Q2 2021 Revolve Group Inc Earnings Call
Good afternoon. My name is RJ and I will be your conference operator today at this time I would like to welcome everyone to revolve second quarter trying to 'twenty 1 earnings conference call.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.
I would like to ask a question. During this time simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question press the pound key.
At this time I'd like to turn the conference over to Erik Randerson, Vice President of Investor Relations at revolve. Thank you you may begin.
Good afternoon, everyone and thanks for joining us to discuss revolve second quarter 2021 results before we begin I'd like to mention that we have posted a presentation containing Q2 financial highlights to our Investor Relations website located at investors revolve Dot Com I would also like to remind you that this conference call will include forward looking statements. These statements.
<unk> include our current expectation regarding the continued impact of the COVID-19 pandemic on our business operations and financial results and our outlook for operating expenses for 2021. These statements are subject to various risks uncertainties and assumptions that could cause our actual results to differ materially from these statements, including the risk mentioned in this afternoon's press release as well.
Well as other risks and uncertainties disclosed under the caption risk factors and elsewhere in our filings with Securities and Exchange Commission, including without limitation. Our annual report on form 10-K for the year ended December 31, 2020, and our subsequent quarterly reports on form 10-Q, all of which can be found on our website at investors not revolve dotcom, 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, adjusted EBITDA margin 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 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 there.
There are limitations on 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 care, Nikolas, and Michael Mente, as well as Jesse Timberlands our CFO.
Following our prepared remarks, we'll open the call for your questions with that I'll turn it over to Mike.
Good afternoon, everybody. We're excited to update you today on the momentum in our business that has been building since the last time. We spoke there are 3 key takeaways that I want everyone to walk away with today.
First we delivered a record top and Bottomline results from the second quarter with accelerating topline growth compared to 2019.
The very strong revenue growth trajectory discussed on our Q1 investor call last quarter improved in May and June and as continued strong through July.
We also meaningfully outpaced the record profitability, we have delivered in the second quarter of 2020 at a time when revolve uniquely reported very profitable results during the depths of Covid.
In fact, our net income and earnings per share more than doubled year over year on top of record Q2 performance from a year ago.
A powerful driver of our exceptional top line growth in Q2 was the further acceleration of growth was on a forward sector, which grew more than 120% on a 2 year growth basis versus the second quarter of 2019.
Clear and measurable catalyst hit forward was the launch of our forward loyalty program early in the second quarter that is fully integrated with revolve.
The amount of forward customers coming directly from our existing revolve customer base accelerated almost overnight.
We launched the Ford loyalty program contributing strongly to our forward segment growth from the second quarter.
Michael will talk more about our cross marketing efforts between the revolve and forward segments, where the percentage of revolve active customers, who also shop on forward is less than 5%.
Third is the world has started to reopen we see our core customer coming back to us in a powerful way in the second quarter, we generated record growth in new customers and unprecedented numbers of reactivated customers, who haven't purchased from us on several quarters, while social events were on pause.
As a result, we delivered our strongest quarterly sequential growth in active customers in nearly 2 years.
With that as an introduction I will provide an overview of our second quarter results and recent developments.
The strong growth in new customers, the return of our existing customers and our ability to engage with her through our marketing and merchandising resulted in record net sales of $229 million in the second quarter and increased 60% year over year and 41% on a 2 year growth basis compared to the second quarter of 2019.
This is 11 points higher than the 30% to your growth we reported in the first quarter of 2021.
Our profitability and cash flow in the second quarter were also outstanding net income was a record 32 million or <unk> 42 per diluted share.
More than 100% on a year over year basis versus our prior record Q2 results from a year ago.
On a trailing 12 month basis, we have now generated more than 100 million in adjusted EBITDA during some really challenging times over the past 4 quarters.
That's higher than the combined adjusted EBITDA, we generated in the 4 years, leading up to our IPO in 2019. These.
These results demonstrate how we have leveraged our scalable technology and operating platforms to drive higher margins overtime.
