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spk07: Good day, everyone. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to Revolve's first quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. And 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, it's star one again. At this time, I would like to turn the conference over to Eric Randerson. Vice President of Investor Relations at Revolve. Thank you. You may begin.
spk19: Good afternoon, everyone, and thanks for joining us to discuss Revolve's first quarter 2023 results. Before we begin, I'd like to mention 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 various business operations and marketing initiatives and investments, our inventory balance and management, economic conditions and their impact on consumer demand, the impact of our new fulfillment centers, our future growth and profitability, market opportunities, macroeconomic and industry trends, 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 risk 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, 2022, 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 Teranikolas 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.
spk16: Hello everyone, and thanks for joining us today. We reported mixed results for the first quarter of 2023 amidst an increasingly uncertain macro environment and against a very difficult prior year comparison. After a better than expected start to the first quarter of 2023 that we discussed in February on our fourth quarter earnings call, Consumer demand decelerated for the remainder of the first quarter, consistent with the US Department of Commerce data showing a meaningful deceleration in consumer spending from January to March. This led to a 1% year-over-year decrease in net sales for the first quarter. On very positive fronts, however, we are making great progress on several key initiatives. We continue to make investments in the brand that we believe will benefit us over the long term. And despite the macro challenges, we made excellent progress on rebalancing our inventory position and generated exceptional free cash flow during the first quarter, further strengthening our balance sheet. With that as an introduction, there are three key messages I want to focus your attention on today. First, despite a macro environment that became more challenging as the first quarter progressed, we achieved excellent progress towards recalibrating our inventory, and we believe we are on track with our objective of rebalancing our inventory position by the end of the second quarter of 2023. The spread between our inventory growth year-over-year and our net sales decline year-over-year decreased by more than 50% in the first quarter on a sequential basis compared to the fourth quarter of 2022. These favorable dynamics give us confidence in our outlook for gross margins improving from the pressured levels we reported in the first quarter of 2023. Second, our significantly improved inventory dynamics helped us generate $49 million in cash flow from operating activities in the first quarter. or then double our cash flow generation for the full year of 2022. Our strong profitability and cash flow generation truly stands out within the fashion e-commerce sector. And coupled with the $283 million in cash on the balance sheet at the end of the first quarter, we're in a position of strength to invest in our large market opportunity ahead of us, a time when many industry peers are forced to play defense. Challenging economic times like the current environment create opportunities for financially strong companies to prudently invest and further separate from the competition. And third, we are executing on several important growth, brand building, and efficiency initiatives that we believe will further strengthen our foundation for profitable growth over the long term, particularly when the wind is at our backs once again. Michael and I will share our progress on several key initiatives throughout the organization, including technology, operations, marketing, and international. In such a dynamic period, I'm pleased that our teams have remained laser-focused on the operational priorities I discussed on last quarter's conference call. Now I'll shift gears to discuss highlights of our first quarter in more detail. Recall that during our Q4 2022 earnings call in February, we shared that our net sales in the first seven weeks of the first quarter of 2023 had increased year-over-year by a mid-single-digit percentage compared to the same period in 2022. Trends decelerated later in the quarter, particularly in March, leading to our 1% year-over-year decrease in net sales for the first quarter of 2023. The monthly slope of our first quarter was consistent with decelerating monthly apparel retail sales data from the U.S. Department of Commerce, which further supports our view that our core young consumer demographic is under more pressure today than she was just a few months ago. Also important to keep in mind are difficult prior year comparisons. Stepping back, our net sales have increased at a compound annual growth rate of 19% since the first quarter of 2019, the year of our IPO. By region, net sales in the U.S. decreased 5% year over year, while international net sales increased 16% year over year in the first quarter. Bear in mind that our U.S. net sales growth in the first quarter of 2022 was exceptionally strong, creating a more difficult comparison. I'm very pleased by the healthy international results considering the continued currency headwinds in some of our larger markets, such as Australia and the UK. Positive contributors to international growth in the first quarter included China, which is benefiting from the reopening of the Chinese economy. as well as an easier year-over-year comparison from China lockdowns that began in the first quarter of 2022, the Middle East, and emerging markets such as Mexico and India. I'm particularly excited about Mexico, a market enjoying exceptional growth with net sales almost doubling year-over-year, now ranking as one of our top five international markets. We have a series of marketing activities planned to drive even greater awareness in Mexico. We already have the second largest social media following among our international markets. Net income for the first quarter was $14 million, or $0.19 per diluted share, and adjusted EBITDA was $15 million. Our profitability was significantly lower than our performance in last year's first quarter, primarily due to the nearly five-point decrease in our gross margin year-over-year. And while the macro environment remains uncertain, some of the pressure points on our P&L in recent periods should begin to ease in the coming quarters. The cost of air freight to import our own brand's products from China has decreased significantly, shifting from a headwind in recent years to a tailwind in 2023 as we look forward. And our top-line contributions from China have also shifted, a headwind into a tailwind after the COVID restrictions were eased earlier this year. Lastly, it appears that we are now past the worst of the headwinds from variable fuel surcharges applied by major carriers to our customer shipments since the peak in jet fuel prices in the second quarter of 2022. Now, as mentioned earlier, I'll provide brief updates on