Q2 2020 Revolve Group Inc Earnings Call
Good afternoon, and welcome to both.
Second quarter 2020 earnings Conference call today's call is being recorded and we have allocated one hour for prepared remarks and QNX at this time I'd like to turn the conference over to Eric Randerson, Vice President Investor Relations out people. Thank you you may begin.
[music] good afternoon, everyone and thanks for joining up to discuss revolves second quarter 2020 resolved.
Before we begin I'd like to mentioned that we have posted a presentation containing Q2 2020 financial highlights to our Investor Relations website located at inductors Dot revolved dot com.
Well I'd remind you that this conference call will include forward looking statements. These statements include our current expectations regarding the continued impacted the cobot 19 pandemic on our business operations and financial results and our outlook for net sales gross margin operating expenses diluted share count in capital expenditures for the second half of this year you.
These statements are subject to various risks uncertainties assumptions that could cause our actual results to differ materially from these statements, including the rest mentions in this afternoon's press release as well as other risks and uncertainties disclose under the caption risk factors and elsewhere in our filings with the Securities Exchange Commission, including without limitation or any report on form 10-K for the year in.
Ended December 31, 29 team in subsequent filings all of which can be found on our website at investors dot revolved dot 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 free cash flow in adjusted diluted earnings per share, we use non-GAAP measures and some of our financial discussions as we believe they more accurately represent the true operational performance in underlying results of our business. The presentation at 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 gap in our non-GAAP measures may be different from non-GAAP measures used by other companies reconciliations of GAAP to non-GAAP measures as well as the description limitations in rationale for using it.
Measure can be found in this afternoon's press release and in RCC filings.
Joining me on the call today, our co founders and co Ceos, My care, Nicolas and Michael mentality, as well as Jesse Temperaments, our CFO.
Following our prepared remarks, we'll open the call for your questions with that I'll turn the call over to Mike.
Thanks, Eric Good afternoon, everyone and thanks for joining US today, we hope each of you in your families are in good health.
Look forward to the day when we can see many of you in person again.
So much has changed in just the past three months.
On our Q1 conference call, we discussed the negative impacts the cobot 19 pandemic that led to a year over year decline in net sales of nearly 50% in the final weeks of March.
Almost overnight to shelter in place mandates put an abrupt pause on the special social occasions that often serve as a catalyst for customers to buy from revolver.
We took swift and aggressive action to protect our people into adjust our cost structure for what quickly became.
Highly uncertain demand environment I'm extremely proud of how well our team has executed against our priorities. Despite the continuing unprecedented headwinds brought on by Cobot 19.
As we prepared for the worst the teams reengineered, our entire approach to brand marketing and merchandising to position revolve for success amid significant changes in consumer buying behavior.
There are three key highlights of our second quarter results could I hope each of you will take away from my remarks.
First we delivered record EPS of 20 cents per share and record adjusted EBITDA of 21 million in the second quarter.
Each of these measures grew double digits year over year during the worst economic climate in decades.
Second we delivered record free cash flow of $53 million in the second quarter alone.
Thats more cash flow than we generated for the entire year of 2019.
Third a key contributor to the exceptional free cash flow generation was are meaningfully higher inventory turns in the second quarter.
Inventory turns in our revolve segment increased approximately 30% year over year, reaching our highest level in six years.
Impressive collaboration and agility by our team drove the strong financial and operational results.
Despite the very difficult macro environment and with most of our teams continuing to work from home, we nonetheless realized efficiencies throughout the business, while maintaining an exceptional service levels for our customers.
With that well continue with the discussion of our second quarter results.
Our monthly net sales in Q2 improved throughout the quarter. In fact June was our first month of positive year on year growth in net sales since the pandemic begin.
We believe the net sales improvement in the past few months reflects a better overall consumer spending environment combined with our effective marketing and merchandising strategies to capitalize on at home categories like beauty loungewear intimates and accessories.
That said, we did experience some pockets of softness late in the quarter is states reopened include cases increased especially in those states with higher cobot numbers.
Shifting to the balance sheet and cash flows.
Recall that when we begin to feel the severe impacts of cobot 19 in March we immediately adjusted our inventory buys for a scenario that assumes no sales recovery in the remainder of 2020.
As a result are reduced inventory buys combined with the better than expected net sales led to a 37% decrease in our inventory balance year over year in the second quarter.
The significant declining inventory, coupled with a better than expected 12% decline in net sales translated to a significant increase in inventory turns year over year.
Working through our inventory position in improving inventory turns has been a key goal we have outlined for the past several quarters. So we're very pleased with our progress.
Higher inventory turns had a very positive impact on our cash flows for the quarter.
As mentioned, we generated 53 million in free cash flow during the second quarter up from 2 million the prior year.
We now have 151 million in cash on the balance sheet, which we believe positions us to navigate through this uncertain time reinvest in inventory to support future demand in further invest in the business to drive long term growth.
The strong results can significantly improve cash position led us to quickly unwind many of the reductions to our cost structure that we discussed on last quarters conference call.
During the peak of Cobot 19 uncertainty, we made the very difficult decision to adjust personnel costs, primarily through furloughs and reductions in salary wages and hours as Wellesley office.
