Revolve Group, Inc.

At this time, I'd 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 first quarter 2024 results. Before we begin, I'd like to mention that 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 our future growth, our inventory balance, our key priorities and operating initiatives, industry trends, our marketing events, our partnerships, our physical retail stores, 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 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 into December 31, 2023, 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.

Hello, everyone, and thanks for joining us today. We had an encouraging first quarter on many levels. highlighted by meaningful gross margin expansion and year-over-year efficiency in our variable logistics costs that exceeded our guidance ranges. The great work by our operations team on the efficiency measures discussed on prior calls enabled us to achieve our first year-over-year decrease in selling and distribution costs as a percentage of net sales in three years. These gains helped us to achieve significant profitability and cash flow in the first quarter, despite a slight decline in net sales year-over-year and the expected increase in marketing spend due to the timing of our brand-building investments in 2024. Importantly, our net sales trajectory has improved since our last update when net sales during the first eight weeks of the first quarter had declined by a mid-single-digit percentage year-over-year. In fact, our net sales returned to positive year-over-year growth during March, and the momentum continued into April when our net sales growth remained positive to begin the second quarter. Most importantly, we achieved these solid results while continuing to invest in the foundations for long-term success. With that introduction, let me step back and provide a brief recap of the first quarter. Net sales were $271 million, a decrease of 3% year-over-year. Recall that in the first quarter of 2023, a much larger than normal percentage of our net sales were on markdown, as we worked aggressively to reduce our inventory position a year ago. By comparison, in the first quarter of 2024, our inventory health was in a much better place. So the net sales comparison in Q1 2024 reflects increased net sales at full price year over year that was more than offset by lower net sales on markdown year over year. Our gross margin expansion in the first quarter powerfully demonstrates the financial benefit of our much cleaner inventory position and a higher mix of net sales at full price year over year. Driven by the performance of the revolved segment, our consolidated gross margin increased 250 basis points year-over-year in the first quarter. The margin gains resulted in increased gross profit dollars year-over-year, despite the lower revenue. By segment, revolved net sales decreased 1% year-over-year in the first quarter. Forward net sales decreased 15% year over year, directionally consistent with external data points, including reports that U.S. luxury spending in March declined 18% year over year, according to Citi credit card data, the lowest monthly rate in nearly three years. We view the luxury industry challenges as an exciting opportunity for Revolve to go on offense and invest in market share capture, supported by our consistent profitability and cash flow generation that sets us apart in fashion e-commerce. Net income for the first quarter was $11 million, or 15 cents per diluted share, and adjusted EBITDA was $13 million. As expected, both profitability measures declined year over year, but benefited from gross margin expansion and operating expense efficiency outperforming our guidance ranges. Importantly, our business continues to generate meaningful cash flow. In the first quarter, we generated $38 million in operating cash flow, increasing our cash position by $28 million in just three months. even while we continued to enhance shareholder value through the repurchase of an additional $8 million in shares of our Class A common stock during the first quarter at what we believe were attractive prices. Beyond the numbers, I'm excited by our team's execution that has led to early progress on the strategic priorities outlined last quarter. Before turning it over to Michael, I'll give you a brief recap on our progress on each initiative. First, I'm extremely proud that we have delivered efficiencies in our logistics costs year over year. Selling and distribution expense as a percentage of net sales decreased 50 basis points year over year, despite continued pressures from a higher return rate in the first quarter of 2024. Considering the meaningful potential to drive efficiency if we can contain our return rate, we are extremely focused on initiatives designed to reduce our return rate and make returns more efficient. While not yet visible in our results, under the hood we see early signs of progress from these tests and initiatives that we intend to scale in the coming quarters. Some focus areas we're excited about include improved size guidance that primarily leverages technology partners and AR tools, testing of important new measures designed to prevent wardrobing, which refers to a customer wearing a purchase style out for an event and then returning it for a refund or exchange. And finally, effective last week, we have reduced our window for product returns to 30 days for returns and 60 days for exchanges. Consistent with the return and exchange window we have successfully offered for many years prior to the pandemic. You may recall that in March of 2020, after the onset of the pandemic, we increased the window for returns and exchanges to 60 days and 90 days respectively. Our analysis of the competitive landscape confirms that our hassle-free return policy remains among the most customer friendly in the industry, especially considering that most apparel retailers now charge customers a fee for online product returns. By comparison, we continue to encourage our customers to use the home as a dressing room with a no-hassle, free shipping and returns policy, which we have offered since our launch in 2003, making us one of the pioneers of free returns. Second, we further validated our opportunity to expand our share of Wallet through continued expansion of emerging areas such as beauty, men's, and home. Net sales in the beauty category increased 34% year-over-year in the first quarter, and our pipeline of coveted beauty brands we expect to onboard has never been stronger. Third, we continue to expand our international presence where we have remained focused on further elevating service levels to drive growth. Australia and the United Kingdom offer important proof points of our recent success. Our operational excellence and wide range of logistics partnerships drove shipping and cost efficiencies that enabled us to reduce the minimum purchase threshold for consumers in Australia and the UK to receive free international shipping. As with many of our service level breakthroughs, consumer response has been incredible. We had improved year-over-year growth in both Australia and the UK in the first quarter, which helped us to offset a very tough comparison in China. Based on this success, we have already begun to expand this proven model to additional international countries. Fourth, we remain committed to efficiently investing to expand our brand awareness, grow our customer base, and strengthen our connection with the next generation consumer. As Michael will expand upon, we reimagined the format of a Revolve Festival held last month to be even more intimate and exclusive this year, while maintaining the elevated brand positioning that is so unique to Revolve. The marketing team delivered an incredible Revolve Festival event that generated a greater impact on our key metrics within the one-day format in 2024 than we had achieved over an entire weekend for last year's Revolve Festival event. And lastly, we continue to leverage AI and other technology to drive the business forward and even further elevate the customer experience. By leveraging AI and machine learning technology to better align product merchandising with customer preferences, we have driven notably higher conversion rates for our curated shops, such as our festival shop, where associated revenue increased more than 50% year-over-year in the period leading up to Revolve Festival. To wrap up, we are pleased with how the year has begun, encouraged by the return to year-over-year growth in March and April, and we are excited about our growth and efficiency initiatives that we believe improve our foundation for profitable growth over the long term. I would like to congratulate our team on the wins this quarter. We have a lot of work ahead of us, but with your relentless drive and commitment, we are confident in our ability to compete and win together in 2024 and beyond. Now, over to Michael.