Revolve Group, Inc.

Q1 2022 Earnings Conference Call

5/3/2022

spk22: Good afternoon. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to Revolve's first quarter 2022 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press the star won once again. Thank you. And at this time, I'd like to turn the conference over to Eric Randerson, Vice President of Investor Relations at Revolve. Thank you, and you may begin.
spk17: Good afternoon, everyone, and thanks for joining us to discuss Revolve's first quarter 2022 results. Before we begin, I'd like to mention that we have posted a presentation containing Q1 financial highlights to our Investor Relations website located at investors.revolve.com. I would also like to remind you that this conference call will include forward-looking statements, including statements related to our current expectations regarding the continued impact of the COVID-19 pandemic on our business, operations, and financial results, including near-term stay-outs in greater China, our growth in market opportunities and related macro and industry trends, our plans to broaden our offerings, our plans to expand our operations footprint and the expected impact on delivery times, our marketing investments and events, our seasonality pattern, our freight costs, the convergence of year-over-year growth rates of active customers and net sales, NRL for net sales, growth margin, operating expenses, and effective tax rate. These statements are subject to various risks, uncertainties, and assumptions that could cause their 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 and elsewhere in our findings with the Securities Exchange Commission, including, without limitations, our annual report on Form 10-K for the year ended December 31, 2021, and our subsequent quarterly reports on Form 10-Q, all of which can be found on our website 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 and free cash flow. We use non-GAAP measures in some of our financial discussions as we believe they provide valuable insights on our operational performance and underlying operating results. 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 these measures, Their limitations and our rationale for using them can be found in this afternoon's press release and in our SPC filings. Joining me on the call today are our co-founders and co-CEOs, Mike Karamikolas and Michael Mintegg, as well as Jesse Timmermans, our CFO. Following our prepared remarks, we'll open the call to your questions. With that, I'll turn it over to Mike.
spk13: Hello, everyone. We started the year out strong with another incredible quarter, highlighted by continued momentum across both segments. In the first quarter of 2022, our net sales were $283 million, a 58% increase year over year. The very strong results further accelerated our multi-year growth rate versus pre-pandemic periods and underscore our team's ability to navigate through what continues to be a very challenging macro environment. As founders, we've been focused on profitable growth from day one, and this quarter was no exception, continuing our long track record of delivering a unique combination of growth and profitability, Net income was $23 million, or 30 cents per share, in the first quarter, and adjusted EBITDA was $32 million, an increase of 35% year-over-year. Cash flow generation in the first quarter was nothing short of incredible. We generated a record $54 million in operating cash flow and $53 million in free cash flow, an exceptional increase of 62% year-over-year for both measures, further bolstering an already strong balance sheet. Looking at net sales performance by geography, the US was incredibly strong, increasing 66% year-over-year, outpacing 28% growth in the international markets that faced a much more difficult comparison. All international regions increased year-over-year, highlighted by outstanding growth in Canada and the UK, where we've made excellent progress with our localization initiatives. Late in the first quarter, we began to experience weaker trends in Greater China after COVID-19 restrictions negatively impacted consumer demand and logistics. With the current state of affairs, in the near term, we expect continued softness in Greater China, which generated a low single-digit percentage of our total net sales in the first quarter. Now, circling back to our consolidated results, our results on a multi-year basis demonstrate just how much our business has strengthened during the past few years. Consider that in the past three years, our net sales have more than doubled, our adjusted EBITDA has nearly quadrupled, and our free cash flow today is almost 5x the free cash flow we reported in the first quarter of 2019. Our results for the past several quarters demonstrate that we are gaining meaningful market share. Our technology-driven DNA, data-driven merchandising, operational excellence, and digitally native approach have enabled us to connect in a very powerful and authentic way with the next generation consumer and provide us with even more opportunity to address more aspects of our life and capture more share of our wallet. Our first quarter results offer encouraging indications of our progress. For instance, we added over 200,000 active customers in the first quarter, significantly exceeding our prior record achieved just three months ago. Only two quarters ago, I was thrilled that we added more than 100,000 active customers for the first time, and now we surpassed twice that amount. Equally exciting is that our fast-growing base of active customers is becoming more productive, illustrating our success in capturing a greater share of wallet. In fact, for the trailing 12-month period, net sales per active customer were $488, an increase of 17% year-over-year. These exceptional results reinforce the path forward in the very large market opportunity we are pursuing, where purchasing power has continued to shift in our directions. Even with the recent growth acceleration, we still serve only 2 million active customers, representing what we believe to be just 3% penetration of our target demographic in the U.S. market. The early stage of our expansion and the much larger global market opportunity where the Revolve brand translates across geography is what gives us confidence to keep the pedal down on our marketing and brand building investments. Our first quarter results demonstrate that our investments are working. Our continued strength and consistent delivery of results also reflect our long-term focus on building trust with our customer through our brand over the last nearly 20 years. Core to building this trust is operational excellence and exceptional service levels. We founded Revolve with a laser focus on customer satisfaction is key to our long-term success. With this customer-centric mindset from the outset, serving our customer incredibly well, is consistent with an unrelenting organizational focus on the customer that is built into our DNA. Our net promoter score once again remained at world-class record level in the first quarter, underscoring how much customers love our brands and value our service levels. Importantly, we are on track to begin operating our first East Coast warehouse in the second half of this year, which we believe will even further raise the bar on our ability to delight customers with even faster delivery times for some of our key geographies. Having gained her trust, we've been able to expand our revenue per customer through category expansion, increased customer loyalty that has driven more orders per customer in recent periods, and increased overlap between Revolve and Ford active customers. Recall that approximately one year ago, we launched the Ford loyalty program that encouraged cross-shopping between Revolve and Ford. This was followed by more cross-marketing of the Ford destination to Revolve customers. Each month since the launch, we've expanded the overlap between Revolve and Ford active customers, yet the overlap is still less than 5%. This is particularly exciting considering that at Ford's average order value of around $650, every additional 1% overlap between Revolve and Ford active customers could drive more than $10 million in incremental net sales annually. Over the longer term, we believe that the foundation of our teams consistent delivery of operational excellence, the strength of our brands, competitive differentiation, and customer loyalty will enable us to not only continue to acquire new customers and gain market share, but also significantly broaden our offerings to serve more aspects of our life and expand our share of her wallet. Now, over to Michael for an update on our exciting brand momentum. Thanks, Mike.
