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spk17: Good afternoon. My name is Audra and I will be your conference operator today. At this time, I would like to welcome everyone to Revolve's third 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 star one again. At this time, I would like to turn the conference over to Eric Randerson, Vice President of Investor Relations at Revolve.
spk02: Good afternoon, everyone, and thanks for joining us to discuss Revolve's third quarter 2022 results. Before we begin, I'd like to mention that we have posted a presentation containing Q3 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 costs and inventory management, our growth, including growth in active customers and market opportunities and related macroeconomic and industry trends, our partnership with Muse Collective, our plans to expand, forward, renew, and introduce the Ford Brand Ambassador Program, our future events, 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 action 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 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, 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 it over to Mike.
spk12: Thanks, Eric. Hello, everyone. We delivered another quarter of profitable double-digit growth in the third quarter of 2022 that further distinguishes Revolve in the fashion e-commerce landscape despite the increasingly challenged macro environment. Before I get into the details of the third quarter, I want to provide a higher-level view of how Michael and I think about our strategy as both operators and long-term owners of the business. We have a founder-led, investor-first mindset that permeates throughout the organization. With this perspective, we were able to confidently make disciplined investments that we believe position us for continued success over the long term, even during periods of macro challenges. The recent time period is no exception, where we continue to make key marketing investments and launch exciting new initiatives that further elevate our brand and build on the long-term opportunity to capture market share. We have a history of this while delivering growth, profitability, positive cash flow, and a healthy increase in our active customer base. This mindset and focus on investing in the long-term opportunity, even through turbulent times, has been a key contributor to our track record of growth and profitability over the last two decades. and we believe it will continue to drive our performance well into the future. Now, getting into the third quarter results. In the face of many challenges, we grew our top line double digits and delivered meaningful profitability and cash flow. Our net sales increased 10% in the third quarter compared to the prior year period, on top of 62% growth in Q3 2021 compared to Q3 2020. We delivered net income of $12 million and adjusted EBITDA of $18 million in the third quarter. As expected, profitability was lower year-over-year due to reduced gross margins, higher return rates, and other cost pressures discussed in detail on last quarter's conference call. Importantly, net income and adjusted EBITDA increased 25% and 22% respectively compared to the third quarter of 2019, further illustrating our track record of profitable growth. Even more important in such a turbulent environment is that we are generating meaningful cash flow and further strengthening our balance sheet. We generated $9 million in free cash flow in the third quarter, a triple-digit increase year-over-year. Nearly 20 years of experience operating Revolve has shown us that companies capable of generating profitability and cash flow during periods of economic volatility can become even stronger relative to the competition. We aim to be very disciplined in our cost and inventory management to maintain profitability, yet we are not overreacting. For instance, with the abrupt shift in consumer demand that we experienced in the second quarter of 2022, we took swift action to rebalance our inventory in a very strategic way to balance the moderation of our inventory levels with our focus on the customer experience and our long-term margin potential while maintaining our very strong brand partnerships. There's still work to do, yet only a few months in, we are on track with our plan and very pleased with our progress, as our inventory position grew only 2% during the third quarter when compared to the second quarter of 2022. Successful execution of our marketing and merchandising investments led to growth of 84,000 active customers during the third quarter, expanding our active customer base to 2.2 million, an increase of 34% year-over-year. This is on top of the record growth in active customers we reported in our third quarter of 2021. We view our continued healthy growth in active customers as further validation of our large market potential. Incidentally, even with our investments in the new East Coast Fulfillment Center we opened during the third quarter of 2022, we are still investing less than 1% of our annual net sales in capital expenditures. An important driver of our capital efficiency and agility is our ability to leverage our proprietary, internally developed technology instead of relying on capital outlays to purchase expensive and cumbersome technology systems from third-party vendors that is a common approach among e-commerce peers. Our approach is completely and fundamentally different. When we expand our fulfillment center infrastructure, we primarily leverage our internal engineering resources to evolve and customize our own existing proprietary technology systems to meet our specific needs and to support our best-in-class service levels for customers. Shifting gears to net sales performance by geography, our US net sales increased 10% and international net sales grew 12% year-over-year in the third quarter of 2022. The international results are impressive considering the significant appreciation of the US dollar during the third quarter, particularly against the British pound and the Euro. These currency movements present a headwind to demand considering that our pricing in local currencies is tied to the US dollar. In other words, when the dollar strengthens against the British pound, our product becomes relatively more expensive for customers living in the UK. And we can clearly see the negative impact on our monthly sales results in affected regions. Our net sales results in Europe and the UK went from high single-digit year-over-year growth during the month of July to negative year-over-year growth comparisons in net sales for the month of September, coinciding with currency exchange rates becoming much more challenging later in the third quarter. That being said, it's also important to consider the broad macro challenges facing our European customers. provide a framework of the UK and Europe on a combined basis, represented a mid-single-digit percentage of our total net sales for the first three quarters of 2022. Importantly, by comparison, our year-over-year growth in net sales remained healthy in key international regions such as Canada and the Middle East, where the foreign currencies have been much more stable. Finally, our track record of profitable growth also reflects our long-term focus on building trust with our customer. Core to building this trust is operational excellence and exceptional service levels. During the third quarter, we received gratifying recognition for our outstanding service levels in a key international market. Revolve was recognized by and profiled in Singapore's largest English-language daily newspaper, The Straits Times, for having the best customer service in the online women's apparel category. The publication highlighted Revolve's customer-first culture, use of technology in the buying process to stay on trend, fast and free express shipping, and hassle-free local returns in Singapore at no cost. We're very proud of this recognition for our exceptional service levels that are a key competitive advantage and are a direct outcome of our growth strategy. Recall that in January of 2020, we announced service level enhancements in Singapore that were designed to further raise the bar on our international customer experience that led to our recognition. Importantly, this example is part of a broader success we are achieving as an organization. Our customer satisfaction score in the third quarter was the highest level in at least five years, and we intend to continue to set the bar even higher. Like many others, we undoubtedly face challenges in the current environment, and we have much more work to do. We will continue with our swift action to rebalance our inventory growth in a very strategic way. We will continue to be very disciplined in our cost management, and we will continue to make investments for the long term. All told, I believe our third quarter results demonstrate that we are capably navigating through these uncertain times from a position of strength while continuing to prudently invest in our long-term growth opportunities. Thanks again to the entire team for their dedication and invaluable contributions to our continuing success. Now, over to Michael.