Im very pleased to report that we have now brought back the majority of furloughed employees in the by the end of this week substantially all active employees, including executives as wells are independent board members will have their compensation back to the pre kobin run rate.
Hi, again want to thank all of our employees for their sacrifice and agility during this difficult time.
With the better than expected sales trends, we have rapidly moved from a mode of trying to reduce inventory receipts at the beginning of the second quarter to now pursuing inventory opportunities to make sure. We have the right mix right level inventory in the second half of the year and as we enter 2021.
Aside from the strong Q2 financial results I am encouraged by the innovation in positive impacts that are moving our business forward.
Our operations team delivered phenomenal results delivering their most efficient quarter in the past seven quarters is the efficiency gains from the investments we've made over the last 18 months continue to provide benefits.
In early 2019, we invested in an expanded in consolidated distribution center in throughout 2019, we layered in incremental automation.
During this past quarter, we automated another key process in the distribution center, which is already having a positive impact on our distribution process.
With capacity in our current facility for over four times, our current unit levels, we have more room for improvement over the longer term.
Continuing on the topic of running the business as efficiently as possible are buying and planning team was able to pivot quickly from initially reducing our inventory commitments and then quickly shifting back into investment mode as demand picked up.
We've also moved very quickly to merchandise into categories that are more aligned with the sudden change in consumer preference.
For example, within just days after the CDC recommended the consumers wear masks and public we had masks available on the site for purchase today, we have approximately 100 stalls of masks across third party brands and owned brands that's grown into a low seven digit net sales business and attractive margins.
Through leveraging our read and react strategy technology and team of data analysts the binding planning team was able to drive our merchant history orders to a record high in July when expressed as a percentage of total net sales.
Product Reorders are very important because reorders improve inventory dynamics and reduce inventory risk since we only reorder those products that are selling well.
In fact, oftentimes the Reordered product is already ordered by customers and reserved for them by the time to merchandise reaches our facility.
Arguably most important from my vantage point, we're keeping our customers very happy.
Our customer satisfaction levels continue to surpass our high standards with the warehouse operating safely and efficiently fulfilling orders with the same best in class service levels, Despite everything going on in the world around us.
Customer inquiries are handled by customer service agents capably working from their homes without missing a beat.
Continuing to drive brand loyalty for our valued customers.
Making our customers happy is with personally brings me the most joy since I firmly believe businesses exist to serve customers in that customer satisfaction is key to long term success.
In co founded the company with a customer centric mindset from day, one to this day I still read every single piece of customer feedback.
Our very strong customer satisfaction metrics are a direct result of this organizational focus on the customer that is built into our DNA.
Now shifting to the more recent trends in the third quarter to date.
The positive year over year net sales growth in June carried through to July in early August with the quarter to date period generally low single digit growth on a year over year basis.
It's important to note that our net sales growth rate remained in the same general range in the last several weeks of July in into August averaging low single digit year over year growth and remaining and positive growth territory. Despite the recent resurgence of cobot 19 cases, the reversal of many cities and states reopening.
These cobot 19 setbacks led to a decline in us consumer confidence in July that adds uncertainty to the slope and timing of the future recovery.
By geography in July International net sales continue to remain stronger than net sales in the U.S.
This aligns with the trend we have witnessed in the second quarter with international outperforming the U.S.
Michael will share a detailed breakdown of our net sales by product category in July which demonstrates the customer shopping and purchasing behavior continues to be significantly influenced by the global pandemic.
A positive outcome of the category mix shift because the reduction in the percentage of merchandise returned which benefits net sales and reduces certain operational expenses, such as shipping and fulfillment costs.
I'm extremely pleased with our ability to navigate through these challenging times.
Time and time again, we've asked a lot of our team and they have delivered.
So thanks to all of our team members for your hard work and sacrifice for staying nimble and for your dedication to exceeding our customers' expectations. We're not out of this yet and there will be challenges ahead, but I'm confident that we have the team in place and the organizational discipline to manage your way through this and come out stronger on the other side with that.
I'll turn it over to Michael.
Thanks, Mike and Hello, everyone.
Great. Thanks, a lot by 17 years operating revolve, but the past few months have been by far the most challenging we entered the period at the Brad know for travel music festivals and social gathering with an inventory position have for prime time, starting with low Vol Festival that had been scheduled for April.
Nearly overnight I customers can travel gathering larger groups and in many cases couldn't socialize locked down at home.
With the strength of our business, how real hot band.
Quarterly that sacrifice commitment and execution of our team.
We are able to deliver our most profitable quarter.
I am so deeply proud of what the team has accomplished this space of here's the diversity and dramatic uncertainty.
I will focus my remarks as opportunities, we have to deepen our customer relationships in merchandising marketing and getting the power and voice market.
Starting with our merchandise the dramatic shift towards more stay at home lifestyle has allowed us to further deepen their relationship with our consumer by highlighting our offering of incredible fashion design areas that would not vocal in times past.
Basal categories such as beauty.
Active and down to that have gone into two customer has begun to love coming to us for.
It's clear that we have been able to nurture expandable evolve is all about.
Enhancing our merchandising strategy, we believe we can expand their share of wallet over the long term.
Incredibly important to us that whatever our customer need she can always come to evolve as their trusted source of style.