spk05: I'm super excited about the momentum in the business. With a strong operations and service level foundation, we kicked off the year with a marketing playbook that is back to full strength and driving incredible momentum in the business. I'm so proud of the team's execution that delivered outstanding results in the first quarter. Net sales growth in the Revolve segment increased 56% year-over-year. The segment's highest first quarter growth in at least eight years. And Forward delivered an even stronger 71% growth in net sales year-over-year in the first quarter. To deliver nearly 60% hotline growth in an environment with inflation pressures, supply chain headwinds, China lockdowns, and a war in Ukraine is truly remarkable. While the macro environment is a challenge, we see strong demand from a resilient consumer that, after more than two years, is finally able to live her life to the fullest again. After being on the sidelines for two years, the content-accessible season has come back strong. Leisure travel has significantly accelerated in recent months. In 2022, it's expected to be the busiest wedding season in nearly 40 years. In all of these cases, our customer wants to look and feel her best. As the go-to fashion destination for millennial and Gen Z consumers, our on-point assortment and aspirational lifestyle events provide the inspiration she is looking for. We believe we are entering an exciting new phase of growth in consumer engagement, and we are investing in this opportunity to engage and inspire our community and build on the strong momentum of our brand. After patiently waiting for most of the past two years, our in-person marketing events are truly back and better than ever. It started in February with our exclusive homecoming event held in Los Angeles during Super Bowl weekend that was attended by an unbelievable amount of A-listers. Our timing was perfect as too many, including myself. The time around the Super Bowl was a turning point for in-person social activities. The highly impactful event generated more than 2.5 billion press impressions. It continued the moment in March with the launch of the Good American brand on Revolve. hosting an amazing event with co-founders Khloe Kardashian and Emma Green that was attended by Kourtney Kardashian, Kendall Jenner, Travis Barker, and more. Also in March, we reopened the Revolt Social Club, an experiential pop-up retail concept that combined a retail store, lounge, cafe, bar, and wellness center all in one, along with incredible backdrops for guests to share their experience in social media. The Social Club was open to the public, enabling our community to experience the Revolt lifestyle and real life By shopping, socializing, or joining more than 25 special events, we help them to heal life, to work out, to do the makeovers, and more. Over the course of approximately six weeks, we hosted over 300 influencers and VIP guests, including Kendall Jenner, Kim Kardashian, Sophia Richie, Perry Sultan, Angled Crowd, Winnie Harlow, Elsa Haas, and Shane Mitchell, just to name a few. The social club was highly effective in building excitement within our community and driving traffic to our site in the week leading up to our flagship event, Revolve Festival. To illustrate the consumer excitement for the return of festival season, our sales generated from the festival shop portion of Revolve.com in the week leading up to Revolve Festival more than doubled compared to the same period in 2019 when we last held our Revolve Festival in Alabama. The two-year hiatus from Revolve Festival combined with our brand heat that has been steadily building among millennial and Gen Z consumers And the incredible lineup of town hall parties led to an overwhelming consumer demand to attend our Revolve Festival event. When guests arrived to Revolve Festival at the exquisite Merv Griffin Estate in Lake Kentucky, there would be the feedback that the people had the time of their lives. In so many ways, Revolve Festival was the best event we've ever had. A musical lineup with an invite-only crowd of around 2,500 people was incredible, featuring performances from Post Malone, Lotto, Ty Dolla $ign, Willow Smith, Migos, Travis Scott, and Jack Harlow, whose recent hit song debuted at number one on the Hot 100 Billboard charts. It was also really exciting to see Jack Harlow and Ty Dolla $ign learn some of our latest styles with Ford Man during their sets. The event was even more impactful than ever across several dimensions. Attendants were incredible and a wide range of personalities, including musicians, actors, celebrities, designers, athletes, Instagram influencers, and TikTok stars. Notable VIPs in attendance included Kendall Jenner, Kim Kardashian, Kylie Jenner, Hailey Bieber, Justin Bieber, Timothee Chalamet, Patrick Mahomes, Halsey, Leonardo DiCaprio, Sidney Sweeney, Diddy, Tyga, Noah Beck, Peter Dundas, and more. When compared to our most recent Revolve Festival in 2019, we hosted 100 more influencers and partnered with even more top-tier consumer-facing brands, including Spotify, Venmo, and Postmates. Brands are increasingly recognizing the power of Revolve and place high value in tapping into our strong connection with millennial and Gen E consumers. With such an impressive caliber of performers, attendees, and partners generating impact for our vendors, the search interest for our Revolve brand was higher during the week of Revolve Festival than it's ever been, according to Google Trend. This excitement around the return of Revolve Festival resulted in demand for our incredible event being much higher than we anticipated. In fact, so much so that we temporarily experienced logistics challenges late in the first day of Revolve Festival when our venue reached full capacity, causing longer wait times for entry and resulting in some guests not being able to attend the festival. We have reached out to all those who affected to make it right, and we believe we have identified solutions to ensure we avoid similar circumstances at future events. We believe our brand-building investments have even further strengthened our connection with the next-generation consumer, demonstrated by very positive signs of consumer engagement. In the first quarter, we drove record quarterly growth in natural customers by a wide margin, and traffic to our sites and mobile apps increased significantly year-over-year. Monetization of this larger base of traffic has also continued to increase, helped by a 13% increase in our average order value year-over-year, and continuing strength in net sales at full price. Consumers spending more with us across more aspects of their lives further validates the trust we have earned and provides us even more opportunity to deepen the relationship over time. Encouragingly, net sales across virtually all product categories increased year-over-year in the first quarter, which illustrates how we have expanded our customer relationships in recent years. Activewear offers particularly exciting growth potential since our customer lives an active lifestyle and increasingly looks to evolve for inspiration. We recently launched our first Activewear-owned brand and it's performed strong in the early Well-being, Being Well brand features styles sourced from sustainable materials