And the profitability is converting to substantial cash flow for the first 6 months of 2021, we generated $65 million in free cash flow. This significantly strengthened our balance sheet and positions us to invest in future growth opportunities.
Turning to our people and operations with the very strong growth in net sales in the second quarter, we have shifted into aggressive hiring mode. We.
We are bringing on talent not only to support consumer demand and exciting growth opportunities, but also to ensure we continue to serve our customer incredibly well.
I would like to acknowledge and express my sincere thanks to our customer facing teams in areas, such as fulfillment and customer service for your dedication and perseverance in handling such a strong uptick in customer orders in recent months, while we scaled up the teams to add capacity.
From a financial standpoint, it is gratifying to see evidence of scale efficiencies come through on the income statement, resulting from a higher demand.
For instance, we delivered leverage on fulfillment costs as a result of automation efficiencies as well as our increased scale and on general and administrative expense, where the cost share more fixed in nature and are spread out across a much larger base of revenue. These.
These operational efficiencies were achieved despite an increasing return rate year over year and were key contributors to our record profitability in the second quarter.
We also continued to manage our inventory very well.
Is best illustrated by our gross margin expansion heated by a record mix of net sales at full price and shallower markdowns in the second quarter, our clean inventory position at quarter end with low markdown levels further illustrates the competitive advantages our data driven merchandising that helps us to quickly adjust our assortment to align with the fast moving shifts in.
Humor preference.
We increased our activity on the marketing front this quarter and we are planning to significantly increase our activity in the coming quarters, we will be investing more than ever in what we believe are some truly exciting initiatives to be enviable build in the upcoming weeks.
We believe this is the right time to invest and that these investments will help us to further capitalize on our current business momentum drive incremental consumer awareness and customer activity and further elevate the brand for the next phase of growth shifting gears. Our strong results have not come without challenge and there remains uncertainty in the macro environment.
We are closely monitoring the recent rise in Covid cases around the world and the varying levels of restrictions that are being reinstated including here in Los Angeles recently.
This serves as a reminder, that we are not out of the woods yet.
Relatedly the industry wide supply chain challenges had a progressively larger.
Be it manageable impact in the last few months.
This came through in a decrease in the percentage of on time deliveries from our suppliers and and an increase in our inbound shipping rates.
And finally, the potential challenges presented by the recent Apple iOS changes that I mentioned last quarter started to become evident late in the quarter. So it's an area, we'll continue to focus on with our advertising partners.
These headwinds are not unique to us and affect all companies. We believe revolve is well positioned to continue to effectively navigate through the many challenges presented in this very dynamic environment.
I'll wrap up with a discussion of regional performance I'm excited by the strong growth in the U S market, which increased 59% year over year in the second quarter and continues to be strong months. After the most recent government stimulus payments.
Meanwhile, our international business continues to perform very well and represents an exciting opportunity for future growth International net sales grew 63% in the second quarter of 2021 relative to the prior year.
Driven by strength in all major regions in illustrating how well our brand is translating across cultures and geographies.
Drilling into some specifics our Q2 results illustrate how our international investments can drive growth and customer satisfaction.
For instance, Canada was again a standout contributor for the revolve segment. After a recent launch of all inclusive pricing that further raise the bar on our Canadian customer experience.
Building on this success in June we introduced all inclusive pricing on our forward segment per Canadian customers. It's early yet the improved service offering has driven a powerful improvement in the growth trajectory at forward off of a small base.
Next up we plan to launch all inclusive pricing on board in the UK another of our largest international markets, where we see a meaningful opportunity to expand our luxury offering before.
Before I turn it over to Michael I will just reiterate that while there is still some uncertainty out there our results demonstrates the where you are continuing to navigate the challenges very effectively moving forward. We are focused on actively investing in our growth opportunity and we are excited for the path that lies ahead.
Thanks, Mike we are more excited than ever about the future of the revolve and solid brand and our ability to continue to capture consumer mindshare or wallet share over the long term.
Our ability to react to the X gene shifts in demand and consumer preferences over the past 18 months as channel scalable on a platform and how agile we can be.