key operating priorities that build on our foundation of growth and operating efficiency and further enhance our already best-in-class customer experience. First and foremost, we are extremely focused on driving cost efficiencies within our global shipping and logistics operations to help offset cost pressures, including the impact from a higher return rate year-over-year. Our team has already delivered early wins in optimizing customer shipping costs to some international regions, We are pursuing a much larger scope of cost-saving initiatives that we believe has the potential to be impactful later this year. Jesse will talk more about this important effort in his remarks. We are continuing to raise the bar on service levels for customers, even while we focus intently on driving cost efficiencies. Our new Pennsylvania Fulfillment Center enables us to more quickly ship packages to East Coast customers, and we are also extending our best-in-class time frame for shipping orders the same day we receive them. For years, Our service promise has been to process and ship orders on the same day if we receive them before 3 p.m. Eastern time. We're now extending that same day fulfillment window to even later in the afternoon. We continue to expand the use of AI and machine learning across several key areas of our operations and customer experience, including fraud detection, personalized product recommendations, image recognition, and product attribute tagging. As an exciting update on our progress, Michael and I will talk about how we leveraged AI technology to develop an innovative marketing campaign featuring outdoor billboards for our flagship Revolve Festival event held last month. And using these same AI designs, we created a limited edition own brand product capsule. We also leveraged our technology stack to enhance the product search results on our sites, elevating the user experience and conversion opportunities by enabling customers to more efficiently find what they're looking for among our curated assortment. We are also leveraging AI to develop even further enhancements to our search capabilities, and we are excited by internal demonstrations of further application of AI technology. We've shown a great deal of potential to drive impactful results in the future. We have advanced our efforts to cross-sell the forward assortment to the much larger base of Revolve customers. Recently launched navigation enhancements on our Revolve website provide increased visibility to the forward assortment, have shown promising early results. We've also leveraged our technology foundation to increasingly enable Revolve and Forward to share inventory for key brands that offer products for sale on both sites, handling more efficient inventory management and improved product availability. We are investing further to elevate service levels in international markets, where we see a great deal of opportunity over the long term. We plan to deploy technology this quarter that we expect will accelerate website response time in key international markets, advancing our localization efforts. In the coming months, we are gearing up to expand our loyalty program to key international markets for the first time. Our loyalty program has been a great success domestically since introducing it three years ago. Like all companies, we face a myriad of challenges in the current environment, and we still have much more work to do. And yet, we are uniquely positioned with a profitable, capital-efficient, and highly cash-generative business model we believe will allow us to continue to prudently invest in our long-term opportunity we are very excited about. Before I turn it over to Michael, I'd like to once again thank all our hardworking team members for your agility, resilience, and dedication to exceeding our customers' expectations every day. Now, over to Michael.
spk13: Thanks, Mike, and hello, everyone. As always, our strategic focus is to create a strong and growing business for the long term. At the center of everything we do is our unwavering focus on serving our customer incredibly well, helping her to live her best life through being her trusted source of fashion inspiration. So it is gratifying that our active customer base have continued to expand at a healthier rate, building on our future growth potential, considering the strong loyalty and retention characteristics of our customer base. Our challenge, 12-month active customers grew to 2.4 million in the first quarter, an increase of 4% sequentially and 19% higher than the first quarter of 2022, growing right through the very difficult record growth comparison in the prior year. Moving forward, we believe we have a large opportunity to expand our customer base within our target demographics. both in the US and internationally. Even more impressive is that we delivered this healthy growth in active customers while at the same time delivering better than expected marketing efficiency in the first quarter. Shifting gears, I would like to discuss our culture of innovation at Revolve. A key contributor to our rapid and profitable growth over the past 20 years is our ability to identify important shifts and opportunities and leverage technology to create competitive modes around us. From our earliest days, our internally developed technology enabled us to embrace data-driven merchandising and drive the business in ways that remain a significant competitive differentiator today. Years later, we were a pioneer at the forefront of marketing innovation and partnering with influencers to create brand awareness and impact on social media, again leveraging our internally developed technology to create a competitive advantage. And now today, I'm thrilled to acknowledge the pioneering efforts of our studio technology and marketing teams for creating what we believe was the first AI-generated billboard campaign. Entitled Best Trip, the visually stunning AI campaign celebrates our 20-year anniversary and was designed in partnership with the AI studio Bazon Meta. Our AI innovation has generated meaningful buzz on social media and major press outlets such as Forbes, Vogue, the New York Post, and Business of Fashion, further solidifying Ruval as a trailblazer in marketing innovation. The Best Trip AI campaign debuted throughout April on several billboards along the highway headed to Palm Springs. strategically positioned to ensure that it would be seen by hundreds of thousands of festival-goers driving to Coachella, Stagecoach, and, of course, Revolve Festival last month. It was great to see our aspirational lifestyle brand proudly displayed front and center for such a large, targeted, and relevant audience. Also compelling is that we were able to efficiently produce and sell a limited-edition capsule collection for the design team in the AI campaign. Our own brand's team had already been testing AI design and related technology innovations to drive further efficiency and product development. So it was really incredible to see our team leverage AI to bring product to life for the first time. Over time, we believe AI design presents an exciting opportunity to create a more powerful, innovative, and streamlined design process. Our conviction and true excitement about the potential for AI technology across the organization led us to help