Revolve Group, Inc.

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 second quarter 2023 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. You may begin.

Good afternoon, everyone, and thanks for joining us to discuss Revolve's second quarter 2023 results. Before we begin, I'd like to mention that we had posted a presentation containing Q2 financial highlights to our investor relations website located at investors.revolve.com. I would also like to remind you that this conference call will include forward-looking statements. including statements related to our future growth and profitability, market opportunities, macroeconomic and industry trends, business, operations, and marketing initiatives and investments, international expansion, our stock or purchase program, growth in active customers, our inventory balance and management, and our outlook for net sales, gross margin, operating expenses, and effective tax rate. These statements are subject to various risks, uncertainties, and assumptions that could cause our actual results to differ materially. from these statements, including the risks mentioned in this afternoon's press release, as well as other risks and uncertainties disclosed under the caption, risk factors and elsewhere in our filings with the Securities Exchange Commission, including without limitation, our annual report on Form 10-K for the year into 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 SDC filings. Joining me on the call today are our co-founders and co-CEOs, Mike Karanikoulis and Michael Mente, as well as Jesse Timmermans, our CFO. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn it over to Mike.

Hello, everyone, and thanks for joining us today. I'll begin with a recap of our second quarter results, and then I'll conclude by highlighting key operating priorities, investments, and growth initiatives we are very excited about. Net sales decreased 6% year-over-year to $274 million in the second quarter, a slight improvement from the 7% year-over-year decline in April 2023 discussed on last quarter's conference call. As you've heard from many companies, the U.S. remains very challenging for consumer discretionary spending, particularly for our younger consumer demographics. Net sales in the U.S. decreased 7% year-over-year, partially offset by international net sales increasing 4% year-over-year, highlighted by exceptional growth in Mexico, which has become one of our most important international markets. Our gross margin was 54%, a meaningful sequential improvement compared to the first quarter's 49.8%. Yet, as expected, gross margin remained lower compared to the second quarter of 2022 when our mix of net sales at full price was exceptionally high. Net income for the second quarter was $7 million, or $0.10 per diluted share, and adjusted EBITDA was $10 million, or 3.8% of net sales. Our profitability was significantly lower than last year's second quarter, primarily due to the decline in net sales, the lower gross profit year-over-year, and continued pressure on operating expenses, in large part due to a higher return rate. We view the current macro environment as a near-term headwind on our path towards resuming attractive growth rates and margins over longer-term horizons as we have demonstrated with our long-term historic track record of attractive growth and profitability. And importantly, challenging operating environments create opportunities for financially strong and cash-generative companies like Revolve to further separate from the pack by continuing to prudently invest through the cycle while some industry peers have no choice but to play defense. With that in mind, I'll now recap several important growth and efficiency initiatives that we believe will further strengthen our foundation for profitable growth over the long term. We are currently extremely focused on driving cost efficiencies within our global shipping and logistics operations to help offset cost pressures resulting from a higher return rate year over year. As an update on this important initiative, This week, we plan to launch a new process that we expect will drive meaningful efficiency gains for future periods by consolidating all return shipments coming back from Canada to the United States. And separately, in the United Kingdom, we also just began to hold certain product returns in the UK for local refulfillment to UK customers without shipping the products all the way back to the US as we historically have done. This initiative both reduces shipping costs and provides for even faster service to our valued customers in the region. These are significant wins in two large international markets that demonstrate great execution and results in a short period of time as we have focused on leveraging our scale to drive efficiencies and continued improvement in our best-in-class customer service. Most importantly, our team is aggressively pursuing a long list of initiatives that we are confident will help us gain significant further efficiencies in the coming quarters. I look forward to sharing our progress in this area as we move forward. We continue to expand the use of AI and machine learning across several key areas of our operations to drive growth and efficiencies. During the second quarter, we launched a new type of AI-powered merchandising that leverages image recognition to recommend visually similar items to customers. To illustrate an impactful use case, when consumers are looking at a product on Revolve that is currently out of stock, our AI technology engages with the customer to recommend visually similar items. This enhancement demonstrated a notable conversion lift in our A-B testing conducted prior to launch. Separately, we are continuing to advance efforts to integrate AI into our own brand design, which we view as an exciting opportunity to enhance creativity and accelerate the product development cycle. We are also actively leveraging technology and evaluating solutions to optimize our return rate. Consistent with our customer-first focus, our efforts to reduce return rates over time will not detract from the customer experience. In the third quarter, we will be experimenting with several new initiatives, including a virtual try-on and size comparison feature tool that went live last month, and we're testing a wide range of tools and visuals to better communicate product fit, such as enhanced fit rating customer reviews, detailed product fit guides, and video content within product detail pages. Shifting to international expansion. We recently appointed our first ever head of Greater China to further strengthen the foundation for future expansion in the region. We plan to further build out our local team on the ground in China to expand key relationships and brand awareness, which is important since the marketing and social media channels in China are different than in all other markets we operate. Considering the size and importance of the China e-commerce market, we believe now is the right time for us to invest in a more meaningful way. To illustrate our growth potential in China, I'm excited to share marketplace during the month of June. This recognition and success contributed to our continued growth in China in the second quarter and illustrates the level of interest and revolve in this very large market. Lastly, in continuing on the international theme, we're also expanding our borders for talent acquisition. After demonstrating during the pandemic that a distributed workforce can work very efficiently for many functions, we have begun expanding our hiring scope well beyond California into select overseas markets. In the past several months, we have successfully attracted talent for technology, customer service, and other functions in countries outside of the US. It's exciting because hiring engineers in a competitive US market has historically been a real challenge for us due to our very high standards, and hiring outstanding talent overseas provides an added benefit of being able to efficiently work on development projects around the clock. While we expect this important initiative to result in some cost efficiencies, it is not our primary focus. What we are most excited about is meaningfully expanding the available talent pool to even further raise the bar on our exceptionally high standards, as demonstrated by our achievement of record net promoter scores every year for the past few years. We have recently opened our first overseas office to guide this important effort. I am pleased with our team's execution on these important initiatives that are key building blocks for our continued long-term growth and profitability. Our long-term mindset and strong balance sheet, combined with our conviction in the strength of our business model and confidence in our team to execute through the short-term challenges and over the long-term, led our board of directors to authorize a $100 million stock repurchase program. Since we view the current environment as a near-term headwind and remain confident in our longer-term opportunity to drive growth and profitability, we view stock repurchases as an attractive and accretive use of our capital. We authorized the stock repurchase program with confidence that the nearly $270 million in cash and no debt on our balance sheet gives us financial flexibility to remain opportunistic to invest in the business across multiple dimensions in our efforts to drive shareholder value. In summary, while we certainly face more near-term challenges in the current environment, we will remain nimble and continue to focus on our hallmarks of technology innovation, operating efficiency, and brand building to capture more share in the very large market. We remain squarely focused on investing in the long-term opportunity ahead of us, leveraging our 20 years of operating experience and our competitive advantages to guide us through these uncertain times. Now, over to Michael.