For instance in July generated year over year growth in net sales of approximately 30% denim, 80% intimates and nearly 100% growth and accessories.
On the other head social distancing restrictions resulted in fewer opportunities to purchase outfits for special occasions outside the home such as dresses, which is revolves large product category.
Currently net sales trends in dresses have improved in recent months, although year over year comparisons remained negative.
To give you some guidepost dresses decreased year over year as a percentage of revolve segment net sales by about six percentage points in July.
However, this year over year decrease in July is less than half of that you have your decreasing dresses as a percentage of evolves segment net sales.
Appearance at the month of April 2020.
We are very excited about the opportunity in the beauty category demands will evolve she'd products has been phenomenal with net sales increased approximately 140% year over year in July.
This is the fourth straight month that the beauty category net sales have increased more than 100% year over year beauty is especially compelling because it it nearly all sold at full price for the very little return and is an incredible way to acquiring new customers. Thanks, Fernando wallet share within our existing customers.
With the base of over 5000 of the most highly coveted beauty products, we believe that they're more.
Major beauty brands to have traditionally relied on department stores for distribution are increasingly sequel to sell the coveted merchandise to evolve.
These brands recognize the Korea, schickel consumer preference to buying online that time with a number of mall based but is expected to further decline.
The percent by the end of 2021, according to published estimates.
Our brand might lose strategy has dramatically evolve this summer with the changing times, despite being dealt a tough hand with an entire calendar of activations canceled we felt powerful new wait to engage our customers are pushing to get adapting to a new lifestyle spending more time at home.
It should last quarter, we shifted our entire brand marketing focus to meeting engaging and inspirational live content shows featuring influencers designers and celebrities.
It's dependent make began.
We have now produce over 140 videos that had been viewed 11 million times on Instagram Library GTV.
The new content strategy has been highly efficient as demonstrated by our customer acquisition metrics in the second quarter.
We joke exceptional increases in marketing efficiency during the quarter as we near the acquired the same number of customers in the second quarter as we had in the prior year period.
Total Mike has been decreasing by 41% year over year.
Operating efficiency with a key driver of a strong profitability in the quarter.
I'm incredibly proud of how quickly and effectively the team responded by spending a marketing playbook, enabling us to prove out an exciting new content strategy in creating video content on Instagram lives NIGC.
I look forward to once again working interest in bend micro events into decides to do so we're continuing our powerful new digital content strategy, that's proven to be but highly engaging and extremely cost effective. We believe the combination will be a powerful driver of growth over the long.
The latest example, if I'm like utilization is of which were evolve summer three weeks series of events that kicked off in mid July in years past. The had held revolves summer, we said timing Bermuda Hampton and could smell in Mexico.
This year brings us a curated virtual revolved number event that is allowed to bring the revolved three together and inspire customers at.
All from the coverage of their homes on June 25 influences from around the World participated band about it we special event that included benefits launching new production exclusively available honorable.
Stepping back and looking into long term opportunity, it's already a seismic shift happening in the broader retail landscape, even before cobot 19.
Purchasing power hasn't shipping to the next generation consumer shopping that move into the digital world overall retail growth being driven purely by economies.
We believe that this year, particularly the digital transformation has an accelerated in the last several months and we'll continue to shift further and Debbie.
With our pure play digital strategy and our focus in the next generation consumer we believe revolver fits squarely at the intersection of the two powerful shifts.
We believe this powerful shift combined with a strong brand in connection with our customer and a strong foundation that we have built over the last 17 years positions us well could have led to the opportunities.
Now I'll turn it over to Jeff you for more detail on the financial results and trends.
Thanks, Michael it's been a tough few months, but we're proud to have executed well against the key priorities, we outlined last quarter of protecting our people and protecting our balance sheet are significantly bolstered cash position further increases our confidence that we are well positioned and have the levers to manage through the current environment.
Now starting with the second quarter results.
Net sales were $143 million, a decrease of 12% year over year, but and that's very fluid environment. It's important to look at the intra quarter trends behind these quarterly figures.
We were pleased that the monthly net sales improved each month throughout the second quarter and our year over year growth turned positive in June.
Drilling into the topline by segment the revolves segment and forward segment net sales in Q2, each decreased 12% year over year.
Similar to the overall net sales trends on a monthly basis year over year net sales comparisons for each segment improved each month from April to June.
Active customers were 1.5 million, an increase of 13% year over year recall that since active customers in the trailing 12 month metric performance on this metric is not directly comparable to traditional quarterly metrics like orders placed or average order value.
As mentioned on previous calls as we cycle to the high customer growth period of late 2018 and into early 2019 and layer on the impact of Covidien. The active customer growth has and will continue to decrease sequentially until recycle out of this period.
Orders placed for 1.2 million, a decrease of 10% year over year.
Average order value with $204, a decrease of 26% from $275 in the prior year and consistent with the April Lv trends, we discussed on the Q1 earnings call.
The significant decline in average order value reflects a shift in net sales mix to at home product categories, such as beauty accessories, and loungewear, but lower average price points on the other hand that dresses category, which carries the highest average selling price decreased as a percentage of our net sales mix by nine point year over year.
This has a disproportionate impact since dress is our largest category.
Also as we expected and communicated on our Q1 call we experienced a lower mix a full price sales and lower margin within our markdown product both of which negatively impacted sales.