spk09: Thanks, Mike. I'm very pleased with our ability to deliver double-digit profitable growth this quarter, and I'm very excited about the complete momentum of our brand, the strong relationship with our network of partners and customers, and the incredible performance by our teams. We were very active in the third quarter as we continue to invest in our future growth opportunities, including key brand building events that generate returns over extended periods of time. We are very pleased with the early results of our activations and brand launches, and importantly, the positive feedback from our customers. In September, we returned to New York during Fashion Week to host an impactful week-long activation, further elevating our brands with engaging experiences intended to delight and excite our community of influencers, customers, and partners. The flagship event was our experiential, interactive, and visually stunning Revolve Gallery that completely reimagines the traditional fashion experience in a signature Revolve way and uniquely features a real-time shopping component. Back for a second year and bigger than ever, Revolve Gallery is an immersive multi-brand installation featuring a curated assortment of emerging fashion designers, exclusive styles, and premier partners showcasing their brands in dedicated spaces. We hosted 9,000 attendees at Revolve Gallery over four days, an increase of about 50% from our inaugural event in 2021. In addition, we hosted a much larger group of high-value customers at our Revolve Gallery and other fashion events, and more than 50% of these high-value customers traveled from out of state to be a part of our Money Can't Buy experience. It was incredible to interact with our customers, experience their loyalty to the brand, and hear their glowing feedback at our level of service and their overall shopping experience. We also attracted participation from hundreds more influencers than last year, who collectively amplified our elevated experience on social channels with our dynamic and engaging content, particularly video. To further capitalize on the powerful industry-wide shift to video content, for Fashion Week, we diversified our influencer partners to increasingly focus on TikTok native influencers, who helped us drive incredible growth in our TikTok metrics. Fueled by a very active month of September, When we held several events during Fashion Week, our new TikTok views in the third quarter were more than 10 times higher than in the third quarter of 2021, meaningfully exceeding our expectations. Shifting to a discussion of own brands, during the third quarter, we further expanded our market potential by introducing two new own brand collections that rank among our most successful brand launches in our history. Own Brands provides a powerful platform for us to internally develop products where we see opportunities in the market based on our data-driven approach to merchandising. One area where we see opportunity for growth is in the elevated own brand products with premium price points. In September, we collaborated with supermodel Elsa Haas to launch an elevated brand called Helsa, featuring an average retail price of around $250, featured exclusively on both Revolve and Forward. The collection was one of our best performing own brand launches and was seen on a number of celebrities during New York Fashion Week. Created with sustainability in mind, Helsa is an elevated and creative expression of Elsa's known Swedish roots that Vogue described as being minimalist heaven. We also see opportunity in expanding our market potential and new customer demographics. As covered extensively in major press outlets such as Access Hollywood, Good Morning America, People, Us Weekly, and InStyle, we have teamed up with content creator and current model, Remy Bader, to create a size-inclusive own-brand collaboration exclusively available on Revolve. Demand for the collection's first drop in August resulted in many styles selling out right away And the second job during fashion also performed exceptionally well. The most exciting outcome is that our collaboration with Remy both resonates with our current customer and expands their own brand market potential into extended sizes, enabling us to attract a new and incremental customer demographic. In fact, approximately one-third of all orders of the Remy X Revolve collection in the third quarter were new customers to Revolve. Now we'll talk about a truly innovative new channel for our brand building investments that I'm very excited to talk about. Today, we are announcing a strategic partnership that we believe has the potential to significantly and cost-effectively expand our audience to reach an increased engagement with our community of customers, brands, and influencers in exciting new ways. We are collaborating on the creation of a fashion-centered mobile gaming and e-commerce experience, a game that is effectively an elevated fashion playground that will feature digital, playable vendors of fashion and beauty items from all over Poland. Web3-enabled platform will empower players to become their own tasers by providing tools for creative expression, enabling them to connect with their favorite Revolve brands and engage with trends through a gamified shopping and selling experience, collectible assets, and deep social interaction. We are particularly excited about this opportunity to expand our reach and engagement, considering that mobile gaming is the fastest-growing social media on the planet and that 49% of mobile gamers worldwide are women, according to Google Play research. Our partner is entertainment studio Muse Collective, which is backed by Griffin Gaming Partners, one of the world's largest investment venture funds exclusively focused on gaming. Muse is led by Amber Bezalder, who has deep experience in leading platform e-commerce and innovation initiatives and gaming brands. Muse co-founder and chairwoman is Sarah Fuchs, formerly of Covered Fashion, a leading fashion mobile gaming platform that grew to more than 3 million active users. and has been downloaded more than 78 million times according to data.ai. Covet fashion generated more than 225 million in lifetime revenue before Electronic Arts acquired the franchise last year. I'll conclude with an update on Ford. A luxury destination where we continue to see a great deal of opportunity for continuing growth. Ford net sales for the third quarter increased 17% year-over-year, an encouraging result in the current environment and considering the prior year comparison as well. To illustrate, well we are executing against large opportunity in front of us in luxury over the last three years our compound annual growth rate for forward net sales is a robust 35 percent and the forward business is about two and a half times the size it was three years ago one nascent area of forwards growth that we view as an exciting new opportunity is resale last quarter i talked about our new forward buyback program a proprietary resale program dedicated to circular luxury shopping where we are offering to repurchase handbags with forward customers in exchange for credit on our site. This exciting repurchase initiative has opened up a brand new opportunity in