Last year when traveling on social activities were halted overnight, we were able to react very quickly with merchandise and marketing that connected with their new stat on the lifestyle, our team and systems enabled us to manage through a very turbulent time, staying connected with our customer and delivering record profitability and cash flow in 2020.
More recently, we were able to get ahead of a significant increase in demand and a shift in consumer preference as economies open up as a customer started traveling and socializing and price again, we quickly shifted our product mix and reactivated our powerful interests.
Bandwagon on strategy.
Outlets are going out on the town and special events on once again I'm on this thousand highest demand dresses and skirts returned to outstanding year over year growth in the second quarter, even while we continue to drive growth in newer categories.
Mike mentioned, our loyal customers are coming back to us for its core offerings to look their best as they get out again on.
Our ability to get ahead of the increased demand for going out categories and have the right product for our customer at the right time was a key driver of the us.
From a bulk segments acceleration in net sales from the second quarter of 2021.
Combined with our successful management of inventory, we achieved a record percentage of net sales at full price in the second quarter.
The strength of our operational execution inventory management, and merchandize selection or leverage throughout the business and were very evident in the success of forward on luxury segment that delivered Q2 results that was nothing short of incredible.
While momentum has been building it for some time the second quarter was a breakout moment net sales increased 151% year over year increase increased on June 22% on a 2 year growth basis compared to the second quarter of 2019.
Ford also delivered record gross margins in the second quarter.
The strong results underscore forwards differentiated position in the market as a preferred destination for the next generation consumers seeking curated luxury offerings as another signal of our momentum next week. We are excited to launch another coveted luxury brand on the flow at site.
The womens collection from Tom Ford, even more compelling is the power of the combined revolve and forward guidance from a customer and suddenly perspective, the tube graduate book synergistic and complementary.
<unk> has historically been focused on the discovery of channel driven ready to wear styles.
<unk> has been more heavily weighted towards the statement pieces in her wardrobe.
Susan handbags categories that we know the revolve customer loves and spends on.
We have only recently started to invest to fully leverage our broader platform and customer base to crosswalk at revolve and forward offerings to maximize our long term market channel.
Called out on last quarter's Investor call. We had just introduced on a forward loyalty program that is fully integrated with our book loss loyalty program.
For the first time ever we are now directly rewarding and incentivizing customers to cross shop on revolve and forward results have far exceeded our expectations in the early going.
We can see on the numbers that the launch of the forward loyalty program with a meaningful contributor to the forward segment growth in the second quarter. After launching the forward loyalty program. We saw a significant increase in the percentage of evolves loyalty shop with some cross shops forward Encouragingly. This rate of overlap continued to increase throughout the second quarter, we estimate.
Is that the increased versus based on levels alone generated more than 10 per setups forward net sales in the U S and the <unk>.
Second quarter and contributed more than 30 points to our year over year growth for that segment U S results.
More importantly, we believe we're just getting started on percentage of all back to customers also shop on for what remains below 5%. Despite the highly complementary merchandise I described.
And we have yet to introduce any loyalty programs outside of the U S, which has an exciting future opportunity we see the global ecommerce market for luxury is offering significant growth potential and we're excited to continue on an investment in solar to capture this opportunity we.
We are also increasing the investment in a powerful brand marketing initiatives the.
The brand marketing team has been agile and responsive in this very dynamic environment delivering provide inspiration to our customers at the right time. This increased level of activity on the aspirational contact reflective of a car lifestyle further supported by the appropriate merchandising mix was a key driver in the record new customer additions and the reactivation of our strong existing customer base.
That's where the depth of the Covid pandemic last year when it became clear that our customers are ready to travel again, we captured their attention by hosting exciting events and aspirational locations, such as Bermuda to them and that multi cause these events stimulated her desire for vacation items.
Our impactful social media content contributing to the high level of customer engagement with our online shop for vacation items in Q2.