fondly designed with our planet in mind, and our advances are a strategy to diversify our own brand assortments into new categories. We also have an opportunity to diversify our assortments to further expand our region to our target demographics. An exciting development was our recent launch of Khloe Kardashian's size-inclusive line, Good American, on Revolve that I mentioned earlier. Specializing in premium denim with size ranges from 00 to 26, The launch resonated extremely well with our customer and generated a lot of excitement. The brand continues to perform exceptionally well for us early on. Continuing on the inclusivity theme, we recently announced plans to create a size-inclusive collaboration for our own brand with project creator and curve model Remy Baker, set to launch in Revolve in the fall of 2022. Finally, I will provide an update on the new brand ambassador program discussed in last quarter's conference call that leverages our proprietary technology. The community-driven expansion of our influential marketing strategy is proven to be a powerful driver of the business, with traffic from this initiative increasing more than 80% in the first quarter compared to the fourth quarter of 2021. It's early that the Brand Ambassador program has already driven meaningful incremental engagement and generated a great deal of excitement across ambassadors interested in gaining access to events and other exclusive posts in the program. We are investing to further expand the Brand Ambassador team and drive exciting innovations forward in the months ahead. To wrap up, I am extremely proud of the outstanding results we have achieved today, especially over the last two years, surviving a time of disruption and volatility. I'm even more excited about the future. We've had a very busy, exciting few months with some amazing in-person events that have generated significant brand momentum over just getting started. We will continue to invest in marketing and building the brand, and with our data-driven approach, operational excellence, and very strong connection with the next generation consumer, we believe we are well positioned to further gain market share in the months and years ahead. Now I'll turn it over to Jesse for a discussion of the financials.
spk18: Thanks, Michael. And hello, everyone. We believe our first quarter results demonstrate the incredible momentum of our brands, our competitive differentiation, and our focus on operational excellence. I'll start by recapping the first quarter results. highlighted by exceptional top-line growth and record growth in active customers for the third consecutive quarter. Net sales were $283 million, a year-over-year increase of 58%, and an increase of 18% on a sequential basis from the fourth quarter. Both segments contributed to our exceptional growth. Revolve segment net sales increased 56%, and Forward segment net sales increased 71% year-over-year in the first quarter. From a merchandise standpoint, the dresses category further accelerated to nearly 150% growth year-over-year, demonstrating that our customer is out again, living a very active social lifestyle. Owned brands as a percentage of revolved segment net sales also increased year-over-year for the second consecutive quarter. By territory, both domestic and international markets contributed to the strong top-line results. Active customers increased by an exceptional 201,000, compared to the fourth quarter of 2021, exceeding our prior record performance announced just last quarter. This growth expanded our active customer count to 2 million, an increase of 38% year-over-year. Looking forward, since active customers is a trailing 12-month measure, the comparisons become more difficult as our new customer growth began to accelerate in the second quarter of 2021. We continue to expect year-over-year growth rates of active customers and net sales to converge in the coming quarters as we cycle out of the COVID period that negatively impacted the trailing 12-month measure for active customers. And our customer was very active, placing a record 2.2 million orders in the quarter, an increase of 68% year-over-year. Average order value, or AOV, was $288, an increase of 13% year-over-year that benefited from the strong growth in dresses, and an increasing mix from the forward segment. Shifting to gross profit, consolidated gross margin was 54.5%, our best ever margin for our first quarter and an increase of 44 basis points year over year. Moving on to operating expenses. Fulfillment, selling and distribution, and marketing expense were generally consistent with our full year 2022 outlook commentary on these measures from last quarter. We continue to drive very efficient results in fulfillment, despite inflation headwinds and a year-over-year increase in our return rate. As expected, selling and distribution costs were a significant headwind year-over-year due to higher return rates that came with a shift in mixed-backed addresses and other going-out categories, and higher shipping costs industry-wide. Increased oil prices have also driven incremental fuel surcharges, further increasing shipping costs that comprise the majority of this line item. For marketing, we continue to keep the pedal down on our investments to capitalize on the current momentum in our business. We are very pleased with the early results of our increased marketing investment and continue to believe that our in-person marketing activations have a long tail and will continue to provide benefits over the long term, just as they have historically. General and administrative costs in dollar terms came in slightly higher than the Q1 outlook we provided last quarter. Nonetheless, our very strong top-line results enabled us to achieve operating leverage is our 58% net sales growth outpaced the 35% growth in G&A expenses during the first quarter. Income before income taxes increased 38% year-over-year, driven by the strong top-line results. Our effective tax rates were very different for the year-over-year comparison. Our tax rate for the first quarter of 2022 was 22%, 28 points higher than the negative 6% tax rate in the first quarter of 2021 that included meaningfully higher tax benefits. Net income was $23 million, or 30 cents per diluted share, flat year-over-year because of the meaningfully higher tax rate in the first quarter of 2022 that I just mentioned. Adjusting for the differences in our effective tax rates between both years, earnings per share would have increased 37% year-over-year. We delivered adjusted EBITDA of $31.5 million, an increase of 35% year-over-year on top of a huge increase in adjusted EBITDA from a year ago. Adjusted EBITDA has now nearly quadrupled in just three years when compared to the first quarter of 2019. Moving to the balance sheet and cash flow statement, we had net cash provided by operating activities and free cash flow of $54 million and $53 million respectively, an increase of 62% year-over-year for each measure. The strong cash flow generation has further strengthened our balance sheet and liquidity. We remain debt-free, and cash-in-cash equivalents as of March 31, 2022 were $271 million, an increase of $52 million, or 24% from just last quarter, and an increase of $88 million, or 48% from a year ago. Most