resale. For the first time, it enables us to attract and retain customers interested in purchasing pre-owned handbags within a new and dedicated section of a forward site called Forward Renew. I'm thrilled to share that customer interest in pre-owned handbags and their early going has exceeded our expectations. To build on our early success, we are investing to further expand the Forward Renew program beyond supply from our own customers participating in the Forward buyback program. In the coming weeks, we will begin testing the resale of handbags sourced from third parties with access to pre-owned handbags, including from the world's most coveted luxury brands. Our investments in Forward include further elevating the brand through our partnership with Kendall Jenner and Forward's creative director. In September, Kendall hosted an exclusive Forward event in New York to celebrate the new Forward Fall campaign that Kendall herself directed. The first time she had stepped behind the camera in her role as Ford's creative director. Co-hosted with GQ Global Editorial Director Will Welch, the event was attended by VIPs and tastemakers including Emily Ratajkowski, Ian Dior, Devin Booker, and Jordan Clarkson. Coupled with the soon-to-be-introduced Ford Brand Ambassador Program I touched on last quarter that will officially launch in the next few weeks, there are other exciting growth initiatives at Ford that have me confident in our future. To wrap up, there is no denying that we are operating in a challenging environment, yet we are very much up to the challenge and see a great opportunity to further separate from our competitors. We have an outstanding leadership team, including many leaders who have been with Mike and I for 10 years or more. We have a strong balance sheet, and we have a business that has been profitable 18 out of the 19 four years since we have founded the company. This gives us the confidence to focus on the long term and continue investing in exciting growth initiatives that we believe will maximize shareholder value over the long term. With our technology-driven DNA, operational excellence, strong brands, and connection with the next-generation consumer, we believe we are well-positioned to capture market share. Now I'll turn it over to Jesse for a discussion of the financials.
spk03: Thanks, Michael, and hello, everyone. We are pleased with our accomplishments in the third quarter, as well as our exciting progress building on our long-term growth initiatives, all delivered by the team within an extremely difficult economic climate. I'll start by recapping the third quarter results. highlighted by double-digit top-line growth, continued profitability, and healthy free cash flow generation that further strengthened our balance sheet. Net sales were $269 million, a year-over-year increase of 10% and an increase of 20% on a three-year CAGR basis. As a reminder, our net sales in the third quarter of 2021 had increased 62% compared to the third quarter of 2020 and had even grown sequentially from net sales in the second quarter of 2021. which is not our typical seasonality, creating a very difficult year-over-year comparison. Revolved segment net sales increased 9%, and forward net sales grew 17% year-over-year. By territory, domestic net sales increased 10% year-over-year, and international net sales increased 12%, despite the currency headwinds that became progressively more challenging throughout the third quarter. Active customers increased by a healthy 84,000 compared to the second quarter of 2022, This growth expanded our active customer count to 2.2 million, an increase of 34% year-over-year. Through the first three quarters of the year, we have already added more active customers in 2022 than in any prior full year in our history. Looking forward, we continue to expect moderation in the quarterly growth of active customers in the fourth quarter of 2022, and especially in the first quarter of 2023 for this trailing 12-month metric. The reason the first quarter of 2023 will be a particularly challenging comparison is that we achieved exceptionally strong record growth in new customers in the first quarter of 2022. Our customers placed 2 million orders in the third quarter, an increase of 7% year-over-year. Average order value, or AOV, was a very healthy $320, an increase of 16% year-over-year. Shifting to gross profit, consolidated gross margin was 53%, a decrease of 211 basis points, primarily due to a lower mix of net sales at full price year over year. The decrease in gross margin is directionally consistent with our commentary on last quarter's conference call, but did come in slightly lower than implied by our guidance range for the quarter. Moving on to operating expenses. Fulfillment costs deleveraged 64 basis points year over year. primarily due to a year-over-year increase in our return rate and the resulting mix of units processed, as well as increased labor costs and costs related to the expansion of our fulfillment network. Selling and distribution costs deleveraged 158 basis points year-over-year and remained a significant headwind, yet importantly, came in at a lower percentage of net sales on a sequential basis than in the second quarter of 2022. Costs for shipping packages to customers represent the majority of this line item, And these costs remain elevated year-over-year due to a higher return rate in 2022 and significant year-over-year growth in variable fuel surcharges included in every package shipped through our carrier partners. Marketing leveraged by 265 basis points year-over-year, better performance than implied by our outlet commentary last quarter, primarily due to lower but still significant brand marketing investment year-over-year, highlighted by the very successful events held in September during Fashion Week that Michael talked about. General and administrative costs were $28.5 million and also came in lower than the outlook we provided on last quarter's conference call. All in, despite some incremental fulfillment cost pressure, our cost structure came out better than expected, reflective of our disciplined approach to cost management. Our effective tax rates were again very different for the year-over-year comparison. Our tax rate for the third quarter of 2022 was 26%, 12 points higher than the 14% tax rate in the third quarter of 2021 that included meaningfully higher tax benefits. Net income was $12 million, or 16 cents per diluted share, a decrease year-over-year that was impacted by the meaningful differences in our effective tax rate, the lower gross margin, and growth in operating expenses that slightly outpaced our net sales growth year-over-year. Adjusted EBITDA was $17.7 million, a decrease of 18% year-over-year. Looking back to the pre-pandemic period as a benchmark, our net income and adjusted EBITDA for the third quarter were 25% higher and 22% higher than the net income and adjusted EBITDA reported for the third quarter of 2019. Moving to the balance sheet and cash flow statement. operating cash flow and free cash flow increased significantly, more than 400% year-over-year, and was helped by our team taking swift action to moderate inventory growth in the current environment. For the nine-month year-to-date period, net