Continuing the momentum of the increased level of investment in the second quarter to successfully capture consumer demand. We are aggressively gearing up for a much larger marketing playbook in the third quarter that will be headlined by some major brand marketing investments I'm very excited about what's in store for us in the coming weeks with events and campaigns that will be unlike anything we've ever done so stay tuned.
I'll wrap up with an update on on beds. Another contributor to our strong results for the quarter.
Call that we are now a few quarters until our reinvestment and on balance after a reset in early 2020, followed with the onset of COVID-19.
Early results of our rebuild efforts are very encouraging.
On consumer demand for our own bench styles led to a high percentage of sales at full price and exceptional gross margins for on balance on that second quarter also exciting is cost style based metrics within owned brands were near record levels in the second quarter net.
We continue to execute well and deliver on these core metrics as we scale up the number of styles. We offer the own brand business has the potential to deliver significant upside to our consolidated gross margin over the long term, especially given the recent strength on our overall gross margin profile on a much lower mix of owned brands when compared to historical periods.
In addition to the shot on brand metrics. The margin profile. We are very excited about the continued expansion of our own brand capabilities on the assortment in the very near term we plan to unveil an exciting collection that brings us into entirely new zone for our offerings. We will continue to invest in our own brands throughout 2021 and beyond to maximize our long term opportunity for these exclude.
We have brands that remain core to our strategy.
All told the recent momentum on cost of business has been incredible with acquisition the market as adjusted premium lifestyle brand and our deep connection with today's consumer combined with our strong flow centered on data do you have on decision, making we have been able to deliver strong results during even the most challenging times, we are primed and ready to drive the next phase of growth.
I'll turn it over to Jesse for review of the financials.
Thanks, Michael and Hello, everyone. We are very pleased with our results for the second quarter and first half of the year. We believe we are well positioned to capitalize on its reopening opportunity, but more importantly for continued strong growth over the long term with that I'll start by recapping the second quarter net.
Net sales were $229 million.
A year over year increase of 60% and reflect a 2 year growth rate of 41% compared to the second quarter of 2019.
2 year growth rate is 11 points higher than the 30% 2 year growth rate that we reported for the first quarter of 2021.
By territory, both the U S and international markets contributed to the strong topline results with domestic and international net sales growth of 59% and 63% year over year, respectively.
By segment, we bought segment net sales increased 49% and forward segment net sales increased by an incredible 151% year over year in the second quarter.
A highlight of Q2 with accelerating growth in active customers, which turned positive year on year, increasing to 1.554 million and this is a 5% increase from just the first quarter of 2021.
Our customers placed 1.8 million orders in the quarter, an increase of 52% year over year, the highest growth rate in more than 5 years importantly, strong increase in orders was driven by a quarterly record number of new customers and equally exciting the reactivation of tens of thousands of customers who had been inactive throughout 2020.
The depth of COVID-19.
Average order value or <unk> was $255, an increase of 25% year over year, and essentially flat with the first quarter <unk>.
Key drivers of the growth in <unk> include a higher mix of net sales at full price shallower markdowns a.
The shift in mix to higher price point merchandize, such as dresses and a higher mix of forward net sales.
These tailwind to <unk>, which is a gross revenue measured prior to any product returns were partially offset by a decrease in average units per order year over year.
Moving to gross profit consolidated gross margin was 55, 6% an increase of 517 basis points year over year.
Strong margin expansion reflects healthy inventory on consumer demand dynamics across both of our segments led to a record percentage of net sales at full price in the second quarter and a significant decrease in the depths of markdowns.
These positive contributors to gross margin were partially offset by a decrease in the mix of owned brands as a percentage of revolve segment net sales.
Consistent with the outlook, we shared on our recent Investor Conference call.
Moving on to operating expenses consistent with our prior commentary marketing expense as a percentage of net sales increased to above our historical trend line on the second quarter as we began to invest in the exciting reopening opportunity.
We intend to even more aggressively ramp our marketing investment for the balance of the year for both revolve and forward capitalize on this opportune moment in time for a brand selling and distribution as a percentage of net sales increased year over year and on a sequential basis consistent with our prior commentary to expect deleverage with a normalizing product mix, leading to a year over year increase in.
