Revolve Group, Inc.

If you would like to withdraw your questions, press star one again. Thank you. 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 third quarter 2024 results. Before we begin, I'd like to mention that we have posted a presentation containing Q3 financial highlights to our investor relations website located at investors.revolve.com. I would also like to remind you that this conference call will include forward-looking statements, including statements related to our future growth, our inventory balance, our key priorities in operating and innovation initiatives, industry trends, our marketing events and impact, our partnerships and strategic acquisitions, 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 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 ended 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'll 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 the most directly comparable 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 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. We delivered an exceptional third quarter highlighted by double-digit top-line growth, a significant increase in net income year-over-year, and a 250 basis point increase in our adjusted EBITDA margin year-over-year. Contributing to the significant growth in profitability was better than expected logistics cost efficiencies helped by a meaningful decrease in our return rate, as well as impressive marketing efficiency that also outperformed our guidance, which more than offset a slight decrease in our gross margin year over year. The fourth quarter is also off to an encouraging start, with total net sales in October increasing in the low double digits year over year, supported by year over year growth in both segments of the business and across both domestic and international. Most importantly, we achieved these very strong financial results while continuing to invest in a wide range of initiatives that we believe set us up well for profitable growth and market share gains over the long term. With that introduction, let me step back and provide a brief recap of the third quarter. Net sales were $283 million, an increase of 10% year-over-year, driven by improved year-over-year trends across both segments and geographies relative to our comparisons in the second quarter of 2024. Net sales in the revolved segment increased 12% year-over-year, our best performance in more than two years. Net sales in the forward segment also improved to nearly flat year-over-year, helped by a solid exit rate that has continued in the month of October. Net sales in the fashion apparel and dresses categories rebounded strongly to 13% and 10% year-over-year growth, respectively, serving as key contributors to our growth reacceleration. These results benefited from outstanding wins in product merchandising in these core categories that Michael will speak to in his remarks. The growth in net sales was further supported by our underlying key operating metrics highlighted by growth in active customers. Trailing 12-month active customers increased by 51,000 during the third quarter, almost double the increase in active customers achieved in the second quarter of 2024. Net income for the third quarter of $11 million, or $0.15 per diluted share, was meaningfully higher than the $3 million in the prior year quarter. Adjusted EBITDA was $18 million, an increase of 85% year-over-year, with a 250 basis point expansion of our adjusted EBITDA margin. Beyond the numbers, I'm excited by our team's execution that has led to continued great progress on the strategic priorities we have outlined on prior calls. Here are some of the key highlights since our update last quarter. First, I'm thrilled that we delivered significantly greater efficiencies in our logistics costs year over year than last quarter, contributing to our strong growth and profitability in the third quarter. Expressed as a percentage of net sales, selling and distribution expense decreased by more than 200 basis points year over year, and fulfillment expense decreased approximately 30 basis points year over year. These impressive results are being driven by successful execution on two important priorities. We continue to make outstanding progress across many initiatives designed to drive efficiencies within our global shipping and logistics operations. Even more exciting, during the third quarter, we achieved incredible further progress on our efforts to reduce our return rate. In fact, our return rate decreased year-over-year during each month of the third quarter and by a larger magnitude than the slight year-over-year decrease achieved in the second quarter. As an illustration of our success, total freight costs for customer shipments and returns decreased by a high single-digit percentage in the third quarter, despite a 3% increase in the number of orders placed and a 10% year-over-year increase in net sales. These metrics provide an indication of the compelling financial benefits we hope to realize from reducing our return rate further over time. Importantly, we achieved a lower return rate in the third quarter through many efforts that further elevate the customer experience. For instance, a size and fit initiative we are testing has resulted in a noticeably lower return rate while also driving a meaningful lift to the conversion rate. It is a great example of a win-win scenario in that for Revolve, the initiative helps us to generate increased revenue at lower costs. And for our valued customers, the improved size and fit information enables us to even further elevate the overall shopping experience. Second, we remain committed to efficiently investing to expand our brand awareness and further strengthening our connection with next generation consumers. We delivered another very strong and efficient quarter with increased customer acquisition and reduced acquisition cost, driven by year-over-year efficiency gains across performance and brand marketing channels. In fact, it was our most efficient third quarter for marketing investments in four years, based on our marketing investment calculated as a percentage of net sales. Of note, one contributor to our marketing efficiency in the third quarter also provides a dual benefit of contributing to our reduced return rate. In recent months, we've begun to leverage our extensive internal data to optimize our marketing efficiency by including within our algorithms an understanding of our customer purchase and return behavior. This initiative provides a powerful illustration of the competitive advantages of our data-driven approach to nearly all aspects of our business. Third, we successfully expanded our international presence in the third quarter, with net sales from international markets increasing 20% year-over-year. Net sales increased across all major regions and benefited from recent marketing innovations that have exceeded our expectations and further elevation of service levels overseas. The great progress we have made to improve the international customer experience in recent years now allows us to confidently invest marketing dollars to drive profitable growth in key international markets. And lastly, we continue to leverage AI technology to drive growth and efficiency initiatives across the company, including e-commerce operations, marketing, and customer experience. Last quarter, I talked about how our internal team of data scientists developed and launched into production on our Ford website an internally developed AI search algorithm that meaningfully outperformed the incumbent retail search platform developed by a large third-party technology company. I'm excited to share that our internally developed AI search algorithm also tested exceptionally well on our flagship Revolve site and was recently launched into full production on Revolve. We estimate that our AI innovation will deliver incremental revenue in the seven figures on an annualized basis at a much lower operating cost than using third-party technology solutions. Another recent AI development that we are excited about is our internal development of AI algorithms that are able to better evaluate our products for marketing purposes and expand our marketing reach. Our team developed the AI innovation from concept to A-B testing in just a few weeks during the third quarter. Most exciting is that early results show that our AI algorithms can deliver a meaningful boost in both revenue and efficiency for one of our largest performance marketing channels, all at a very low operating cost. To summarize, we believe that our improved results on the top and bottom lines are a direct outcome of our team's strong execution on our strategic initiatives. I'd like to thank all of my Revolve colleagues for their incredible contributions that have driven the business forward this year and strengthened our foundation for future growth. We are firmly on offense, and as always, we are focused on testing, learning, and iterating our way towards continued improvement in all aspects of our business. We still have a lot of work to do, yet I feel great about our progress and current momentum in the business. Michael will now talk in his remarks about investments in our brands and many growth opportunities that we are very excited about. Thanks, Mike, and hello, everyone.