cash provided by operating activities was $34 million, and free cash flow was $31 million, with both measures down significantly year-over-year from the exceptional cash flow generation in the prior year period. The decreases in both measures year over year primarily reflect the lower net income, which included much higher tax rates and cash payments for income taxes that increased by $14 million in 2022, as well as the increased investments in inventory during the first half of the year. With the demand trends shifting lower in the current macroeconomic environment beginning in the second quarter, we moved quickly and decisively to bring inventory back in balance. Well, it has only been one quarter. We are pleased with our performance thus far, and we are continuing to make further adjustments. The strong cash flow generation has further strengthened our balance sheet and liquidity. Our balance sheet remains debt-free, and cash and cash equivalents as of September 30th, 2022 were $244 million, an increase of $22 million, or 10% from September 30th, 2021, and an increase of $6 million, or 3% from just last quarter. Looking back further, our cash position at quarter end was nearly five times higher than the cash on our balance sheet three years ago as of September 30, 2019. And this cash generation was operational without any kind of major financing event, providing a clear and powerful indicator of our operating strength and ability to generate cash through business cycles. Now let me update you on some recent trends in the business since the third quarter ended and provide some direction on our cost structure to help in your modeling of the business. Starting from the top, as you know, it's a very uncertain time for consumer spending globally, with persistent inflation weighing on consumer confidence, macro pressures on consumers in key markets like Europe, the UK, and China, and increasing foreign currency headwinds that became even more pronounced as the third quarter progressed. Looking at our net sales trends early in the fourth quarter through the month of October, net sales increased approximately 3% year-over-year against a more difficult year-over-year comparison than we faced in the first nine months of the year. Trends in October were better domestically than in international markets, as net sales in regions where we face significant currency headwinds, such as the UK and Europe, have trended lower in recent months. Given the uncertain macro environment, and considering that our year-over-year comparisons are even more difficult for the balance of the fourth quarter, we encourage investors to model further moderation in our year-over-year net sales comparisons for the balance of the fourth quarter from the approximately 3% year-over-year growth in October. As a basis of comparison, recall that our net sales in the fourth quarter of 2021 a year ago increased 70% year-over-year. While we're on the topic of year-over-year top line comparisons, looking ahead to 2023 for modeling purposes, based on what we know today, the first quarter of 2023 will be by far our most challenging comparison for net sales in 2023 since we had such an incredible first quarter of 2022. We expect net sales comparisons in 2023 to become progressively easier thereafter following the first quarter of 2023. Shifting to gross margin, consistent with the commentary on last quarter's conference call, we expect our gross margin for the fourth quarter of 2022 to be sequentially lower than the third quarter of 2022 primarily due to our expectation for a lower mix of full price sales on a sequential basis versus the third quarter of 2022. As a result, for the fourth quarter, we expect a gross margin of between 52.5% and 53%. This implies a decrease of approximately two points year-over-year at the midpoint, about the same year-over-year decline as the third quarter. Looking beyond the fourth quarter, we expect continued pressure on gross margin in the first half of 2023 as we continue to work through our inventory position. Fulfillment. We expect fulfillment expense of around 3% of net sales for the fourth quarter of 2022, consistent with our performance for the third quarter. Selling and distribution. We expect selling and distribution costs as a percentage of net sales in the fourth quarter to be relatively consistent with the 17.3% in the third quarter and slightly lower than our outlook provided last quarter. Marketing, we will continue to invest in building our brands and even further strengthening our brand connection with our loyal customers. We expect our marketing investment to be between 16% and 16.5% of net sales in the fourth quarter, higher year over year, but lower sequentially versus the third quarter of 2022, and also lower than our prior outlook. Of note, in the third quarter, we saw some early signs of advertising prices decreasing, likely due to marketers reducing investment in the current economic environment. General and administrative, we expect G&A expense of approximately $29 million for the fourth quarter. The expected increase in G&A costs year over year reflects investments in our team we have made this year to support our continued growth and expansion. We believe we operate very efficiently. illustrated by the nearly two points of G&A leverage we have achieved in just the past three years. And, directionally speaking, we expect the rate of year-over-year growth in G&A expenses to moderate in 2023. 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%. We continue to anticipate a very challenging macro environment in the months ahead. and we will remain disciplined in our cost management while prudently investing in key initiatives and keeping an unwavering focus on the very attractive market opportunity ahead of us over the long term. We are confident that with our strong brand, healthy balance sheet, and operational excellence, we can navigate through these short-term challenges and continue to gain market share. With that, we'll open it up for your questions.
spk17: Thank you. 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. We'll take our first question from Randy Koenig at Jefferies.
spk14: Yeah, thanks a lot, guys. Jesse, I want to first go to you and ask about gross margin guidance. So you made some good progress on the inventory growth relative to sales growth. in the third quarter relative to the second quarter. Sounds like you're continuing to make that progress. When could you expect the inventory growth to come in line with sales growth? Would it be by the end of the second quarter of next year, such that the markdown pressure should abate in the back half? Just want to get some perspective on how you're thinking about the cadence of inventory growth relative to sales growth first. Thanks.
spk03: Yeah, sure. Thanks, Arne. I think you're in line there. You know, as Mike said, we made great progress. We're on plan in terms of rebalancing that inventory and bringing it closer in line with the sales growth. But it does take some time, especially on the forward side. So we'd expect a bulk of the positive impact there and bringing that closer in line in 1H23. You know, especially, you know, by the time we hit the end of the second quarter of 2023. Got it.