Return rate in the second quarter of 2021.
The other 2 line items fulfillment and G&A expense leveraged year over year, resulting from automation efficiencies in our fulfillment center as well as capacity utilization and scale efficiencies, resulting from our 60% growth in net sales during the quarter.
The strong topline results gross margin expansion and our operating discipline resulted in record net income $32 million.
Our 42 per diluted share for the quarter more than doubling the 20th of diluted EPS in the prior year.
Adjusting for lower than expected tax rate in 2021, our EPS would have increased 65% year over year.
We reported adjusted EBITDA of $35 million on a record high and a year over year increase of 70% adjusted EBITDA margin expanded to 15, 5% from 14, 6% a year ago, an increase of 86 basis points.
Moving to the balance sheet and cash flow statement during.
During the second quarter, we continued to invest in inventory to position our assortment to support very strong consumer demand as a result inventory increased by $18 million during the quarter to $119 million, our average inventory balance for the second quarter of 2021 increased 32% year over year, well below the 60% year over year.
The increase in net sales illustrating our increased inventory efficiencies.
Even with the investment in inventory, we generated $33 million on free cash flow in the second quarter from $65 million for the first 6 months of 2021, an increase of 8% year over year for the 6 month period. Despite a very strong comparison in the prior year.
Cash and cash equivalents net of borrowings at June 30th from $220 million, an increase of $93 million or 73% from $127 million as of June 32020, and our balance sheet remains debt free.
Now looking ahead, we remain very cautious as there is still a level of uncertainty out there with.
With the recent increase in positive Covid cases varying levels of restrictions and supply chain issues. We are not yet fully through the challenges presented by COVID-19.
And while we have successfully managed through similar challenges in the past we are not immune to these macro headwinds.
Said with a very strong trends that began in March and April are they are accelerating in the second quarter eating to 41% year over year sales growth on the first half of 2021, our net sales growth for the full year 2021 will very likely land well north of our historical target range of 20% growth.
Looking beyond 2021, we remain confident that we can continue to deliver net sales growth in excess of our long term growth target of 20% just as we were prior to the onset of COVID-19.
Now let me update you on some recent trends on the business into the second quarter ended and provide some direction on our cost structure for the balance of the year to help on your modeling of the business for 2021.
Starting from the top strong topline trends, we experienced throughout the second quarter continued through to the month of July with growth of more than 40% on both a year over year and 2 year basis compared to July of 2019.
We are very excited about the recent topline trends, but again, we need to acknowledge the uncertain environment related to COVID-19 variance potentially resulting in increased restrictions like we have recently experienced in Los Angeles.
Fly chain challenges and other potential headwind.
Shifting to gross margin we are extremely pleased with our gross margin performance driven by the record mix of net sales at full price in the second quarter.
We rebuild our inventory. However, we continue to expect a full price mix to begin to move closer to historical norms overtime.
Nonetheless, given the strong first half results.
Now expect gross margin to come in around 54% for the full year of 2021.
Which is at the high end of the prior gross margin outlook at 53, 5% to 54% provided last quarter.
<unk>, a gross margin expansion of 140 basis points versus 2020 and expansion of 40 basis points versus 2019, despite owned brand penetration being significantly lower today than it was in 2019.
This speaks to the longer term opportunity for gross margin as the owned brand mix returns to year over year growth in 2022 and beyond.
Fulfillment with the very efficient fulfillment performance in the second quarter, we now expect fulfillment cost to be approximately 2.5% of net sales for the year.
Which is 40 basis points lower than our previous outlook and 70 basis points lower.
Film, representing 3.2% of net sales in 2019 really great work by the team and continuing to deliver efficiencies in this area.
For the full year of 2021, we now expect selling and distribution costs to be slightly higher than the 14, 6% of net sales we achieved for the full year 2019.
It implies a sequential increase in the third quarter driven by increased return rates year over year.
Mix normalizes and continued pressure on shipping costs.
Moving on to marketing.