impressive, our cash-in-cash equivalents net of borrowings were more than 250% higher than just two years ago. We are proud of our incredible results. especially considering the supply chain headwinds and uncertain macro environment that have dominated the headlines on a daily basis. Our team has remained agile and focused on the customer throughout, rising to the occasion to successfully navigate through these operating challenges. Now, let me update you on some recent trends in the business since the first quarter ended and provide some direction on our cost structure to help in your modeling of the business. Starting from the top, through the month of April, we have continued to deliver strong top-line growth, with a year-over-year growth rate of more than 30% that was achieved on a more difficult comparison than we faced in the first quarter. Now, as you think about modeling net sales growth for the full second quarter, it is important to keep seasonality and prior period comparisons in mind. Recall that our strong sales trends in April of 2021 continued into May and June of 2021, but the monthly growth rates in 2021 were skewed by the COVID dynamics of 2020. We believe it is more informative to view the 2021 comps on a two-year basis versus 2019. To provide some context, on a combined basis, the net sales comparisons we faced in May and June of 2021 are more than 10 points higher than the April comparison we faced on a two-year growth basis versus 2019. Also keep in mind that in light of the exceptional sequential sales growth of 18% from the fourth quarter of 2021 into the first quarter of 2022, that was significantly above the historical trend line, we expect the sequential growth from the first quarter of 2022 into the second quarter of 2022 to moderate versus historical pre-COVID levels such as 2019. We continue to expect the second quarter ending on June 30th to be the peak sales quarter for the full year, and we expect year-over-year growth for the second quarter to exceed our long-term target growth rate of 20%. Shifting to gross margin, we are very pleased with our gross margin performance that exceeded our Q1 outlook provided last quarter, despite continuing headwinds on inbound freight costs that remain significantly higher than pre-pandemic levels. We expect continued gross margin strength and expect gross margin in the second quarter of 2022 to be between 55% and 55.5%, improving sequentially from the first quarter margin of 54.5%, consistent with typical seasonality. For the full year 2022, we continue to expect growth margin to be flat to slightly down versus our record growth margin of 55% in 2021 for the reasons outlined last quarter. Fulfillment. We continue to expect fulfillment expenses of around 2.5% of net sales for the full year 2022, which we view as very efficient among peers and gratifying considering the current inflationary environment and rising input costs. Selling and distribution. In 2022, we continue to expect selling and distribution costs to be around 16% of net sales, but we remain very cautious and are closely monitoring fuel surcharges from our carriers, which is a key driver of shipping costs that comprise the majority of this line item. Marketing. We continue to expect our marketing investment to remain approximately flat with the 2021 rate of 15.8% of net sales as we keep the pedal down to fully capitalize on our current momentum. With the return of our Revolve Festival bigger and more impactful than ever, we expect the second quarter to represent the highest level of marketing investment of the year, comprising at least 17% of net sales. General and administrative. We expect G&A expense of approximately $28 million in the second quarter and now expect the full year to be approximately $110 million at the high end of the previously provided range for the full year 2022 as we continue to invest to support our growth and expansion. Lastly, let me touch on our tax rate. Absent tax benefits in future quarters, we continue to expect our effective tax rate to be around 24% to 26%. To recap, we are incredibly excited about our outstanding start to the year, with strength across segment and geography, supported by a very loyal customer. While mindful of everything going on in the world around us in the current environment, including continuing macro headwinds and geopolitical uncertainties, We remain focused on the customer and on the long term, and we are investing in the business to build our brands and capitalize on the incredible growth opportunity ahead.
spk00: Now we'll open it up for your questions.
spk22: At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad, and we'll pause for just a moment to compile the Q&A roster. And your first question comes from the line of Lorraine Hutchinson with Bank of America. Your line is open.
spk20: Thank you. Good afternoon. I just wanted to follow up on your comments around inventory. Looks like you're in good shape or too few, but have you had any struggles getting the inventory you need? Are you seeing any logistical challenges with the more recent COVID outbreak in China? And what's your outlook for the inventory availability and levels going into the back half.
spk13: Definitely. We feel really good about our inventory position at the moment. We feel like we're well supplied. Certainly there's been challenges and we expect there to continue to be challenges for the back half of the year. At the same time, this is really consistent with the environment we've been dealing with the past two years and we feel confident in our ability to execute and deliver results regardless.
spk22: Thank you. Your next question comes from the line of Anna Andreeva with Needham. Your line is live.
spk02: Great. Thank you so much, and good afternoon, guys, and congrats. We just wanted to follow up on the quarter-to-date trend. You said sales up in the 30s. Should we think it's a similar dynamics like the last couple of quarters, and forward is outpacing the growth of a revolve segment. What are you guys seeing with international business quarter to date, just given the macro? And curious if you could talk about how you feel about the pipeline of in-person events ahead for 2Q. And thank you so much.
spk13: Yeah, so with regards to revolve and forward, we feel really good about the trends in both businesses, and they continue to perform strongly. And then... Sorry, what was the second part of the question?
spk02: International quarter to date.
spk13: Oh, right, international quarter to date. Yeah, so on a one-year basis, the international is not quite as strong as the domestic. On a multi-year basis, we feel really good about the international. It continues to perform well.
spk04: Let's go to pipeline of events. We're feeling great that the world is open. So we're back to full strength, our full range of capabilities and a full calendar. Revolve Festival is a large investment to begin the warm weather season, and there will be other in-person events in Q2. And then H2 will have similar scale events as Revolve Festival as we pursue the cold weather season. So you'll see a lot more of us. Our customers will see a lot more of us in the rest of the year.
spk22: We'll take our next question from the line of Mark Altschweiger with Baird. Your line is open.
