Revolve Group, Inc.

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.

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.

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.