launch the first ever AI Fashion Week last month to promote greater experimentation and use of AI in a fashion. I encourage you to follow the updates on our social media channels and participate in voting for the more than 400 AI Fashion Week contest submissions through the AI Fashion Week app. Of note, the three winners from the AI Fashion Week contest will have the opportunity to sell their AI capsule collections on Revolve. As a company, it's very important for us to stay at the cutting edge of technology development, testing and learning how to leverage these new technologies, which is ingrained in our cultural DNA. Now let me shift gears and recap our highly successful Revolve Festival event held last month at an exceptional new venue. This year was particularly special for Mike and I because the timing of Revolve Festival coincided with our 20-year anniversary. We kicked off the week of Revolve Festival with an intimate 20th anniversary celebration in Los Angeles, attended by A-listers, VIPs, and brands, including key fashion partners who have been with us since the earliest days. In true Revolve fashion, the event grabbed headlines, particularly focused on Kendall Jenner's stunning ensemble, highlighted by the sheer white, form-fitting Alaya dress from our forward installment that sold out almost immediately after all the favorable press. Once again, illustrating our powerful marketing impact that our brand partners are increasingly excited about. It was clear from the conversations and toasts at our intimate gathering just how much brand loyalty we have earned with emerging brands and content creator partners over the years from our mutually beneficial relationships. We are truly grateful for the relationships we have built and to see the many businesses that have grown with us in our journey. We are a strong brand, our focus on the customer, our technology, and data-driven foundation In the support of our partners, we have nearly quadrupled the business from roughly $300 million in revenue in 2016 to $1.1 billion today. The wall festival was held over two days in mid-April, and it was an incredible event that the Wall Street Journal called Coachella's most lavish party and was better than a day at Coachella, according to an article from Insider. The aspirational lifestyle event was very successful in elevating our brand and exciting and delighting our community of VIPs, brands, influencers, partners, and fans who are fortunate enough to attend the invite-only activation. This year, their band featured an even more exclusive and intimate setting while delivering a high-energy vibe that was inspired by our outstanding lineup of musical acts. Headline performers included 21 Savage, Don Toliver, City Girls, Pink Pantherous, Boy LaRae, Zat Bia, Amore, Parastar, and the trending Ice Spice in her first live performance since releasing a hit single with Nicki Minaj that debuted at number one on the Billboard charts. An important driver of impact and awareness was incredible event attendance across a diverse range of personalities, including musicians, actors, celebrities, designers, athletes, content creators, and TikTok stars. Teen Vogue wrote that it would seem as though every celebrity and influencer on the planet was in attendance. Notable VIPs at our event included Kendall Jenner, Dixie and Charli D'Amelio, Hailey Bieber, Leonardo DiCaprio, Emma Roberts, Travis Kelsey, Lewis Hamilton, Storm Reid, Lori Harvey, Saweetie, Leon Bridges, Camilla Marone, Madison Bailey, Spooky Waterhouse, Natalia Bryan, Reena Shaikh, Shay Mitchell, Noah Beck, David Dobrit, Christina Milian, and Tyga. To illustrate the scale of favorable impact on our brand, the week of Roval Festival generated approximately 7 billion press impressions, our highest ever for any campaign or event. Our investment in Revolve Festival and other experiential events over many years has created a truly powerful lifestyle brand, which has resulted in increasing opportunities to partner with top brands and celebrities. For example, mobile icon Jennifer Lopez and her team were very excited to partner with Revolve because of the strength of our brand and strong connection with the next generation consumers. We recently launched an exclusive shoe collection called J-Lo Jennifer Lopez and hosted an impactful marketing event with J-Lo that attracted more press than any launch event in our history. It was all made possible by the combined strength of our brand. Shifting to an update on Forward, we have some exciting marketing plans for later this year, so stay tuned for details in the coming months. One of the areas that has been a real bright spot is our recently introduced Forward Renew, a section of Forward dedicated to circular luxury shopping where we sell pre-owned handbags from coveted luxury brands. Sales from this early effort grew more than 50% on a sequential basis in the first quarter, in the fourth quarter of 2022, and renewals attracted many new customers to the Forward brand. I am also excited by our efforts to encourage our leading premium beauty brands on Revolve to co-listen Forward this year. Some of our largest beauty brands on Revolve are in the queue to make their beauty products available on Forward as well, expanding our opportunity. I'll wrap up with an update on beauty, where our year-over-year growth in the first quarter remains solid in the low double digits. The major focus of our beauty strategy for the near term is to attract the right selection of beauty brands on the site. I'm confident that having the optimal beauty assortment will drive an exciting growth opportunity over the long term, simply because our customer loads revolve and we consistently exceed their expectations. As context, we know that when we launch a major beauty brand, it moves the needle, as a small number of beauty brands currently drive a high share of our beauty volume. We are very excited about the pipeline of high-impact beauty brands we expect to be onboarded with this year. An exciting development was the launch of Courtney Kardashian's wellness brand, Lemmy, on Revolve in February, months before distribution through any major beauty retailers. The launch of Revolve has done very well in the early going, helped by Courtney really leaning into marketing on her social channels. This example reinforced the powerful Revolve brand, community, and trusted relationships we have built with tastemakers. In closing, it is clear to me that we remain in a highly uncertain operating environment as Michael alluded to. Not surprisingly, consumers are dealing with persistent inflation pressures, which has led to some reduction in our customers' propensity to spend, evident in our average spending per active customer. Despite the challenging macro environment, we are continuing to play offense, building on our already solid foundation that will support our future growth when the environment improves and our spending returns. I'm super energized by the energy and level of innovation throughout the company. We continue to push the boundaries, leveraging new technologies and marketing techniques. Our entrepreneurial team culture is in full force as we pursue our goal of being the fashion destination for the next generation consumer. Now I'll turn it over to Jesse for a discussion of the financials.