spk14: And just to follow up there, you feel like you'd be more comfortable with those gross margins being able to improve in that back half as they go up, better comparison, your comparison. Yeah. The inventory being matched up. Yeah. Yeah. Yeah.
spk03: Into the first half of 2023, before it eases up and we start to see some gains in the back half of the year.
spk14: Got it. Okay. And then just last question more for Mike and Michael, just kind of perspective, if you could, on just how the consumer, your consumers may be changing, the notable changes that you're seeing in that consumer across the two different businesses. Is she becoming more price sensitive or not? Is her frequency changing at all? Any kind of more either quantitative or qualitative aspects of how she's changing would be super helpful to the audience. Thanks, guys.
spk09: Yeah, the one thing that we're really noticing is that our core customer, you know, premium customer is, you know, still strong. We've seen AOV rise over this quarter. But we have seen that kind of the lower price customer is a little bit softer there. So I think we're seeing like a mixed tale of two worlds there, which, you know, we'll see in this week's economy is, you know, not surprising at all. I think as the economy gets better, I think we'll see strength, you know, increased strength across the board. So I think that's probably the one noticeable thing that we're seeing at the moment.
spk14: Thanks, guys. Super helpful.
spk17: We'll move next to Oliver Chin at Cowen.
spk13: Hi. Thank you. Regarding the comments, very helpful. The comparisons do get tougher. How would you generally think about normalization towards your longer-term growth algorithms and how that may manifest? You attractively picked up a lot of new customers. And then second question on Web3, some of the themes of Web3 include decentralization and the evolution of different kinds of platforms as well as crypto. Just what should we understand? That customer may be different from your existing customer. It's a younger customer, but the video games are so significant. We just love the vision and the implications for financial modeling if you have any. And last question on promos. It sounds like you're working through inventory to the way in which you're happy about but would love a your diagnosis of the promotional environment and how you're competing and what you're prepared for. Thank you.
spk12: Hey, definitely. Kyle or Mike here. So I'll take the first part as far as how we think about the growth rate and normalizing and kind of how it compares to that long-term trend. So on a three-year basis, we're essentially in line with our long-term targets and obviously there's a lot of noise in between with COVID lows and then a huge rebound last year, you know, potentially overshooting a bit towards online and kind of aspirational items. And so, you know, we're a bit short of that long-term target in the current period. That'll likely continue for a few quarters while, you know, the current macro weakness and comps work themselves out. But, you know, I feel great about the momentum of the business and, you know, kind of continuing to achieve that long-term growth target of 20% plus. On the Web3 stuff, Michael, you want to talk about that more?
spk09: Yeah, 1,000%. I think at this point in the game, it's going to be far too early to model the financial implications over the long term, but I think it's very important for us to really stay innovative and stay at the forefront of what's going on. To me, it's very similar to when Mike and I were starting the company 20-plus years ago. There was a lot of doubt about the future of e-commerce. It was about lot of doom and gloom. And I think that was where we saw the opportunity. And I think it's important that we're continuing to invest and keep an eye out, you know, for the next 10, 20 years. With regards to decentralization, I'd love to have a longer conversation with you offline. I don't want to tip off too many competitors about what we have in the roadmap there. But I think there's some exciting kind of opportunities here that this new platform provides with us to provide, you know, a broader platform for, you know, a decentralized kind of product development. I think it's a super excited about what we're doing here. Yeah.
spk12: And then the last part of the question, you know, kind of on the promotional environment, we've certainly seen the promotional environment get more intense as the year has progressed and we expect Q4 this year to be pretty heavy promotional-wise. You know, with Revolve, you know, our approach is similar to how it's always been where we feel like Revolve is not as influenced by what others are doing, although we're certainly influenced by kind of, you know, more broader macro sentiment and or kind of broader sales trends. And I think you saw them in the third quarter with the revolve. Gross margin held up pretty well. And, you know, Ford, we took a bigger hit on the gross margin side. Ford, we're definitely expecting an intense promotional period in the fourth quarter. And we look to get ahead of that a little bit with some increased markdowns in the third quarter. But, you know, there will definitely be, you know, some pressure there on the promotional side for Ford in the fourth quarter.
spk17: We'll take it. We'll take our next question from Mark Allschweiger at Baird.
spk06: Great. Thanks for taking my question. With respect to the guidance, it does seem like you have a bit more confidence in your ability to manage the costs versus what the macro demand backdrop might look like. It appears evident in the cost discipline in Q3 as well as the guidance for Q4. So I'm wondering if you could just share any high-level thoughts on how investors should be thinking about the range of margin outcomes for 2023 as you navigate this more uncertain macro. I think the guide implies roughly an 8% EBITDA margin this year, but you also pointed to some ongoing headwinds in the first quarter. So I know you probably don't want to get too specific, but just any high-level thoughts or framework would be helpful. Thank you. Yeah, sure. This is Jesse.
spk03: I think it probably works best without getting too specific to just kind of work through the line items and give some color there. So, you know, on Randy's question, we talked a little bit about the gross margin pressure continuing through the first half of the year and next year and then, you know, easing up and getting some gains in the back half of 2023. Own brands has increased moderately from that 20% that we exited or had in 2021. So that, you know, a continued build there will provide some benefit, especially as we progress through 2023. If we look at fulfillment, we are pressured at the moment with high return rates. We did move into a new facility, so there's some short-term cost pressures there. We would expect to get some moderate level of efficiencies as we grow into our space and maximize that with scale. And that will also benefit to some extent on the selling and distribution line as well. So if we segue into selling distribution, again, a lot of cost pressures there from the return rate to fuel surcharges and just macro dynamics. Again, that's a very variable line item, but we do expect to get some efficiency there over time. Hopefully fuel is shorter term in nature. Marketing, continue to keep the pedal down on investment in marketing. You know, similar to what we've done in the last couple of quarters. And then finally, G&A. I think we mentioned in the prepared remarks that that rate of growth will moderate in 2023. We made some pretty meaningful investments this year coming out of COVID, but that will moderate and come back in line. So we should get, you know, leverage similar to what we've seen in the last couple years with that two full points since 2019. So hopefully that helps give some color into 2023 to the extent we can. And then to your point, the macro top line is very uncertain.