As a reminder, orders placed and average order value our growth metrics, which means they are calculated prior to the effect of merchandise return.
Speaking of return.
Partially offsetting the lower number of orders year over year, and the lower average order value with a meaningful decrease in the percentage of merchandise returned to year over year.
The reduction in return rate is due to a number of factors working in our favor first we do believe there may be a broader change and customer behavior in response to the uncertainty caused by covert 19 as it relates to return with customers being more discerning and their purchase decision making process.
This is evidenced by the fact that return rate even at a category level have decreased.
Second there is a positive impact to merchandise return as a result of the changing merchandise mix for instance, the return rate for the currently fast growing beauty category is typically in a low single digit.
And return rates for other currently fast growing categories like intimates and accessories are also much lower than the overall average.
Dresses, which has historically been our largest category by a wide margin at the meaningfully higher return rate than the average and finally, there's also a positive impact on returns from the higher mix of markdown sales, particularly final fail item.
International net sales increased 3% year over year outperforming the 15% year over year decline in net sales in the U.S.
By region positive trends in Western Europe have been partially offset by headwind in certain Asian markets, such as Hong Kong.
Moving to gross profit consolidated gross margin was 50.5% for the second quarter, a decrease of approximately 530 basis points over the prior year and Directionally consistent with our commentary last quarter predicting growth margin headwinds for the balance of 2020.
Within the revolver segment, we delivered gross margin of 52.2% in Q2 down approximately 530 basis points year over year.
The revolve segment margin was impacted primarily by a lower percentage of revolve segment net sales at full price.
Deeper markdowns within the markdown product and a lower mix of owned brand as we have shifted a greater percentage of merchandise buys to third party products, but the lower initial purchase clarity in order to maximize our flexibility in the pandemic.
As we discussed on our Q4 2019 Investor call. We started to recalibrate the owned brand platform to better refined the assortment.
With that we expected owned brand mix to compress.
With the additional pressure is felt as a result of Kogut 19, we expected further owned brand mix compression in the short term to give you. Some guide posts. The owned brand mix was down around nine points year over year in the second quarter.
The company owned brand mix ramping in the prior year and as we cycle through the significant covet 19 reductions we made in the second quarter and this year, we expect the mix of owned brands to decline by a greater magnitude on a year over year basis in the second half of 2020.
Owned brands are core to our long term strategy and we have already started to ramp up design and reinvest in owned brands styles that will flow through to new inventory and subsequent sale.
Within the forward segment, we delivered gross margin of 36.8% a decrease of approximately 540 basis points year over year.
The forward segment operates within what has become a highly promotional environment in the luxury goods base. This led to a lower percentage of foreign segment net sales at full price as well as lower margin on the markdown product.
And now moving to the cost structure, starting with fulfillment, which reflects the costs incurred to staff and operate our distribution center.
Selling cost totaled $3.8 million or 2.7% of net sales as compared to 3.3% in the second quarter of 2019.
This leverage is better than we expected, particularly since the lower average order value is typically a headwind for fulfillment costs as a percentage of net sales.
The team did an outstanding job driving efficiencies and balancing the scheduling of team members within a dynamic demand environment that any end proved to be much better than our working assumption.
We also benefited from a reduced return rate any efficiencies gained from the automation investments we made last year.
All the while we have invested and maintaining our primary focus of ensuring worker safety and social distancing for all of our team members.
Selling and distribution costs, which consists primarily of shipping merchant processing fees and customer service were $19.1 million or 13.3% of net sales decreased from 14.6% of net sales in the second quarter of 2019.
Once again, the efficiency was better than we planned for and benefited from efficiency than shipping costs due to lower returns and to a lesser extent efficiencies and payment processing and customer service costs.
Great job to the team for delivering our best efficiency performance in more than two years.
Marketing costs were $14.6 million or a 10.3% of net sales as compared to 15.4% of net sales in the second quarter of 2019.
As discussed on the Q1 Investor call. The second quarter is typically the peak for brand marketing investment driven by the revolve festival than in prior years, we have invested millions of dollars toe.
None of that was possible. This year, so by necessity, we shifted into highly effective digital brand marketing content at a much lower cost of production.
As a result, our brand marketing spend decreased by $6.6 million year over year and performance marketing spend decreased by the remaining $3.7 million.
General and administrative costs, which primarily consist of salaries and wages were $15.8 million or 11% of net sales in the second quarter as compared to 11.6% of net sales in the second quarter of 2019.
The year over year reduction in DNA spend reflects the cost reduction actions announced on last quarters conference call.
Fortunately net sales trends improved from those we experienced in late March and April and have overall than much better than initially feared so.
So we moved rather quickly to restore salaries and wages that had been temporarily reduced we've started making these adjustments in may and by the end of this week substantially all fulltime active employees, including executives and our independent board members will have their competition that to the pre covered run rate.
For the second quarter of 2020, we achieved record net income of $14.2 million or 20 cents per diluted share an 11% increase compared to 18 cents, an adjusted diluted EPS in the prior year.
Adjusted EBITDA was $20.9 million, an increase of 10% year over year for a margin of 14.6%.
