Revolve Group, Inc.

Good afternoon. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to Revolve's second 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. To withdraw your question, press the pound key. Thank you. At this time, I'd like to turn the conference over to Eric 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 second quarter 2022 results. Before we begin, I'd like to mention we have posted a presentation containing Q2 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 economic conditions and their impact on consumer demand in our business, operating results, and financial condition, our current expectations regarding the continued impact of the COVID-19 pandemic on our business, operations, and financial results, including on our near-term sales in greater China, our growth, including growth in active customers and market opportunities and related macro and industry trends, expected impact on delivery times from opening our first East Coast Performance Center, our marketing and technology investments and marketing events, the launch of our Remy Bader collaboration, the extension of our brand ambassador program to include forward, our freight costs, and our outlook for net sales, gross margin, operating expenses, and effective tax rate. 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 and elsewhere, 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, 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. In our non-GAAP measures, they'd 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 Karanikoulis 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 it over to Mike.

Hello, everyone. We delivered strong results in the second quarter, highlighted by record net sales that increased 27% year-over-year, gross margin expansion to record levels for a second quarter, and continued strong growth in active customers. We delivered these results despite macroeconomic conditions that became more challenging as the quarter progressed, creating cost pressures that impacted profitability and also contributed to a moderate year-over-year growth trend in net sales in June that has continued into the third quarter. With that as an introduction, I'll briefly recap our results. In the second quarter of 2022, our net sales were 290 million, a 27% increase year over year. We added 124,000 active customers during the quarter, the highest ever for a second quarter, and representing 39% growth year over year. Impressively, growth in active customers in the first half of 2022 has already exceeded our total growth in active customers for the full year in 2019. Gross margin expanded approximately 30 basis points year-over-year to 55.9 percent, an all-time high for a second quarter, despite inbound freight costs remaining elevated. However, below the gross margin line, we faced increasing pressure on operating expenses that contributed to softer than expected profitability measures in the second quarter. Our second quarter net income of $16 million and adjusted EBITDA of $27 million declined 48% and 24% year-over-year respectively against a difficult prior year comparison when our net income had increased more than 100% year-over-year. Importantly, net income and adjusted EBITDA were 28% and 42% higher than pre-pandemic levels in the second quarter of 2019 respectively, further illustrating our continued focus on profitable growth. The increased cost pressures were mainly within selling and distribution, and more specifically, customer shipping expenses. There are two main reasons why these costs came in higher than expected. First, we incur fuel surcharges on every package that we ship to our customers and on return packages. Our fuel surcharges in the second quarter were more than 4x what they were in the prior year and had a material impact on the selling and distribution line item for the second quarter. While our premium price points enable us to absorb these costs more efficiently than if we were operating at lower price points, and we do expect some moderation costs from the peak, these surcharges continue to create real cost pressure in the near term. Second is our return rate. We had anticipated that our return rates would increase year over year as our product mix of net sales continued to normalize. However, our return rate has trended even higher than pre-COVID levels in the first half of the year. Historically, the main factors that influence return rates include the mix of sales by category, by geography, by segment, and the mix of full price and markdown sales. One of the primary drivers of the higher return rate compared to pre-COVID levels is a fast-growing percentage of our international net sales coming from countries like Canada, where we offer hassle-free returns, a major growth catalyst that has resulted in Canada net sales quadrupling in just the past six quarters. Our return rate in Canada has approximately doubled since late 2020 when we launched hassle-free returns for Canadian customers, yet it's a trade-off we'll make all day long considering the exceptional growth of our localization efforts in the markets. Another factor was our mix of full-price sales, which have a higher return rate. The mix of full-price sales was higher than we anticipated for the second quarter and was significantly higher than in 2019. And finally, on a normalized basis, we did experience an overall increase in the return rate this quarter due to what we believe is a shift in consumer behavior that is likely driven by the challenge macro environment's effect on consumer sentiment. Shifting gears to net sales performance by geography, our U.S. net sales increased 30% year-over-year, outpacing international net sales growth of 14% from a year ago. Our international trends reflect continued strong growth in Western regions like Canada and the UK, where we've made excellent progress with our localization initiatives, partially offset by foreign currency headwinds resulting from the stronger U.S. dollar and temporary headwinds in China due to COVID-19 preventative measures. As I mentioned earlier, customer activity continues to be a bright spot. Our active customers are becoming more productive, illustrating our success in capturing a greater share of wallets. For the trailing 12-month period, net sales per active customer were $488, an increase of 9% year-over-year. This data is quite encouraging, considering that new customer growth has been really healthy for the past several quarters, and that revenue per customer tends to increase significantly over time. Consider that in 2021, customers who had purchased from Revolve in a previous year represented 49% of our total active customers for the year, yet these more tenured customers generated 77% of total net sales for the year. I'd also like to highlight that the significant majority of our newly acquired customers in recent quarters have purchased from us at full price, since our full price customers consistently generate a higher lifetime value than customers acquired through markdowns. Our consistently strong and profitable financial results also reflect our long-term focus on building trust with the customer. Core to building this trust is operational excellence and exceptional service levels. I'm excited to share that we've begun operating our first East Coast Fulfillment Center, which we expect will raise the bar on our ability to delight customers with even faster delivery times for key East Coast geographies. We've seen firsthand how much our West Coast customers appreciate and value our one-day delivery timeframes available for many regions surrounding our Los Angeles Fulfillment Center. The power and stickiness of compelling service levels is also clearly evident in performance within our international markets. Almost universally in international markets where we've invested to elevate service levels, our growth has accelerated in the months that follow. To wrap up, we believe our results for the past several quarters demonstrate that we are gaining meaningful market share. And more importantly than just outpacing the competition, we're uniquely doing that while generating significant profitability and cash flow year after year. Our ability to self-fund the strengthening of our balance sheet year after year affords us a great deal of financial flexibility to invest where we see opportunities to drive shareholder value. It's particularly important in an uncertain market environment like we're operating in today, where inflation is at a 40-year high and U.S. consumer sentiment was at the lowest reading on record in June. I'm extremely proud of how well our team has navigated through this increasingly challenging macro environment. Michael and I have seen multiple economic cycles over nearly 20 years, We have complete confidence in our team's ability to execute through even the most challenging environments, as we demonstrated in profitably navigating through uncertainty in the early stages of the pandemic. Our team and technology are battle-tested and have emerged stronger through this volatile period, and we are primed and ready for what lies ahead. Now, over to Michael.