spk06: Thank you.
spk17: We'll go next to Michael Bonetti at Credit Suisse.
spk11: Hey, guys. Thanks for all the detail. Jesse, can you unpack the 3% in October, please? A little bit of a deceleration in the multi-year rate. Just what's going on on the ground that you're seeing that you want to isolate for us here to help us think about the trends in the quarter? And then I'm just trying to think about customer growth versus order growth a little bit. I know customers is a trailing 12 number, but 34% growth. We can make some inferences there on the quarter. Can you help us understand that growth rate versus orders up 7% in the quarter? And I'm wondering if you're seeing a new customer that you think is going to require some higher level of discounting going forward or anything like that, just given that I didn't expect the customer growth rate to be as strong given some of the dynamics last quarter.
spk03: Yeah, yeah, a few things there. I guess maybe starting from the back and working in reverse. So that active customer, again, being a trailing 12-month number, we are, you know, picking up the benefit of a couple of really strong quarters, especially Q1 of 2022. So we do expect that rate of growth to moderate into Q4 and then especially into Q1. So that 34% will come down. And again, these things will, you know, start to converge as things normalize, hopefully get to some kind of normal here soon and get out of these crazy comps. And then on the order side, the order versus dollars and active customer, we are seeing that increase in AOV and that's a combination of inflation, price increases in that kind of mid to high single digit range, but also her shifting to higher price point products. And then also, like Michael mentioned, those higher price point products holding up better than the lower price point. And you can see that in the forward results. And then also, Within Revolve, you can also see dresses checking really well. And then within some of the other categories, handbags and shoes doing really well. And within the fashion apparel category, some of those higher price points doing better relative to the lower price point category. So a lot of dynamics at play on that front. And then the trends in Q3 and as we entered Q4. So as we mentioned, July was plus 10. The comps got harder. We closed the quarter at plus 10. So it was pretty linear through the quarter despite some you know, more tough comps in August and September, and also international getting progressively more challenging with the currency movements within the quarter. And that, you know, led into Q4, and we continued to see the currency and international pressure there. So, you know, domestic outperforming international in the fourth quarter. You know, but October was softer than what we experienced in Q3, you know, when you look at, you know, one-year and multi-year comparatives. Thanks a lot, Jess.
spk17: We'll take our next question from Anna Andrevy at Neenem Company.
spk16: Great, thanks so much. Good afternoon. Thanks for taking our questions. A follow-up on the previous point, so on October being a little bit softer, Jesse, maybe talk about what you're seeing by brand. Is that more traffic or conversion? Just any surprises from October. And then secondly, on inventories, great to see progress being made there. Can you maybe talk about your comfort with the carryover levels by brand? Sounds like Forward maybe is a little bit heavier than Revolve right now. And how do you guys think about inventory buys for 23? Thanks so much.
spk03: Yeah, on the October traffic conversion trends, nothing significantly different than what we experienced in Q4. There's always week-to-week, month-to-month dynamics there, but nothing that I'd call out that is significant outside of that continued pressure on the international front. On the inventory side, Mike commented, I think we both commented, we feel good about the progress we've made thus far. It's only been a few months into the cycle of rebalancing. The one to call out there is Ford. It just takes longer on Ford given the buying cycle there. So we have less ability in the short term to impact things on that side. So Ford is heavier relative to Revolve as we get into Q4, but that should start to rebalance in the first half of 2023.
spk17: We'll take our next question from Lorraine Hutchinson at Bank of America.
spk15: Thanks. Good afternoon. You got some nice leverage from reduced brand marketing. Can you talk about the decision to reduce this brand marketing and what this means for events on a go-forward basis?
spk09: Yeah, we feel super, super proud of the work that we've done. We reduced brand marketing not because it was a financial decision, but we realized running our second annual event Revolve Gallery, we were able to accomplish, you know, even more with less. The first time we did something, of course, you know, a lot of experimentation and preparation. So the second time around, we really understood what worked best. We understood where to trim. We understood where to double down. And ultimately, we were able to achieve better results on a decreased spend. So very, very proud of the team. This was not a Let's share financially. Let's do our best. Let's make sure we do what's important. Let's continue to invest. But, of course, be disciplined and get better. And I think that's exactly what happened this quarter.
spk15: Thank you.
spk17: We'll go next to Rick Patel at Raymond James.
spk07: Thank you. Good afternoon, everyone. Can you talk about the outlook for AOV going forward? Just curious what the right way to think about the mixed impact of Revolve versus Ford. and the work that you need to do on managing inventories. And then secondly, I was hoping to ask a follow-up question on margins. So any additional context you can give on the margin pressure in 3Q and the fourth quarter guide related to higher supply chain costs and the fuel surcharges would be helpful. I think you mentioned that gross margin would be under pressure in the first half. Curious if that means that easing supply chain pressure will be more of a back half 23 tailwind.