spk06: Thanks, Michael, and hello, everyone. We encountered our share of challenges in the first quarter on top of a very difficult prior year comparison. In such a dynamic environment, I am pleased that our operating discipline enabled us to achieve significant progress in recalibrating our inventory position while generating exceptional cash flow, further strengthening our already pristine balance sheet. I'll start by recapping our first quarter results. Net sales were $280 million, a year-over-year decrease of 1%. As shared on our earnings conference call for the fourth quarter of 2022, the first quarter of 2023 began on a high note with year-over-year net sales growth in the mid-single digits through the first seven weeks. However, our net sales trajectory decelerated in the last six weeks of the first quarter of 2023, consistent with a variety of public data sources reporting softer consumer spending on discretionary items during February, and particularly during March. Looking at our first quarter of 2023 results over a longer time horizon, our net sales have increased at a four-year compound annual growth rate of 19% when compared to the first quarter of 2019. Revolve segment net sales decreased 3%, and forward segment net sales increased 5% year-over-year in the first quarter. By territory, Domestic net sales decreased 5%, and international net sales increased 16% year-over-year. The U.S. faced a much harder comparison as the U.S. grew more than twice as fast as our international business in the first quarter of 2022. Active customers, which is a trailing 12-month measure, increased by a healthy 84,000 customers during the first quarter. This growth expanded our active customer count to 2.4 million, an increase of 19% year-over-year. Our customers placed 2.3 million orders in the first quarter, an increase of 6% year-over-year. Average order value was $288, flat year-over-year. Shifting to gross profit, consolidated gross margin was 49.8% at the high end of our guidance range, and a decrease of 468 basis points year-over-year, primarily due to a lower mix of net sales at full price compared to the first quarter of 2022. We exited the first quarter with a more balanced inventory position, which gives us confidence in the improving gross margin outlook in future quarters. Moving on to operating expenses. Fulfillment costs deleveraged by 67 basis points year-over-year, directionally consistent with our outlook commentary, primarily due to a year-over-year increase in our return rate, as well as increased labor costs and investments made to expand our fulfillment network. The softer revenue trend was also a headwind for fulfillment efficiency year-on-year, due to decreased utilization of our expanded fulfillment center capacity. Selling distribution costs deleveraged two points year-over-year and were higher than expected, primarily due to elevated costs for customer shipments cost by a higher return rate year-over-year and continued year-over-year growth in variable fuel surcharges. We are very focused on reducing the significant negative impact on our profitability from these increased shipping costs, with several initiatives in place and more being developed and tested. Marketing was more efficient than the outlook we provided on last quarter's conference call. Our marketing investments represented 13.7% of net sales in the first quarter, an improvement of 225 basis points year over year. General and administrative costs were $28 million, slightly lower than our outlook provided last quarter. Our effective tax rate was 25%, three points higher than in the first quarter of 2022. Net income was $14.2 million, or 19 cents per diluted share, a decrease of 37% year-over-year that was impacted by the lower growth margin and growth in operating expenses, partially offset by an increase in other income due primarily to an insurance reimbursement. Adjusted EBITDA was $15 million, a decrease of 52% year-over-year. Moving to the balance sheet and cash flow statements. Our cash flow in the first quarter was exceptional and benefited from favorable working capital dynamics. Net cash provided by operating activities was $49 million, and free cash flow was $48 million, which was our second highest for any first quarter, yet declined compared to the first quarter of 2022, primarily due to lower net income year over year. In just the first quarter of 2023, we have already generated more than twice the amount of operating cash flow than all of 2022. The strong cash flow generation has further strengthened our balance sheet in liquidity. Cash and cash equivalents as of March 31, 2023, were $283 million, an increase of $49 million, or 21%, from year-end 2022, and an increase of $13 million, or 5%, year-over-year. Our balance sheet as of March 31, 2023, remains debt-free. Inventory at March 31, 2023, was $190 million, a sequential quarter decrease of $25 million from year-end 2022. As a result of this significant inventory reduction in the first quarter, our inventory moderated to a 6% year-over-year increase, narrowing the unfavorable spread between our year-over-year inventory growth and year-over-year net sales growth to only 7 points. We remain confident that we are on track to rebalance our inventory by the end of the second quarter. 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 helping your modeling of the business. Starting from the top, the top-line pressure we experienced late in the first quarter has continued, as net sales for the month of April 2023 decreased by approximately 7% year-over-year. We believe the uncertain macro environment is increasingly weighing on our customers' purchasing behavior, shifting the gross margin. We expect gross margin in the second quarter of 2023 of between 53 and 53.5%, up from the first quarter of 2023 gross margin reported today, yet lower year-over-year as we expect a reduced mix of net sales at full price this year. Importantly, the year-over-year decline in gross margin implied by our outlook for the second quarter of 2023 is about two points lower than the year-over-year decline in gross margin reported for the first quarter announced today. For the full year 2023, we continue to expect a gross margin of between 52% and 53%. Fulfillment. Primarily as a result of the increased top line uncertainty, we are taking a slightly more conservative view of fulfillment efficiency. We now expect fulfillment as a percentage of net sales to be around 3.2% for the second quarter of 2023. We continue to expect slight sequential improvement on fulfillment efficiency in the second half of the year. resulting in fulfillment of the percentage of net sales of approximately 3.1% for the full year, 2023. Selling and distribution. We expect selling and distribution costs to represent around 18.7% of net sales for the second quarter of 2023 and 18% of net sales for the full year, 2023. The increase from our prior full-year guidance primarily reflects a higher-than-expected return rate that we believe is influenced by the challenging macro environment. As a result, we are now assuming a higher return rate in 2023 than was embedded in our prior guidance. Importantly, our outlook for the full year implies sequential improvement in the back half of the year. There are three key drivers of the sequential improvement we expect in the back half of the year for selling and distribution. First, we expect variable fuel surcharges to decline year-over-year starting in the second quarter after several quarters of significant growth. We expect to begin to realize efficiencies from our new Pennsylvania Fulfillment Center as its volume scales. And third, we expect to begin to realize early efficiencies resulting from a variety of other shipping and logistics efficiency measures we are pursuing. However, we are factoring in an elevated return rate in the near term, which will partially offset some of our efficiency measures and contribute to continued pressure on shipping costs. Marketing. Our marketing efficiency in the first quarter of 2023 was partially due to a reduction in brand marketing events this year compared to the very active events calendar in the first quarter of 2022. By comparison, we expect the second quarter of 2023 to include a larger investment in brand-building events year-over-year when compared to the second quarter of 2022. As a result, and consistent with our commentary from last quarter, we expect our marketing investment to be the highest of the year in the second quarter of 2023 and to represent approximately 18.5% of net sales. For the full year 2023, we expect marketing to be within the range previously communicated of 16 to 16.5% of net sales. General and administrative, we expect G&A expense of approximately $29 million in the second quarter of 2023 and between $113 to $150 million for the full year 2023, unchanged from our prior full year outlook. And lastly, touching on our tax rate, we continue to expect our effective tax rate to be around 24 to 26%, consistent with the past several quarters. To recap, while the current environment is challenging, led by Mike and Michael's long-term mindset, our leadership team is energized behind a wide range of exciting initiatives that we believe will benefit Revolve for years to come. After delivering exceptional growth in the past two years, our key focus is our active evaluation of how we can leverage our technology data-driven approach, and operating excellence to take advantage of our increased global scale in driving further operating efficiencies across the organization.