Moving to the cash flow statement, we had an incredibly powerful quarter for cash flow generation. The combination of increase net income and a $37 million decrease in our inventory balances enabled us to generate $53.8 million in cash from operations and $53 million in free cash flow for the second quarter of 2020.
In the 12 month since revolve it's been a public company, we have generated more than $80 million of free cash flow.
The strong cash flow generation significantly strengthened our balance sheet and liquidity cash and cash equivalents as of June Thirtyth 2020 were $151 million, an increase of $47 million during the second quarter.
As of the end of Q2 $24 million remained drawn on our revolving credit line a decrease from the $30 million balance as of March 31st 2020.
We ended the quarter was $65 million in inventory a decrease of 37% year over year by comparison, our net sales decreased year over year by only 12%, which highlights the inventory turns improved significantly year over year.
As Mike mentioned inventory turns improved approximately 30% year over year in our core revolve segment.
Well the cost of carrying inventory is low for us and we have the ability to hold merchandise for multiple season, we also targeted lower inventory and higher turns as we entered 2020.
This initiative became even more important as we navigated through the impacts of Coca 19.
With sales performance that has been better than we initially expected we actively shifted our efforts to reinvest more aggressively into inventory purchases to support the improved trends in consumer demand.
These investments are over indexed on third party inventory and we are very focused on the categories that have performed well during the covet 19 period and those categories. We expect will drive sales in the back half of the here.
Now, let me talk about business trend since the second quarter ended on June Thirtyth.
As Mike mentioned and consistent with the month of June net sales in July and August to date are in positive territory on a year over year basis.
Average order value in July, but slightly higher than the second quarter, reflecting the improvement in the dress category, but was still well below prior year levels.
The return rate is still well below the pre covered level, but has increased from the low point earlier in the second quarter as we're seeing a slight mix shift back to full price and as the dress category has performed sequentially better.
We believe we're in a much better place than we were just three months ago as illustrated by our returned to growth significantly stronger balance sheet and improved inventory dynamics. Nonetheless, the duration and extended the pandemic remains highly uncertain and the economic impact could last much longer.
So given the fluid environment, we're still not comfortable offering traditional guidance. However, I will provide some additional information to helping your modeling.
Net sales.
As we mentioned we're operating in a very fluid and uncertain time with a number of factors that play that can impact consumer demand and our topline results.
Well net sales improved sequentially on a monthly basis through Q2. It is important to note. The last several weeks of July and into August have been in the same general zone with low single digit positive growth year over year.
Touch and based only on what we know today I would not expect significant improvement from our current levels in the near term growth.
Gross margin.
The Q2 performance was better than our initial expectations, but we continue to believe gross margin will be challenged through the balance of the year and lower on a year over year basis, while gross margins have improved from the peak of the of the 19 uncertainty earlier in the second quarter and we do expect promotional pressure to abate, we're still operating in an uncertain environment and historically.
Our gross margins in the back half of each year are typically lower than the first half.
For our selling and distribution and fulfillment cost line items as pleased as I am with our fulfillment and selling and distribution cost efficiency in Q2 for modeling purposes, I would not guide inland to expect this very high level of efficiency on the line items going forward.
These variable cost line items were largely fluctuate with net sales in the near term. We do expect continued efficiency gains over the next several years, particularly in the fulfillment line item as we go into our capacity and continue to realize the benefits of automation.
We also continue to face ongoing external headwinds and will be exposed to additional cost pressures as the product mix and return rates continue to evolve in these uncertain time.
Marketing, we will continue to manage our marketing investment efficiently.
The opportunity to activate large scale in person event as we have done in prior years, we expect marketing as a percentage of net sales to continue to be lower year over year and the second half of 2020.
Note that the magnitude of the year over year decline in marketing spend in the second half will be much smaller than it was in the second quarter. Because historically Q2 has the highest amount of brand marketing investment by a wide margin.
General and administrative.
As mentioned, we realized leverage on this line item in the second quarter with the aggressive cost reductions we made.
As we unwound most of those cost reductions over the course of June July and August we would expect to see a sequential increase in gene a in the third and fourth quarters when compared to the second quarter.
Note that we don't expect to return to the pre covered run rate in the current here as we did have a number of layoff and made other non headcount cost reduction that we'll continue to benefit cost structure and the current year.
Finally, we don't expect significant movement in our diluted share count or capital expenditures from what we communicated last quarter now I'll turn it back over to Michael to close out our prepared remarks.
Thanks Jesse.
Coping 19 has been incredibly challenging machu to our resiliency an entrepreneurial spirit.
Team has responded very quickly by protecting our employees and our balance sheet well at the same time launching innovative new ways to engage with the consumer and deepen our customer relationships.
Seeing our team executes still well, while further expanding our growth potential at a time when many of the street companies are just trying to survive, we even more confident in our future.
We believe our agile team strong brand differentiated technology deep customer connection coupled with our balance sheet strength and flexible business model positions us to drive over the long term.
That.
And over to the operator for questions.
As a reminder to ask a question, we'll need to press star one on your telephone.
To withdraw your question press, the pound or hash key please limit yourself to two questions to allow time for everyone.
Our first question will come from Michael Binetti with credits your line is open.
Hey, guys congrats on a really nice quarter in a tough backdrop there.
So I want to asked about the about the inventories and perhaps if this is the new normal do you.