With our customer coming back stronger than ever to refresher, where Joe we are excited to step up our investment in marketing to include new initiatives that we believe offer compelling returns over the long term.
We will significantly increase our marketing investment in the second half of the year and as a result, we continue to expect marketing expense as a percentage of net sales for the year 2021.
Least 15, 8% of net sales a full point higher than we reported for the full year in 2019.
To be clear with marketing for the first half of the year at 15% of net sales in order to achieve the full year target of at least 15, 8% of net sales you should expect a significant increase in the level of marketing investment during the second half a day.
And in particular, the third quarter.
<unk>.
During the third quarter, we expect to deliver on the very exciting brand building activities, Mike and Michael mentioned, which we expect will increase our marketing as a percentage of net sales to more than 18% in Q3 before coming back down to the 15% level on the fourth quarter.
The bulk of this investment will be in brand marketing activities, which have some level of short term benefits that are most impactful and important long term building of the brand.
General and administrative in 2021, we are reinvesting in our own brand platform and other functions to support our next phase of growth and expansion.
On a quarterly run rate per general and administrative costs has increased by $3.5 million on the first half of 2021.
Measured by comparing G&A expense in the fourth quarter of 2020 G&A expense in the second quarter of 2021.
We expect a similar sequential growth trajectory in the second half of this year as we continue to add talent to support our growth.
Lastly, let me touch on our tax rate our effective tax rate in the second quarter of 2021 reflects tax benefits realized as a result of the exercise of nonqualified stock options.
Such tax benefits in future quarters, we expect our effective tax rate to be around 24% to 26%.
Yes.
Credibly excited about our recent results delivering yet another quarter of record net sales record net income and exceptional free cash flow on.
On the strong growth is coming from all dimensions of the business, including the U S and international markets revolve and forward.
While mindful of continuing uncertainties and potential headwinds in the current environment. We are focused on the long term and investing in the business to capitalize on the incredible growth opportunity ahead now.
Now, we'll open it up for your questions.
As a reminder.
Mind, you to ask a question over the phone line. Please press star followed by the number 1 on your telephone keypad again that is far from 1 to withdraw your question press the pound or day Hashed E. Please standby, while we compile the Q&A roster.
Your first question comes from the line of Oliver Chen from Cowen Your line is open.
Hi, Thank you the new customer growth has been very impressive and what are your thoughts on retaining the new customers and what.
The new customers are looking for relative to existing if theres any distinctions.
So you had a very attractive and shallow markdowns on did you have enough inventory and how should we model inventory versus sales.
Finally, our board continues to show Great momentum I would love for you to brief us on where you are on the inventory journey at board and how youre thinking about debt depth versus breadth as well as what experiential means that Ford. Thank you.
Sure. Thanks, Oliver Mike Carroll Nikolas here.
Yeah, we feel great about the trends across the business, particularly on the new customer side seem really strong acceleration there continuing through.
Q3.
And in terms of the customer profile.
We're seeing great thing so far in terms of those customers and their propensity to.
Continue to purchase I think over the past year, we've expanded the.
The Pilbara brand with new categories brought in but also what's really exciting to us is as the core of what we've always been known for has come back in a big way, we see customers gravitating towards those going out categories and a much bigger way this quarter than they did the previous quarter really accelerating through the quarter and through early Q2, and traditionally some of our most sticky new customers.
Who have been those customers that have come to us for those key brand elements.
We feel really great about the funds that we received.
From an overall inventory perspective in terms of what we saw during the quarter. There was likely some levels untapped demand due to our inventory position, we feel like we've positioned ourselves really well compared to the broader set investing heavily in the going out categories and kind of returned to the pre COVID-19 lifestyle.
But even then we struggled to keep up at times with the demand so.
We're continuing to make improvements there and again, we feel better than ever about our position as we enter Q3 here.
We think theres more to build upon there.
And then the final question with regards to.
Forward, yes tremendous momentum on the <unk> side of the business.
Just all round was the core forward business itself, we think is really coming into its own in terms of its position in the marketplace and it's right now in the marketplace. It's inventory offering and then you combine that with.