spk08: Now, we'll open it up for your questions.
spk09: Thank you.
spk07: At this time, I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad. We'll pause for a moment just to compile the Q&A roster. Your first question comes from Oliver Chen with TD Cowen.
spk17: Hi, Mike, Mike, and Jesse. Regarding the softer revenue trends and what you see ahead, which classifications were more concerning? And also, your inventory spreads better, but what do you think about going forward in terms of the promotions and markdown cadence and what risk factors are you monitoring there in terms of what's embedded in your guidance? Do you expect the trends on an ongoing basis to continue to be fairly volatile? Thank you.
spk16: Yeah, so with regards to classifications, Oliver, are you just wanting more color on kind of across different segments, you know, whether it's geographies or types of merchandise or what are you referring to there?
spk17: Yeah, I think the categories that were softer and if they followed patterns that would help us get a feel for what's happening with the customer and what's driving some of the softer trends.
spk16: Yeah, definitely. So, you know, if you look at my kind of – category as well as customer segment there's a couple of call-outs you know one would be that certainly the their aspirational customers versus the high-end customers there's a bit more softness there but we'd also emphasize the softness was fairly broad-based so it's not to say we didn't see impact on the high end you know within the merchandise category you know I think you know if you look at apparel that's more going out oriented you know there was a bit of a of an overshoot or peak last year, and so we saw some rebound in the opposite direction, you know, this way for this particular quarter. And then, you know, if you look at non-apparel categories like beauty, you know, they performed relatively well in comparison. Obviously, that's a long-term growth area for us, but we're happy to have delivered solid beauty growth during the period.
spk17: Okay, and promos and markdowns, what do we know about, you know, what's embedded in forecasts and the degree of inventory that you have now and the freshness of the current inventory as we think about risk factors there, given the softer top line?
spk16: Yeah, we feel good about our inventory position. We made great progress on it in the quarter. Obviously, we would have liked profitability to have been stronger and revenue to be stronger, but We did what we needed to do on the inventory position as far as bringing it down substantially, getting to a place much closer to imbalance. And again, we feel like at the end of the second quarter that we'll be feeling good about where that position is. And the result was exceptional cash generation, which is something that we're focused on. Obviously, in an uncertain macro environment, there is continued risk around inventory levels and gross margins and things of that nature. But it's something that we're laser focused on and being very active on.
spk17: Okay, last question, Mike, on customer acquisition trends. And what you saw, was it more concerning in terms of new versus existing cohorts? And or there's been a lot of volatility in CAC and also less productivity in their performance marketing. Is there any color in terms of what you've been seeing with that?
spk16: Yeah, so the first quarter was actually, you know, good by a number of marketing metrics. You know, quickly CAC, you know, was favorable versus prior periods. New customers were generally strong. You know, it was just, again, kind of offset by a broader base weakness. And, you know, as you saw in the numbers, we pulled back on marketing a bit in the first quarter, which, you know, certainly had some impact on the overall trends. We didn't want we hadn't wanted to pull back on marketing too much until we felt the inventory position was in a better place And again, we feel good about the progress there. Yes, so that's when we had some impact on the trends and and also an increased level of Kind of new marketing techniques and marketing experimentation had a little bit of an impact also That's something that we didn't want to play with too much when inventory levels were elevated before but we're a little bit more free to do that in the first quarter which is a It has some, you know, I'll call it minor impact in the current quarter, but it's overall good for the long term.
spk07: Your next question comes from the line of Mark Altschwager with Baird.
spk03: Good afternoon. Thanks for taking the question. So the valuation landscape for DTC brands has certainly shifted versus a couple of years ago, and your cash balance is building. I'm curious how you're thinking about opportunistic acquisitions in this landscape. What would an ideal target look like, and are you seeing any attractive opportunities out there at multiples you would deem reasonable?
spk16: Yeah, it's certainly interesting, and as we've talked about on past calls, it's something that we're always actively thinking about, and certainly as valuations get more attractive, the possibility of an opportunity there becomes more realistic. That said, our answer would be the same as previous periods were. Again, it's just something that we're always actively monitoring and considering, and we'll let you know if there's any updates there. But that's how we characterize it at this point.
spk08: Thank you.
spk03: Just a quick follow-up then, just regarding the top line. Obviously, the macro is more challenging, but you did speak to some opportunities to maybe go on an offense in this sort of environment. Could you maybe elaborate on that a bit?
spk16: Yeah, there's a number of areas we're going on offense, and maybe I'll mention a couple, but I'll also let Michael dive in here because he's very active in a number of them. But obviously, continuing to build our brand, we continue to make impactful long-term brand marketing investments, and Revolve Festival, we think, was a very big success this year. I think, importantly, on the technology side, obviously, with the recent AI developments, that's a very hot area. It's an area that we've been actively working you know, working on and actually deploying in practice for multiple years now. And things are just moving faster. We view that as a huge opportunity. We're increasing our investments there. At times, others are pulling back. You know, I know there's some news of other media retailers pulling back on overhead, and we're hiring engineers at this point. And obviously, doing it in a prudent, cost-efficient way, as we always do, but overall, increasing investments. in AI and tech, and we think it's a huge opportunity over the coming quarters and coming year, and excited to hopefully every quarter have something new to share with you there.
