Mike is actually on mute. So he's -- but I'll just jump in right here. But thank you guys for joining us today. It's been a challenging year for all of us, and we're extremely proud of the results. It was definitely not what we were expecting for the year, but all things considered, we really have to thank our team for all the incredible work and everything they had to do to achieve these numbers. This is really just not a little positive interim year for us. We really think that we've done a lot to build for the future. And I think we're definitely excited to demonstrate all of the investments, all the work and all the incredible things that the teams have done. Stay safe, everybody. We send our regards to everybody in Texas, that’s been a quite challenging situation. And when you can, get your vaccines and come party with us.

This concludes today's conference call. You may now disconnect.