Do you see anything in the business model that unless you think you couldn't you can run it at these higher inventory turns I know you said this is the highest spending a few years and just over three times I know we've talked a few times about why the.
The returns for digital model driven by the data that you guys have isn't doesn't turn inventory faster I think your your language on that has been.
We don't have.
The urgency of having to turn shelf space as quickly and we can we can let inventory that we think is good sit there for a while in some of the Dcs, but I wonder if anything you've seen as you sped up the inventories and moves through inventory really fast pace here.
Just told you that you could you could operate this it faster turns going forward.
Definitely mechanical is here.
I think both sides of that argument or actually true. So we view.
Lower earning cost of turning inventory, which means we can turn slower we without it impacting.
In profits is the same same way as a traditional retailers, but it's also very true that we believe for inventory at a much faster rate with fairly minimal impact too.
Revenue in demand.
So it's all about balancing those two factors and I think the nice aspect of our business models that we do have the flexibility to running both ways and of course, we prefer to be closer to the zone. We're in right now versus the zone or in a couple of quarters. We go up but it's about strike a balance between those two includes.
Our next question comes from Mark Altschwager with Baird. Your line is open.
Good afternoon, and nice job executing through this environment.
In terms of the quarter to date trends, you're seeing wanted to dig into that a little bit further just to understand some of the drivers I guess any shifts from a category perspective versus what you've seen in recent months, just maybe help us understand the recovery in dresses versus the incremental demand some of these emerging category.
Ladies and then secondarily just with the leaner inventory has the leader inventory been a limiting factor in the quarter to date trends so far thanks.
Yes, Hi, Michael Thank you.
What's the category, Sheffield and dependent hit lifestyle shifted.
Near overnight shipping certain categories, where of course going out directive and whatnot will hit really hard it.
And now they're active around a lot of the category that we've already mentioned performed quite well as we've seen.
The consumer come back we've seen continued strength in those.
Loan category. We've also seen a rebound is going to the more going out for that kind of bumping balanced fourth whether newly developed categories are continuing to perform quite quite well and continue to have our highest turn.
The the core category coming back in.
Our next question comes from nickel with BMO capital markets. Your line is open.
Great. Thanks, Good afternoon, everyone I Hope you and your families are doing well through all this.
Congrats on the meaningfully better returns that was great see can you elaborate on your view, whether that's a new norm or onetime academic side effects of just talked about it.
How was the return cadence over the quarter and really encouraging.
Sales growth.
Our gross.
Thanks.
It definitely.
So with regards to the return rates, we believe impacts there are primarily due to the shifts in consumer behavior that have happened with dependent.
And then we have started to see the interim rate come back off its still far below historical norms, but we have some start to come back up as consumer behavior starts to return closer to the norm as far as.
What extent any of that you're continues for the long term I think it's too early to say, there's certainly some aspects.
Can you over the longer run we're very hopeful that are shifting product mix can represent an expanded wallet share. So in addition to.
Performing really well in high return in categories like dresses were hopeful that longer term that our gains in beauty and some other categories also become drivers personnel that had an impact on return rate. There's a few other things we've done on the return rate side as well, but I think high level, it's too early sir.
And with regards to trends on net sales and gross sales.
As you might not in with net sales in the low single digits, but mean lower return rates year over year that means our gross sales are still meaningfully lower year over year, we believe that those consumer purchasing behavior much more purposeful in terms of taking a purchase that they have confidence that they're going to keep.
But we have seen as return rates creep back up a little bit some improving sales numbers.
Great. Thanks, much that's left for the rest of year.
Thank you.
Our next question comes from Kimberly Greenberger with Morgan Stanley. Your line is open.
Thanks, so much sorry about that.
I wanted to follow up on.
Yes.
Right.
Yes.
Uh huh.
Art.
Great.
Sure.
Yes.
Right.
Yes.
Okay.
Yes, so in terms of inventory composition, we feel much better about it certainly than we did entering.
Into Q2, I think there is some level of opportunity cost in terms of our popular categories that were chasing.
And there's been a shift between third party Nonbranded as we noted we feel like we're positioned.
Well and we think theres opportunities in the back half the year, if we can choose harder into some of those talks or categories.
And then Jesse just a follow up on the marketing costs is there any sort of magnitude.
But you can guide Q.
Second half reduction and are you seeing any sort of change and payment behavior. Among consumers are they utilizing after pay for example, little bit more or I I noticed you said there were some savings on the credits or the transaction costs I just wanted to follow up on what the driver.
There thanks.
Yeah sure. Thanks Kimberly.
QQ, we're comping, our peak marketing period in the air so into Q of 19 it was.
14.6%, having 14 and half percent of net sales.
Much lower this year, given where we're at and then it starts to go down in the back half of the areas. We don't have the magnitude of in person event.
In the prior years Q3 is.
Relatively high as compared to Q4 with revolve summer so you'll see some savings there going forward, but the magnitude into h. will be lower than that of.
We signed Q2.
It's keeping that in mind for modeling and then on the customer payment types, we have seen a shift overtime with the advent of the the installment players out there so a shift from the traditional visa Mastercard amex to the installment payments.
Which do carry higher fees. So we've seen some pressure on those costs over the last call it year to 18 months.