spk09: Good afternoon. Thanks for taking my question. The active customer productivity metrics have been pretty impressive. I think $488 net sales per active customer on a trailing 12-month basis. Is it your expectation that these higher levels of productivity are sustainable? The key drivers that you've outlined, I think you have them on page six of the slide deck. They all sound pretty structural, but I'm curious if there's a view that some pent-up demand is at play here as well. Thank you.
spk18: Yeah. Hey, Mark. This is Jesse. Yeah, we're really pleased with the active customer growth this quarter again after several quarters of really robust growth. That said, we have commented in the past that that active customer growth number will start to come down as we kind of cycle out of those COVID periods of past, and that active customer growth will converge closer to net sales growth. But to your point, structurally, we anticipate and expect continued productivity from those customers. I think one important driver there is that overlap between the Revolve and Forward Customer and that Forward Customer AOV being much higher than the Revolve Customer AOV. So we see a lot of opportunity there and structurally just really good momentum in terms of customer productivity retention across the board.
spk08: Thank you.
spk22: And your next question comes from the line of Seth Sigman with Guggenheim. Your line is open.
spk10: Hey, everybody. I wanted to follow up on the seasonality of the business. I think you did say you expected higher revenue in Q2 than Q1, but not the same seasonal increase that you would typically see, I guess, when you go back to 2019 or other years. Is there a reason why we wouldn't see a similar 18% type of quarter-to-quarter growth rate? Was there a pull forward or anything else that we should be thinking about here?
spk18: Yeah, no, great question. And we definitely wanted to call that out. I think the main point here is that we just had an exceptional Q1 and that sequential growth coming out of Q4 of 21 in the Q1 of 22 was phenomenal with that 18%. You didn't see that back in 2019. So kind of balancing between the Q4 to Q1 and then Q1 to Q2. And then, you know, just factoring in all the uncertainty out there. We just wanted to provide some caution on that sequential growth, but still expect Q2 to be the seasonal high for the year, and then, you know, with that 30% growth in April. So Q2 to date performing well.
spk22: And your next question comes from the line of Michael Benetti with Credit Suisse. Your line is open.
spk14: Hey guys, thanks for taking our question here. I had one similar to Seth. I guess if we look on a three-year basis to the pre-pandemic period that Mike spoke to, I guess the 30% that you're pointing to in April is maybe a 15-point slowdown versus 1Q. I don't know why it would slow. It seems like demand is very strong in the quarter. And then to Seth's question, Maybe it does seem like recent data points are a little more indicative of the demand environment than going back all the way to think about what the world was pre-COVID. I guess it seems to me that the categories you want to work are working. The festival seemed like it went fairly well. I'm just wondering if you think we should think about seasonality different beyond 2Q, if there's anything specific you can point to in 1Q that might have pointed to some pent-up demand being unleashed that you think slows or anything like that.
spk18: Yeah, yeah. I think the three years is the most appropriate way to look at it, you know, going back to 2019, which is the most recent kind of quote unquote normal period that we had. And, you know, more similar to 2021 with festivals in both years, or sorry, 2022 with festivals in both years. I think difference being we had a lot of activity early on in the current year, starting with the Super Bowl and then heading into the social club, which then led into festival. We're a little bit lighter in 2019 in that Q1 period. So there is some, you know, seasonal shifts within the quarter into April. But again, it's really tough to call and, you know, kind of what's going to happen out there. So we're cautious, but just still really excited with the performance thus far.
spk14: Jesse, can I follow that with, I'd be curious, you know, you, You came in revenues about $30 million above where consensus was in the first quarter, EBIT about $3 million above. Should we think about incremental margins as we go through the year if we do track above the revenue trends in the consensus models? How should we think about flow-through? Is it similar to what we saw in the first quarter? Would you say you pulled forward some marketing or anything like that to go big on the first revolve test in a few years? Any help there would be helpful.
spk18: Yeah, I wouldn't factor in too much incremental flow through, you know, looking ahead. I think in Q1, we didn't feel the full pressure from inflation, fuel charge charges, cost, etc. Return rate was also just, you know, eventually increasing as people started to get back out, started buying dresses again. So I think, you know, we'll see some of those pressures continue and it's still uncertain out there and you know, what freight charges, fuel surcharges do for the balance of the year, inflation and everything else that's in the headline. So, you know, again, phenomenal quarter. We continue to invest in the marketing and then continue to face those cost pressures. So, yeah, I wouldn't factor too much incremental flow through as you look in the back half of the year. And then G&A, we mentioned, you know, being at the higher end of that range for the full year.
spk14: Okay. Thanks for the detail. Appreciate it.
spk22: And your next question comes from the line of Lauren Schenk with Morgan Stanley. Your line is open. Great. Thanks for taking my question.
spk21: Similar question as some of the others, but on the gross margin line. The first quarter gross margin better than expected. Wondering why perhaps we shouldn't assume that that flows through to the full year relative to your comments that still expecting flat to down slightly for the full year. And then as a part of that, how are you thinking about promotional environment? for the industry more broadly for the course of the year.
spk18: Thanks. Yeah, growth margin performed really well again this quarter and really driven by continued full price strength. Again, really strong this quarter as we've seen the last several quarters and that held through Q1. We did see slightly higher markdowns within that markdown mix, a smaller portion of course, but we did see some offset there. And then back to the plus side, our own brand mix did increase, and those products performed really well in Q1. So recall that we were at a 20% mix in 2021, so that increased slightly and increased from the exit rate that we were at in 2021 as well. So I think, you know, great margin performance. We're holding the full year outlook there. As we do anticipate, you know, just natural inventory flow through that that full price markdown or full price mix will come down. You know, that markdown margin will come down as well just naturally. But great performance in Q1 thus far. And in the promotional environment, we're not, you know, seeing anything too dramatic out there. You know, I think there's maybe brand by brand some incremental promotion. We're not really focused on, you know, trying to compete there. We just, you know, maintain our cadence and, you know, watch the inventory flow through and velocity.
spk22: Thank you. And your next question comes from the line of Camilo Lyon with BTIG. Your line is open.