spk13: The only other things I would add on top of that, all of that I completely agree with, it's all very exciting, is leaning into some of the really amazing categories. I think coming up for Revolve Gallery, which will be in H2, will be the first time we integrate men's, as well as the first time we integrate beauty as well, so there's you know, longer-term categories that we think will be, you know, very, very crucial to our long-term success over the next 10 years or so, that we are beginning to always step up and begin with our core activities and getting more serious about. So there'll be a lot more of that. We won't be getting lost shy by some long-term opportunities during, you know, things like this.
spk16: For sure. And the only other thing I might layer in without getting, I guess, too detailed, but there's areas of the business, whether it's like the marketing experiments that I alluded to in the first quarter, uh, and also other areas related to cost efficiencies and other opportunities that we're increasing our investments in, and in the short term are more likely to have a slightly negative effect. Whenever you're doing something new, it takes time to work out the kinks to figure out exactly how to use something right or get it working in the right way. We're investing prudently, but we're increasing our investments in those areas. Obviously, between the cash balance and where technology is going, it's just an exciting time, I think, for all of us to be active.
spk09: We'll take our next question from Randy Connick with Jefferies.
spk18: Hey, thanks for taking my question. I guess, Jesse, maybe you could give us some perspective on just how, in trying to think about various outcomes for top line, I know you're not going to get a consultation specifically, but is there a way you could give us some perspective on how we should be thinking about differences in a range of outcomes in average order value, number of orders, or something to that effect that we can kind of get a sense of how you're thinking about a range of outcomes for the top line, that would be super helpful for the year.
spk06: Yeah. You know, it is still highly uncertain out there, as we've talked about. And that's why we're only giving the kind of actual results through April, which were down 7%. You know, that said, some additional color. I think, you know, we're still confident that AOV can have a modest increase this year. We were pleased with the flat AOV year on year with the significant decrease in full price mix. You know, as expected, full price mix shifted down significantly year over year coming off those record highs of last year. So to get a flat AOV in this quarter, we were pretty pleased about. And then we're already seeing the full price mix shift back with the inventory rebalancing So we feel good there. Customer acquisition has been healthy. CAC has been healthy. The majority of the new customers that we acquired were at full price. That said, the growth really came from the markdown given the shift to markdown that we saw this quarter. And then, you know, I think the uncertainty out there is real. And, you know, given that we're starting off at a minus seven for the quarter, You know, we're kind of in the zone of, you know, it could be slightly negative to slightly positive for this second quarter, depending on how this next two months play out. You know, comps do get easier on a one-year basis, but on a multi-year basis, if you look back, 22 versus 2019, they're still tough. So, you know, I think, you know, we've just got to keep, you know, stay on the offense, keep doing what we're doing, and kind of work through this moment in time we're in.
spk18: Got it. And then you gave us good perspective on how you're thinking about the selling and distribution line as percent of revenue for the year, I assume. So when you think about maybe stepping back and looking at the return rate as an impact line item, can you just give us some perspective of where we are in that return rate cycle and And how should we be thinking about that over the coming year? Is there a meaningful opportunity to, over time, improve that return rate? Just how should we be thinking about that, not for just a balance this year, just kind of thinking out more into the long-term future? It does have a very sizable impact, or it does have a sizable impact on margin.
spk06: Yeah, maybe I'll address the first part and just kind of Talking about the current quarter and return rate and what we've factored into the guidance and then kick it over to Mike for the long-term opportunity on return rate. We did see an elevated return rate for the quarter, higher than we had initially expected. And we did see it increase as the quarter progressed. I think just a couple of things, you know, more granular on the seasonality. We typically see March, you know, about 20% higher in dollar terms than January. We didn't see that this quarter. It was only about 10% higher than January on a gross basis. And then when you factor in the return rate, March was actually 6% lower than January. So you can see the impact not only of the macro consumer impact in March, but also that increased return rate as the quarter progressed. And then we also saw increased return rate across segments and then across categories as well. Even the lower return rate categories like handbags and then even beauty saw an increased return rate. We do attribute a lot of this near-term pressure to the macro environment. And that's why we've taken up the fulfillment a little bit and we've taken up selling and distribution pretty meaningfully in our guidance. And as a reminder, two-thirds of that selling and distribution is freight. And that return rate does have a significant impact on that. And as mentioned in our prepared remarks, we are still seeing that fuel surcharge meaningfully higher to the tune of 30% higher year-on-year this quarter. We do expect that to subside at least on a year-over-year basis, and we're starting to see some softening there that will give us some benefit as we look ahead. And then maybe over to Mike for the longer term.
spk16: Yeah, so over the longer term, you know, I'll start my comments with remarks that are maybe similar to what I've made before and then also kind of provide an update on top of that. From a strategic standpoint, we're going to continue to focus on making it easy for customers to return to lead within the industry in that process. And that's generally something that we're not going to compromise. We feel like there's a lot of long-term opportunity there. It's something that we've repeatedly said. But it hasn't been the biggest area of active focus. There's been some focus on it. But obviously, with the increase in return rate, that focus is shifting. And there's going to be a lot more internal work on that and investments, kind of going back to the playing offense and investing remark from earlier. We're increasing our investments there. And we're confident that over the long term, and hopefully earlier than that, we can make some impactful changes that reduced return rates in a win-win way for the consumer and for us. On top of that, certainly Jesse talked about the transactional cost efficiency that we're focused on. We're laser focused on that. That's one of our key priorities this year, and we're looking to drive those down significantly.
spk09: Our next question comes from the line of Lorraine Hutchinson with Bank of America. Please go ahead.
spk14: Thank you. Good afternoon. I just wanted to follow up on the return rate, but maybe taking a little bit of a different approach, asking the international business, how much of an impact does that continue to have on return rates? And can you talk through any progress you've made on making that fulfillment and return process a little bit more margin efficient globally? Thank you.