But there is a benefit in the quarter not only from Comping that but also from the returns the lower return rate.
So we saw call it a 30 basis point improvement there on.
On credit card fees and the way customers are purchasing.
Our next question comes from Ed Yruma with Keybanc capital markets. Your line is open.
Hi, This is on abbey on for AD I had two questions on there how do you expect that promotional environment to change in the back half I know you said you also see gross margin pressure, but do you think promotions will be less deep or are there will be less item on sale.
And then second quickly do you think you'll developing brand and.
Good.
Yes. This is Jeff you, maybe I'll take the first part of that and talk about margins and promotional pressure and then and then pass it on.
We do you expect to see a year over year compression in gross margin continuing to into the second half that as we mentioned to less so than the second quarter and just to backup and remind we are we're comping a record high margin into Q of 19, So thats, where we'll see that.
Compression subside a bit into h. still year over year decline.
And then the promotional pressure I think it's an extension of what we've seen already in the second quarter, where that promotional pressure wasn't as great. As we first anticipated early in the coveted pandemic.
And as we get as Weve cycled through some of the markdown inventory and start to get the new inventory in the in the both performing categories. We feel good about that full price mix coming back slightly.
And I think that was.
Oh, and I guess just focused on on the revolver segment, we do see increasing promotional pressure in that luxury segment of forward in that.
We expect to continue in the near term.
And with regard to.
Owned brand in the to get something in the mix for the long term I think there's a lot of other higher priority things on.
Particularly in the of health segment that we'll continue to develop and make investments in but owned that long term is definitely an opportunity for us we're carrying a lot of emerging brands and a lot of excitement I think thats exactly what we've been successful manufacturing all on the account.
Inciting opportunity there.
Our next question comes from Oliver Chen with Cowen Your line is open.
Hi, Thank you regarding average order value how do you see that trending in the back half and as it relates to some of the category shifts that you're seeing now and then second follow up questions. Just the changes that you're witnessing in executing on in marketing could you speak to which ones will will stick for the long term and your own.
On a on the longer term, how marketing as a percentage of sales may change and evolve on that as you engage in what seems like really successful.
Online customer acquisition techniques as well thanks.
Yes, I'll take that this is just the thanks I'll take the first part of that and then pass it on the Michael for the longer term marketing comment.
That average order value significant decline in in the current quarter that 26%.
We have seen it ticked up slightly in July and August as the mix has shifted back.
Not only to the largest category dresses at the higher average selling price, but also a slight uptick in the full price sales again as we cycle through some of that markdown inventory so we'd expect to see.
Ill call it a slight increase in average order value as we exit.
On a sequential basis still lower year over year.
But but we do see some improvement there on a sequential basis.
Okay, and just on that topic with gross margins and markdowns next quarter will markdowns be less or more than last year next quarter given that dynamic.
You know probably.
Lightly.
Slightly more on the markdown side year over year.
But even better on a sequential basis again, as we cycle to that Q2 inventory.
Thank you.
And with regards to the marketing mixing that were very very thrilled with.
The team has been able to do in terms of expanding our playbook. These are things that are of course driving shirt or short term customer acquisition, but are also long term kind of era arrows in our equipment where of course looking forward to the world opening up a bit for our consumers will be out in about travel.
And whatnot and when that that's an important part of their lifestyle. We will subsequently return that it will be a hybrid which is very exciting when it comes to the overall brand marketing and particularly it really will be contingent ahead of the health of the overall business of course, we're very conservative at the moment, but as opportunity comes the consumer.
The macroeconomic environment improves we will definitely be ramping up.
As far as where it was in relation to historic tightened its really kind of contingent to see what the markets like what our businesses like in such that would be a lot effect that would be that.
Thank you great quarter.
Thank you. Thank you.
Our next question comes from Justin.
Bank of America Merrill Lynch. Your line is open.
Hi, Thanks for taking my question this is Joanna.
So I have to.
Q1.
Can you comment.
Trend.
Right.
Yes.
Second quarter.
Either.
The trend month over month pandemic started.
Then my second question.
Getting away from third party.
I'm sorry.
Okay.
Third party Brendan.
Do you see that Nick.
The goal of that Nick for the second half plenty plenty.
Revolving.
Yes sure. This is Jesse again on the full price still meaningfully lower than the prior year and that's important to call out again, we're comping a record high growth margin and that was really driven by both owned brand mix as well as full price sales.
Which we're really high in the prior year, so meaningfully lower this year in the second quarter that said, we did see slight improvement as trends picked up and as we assorted into the new inventory.
Into July and August, but I'll emphasize that slight and still being year over year.
Flat to down on a full price.
Full price markdown ratios, where there's more markdowns this year than prior year.
And then on the owned brand mix, we had commented in the prepared remarks that own brand is approximately.
Nine points lower year on year than we were in the prior year. So again stepping back to the prior year, we are ramping aggressively on the owned brand front.
And then earlier this year, we had communicated the recalibration of that owned brand platform to reassert into different categories and really refine.
That platform, so with that and then the added pressure of coded 19, we took that down significantly not led to that nine point reduction.
We expect that year over year decline in owned brand mix to be greater in the second half than it was in the second quarter again, as we cycle through that inventory and just start to redesign and resort into the back half of this year in early 2021.