spk19: Thanks very much. Good afternoon, guys. On the return rates, it looks like you got back to that 2019 level and that 54% range. But then in 2019, it really does start to kind of decelerate going into the back half of the year. Is that the right way to think about how the return rates should unfold for the balance of the year?
spk18: Yeah, generally that's, historically that's what we've seen. You see the full price mix and kind of, you know, dress mix hitting a peak in Q2 with dresses having a higher return rate, full price having a higher return rate. That's where you see the peak in return rates, and then it starts to come down for the balance of the year in the past. I think, you know, we should, you know, assuming a consistent mix and consistent seasonality, we should see something similar. Different, though, is over the last three years we've layered on you know, almost 10 countries, maybe more, with the all-inclusive pricing, free shipping, free returns internationally. So we saw a meaningful increase in the return rate internationally that is having an impact this year that wasn't there back in 2019. So that, you know, if you look at the return rate comparison this year versus 2019 and that incremental, you know, call it point, maybe a little bit north of a point, that's largely due to international and those customer service initiatives that we've been layering in. And then also the other component there is full price. If you look at just domestic and normalized for that full price mix, we actually saw return rates tick down just very slightly. But back to your main question, I think it depends on the mix, both in terms of full price and the dress mix and what that does to return rate for the balance of the year.
spk19: Super helpful. Thanks, Jesse. And then just one final question. If we kind of unpack the metrics underneath, what you provided today and think about your consumer's purchasing behavior. Are you seeing any signs of a pullback on spend, whether it's basket size or a trade down in price of goods that you normally would have bought? Anything to signal that there's an inflationary pressure that's impacting your purchase behavior?
spk18: You know, just speaking through Q1 kind of results to date, we're not. You can see it, you know, AOV at $288. I think it's a Q1 high record. We're seeing the orders per customer checking really well. So, you know, just kind of across the board, purchase frequency, the types of products, dresses coming back in a really big way, and then even within dresses, the special occasion kind of going out type dresses. So, you know, not really seeing it. We see that continued overlap between the revolve and forward customer continue to increase. you know, kind of her, you know, even moving up the chain a little bit in terms of AOV and purchasing. So, you know, not yet. Not to say that won't change, but so far so good.
spk19: Great. Thanks for the call. Good luck.
spk22: And your next question comes from the line of Oliver Chen with Cowan. Your line is open.
spk16: Hi. Thank you. The average order of values were Impressive. Going forward, what are your thoughts on that dynamic as it applies to dresses and or the mix? And second, as we think about new customers, what are your thoughts on retention and the retention strategies? I also noticed that you increased performance marketing with IDFA and new customers just would love some color on why and why that made sense. And finally, on the more markdowns, Are there implications for how you're planning inventory, given that you have slightly deeper markdowns? I know you're up against a lot of very full-price selling. Thank you.
spk18: Yeah, maybe I'll take that first and last one, the AOV and then the inventory, and give it to Mike for the IDFA performance marketing stuff. So AOV, this is largely dependent on what Mix does in terms of dresses in full price. Again, full price continues to check. We do expect that dress mix to balance out over the course of the year, you know, especially in the back half of the year, just typical seasonality. But we expect continued strength on that AOV. Again, really strong full price and then calling out that forward revolve customer overlap again with forward having, you know, a 2 plus X AOV then revolve. And then the inventory, you know, we're constantly balancing inventory. And when I say the markdowns were slightly deeper on that markdown, it was, you know, it was slightly and it was natural and expected. So I don't think that has changed anything in terms of how we're planning inventory for the balance of the year. We did, you know, stock up ahead of the increased demand and felt really good coming out of last year and into this quarter and able to support that robust demand we saw in Q1.
spk13: Sorry about that. Yeah, and then with regards to IDFA, I mean, it's certainly been an industry headwind. You know, we've generally been impacted by it less than others due to our very diversified marketing mix, brand marketing obviously being very strong for us, word of mouth being a huge source of customer acquisition. But, you know, it's certainly something that has an impact, and, you know, from quarter to quarter, we're going to see, you know, some volatility between the various channels that we market in.
spk16: Okay, lastly, it looks like Private Label has seen some really good momentum. How do you feel about the capabilities you have there and what we should know relative to the past? And we're also curious about super down and or lower average unit retail strategies. Ford is really doing excellently. But as you think about broadening to lower price points, is that in your radar as well? Thanks a lot.
spk04: Yeah. Hey, Michael Mente here. Hi, Oliver. In terms of capabilities, over the past two years, obviously pulling back and then accelerating at the end, having an incredible quarter. Moving forward, there's going to be a big diversity of capabilities in own brands across price points, across fabrications, across end uses. As we saw this last quarter, launch of Active, which is going extremely well. You'll see a lot more things in that nature, diversified offering. We've been already classically great at some of these going out categories like dresses and such. we really seem that the consumer, you know, not just their own brand, but across the board wants a sharper, broader selection for us, not just, you know, going out and, you know, the festivals and travel through the pandemic at home, active beauty, and just a range across the board. So, diversity across the board will be there, which we think ultimately, you know, going back to an earlier question, long-term-wise, we're really optimistic that we can really increase, you know, productivity per consumer as we have this broader offering, you know, of course, to integration with forward, handbags, shoes and accessories and all that. When it comes down to low price, the capabilities are strong there, but we think that the greater opportunity over the long term is in our core as well as continuing to upmarket. I think there's an appropriate balance of low-price products that we have, and I think we're calibrated quite well. But I think it's important for us, being a premium brand, the real white space lies in our core price point, and we think that there's a lot of opportunity to continue to migrate that core price point up over time. Don't anticipate seeing any more high proportions or ratios of low-priced product in the future.
spk22: And your next question comes from the line of Matt Caranda with Roth Capital Partners. Your line is open.