spk03: Yeah, on the first one, and the – sorry, and I just lost the first one. Margin – sorry, can you repeat the first part again? I had my answer, and then it slipped. AOV? Yeah, just – Oh, AOV, sorry. Just the outlook on AOV. No, my bad. So, on AOV, you know, really good gains there, you know, the last several quarters, and that's a combination of Ford performing really well, higher price performance, price points performing really well. And in the full price mix, we've been operating at, you know, really record levels of full price for the last several quarters. It came down this quarter, of course, but still operating at higher levels than the pre-COVID era. So, on that front, you know, we expect the higher price points to continue to perform well. Addresses is great for us. As we go into the Q2 kind of peak, what is typical peak season, we generally see AOVs increase. But we will see some moderation there, so I don't think we'll see the, you know, the expansion that we've seen the last couple quarters, given that shift from the record full price into markdowns, especially as we enter, you know, this quarter and into the first half of 2023. And then the kind of amount price cost and how that's impacting margin. We are seeing some softening on that front sequentially from the second quarter. still running, you know, Q3X depending on which period you pick higher than the prior year period and pre-COVID levels. So, you know, it's coming down. How fast it comes down, we're not sure yet. So, probably wouldn't factor too much into that until, you know, in that mid-2023 time zone. And also important to also check that against the AOVs. You know, we do run at premium ASB and AOV levels. So, you know, the freight is a challenge on the inbound side as well, but not to the extent it is on the lower price point players out there. So, you know, it's a smaller percentage of the cost of goods sold.
spk17: We'll go next to Jim Duffy at Stiefel.
spk10: Thank you. Good afternoon. Two lines of questioning for me, guys. First, a question on the pressure that you're seeing on orders per active customer. Jesse, you touched on this some earlier, but I'm curious if you could isolate the fall-off in orders per active customer to a particular cohort or type of customer, or if there's any analysis that sheds light on that.
spk03: Yeah, nothing really tall out there. We did see a small decline sequentially on that orders per active customer, still running higher than we were experiencing So still a really healthy number, but we did see a decline there. And again, there's a little bit of a, you know, picking up these active customers from that record Q1 timeframe. But nothing to call out on the cohorts. They continue to perform really consistent over time. You know, you did see the COVID pressure in all cohorts getting compressed, and you saw the 2021 rebound in all cohorts expanding. You see that in retention numbers, but nothing to call out on a specific cohort. I'm really optimistic with the customers that we've acquired over the last, you know, couple years and retention rates holding, you know, at where they've been historically. And, again, we have, you know, call it 19 years of cohort data. So really good data set to read.
spk10: Okay. Thank you for that. I also wanted to ask about performance marketing effectiveness. Can you speak about how consumer shift of video is influencing marketing yield and, therefore, allocation of your performance marketing spend?
spk12: Yeah, so the consumer shift to video has definitely been a factor, and that's an area that we've been ramping up investment in. It's still, from a pure performance marketing standpoint, a fairly small portion of what we do. I think where it's made a much bigger impact is on the brand marketing side, where we've seen huge growth in video-oriented platforms like TikTok, where I believe our views were up 10x compared to the prior period year over year, and then even on Instagram itself with the shift to Reels. Really big shift on the brand marketing side, and then starting to see some shift on video, but still more focused on the static ads.
spk17: We'll go next to Matt Caranda at Roth Capital.
spk04: Hey, guys. Thanks. How would you characterize sort of the number and depth of promotions on both sites relative to pre-pandemic levels? And then I have a follow-up.
spk12: Yeah, so I think it depends kind of what, you know, period you're looking at. But, you know, to Jesse's earlier point, full price sales mix is still, is all very healthy and higher than pre-pandemic levels. You know, Revolve, as we talked about, you know, we think we have a better ability to manage through that inventory without taking significant levels of markdowns. And then Ford is a little bit more subject to competitive pressures and whatnot. So, you know, certainly, Our markdowns are elevated, I think, versus what we would consider a kind of normal economic environment on a go-forward basis. You know, our markdowns are elevated versus where we'd like to be. But, you know, we think that'll take a couple quarters to work through, and then we expect to see that the margins bounce back to close to where they were in kind of the pandemic high periods. But, you know, it's really not quite there because that was a unique period.
spk04: Okay, thanks for that. And then just on return rates, curious how you guys would characterize those and how they trended into October. It seems like, you know, potentially we're seeing a downtick just a touch in the third quarter relative to the second, but just was wondering if you can kind of characterize the latest in terms of returns and expectations for return rates on a go-forward basis.
spk03: Yeah, I think we'd characterize it as you know, expect them to remain elevated, at least in the, you know, the near term. The couple things that play there just, you know, as a reminder is that if you compare to pre-COVID levels, we're running a couple points higher. That's number one due to the international localization and higher return rates internationally, which we think is a great thing and has really expanded markets like Canada that, you know, was growing triple digits after we launched the localization there. Full price is another factor, you know, smaller than the international factor, but the full price sales do carry higher return rates. So, you know, maybe in the near term there's some relief given the shift to markdown, but not banking on too much there. And then we are, you know, for the last couple of quarters, it started really in June. I think we commented last quarter. We did see just kind of macro kind of return pressure outside of just shifts in mix and international. So we're factoring that in at least for the short term. And then over the long term, we'll continue to look for ways to reduce that in the benefit of both Revolve and the customer, importantly.
spk17: We'll go next to Trevor Young at Barclays.
spk06: Great, thanks. Mike, you mentioned the deterioration in international throughout the quarter in part because of USD pricing. It seems like FX volatility is going to be here for a while or certainly something you're going to have to continue to contend with. Are you making any changes in how you think about pricing for international to maybe alleviate some of that volatility, or is that just premature given the size of the business?
spk12: Yeah, we are – maybe it's too strong a statement to say we are making changes, but we are currently analyzing making changes, and we make some changes there. So we're doing some analysis on – you know, the benefits and costs of subsidizing the currency pressure a little bit. You know, also considering, you know, maybe hedging a little bit more in the future. But, you know, at the end of the day, currencies could go up and they could go down. And we're prepared for either scenario. In the short term, and we've seen this historically internationally, when the currencies are working against us, it applies that short-term pressure. But, you know, the long-term trajectory is very healthy. And, you know, I think as soon as consumers adjust to the new reality of the exchange rates, we'll be in a very good place.
