Revolve Group, Inc.

At this time, I would like to turn the conference over to Eric Randerson, Vice President of Investor Relations at Revolve. Eric, you may begin.

Good afternoon, everyone, and thanks for joining us to discuss Revolve's second quarter 2025 results. Before we begin, I'd like to mention that we have posted a presentation containing Q2 2025 financial highlights to our investor relations website located at .revolve.com. I'd 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 business initiatives, industry trends, the impact of tariffs, and our mitigation efforts on marketing events and their expected impact, 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 in the caption, risk factors and elsewhere, in our filings with the Securities and Exchange Commission, including without limitation our annual report on Form 10K for the year ended December 31, 2024, and our subsequent quarterly reports on Form 10Q, all of which can be found on our website at .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-GAP financial information, including adjusted EBITDA and pre-cash flow. We use non-GAP 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-GAP financial information is not intended to be considered in isolation or is substitute for or superior to the financial information presented and prepared in accordance with GAP, and our non-GAP measures may be different from non-GAP measures used by other companies. Reconciliation of non-GAP measures to the most directly comparable GAP 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 in our SEC filings. Joining me on the call today are our co-founders and co-CEOs Mike Karonikolis 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. Outstanding execution by our team within an incredibly dynamic operating environment led to strong second quarter results and continued market share gains. Our net sales increased to 9% year over year, outpaced by adjusted EBITDA increasing 12% year over year, as we delivered our highest adjusted EBITDA margin in three years, despite pressure from increased tariff rates. Improved inventory dynamics and our tariff mitigation efforts drove a slight expansion of our gross margin year over year, as well as healthy cash flow generation. In fact, our 52 million in free cash flow generated during the first six months of 2025 is nearly three times the free cash flow we achieved for the full year in 2024. Looking beyond the numbers, I'm excited by the underlying drivers of our strong results that illustrate great progress in key areas of investment for long-term success. Our customer base continues to increase, and on average, we are generating more revenue helped by a lower return rate year over year, and our successful efforts to capture a greater share of the consumer's wallet. I'm also thrilled with our momentum and expansion within international markets, and by the increasing mix of owned brands as a percentage of revolved segment net sales that is accretive to our markets. With that as an introduction, I'll step back and provide a brief recap of our Q2 results before reviewing the progress on our longer-term initiatives. Starting with Q2 results, as discussed on our Q1 earnings call, net sales for the second quarter of 2025 had a slow start coinciding with the peak tariff uncertainty in April, and historically low consumer sentiment. Encouragingly, our net sales growth rebounded strongly from mid-single digits in April 2025 into the low double-digit growth territory for the months of May and June. All told, net sales for the full second quarter increased to 9% year over year, driven by domestic and international net sales increases of 7% and 17% year over year, respectively. By segment, revolved net sales increased 9%, and forward net sales increased 10% year over year, within a global luxury market that declined year over year in the first quarter, according to research from Bain Aldegama. The underlying forward metrics are very encouraging, further validating the efficacy of our forward investments over the past several quarters to capitalize on opportunities created by all the challenges among other luxury retailers. The biggest source of upside for the second quarter relative to expectations was our gross margin performance. Despite the tariff pressures we discussed at length last quarter, we delivered a slight increase in consolidated gross margin year over year, significantly outperforming our guidance. Key contributors to our gross margin outperformance in Q2 were continued penetration growth for our own brand offerings, which generate higher margins than third-party brands. The team's outstanding work on tariff mitigation relative to our prior assumptions, as well as the successful testing and rollout of enhancements to our markdown algorithms that drove meaningful improvements in the depth of markdowns in the second quarter relative to our recent performance on these metrics. Speaking of tariff mitigation, while there is still a level of uncertainty, thus far, we have been able to successfully mitigate a significant majority of the tariff impacts. Importantly, the severity and abruptness of the tariff served as a catalyst for mitigation efforts that should be favorable to our long-term margin structure, which is exciting. Shifting to our bottom line results, our operating discipline allowed us to achieve a 10% increase in operating income and a 12% increase in adjusted EBITDA year over year, outpacing our net sales growth of 9% year over year. In addition to our top line growth and increased gross profit we discussed, contributing to our profitability gains were our successful efforts to drive efficiencies in our global logistics operations. Notably, our product return rate decreased by more than one and a half points year over year in the quarter, helping us to achieve nearly 60 basis points of leverage in our variable cost line items of selling and distribution and fulfillment. Most exciting is that our profitable growth once again converted very strongly to cash flow generation that serves as a key competitive advantage. It was our best second quarter performance for cash flow generation in four years, helped by our conveniently improved inventory dynamics. As an illustration of our improved efficiency, our net sales increased 9% year over year, while our inventory balance declined 6% year over year. Notably, for the first half of 2025, our free cash flow generation exceeded our adjusted EBITDA profitability by 10 million. As a result, cash and equivalents grew to an all-time high of 311 million as of June 30th, an increase of 27% year over year. Now, I'll conclude by recapping our exciting progress against our strategic priorities and growth vectors over the past few months. We have a lot of exciting initiatives in play, and our team is doing an excellent job executing on the set of initiatives that we believe can deliver value for shareholders over the long term. First, we continue to efficiently invest to expand our brand awareness, grow our customer base, and strengthen our connection with the next generation consumer. We had an extremely active and impactful second quarter for brand marketing, featuring marquee events such as Revolve Festival, Revolve in the Hamptons, and more that Michael will talk about in his remarks. Second, we continue to successfully expand our international penetration, highlighted by 17% growth outside of the US in the second quarter. Net sales increased across nearly all regions, including China, which has become one of the top contributors for our Revolve segment. In fact, our Revolve segment sales in mainland China have more than doubled over the past two years after we invested in a team dedicated to the China market. Their efforts have helped us to capitalize on exciting opportunities, including through successful marketplace partnerships that have fueled our growth acceleration. Revolve was recently named the number one cross-border store on the T-Mall global marketplace within the apparel category, and we recently launched a dedicated Revolve man store on the T-Mall marketplace to further expand our reach. Our international results underscore our traction in the attractive growth opportunity overseas that is several times larger than the US market. Third, we have continued to build on the successful expansion of our assortment to gain a greater share of consumer spending. Sales of fashion apparel, beauty, men's and home products, each increased by a healthy double-digit percentage year over year, contributing to our reduced return rate and increased revenue per active customer year over year. This success expanding beyond our historical core further validates our opportunity to drive customer acquisition and expand our share of wallet among our loyal existing customers who trust in our brands and delight in our premium shopping experience. Finally, we are continuing to leverage AI to drive growth and efficiency initiatives across the company, including to refine our shopping experience and personalization capabilities. Building on our successful recent launch of internally developed AI search algorithms for consumer product discovery on our e-commerce sites, during the second quarter we tested and launched into production enhancements to our AI search algorithms that are delivering great results, including a meaningful lift in conversion rate for search queries on our Revolve site. This exciting innovation by our data science team is driving incremental conversion gains on top of the incredible lift in performance that we achieved last year by replacing third-party search technology with our internally developed AI search algorithms for on-site search. To wrap up, I'm very proud of the team for delivering such strong second quarter results and great progress on longer-term initiatives that are critical building blocks for continued profitable growth over the long term, particularly in such an uncertain environment. I'd like to thank our team for your incredible agility, innovation, and commitment that has helped us to navigate through all the tariff uncertainty while remaining focused on delivering excellence for our customers every day. With our talented team, powerful brands, operational excellence, data-driven mindset, and proprietary technology infrastructure, I'm confident that we have the ingredients to power profitable growth and further market share gains in 2025 and beyond. Now, over