spk07: Hey, guys. Thanks for taking the questions. A lot have been asked and answered, but just wanted to cover the loyalty program and just whether you could comment on the cross-pollination between Ford and Revolve this latest quarter. I think in the past you guys have quantified active customers that buy from both Ford and Revolve, so I wondered if you guys could update on that front and then just any benefits that you see coming from all the events that you're able to hold in 2Q and the rest of this year from that loyalty program.
spk13: Yeah, it continues to be a huge success for us, and it's really more of the same of what we've been seeing where we're continuing with each passing month to increase the percentage of active customer overlap between Revolve and Ford. I think we last disclosed it's less than 5% of the business. It's still less than 5%, but it's starting to get a lot closer to that number. And, you know, we think long-term the opportunity is huge. We think the vast majority of Revolve customers shop products that Ford carries. And so we're just excited to keep driving that number month after month, quarter after quarter. And the loyalty program is a big driver of that.
spk22: And your next question comes from the line of Tom Nickett with Wedbush Securities. Your line is open.
spk12: Hey, good afternoon, guys. Thanks for taking my question. I want to follow up on the gross margins. Sorry if this was mentioned already earlier, but there was a disparity between the year-over-year changes in gross margin between Revolve and Forward. I think Revolve was up about 100 basis points and Forward was down about, you know, over 100 base points. Can you help us understand why there was a disparity between the two segments?
spk18: Yeah. Hey, Tom. This is Jesse. It's really about inventory timing and forward accelerating faster than Revolve last year. If you recall, last Q2, we had a phenomenal quarter for forward. So kind of heading into that, you had higher full price. And then, you know, it's kind of transitioning faster on the forward segment than it is the Revolve segment. But still really strong on both fronts.
spk12: Got it. And if I could ask one more, you know, you mentioned the pop-up store that you did, the Revolve Social Club. Obviously, you're doing great online. But, you know, I wonder if, you know, is this kind of like a sign that you think that maybe having more of a physical presence and would be beneficial, and maybe we'll see more of these pop-up store events?
spk04: Yeah, the pop-up store events are kind of great. They really give us an opportunity to get in front of our consumer. They give us great opportunities to engage our influencer community, and it gives us a great opportunity to experiment with retail concepts and such. So we learned a lot. This is Revolve Social Club, and I think there will be further iterations in the future. I think that's you know, pop-ups can easily be incorporated into, you know, a number of our future events. You know, for example, at Revolve Festival, there's no pop-up store, and I think that, you know, in the right way could be, you know, a very incremental additive component with future events as well. So we've done things in times past, and we continue to learn, and we'll definitely see, you know, experimentation and continued evolution of what we're currently doing.
spk22: And your next question comes from the line of Jim Duffy with Stiefel. Your line is open.
spk15: Thank you. Good afternoon. A terrific growth in the active customers. I recognize this is a 12-month metric, but can you comment even directionally on the composition of customers net new to the data file versus the reengagement of those who may have lapsed during the COVID influence period?
spk18: Yeah, this quarter was really both. And I know it's very general to say that, but it truly was both new and repeat customers. You know, we saw more kind of recovery from that relapse customer over the past couple quarters before we got to Q1. So those customers had kind of already come back. But what you have seen is that, and this is true historically as well, that full price customer performs really well for us over a lifetime. And with the robust full price sales mix that we've had over the last, you know, four plus quarters, we're seeing really great retention coming out of that 120% retention that we saw in 2021.
spk15: Great.
spk18: Go ahead, please. I was going to say one more on that. I think Mike and Michael mentioned the friend referrals. Friend referrals are a great source of traffic for us and that helps in the retention and the new as well. So it's great to see that coming back as she gets out and socializes more even beyond our specific events. She's out on the weekends talking to her friends
spk15: And I wanted to ask how this relates to marketing investment. It seems you're pleased with the return on performance marketing investment against prospecting for net new customers. You mentioned pedal down on marketing. As sales came through strong, did you reinvest in marketing? Was this prioritized towards prospecting, and will that be the continued strategy as the year unfolds if sales over-deliver relative to the budget?
spk13: Yeah, so Q1 was fantastic for us from a revenue standpoint, from a customer acquisition standpoint, and we felt like we were getting great returns on our market investments in the first quarter, and when we do that, we tend to spend against it. In our view, both are important. We don't view it as one or the other. We think it's important to market to both new and repeat customers, but you know, we feel like our results for the quarter were fantastic. And, you know, I think if you look at the active customers and the revenue and all that, it really supports that.
spk00: Thank you.
spk22: And your next question comes from the line of Dylan Cardin with William Blair. Your line is open.
spk01: Thanks. Since you're giving this metric about sort of every incremental customer percentage point overlap between the two brands. I'm just kind of curious how you're thinking about what that ultimate sort of crossover spend could be and if the sort of the shopping behavior between the two brands is sort of as you expected it. I think the idea here was that it would be sort of an accessories forward customer that then rounds out the wardrobe on Revolve. Is that kind of the spending pattern that you're actually seeing?
spk13: Yeah, that's generally the spending pattern that we're seeing. That said, we have a diverse set of customers, so there's plenty of Revolve customers who will spend on, you know, the dresses and apparel on board as well. But we think the biggest opportunities in the handbag, shoes, and accessories, we feel great about our success, you know, driving the incremental increases. And, yeah, every point has a huge contribution to the business. And, you know, what's really exciting to us is it's not even about the current size of the business, right? Revolve is growing at tremendously fast rates. So, you know, the size of that opportunity is going to grow as Revolve continues to grow. So we really just think more big picture in terms of, you know, long-term big picture opportunity in the luxury, you know, space where it's a multi-billion dollar opportunity for us. Great. Thanks.
spk22: And your next question comes from the line of Aaron Kessler with Raymond James. Your line is open.
spk06: Great. Thanks. A couple of questions. Maybe just on international, I know you mentioned China. Any other regions you would call out kind of positively or negatively? And then labor costs obviously have been coming up a lot for kind of e-commerce companies. Anything you would comment there as well? Thank you.