spk06: Great. Thank you.
spk17: And we'll move next to Edward Ruma at Piper Sandler.
spk01: Hey, guys. Thanks for speaking to me here. A couple quick ones from me. I guess first, can you give us a quick update on where you are in dress penetration relative to historic norms? I know that that's obviously been a headwind for returns. We're trying to link it back to that. And as a follow-up to your last question on return rates specifically, I know you call it this macro-related return pressure. Obviously, second quarter saw a lot of inflationary pressures. Have you seen any reduction in the consumer that's just returning the entire order or that you view as more macro-related? Thank you.
spk03: Yeah, on the first one, Jeff makes it up to 31%. So, a tick higher than, you know, a couple points higher than last year. You know, plus or minus in line with that pre-COVID There is some seasonality there as well. We typically see the higher draft mix in Q2. You know, in line to back where we were. And then the returns, you know, nothing really to call out there in a significant change of, you know, kind of full order or partial order. We are seeing units per order increase slightly. So that's, you know, a benefit on some of the other costs. But, you know, it could be impacting return rate as well.
spk06: Thank you.
spk17: Next, we'll move to Tim Nikic, Wedbush Securities.
spk05: Hey, guys. It's Tom Nikic with Wedbush. So, Jesse, I believe before, you know, when you were talking about some of the puts and takes for 2023 margins, you know, I think you said something along the lines of keeping the pedal down on marketing. Does that suggest, you know, you know, maybe another year of deleverage on marketing? And just, you know, at a high level, how should we kind of think about the point where that line item inflects and, you know, comes a, you know, tailwind to EBITDA margins rather than admin? Yeah.
spk03: Yeah, I think, yeah, that kind of gets at, you know, what we're expecting on the top line for 2023, which is, you know, kind of, well, very uncertain. So at what point we start to get leverage is unknown at this point. I think the theme is that, you know, performance marketing is variable. We'll continue to, you know, balance that on a day-to-day, week-to-week basis. The brand marketing is, you know, more structured, more fixed, and also part of that is opportunistic. So we'll continue to make those investments. And that's where you will get some volatility quarter-to-quarter. And the point at which we start to get leverage on that line item is, you know, we will at some point. but can't comment much beyond that on timing.
spk17: We'll go next to Simeon Siegel at BMO Capital Markets.
spk06: Thanks. Good afternoon, guys. Sorry if I missed this. I think you gave general color and moving pieces for Q4 top line. Any just more granularity you're willing to dig into for what you expect for 4Q and 1Q revenues and the implied active customer growth embedded within that?
spk03: Yeah, so we did say that October grew at 3% on slightly more difficult comps than Q3. The comps get even harder in the Q4. If you call back to Q3 of last year's call where we said October grew at roughly the same rate as Q3, which was 62%, and then we closed 4Q at 70%. So you kind of get to a tougher comp dynamic in November and December. so that's on q4 and then q1 again you know just going back to highlighting that this is a this will be a very challenging one-year comp quarter um you know so expecting ongoing challenges there on a one-year basis and then on active customers you know similar dynamic at play with the added complication that that trailing 12-month number as we start to drop you know especially as we get into q1 of 2023 and we drop that q1 of 2022 quarter um that'll be very challenging so know if you work from the plus 34 that we're at for q3 that'll go down in q4 that'll continue to go down in q1 um and probably into q2 before we start to start to normalize okay and then how much what was ending inventory growth in units rather than dollars do you know offhand what your ending inventory growth was in units rather than dollars Yeah, we're not disclosing the specific number, but it was much lower than the dollar growth, and also the kind of sales growth to inventory growth differential on a unit basis is tighter than the dollar basis.
spk09: Okay, great. All right. Thanks a lot, guys. Best of luck for the rest of the year.
spk17: Thank you. We have time for one more question, and we'll take that question from Janet Kloppenberg at JJK Research Associates.
spk08: Thank you so much for taking my question and sneaking me in here. I wondered about your inventory levels, if we should expect another significant tick down at the end of the year. And I also wondered if at that point you felt that they would be aligned and at appropriate levels. And just lastly, if you could comment on your newness levels year over year. You're a very fashion-forward customer, and I'm wondering if perhaps lower levels of new products led to some of the deceleration in sales in fourth quarter to date. Thank you. Sure.
spk12: So on the inventory balance, our view as far as the end of the fourth quarter is a lower inventory balance year-over-year, certainly within the range of outcomes, but it depends on some of the demand dynamics in Q4 and other factors. And so we'll have to see how it shakes out. But we're pleased with the trajectory and the progress we're making. And again, we're going to balance managing the inventory levels with maximizing long-term margin retention. So in endless regards to kind of the newness and freshness, Right. That's one of those key things that we balance in terms of customer experience and making sure we have enough new fresh inventory. So we feel good about the new inventory that we're bringing in and the reorders of the great products that we're bringing in. And we've been very careful not to kind of shortchange that area of the business just to moderate inventory positions. So there's certainly been some movement at the margins, particularly given that we're seeing overall lower demand levels in general. But I wouldn't say that's a significant factor in the demand levels.
spk17: And that's all the time we have for questions today. I will turn the call back to management for closing remarks.
spk09: Hi, guys. Michael here. You know, definitely, you know, challenging macroeconomic environment, but we're really excited about the challenges and opportunities ahead. the type of environment where we started the business, the type of environment that set us up for an incredible run post-2008, 2009, and we're seeing a lot of opportunity in this current day. So excited for all the challenges and opportunities to come.
spk17: And this concludes today's conference call. You may now disconnect.
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