spk06: Yeah, yeah. On a year-over-year basis, the kind of shift to international or kind of the localization of international didn't have a meaningful impact. You know, we continue to make improvements there for the customer, but the big shift there were over a multi-year period. So, if you look kind of a pre-COVID, you know, 2018-19 compared to 2023, that's where you see the significant impact from the international localization. But on a On a year-over-year basis, we saw relatively consistent increase in return rate, again, across segments and geos and categories. So I wouldn't call that out as a big factor this quarter. And we continue to make progress on those cost reduction initiatives when it comes to the re-fulfillment or the shipping back and forth of the returns. On the domestic level, Pennsylvania is continuing to ramp, so we expect to get some efficiencies there, you know, starting this quarter, but really in the back half of the year. And then there's, you know, a number of initiatives, both domestically and internationally, but really internationally to reduce those costs and optimize the shipping range. Again, not expecting huge impacts this quarter, more towards the back half of the year and just really setting us up well for 2024.
spk09: And we'll take our next question from Rick Patel with Raymond James.
spk02: Thank you. Good afternoon, everyone. Can you provide additional color on international performance? If we put China aside, are you seeing changes in consumer behavior that you think is noteworthy and keeping an eye on? And we're particularly interested in Europe.
spk16: Yeah, so with regards to the international regions, you know, China, as we mentioned in the comments, was a really nice story for the quarter, a big growth driver. In the quarter, you know, coming off of, you know, certainly a difficult comparison, but just in general, we saw a lot of great momentum there. Europe has been, a market that's been struggling a bit as with other Western markets, whether it's, you know, certainly domestically, you know, our sales momentum is not what we want it to be, other Western markets like Australia, in the UK, also kind of not where we want them to be. So I think within those Western markets, things have just generally been soft from a macro standpoint. But more broadly, globally, there's definitely those bright spots, including Middle East and Latin America, where we've been making investments. And it's really nice to see those investments paying off in regions that don't have the same currency headwinds or some of the same economic headwinds as the Western markets.
spk02: And also a question on AI. Can you talk about the potential use of AI beyond marketing engagement? I'm just curious what kind of role you see it playing from an operational perspective and whether this has the potential to be a needle mover in the next year or two, or if you see it as an out-eater event. Yeah.
spk13: I can hear every aspect of the business, you know, as you kind of see what kind of like white whiteboarded and brainstormed there. So yeah, We think that, you know, there's possibilities in some departments for a strong needle mover, you know, within the next 12 months for sure. But also anticipate, you know, continued acceleration across the board. We've literally gone through, you know, every aspect of the organization. And we think some of the first places that will impact the business the most is going to be in our fashion design zone. We've already started to leverage some of the generative AI tools for, you know, fashion design. And it's still early stages. We're seeing week to week these tools just improve. But the design team has been happy with what they've been able to do with kind of like semi-permanent, you know, generative tools. So, you know, super exciting there. I think that there's a lot of things that can link ultimately. And as we fast forward, you know, a few years into the future, I think that things could be dramatically different for us. So it's a really exciting time. I think Mike and I are really reminded of the, you know, 20, 25 years ago, early Internet days, where I saw The clear long-term trend was there. The specifics of how things will pay off, of course, will evolve over the ages, but we think that we're positioned well to take advantage of this next wave of technology.
spk09: We'll take our next question from Edward Iruma with Piper Sandler.
spk12: Hey, guys. Thanks for taking the question. I wanted to click down a little bit more on Forward. Obviously, I know you guys are excited about the longer-term growth opportunity there. Could you kind of click down a little bit on inventory there? How do you feel? I know you said kind of from the entity level, you'll be kind of clean, but in the second quarter, how do you feel about Ford's inventory level? And kind of have you seen any impact from some of the promotions that we've seen across the luxury space? Thank you.
spk06: Yeah, I think consistent with what we've talked about before, it does take longer to write the ship on the Ford side than it does on Revolve. So, you know, we feel really good on the Revolve side. Ford still has a little ways to go, and that's where we're sticking to the you know, the end of Q2 before we feel like we're in, you know, a kind of a rebalanced position. So right now, forward inventory does over-index relative to the kind of the sales mix on revolving forward. And then, yeah, I think promotions do have an impact, have had an impact, and I think will continue to have an impact as everybody works through their inventory, the uncertain and challenging macro environment. But we're working through that, and we typically don't respond on a kind of a head-to-head, one-to-one basis on the promotion. It's more about, you know,
spk12: working through our inventory and getting it in the right place maybe one other follow-up i guess have you seen enough from a weakening consumer macro perspective that makes you want to tilt your assortment within core evolve to more entry price point or lower price point versus kind of where it had been migrated to thank you
spk16: Yeah, so we're always mindful of consumer shopping behavior. And, you know, there's certainly not going to be any shifts that, you know, dramatically change our position in the marketplace. But, you know, certainly at the edges is we kind of tactfully react to where consumer demand is strongest versus softest. We're constantly optimizing the mix, and that will continue to be the case.
spk08: Thank you.
spk09: We'll take our next question from Jim Duffy with Stiefel.
spk01: Thank you. Good afternoon. I wanted to start asking about inventory and promotion. Q1 showed some aggressive actions on the inventory. I'm curious, did the inventory progress exceed your expectations in the quarter? And then even with leaner inventories, do you expect you'll need to sustain promotion to remain competitively relevant?
spk06: Yeah, I would say, you know, the inventory progress is roughly in line with our expectations, despite, you know, softening on the top line that we did not expect late in the quarter. So I think, you know, we're really pleased with the inventory progress despite the softening top line. And, you know, we'll just have to kind of read the landscape as we go through the year. If we forget about the inventory, we'll feel, you know, like we're rebalanced at the end of Q2 and we'll kind of manage accordingly. But again, We typically don't respond, again, head-to-head or, you know, in direct response to individual promotions from others. It's all about, you know, kind of working through our inventory at the right pace. And, you know, if things pick up, we're confident we can chase into demand in the right categories as well.
spk01: And I'm curious, just the consumer response to promotions, have the consumers been embracing the proposed merchandise more than you would expect at the expense of full-price sales, or... What are you seeing in the mix between full price and promoted goods?