spk13: Yeah, yeah, definitely. So, yeah, China with the lockdown certainly saw softness. And in China, particularly at the back half of Q1 and continuing into Q2. In terms of, you know, the rest of international, generally quite strong conditions. You know, particularly Canada, as we've mentioned on a number of calls, continues to perform phenomenally with triple-digit, you know, growth rates in the quarter. U.K., also extremely strong. And in general, I think really nice growth across most of our major regions. And then on the cost side, Jesse, you want to take the question?
spk06: Yeah, second question was on the labor costs.
spk18: Yeah, yeah. You know, we are seeing incremental pressure there, more so than in past years. But, you know, we're managing through it. And with that higher AOV, you know, we're able to absorb those costs more than some of the others in the space. So, you know, we continue to balance and make up for it where we can in efficiencies like the warehouse automation and other things.
spk06: Got it. And maybe just on the AOV quickly, how much are you increasing pricing as well on the kind of the same item basis?
spk18: Yeah. On the third-party side, it's largely pass-through. We are seeing mid-single-digit price increases there. And then on the own-brand side, we go style-by-style to adjust and make sure it's comparable to that third-party. And we're balancing, again, on a style-by-style basis. So call it in that mid-to-high single-digits.
spk22: And your next question comes from the line of Simeon Siegel with BMO Capital Markets. Your line is open.
spk08: Thanks. Good afternoon, everyone. Did you guys say how you're thinking about gross margin for evolving forward over the year embedded within your gross margin guide? And then any way to tell us about inventory units versus the inventory dollars that you're seeing? And then just thoughts on maybe just updating us on your views on inventory turn over the next couple of years. Thanks. Yeah, let's see.
spk18: So the first one, margin outlook for Revolve and Ford specifically, we're not providing that, you know, in our commentary for the outlook other than to say, you know, we'll keep shooting for that, you know, call it 55% or slightly lower for the full year. And again, you know, full price is strong. That dress coming back with higher margin, strong own brands with a slightly higher mix. And then, you know, forward has a slightly offsetting impact there with the lower comparative margin to that of revolve Inventory turns. Maybe I'll hit that one next, you know, with the inventory down and dynamic and stocking up ahead of the demand. We are seeing, you know, slightly lower turns than our target. But that is somewhat seasonal and expect those to, you know, pick up over time. And I think, you know, we'd like to see him slightly higher, but really comfortable with the inventory health and where we're sitting. and being able to support the demand that we're seeing. And then on a unit basis, you know, it tracks largely to the dollars. That said, with the increase in forward and forward-taking mix over the years and that higher comparative AOV, you do see units slightly lower on a growth basis than you do on the dollar basis.
spk08: Great. Thanks a lot, guys. Best of luck for the rest of the year. Thank you.
spk22: And your next question comes from the line of Trevor Young with Barclays. Your line is open.
spk11: Great. Thanks. At the risk of belaboring the inventory point, obviously growing north 75% year-on-year for four straight quarter, outpacing revenue growth. I think you mentioned you feel pretty good about inventory levels now, looking at the slower revenue growth going forward for the next couple quarters. Should we expect that inventory growth to slow a little bit, or will there still be some build on the new distribution coming later in the year? And then a second one, you mentioned the diversity in marketing channels. Any update on early success or lack thereof using TikTok and how that's comping against Instagram this year? Thanks.
spk18: Yeah, I'll take the first one there on inventory. Yeah, we'll definitely see the year-over-year inventory growth start to moderate. It already has started to moderate kind of on an inch or quarter basis, but especially as we get into 2H. And that was anticipated again, getting ahead of the demand. And then also getting back to a more kind of pre-COVID historical normal seasonality where the inventory comes in ahead of that peak spring-summer demand that we see right around this time. So definitely expect that inventory growth to balance, especially in the back half of the year.
spk04: Yeah, when it comes to TikTok, there's something really great about the progress that we've made. You know, Revolve Festival, there was definitely, you know, this was the first Revolve Festival where TikTok was relevant to the consumer. So the appropriate investments were made, and we gained 25% new followers in a single month, which was absolutely phenomenal. So I think there's strong momentum there. A lot of the highest-performing posts and a lot of the envy that we were driving across the channel was driven by TikTok in a more diversified way than we've ever done before. So really proud of the team and really happy with the progress, and it'll be important for us to stay focused and continue to sustain this momentum.
spk22: And we have time for one more question. Your final question will come from the line of Susan Anderson with B. Riley. Your line is open.
spk03: Hi, good evening. Thanks for taking my question. I was just curious maybe if you could talk a little bit about capital allocation with the cash on the balance sheet. I guess would you ever start to think about returning any cash to shareholders, or is there opportunity to make acquisitions, or should we just think about continued investment in the business? Thanks.
spk18: Yeah, thanks, Susan. Yes, we are constantly thinking about it. You know, I think number one to call out, which, you know, very capital efficient. It doesn't take a lot to run the business, not a lot of capex. Even as we think about this distribution center in the back half of the year, that will be very, very minor investment in terms of capital. So that leaves us with the other alternatives. So next one up is opportunistic M&A. We continue to look at things, think about things. You know, but again, we're very disciplined. you know, when the time and price is right, we'll make a move there. And then we do think about, you know, longer term other ways to return capital such as buybacks and dividends, but that's probably, you know, further down the road. Great. Thanks so much.
spk03: Good luck the rest of the year.
spk22: And that's all the time we have for questions today. I will turn the call back to management for closing remarks.
spk04: Well, thank you guys for joining us for a quarter. We're very, very proud of the results we've driven. It's been probably two years, but we're really at a point where everything within our control is going extremely well and a lot of opportunity ahead. We're ready for, on a macro level, whatever comes, I think we'll continue to gain strength and gain momentum and quite confident in our competitive abilities and competitive marketplace. So feeling great and excited for you guys to join in a few months.
spk22: And ladies and gentlemen, this concludes today's conference call. You may now disconnect.
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