Great. Thanks, and congrats on the results again.
Thank you. Thank you.
Our next question comes from Ralph Schackart with William Blair. Your line is open.
Good afternoon, and maybe just on the customers in terms of newer cohorts and comparing them to your older cohorts any color you could add on spending patterns, how they're behaving and now are you observing any newer customers coming in for example, purchasing loungewear and may be.
If you could highlight your incremental opportunities for you to advertise newer categories for them such as dresses going forward. Thanks.
Yes, definitely yes, we think thats one of the most exciting aspects of these newer categories, you're not just expanding wallet share with existing customers that they are agreeing avenue for new customer acquisition.
The beauty side. So we saw that that category engine was very beneficial on the new customer acquisition side, which I think is why you saw.
Some pretty decent new customer acquisition numbers, given the environment and given that really sharp reduction in marketing spend that we had during the quarter.
Okay, great. Thank you.
Our next question comes from.
So with Guggenheim Your line is open.
Hey, guys.
Good afternoon, just a couple of questions for me. The first one is can you comment a little more on the the international sales performance.
In the second quarter, maybe quarter to date I don't know if you could talk month to month.
And even quarter to date would be helpful and second question.
He is on shipping costs, there has been a lot of discussion around surcharges heading into the back half of the year just wondered if is that something you guys expect.
In the coming quarters. Thanks.
Definitely so on the international side in Q2.
I think there versus the domestic.
Where.
International will lose was growing caught moderately faster than the domestic market. We've seen that continue to Q3 with maybe a little bit of acceleration on the international side, but but it's still early.
And.
And then with regards to shipping cost surcharges.
There is potential risk there that's something we're actively working on and one with behind the scenes and still TBD how that plays out.
But I think working in our favor is that we're not a very seasonal shipper, which is very good for the carriers, who normally slammed in Q4 and.
In contrast, most others Q4 is not a previous quarters.
Yes.
Great.
Our next question comes from Ross Sandler with Barclays. Your line is open.
Hey, This is Tom is on for Ross what are the customer acquisition trend.
Like into Q and in Threeq, you how might.
Talk battery pack, the Infospace and your business.
Also any update on Facebook ads performance. The company has been flagging E commerce as a strong area. Thanks.
Yes, so what's your assessment acquisition trends in Q2 as I mean, given the.
Sharp reduction in marketing spend we're very happy with how that's trended Matt said as.
We have seen starting to see some some increases in contractor costs as macro market has recovered somewhat there's been a little bit of a contraction there but in general very healthy results with regard to tick tock.
You know tick tock are still very nascent marketing channel for us. So it's an area where we do have.
This amount of activity, but a very nascent in terms of delivering results. So we don't expect any.
Meaningful impact.
Whatever ends up happening with Smith with tick tock.
And in fact.
We're particularly excited about as with Instagram reels, the tick tock competitor since they've launched that we've had some really meaningful.
Traction there actually I believe over a million dollars.
Just a couple of days since the two mobilized on Instagram real so if anything you might be an opportunity that opens up depending on.
It goes on.
Then the third part of your question.
Hi, trouble hearing you can you restate it.
Just any updates on the Facebook outperformance as they were flagging ecommerce as a strong area I was just the last summer.
Yes, so Facebook ad performance.
It's been similar to the overall market what we've seen.
Cheaper traffic earlier in the quarter, and then increases throughout the quarter as the macro environment recovered.
We have time for one more question. Our final question comes from Susan Anderson with B. Riley FBR. Your line is open.
Hi, good evening, Thanks of any man and nice job on managing the quarter I guess on the supply chain friendly I was curious if you're seeing any issues such as the late deliveries for the back half and then also are you seeing lower product cost for the back half and then just a quick follow up on the third party brand it sounds like you're picking up quite a homerun either.
At the same part.
[music].
Yeah.
Sure Yeah, Hi, Susan Thanks, This is Jesse.
You know in regards to the supply chain, we did see an initial impact in some delayed deliveries, particularly for fall.
But since then it's been relatively stable theres, probably a little bit of lack of supply just given that nobody's at 100% right now that but not a significant impact from our perspective, and then product cost not.
Not a meaningful decrease in product cost in the second half either you know there is.
Breath in particular, a shift in the category mix as we sort into those categories that are performing well during the cold in 10 minutes. So there is definitely a product cost component there, but not on a like for like basis.
This concludes our allotted time for the Q and a session I will now turn the call back over to management for closing remarks.
Well, it's definitely a extremely challenging quarter.
But again really really out of.
The team executed there's a lot of sacrifice.
On a personal level a lot of sacrifice with working from home and really the rapid drop ship behind the we're incredible the operational founded incredible job to maintain customer service levels, which unlike mentioned extremely extremely important I think these challenging times, we feel very confident about we'll continue to acquiring new customers BP they relate.
As it with our existing customers.
And with the competitive dynamic we also feel that exiting these challenging times, we positioned incredibly incredibly well.
Of course, it's not one for a lot of people out there, but yes, similar excel positioning in the last day downturn.
Really view this as.
Brush product clearing out with some of the growth to really.
Right and pave the way for what.
So challenging times in great great work for the team the features of the incredible Im excited for that.
This concludes today's conference call you may now disconnect.
[music].