spk06: You know, generally, you know, I'd say they're responding as we would expect to the markdowns. And I think also responding on the flip side as we're now shifting back into full price. And we're already seeing a pretty meaningful, you know, kind of reversion back to that full price. Not to the record levels we were at last year, of course, but you can see that in our gross margin. guidance that we gave for Q2. So, you know, again, just managing accordingly and responding to the customer.
spk09: We'll take our next question from Chad TV Ball with Needham & Company.
spk20: Hi, it's Chad on for Ana. Just on the better forward growth in the quarter, can you talk about what's embedded for 2Q and what you're seeing with the more luxury consumer? And then additionally, with the moderating inventory at the end of 2Q, Should we think about inventory being more in line with sales in the back half of the year?
spk06: Thank you. Yeah, no comment really on the expectation for forward, you know, beyond what we saw in April, which, you know, was a, you know, kind of a slight sequential improvement on a one-year basis versus March. But again, on a multi-year basis, still, you know, still a decel across the board. And then... And Ford is just, you know, much more volatile on a month-to-month and quarter-to-quarter basis, which is, you know, why we want to stay away from giving too much color on the expectations there for the balance of the year. And then inventory in line with sales, you know, again, that was our expectation that is around, you know, the middle of this year that, you know, those two would converge closer.
spk09: All right. And we'll move on to our next question from Janine Stichter with PTIG.
spk00: Hi, everyone. Can you talk to your own brand penetration, where it sits currently, and then would we expect to see it ramp as we get inventory more aligned in the back half? And then also on that, can you speak to where margins are currently on private brands versus historical and where you see them trending? I know you mentioned the lower inbound freight starting to kick in. Anything else to call out there just on the costing environment? Thank you.
spk06: Yeah, for the own brand mix, I wouldn't expect, you know, a meaningful increase in the mix this year versus last year. I think that is more of a, you know, probably a 2024 dynamic. In times like this when we're rebalancing inventory and given the depth that we need to produce into an own brand, you know, that has a more meaningful pullback than on the third-party side. So not expecting a meaningful increase this year on a full-year basis. more kind of comparable even, you know, throughout the balance of this year to what we had last year. And then the margins are holding strong. Freight has that inbound freight on own brands has returned close to pre-pandemic levels. But keep in mind that given the higher price point that we operated at, that premium price point, the freight is a much smaller percentage of the cost of goods sold than maybe for others. It does have a positive impact, you know, but it's not as meaningful as you might otherwise think. And that margin is still significantly higher than a third-party margin.
spk09: We'll take our next question from Tom Nickich with Wedbush Securities.
spk15: Hey, guys. Thanks for taking my question. Jesse, the gross margin for Q2 is implied to get much better sequentially. Is that just a function of... less discounting, a full price mix, getting back to normal or closer to normal? Is there anything else like mix related we should think about that starts becoming a good guy? Can you just help us sort of understand the progression of those margins here?
spk06: Yeah, no, that is the primary driver is shifting back to a healthier full price mix in Q2. And we see that, you know, that's typical for any year, but especially this year as we made significant progress on the inventory in Q1 and then in a healthier place in Q2. So, there's both a seasonal aspect and then our inventory coming back in check that also helps that. You know, mixed across categories is relatively consistent. We think we're back to, you know, call it plus or minus normal with, you know, that 30% being dresses. Dresses does tick up a little bit in Q2 as does that fashion apparel. So, There's a little bit there, but I would say the primary driver is that full price mix component.
spk08: Got it. Thanks, Jesse.
spk09: We'll take our next question from Matt Carondo with Roth MKM. Please go ahead.
spk04: Hey, guys. Good afternoon. Thanks. A lot of been asked and answered, but just wanted to cover engagement. In what categories are you seeing new customers enter the active user base? Anything that's changed there? Any callouts just given the different economic environment we're in?
spk16: Yeah, I wouldn't say there's any major changes from some of the trends we've seen in earlier quarters, but a couple of callouts. One would be that markdown products were particularly strong in new customer acquisition, and that's generally true historically. So that was certainly one reason we saw strong new customer growth in the first quarter. And then also beauty. And again, the same quarter as previous quarters, beauty has been a growth area for us. And that area is typically more efficient for us in driving new customers. And so we saw strength there as well.
spk09: And we have time for one more question.
spk07: We have Simeon Siegel with BMO Capital Markets.
spk05: Thanks, everyone. Good afternoon. I understand it's trailing 12 months, so perhaps it's a little different than what would have been this quarter. But just from what we can see, you're still showing impressive active customer growth, especially versus revenues. So I'm curious. I appreciate the tougher macro, but do you think the new customers are any different than the existing ones? I'm just wondering if they might be partially driving lighter productivity, just whether it's the returns, the margin, the AOV, et cetera. So just curious if you're seeing anything interesting learning-wise or discrepancies with the new cohorts. Thank you.
spk16: Yeah, we're not seeing anything particularly different from the new cohorts versus previous cohorts. You know, certainly depending on how we bring in a new customer, there can be some differences over time. But in general, what we're seeing is consistent with what we've seen historically as far as our expectations from those consumers. As it relates to return rate, typically new customers actually tend to have a lower return rate than returning customers. So that wasn't, you know, that didn't have any impact on the increase in return in the first quarter.
spk08: Okay, great. Thanks a lot, guys. Best of luck for the rest of the year. Thank you.
spk07: And that's all the time we have for questions today. I'll turn it back to management for closing remarks.
spk13: Thanks for joining us for this quarter, guys. Obviously, you know, a lot going on in the business, a lot going on in the world, but very excited to look forward. the organization. Looking forward to next quarter to show you continued results, both operationally as well as financially.
spk07: Thank you, and that does conclude today's presentation. Thank you for your participation, and you may now disconnect.
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