Really successful.
Kind of cross exposure efforts on revolve that are still in the early innings, it's less than 5% overlap yet.
That those increases in overlap from the increased exposure. We gave forward drove around 30 points of more than 30 points of growth for the quarter. So we.
We feel great. There obviously to support that growth we have to continue to invest in inventory, we're continuing to do that in a big way and we feel great about.
<unk> trajectory and then finally with regards to forward.
Well, we kind of alluded to it in the earlier comments and it's it's too early to share anything official but we have some.
Really strong marketing components coming up on the <unk> side.
We're really excited about it and we hope to.
Continued to drive results there.
Your next question comes from the line of Mark <unk> from Baird.
Great. Good afternoon. Thanks for taking my question, maybe just to just a quick follow up on on forward just given all the momentum there just any quantification you can provide on how youre thinking about the magnitude of that revenue opportunity over the next couple of years I guess, where do you think it can get in terms of the mix of the business.
Medium to longer term.
And then separately I just wanted to ask if you could give us a little bit more clarity on the sourcing side. It sounds like youre managing through it and I think thats embedded in the selling of distribution.
Guidance in the back half, perhaps but just any more clarity on what youre expecting from a product flow perspective, and how that might impact top line. Thank you.
Definitely.
As regards before and we're not guiding to any specific numbers in terms of share of the business, but obviously with the momentum. It has we think theres the potential for.
Substantially greater share and as you know the luxury market in the online luxury luxury market is absolutely huge.
Ford is still a relatively small player in the market.
But with really more momentum than at least this quarter then.
Most of the others, if not all of the others out there from a trajectory standpoint. So it has a lot of potential and then you've got the really low overlap on revolve. It we think we can.
Continue to grow over time, so we're really excited about the future there.
With regards to revolve inventory supply.
Supply chain.
<unk>.
Difficult across the board I think for every company I feel great about how we manage it certainly we're seeing more delays than we have historically in the supply chain and unfortunately, those delays have continued to increase over time as Q2 progression as Q3 progressed, but I also feel like the <unk>.
Team and the systems have reacted really well and despite those delays we've been improving our inventory position and we're continuing to position it better and better as the weeks and months pass.
Thank you.
Your next question comes from the line of Erinn Murphy from Piper Sandler Your line is open.
Great. Thanks, good afternoon.
<unk> from me as well first you would feel a lot more in person events. This quarter could you share a little bit more about what that drove to the brand event with the Delta variant does that change how you're thinking or have you had to make any adjustments to in person events and if you look into the fall season, and then just 1 other follow up on forward. If you look at your Influencer network.
What percent of your Influencers feature both revolve and forward I think you said it was only up 5% of your customer overlap, but would love to hear more how you are kind of positioning it with your Influencer community. Thank you.
Hi, nice to chat with you guys.
Yes first question was interesting events and I think for US It was really important to have those in person events to really.
Refresh and kind of remind the customers that it's time to go out and Thats that's revolve time.
A lot of people are.
On vacation as we speak and I think that crept up from vacation is very much a revolve shopping experience I think people are going out people are hanging on with their friends again and whatnot. So.
Having those events is really to Vienna.
Force, our core brand message and it really does show on the type of merchandise that we have been selling it's been a dramatic shift from.
Only a few months ago from what we were strong dental growth selling now so those events, where it all very very important.
We are definitely definitely following delta very closely I think it's been on our mind for.
Well over a month at this point, maybe 6 weeks or so as we're planning into Q3, we've seen a lot of things going on but thankfully we have seen in other parts of the world kind of go through Delta spikes prior to us. So we're not in completely uncharted territory, but we have contingency plans for future events with regard every event basically has to have that.
Changes to the plan in terms of I'll be wide open and lose some comfortable are there.
Various tiers of kind of restrictions in.
On safety measures that we have to have in place, but we feel good with what we have had I think that our current assumption is that.
Things could get worse, but it will not be as restrictive as in times past, but of course these things change very very quickly so.
Now when it comes to forward. This is something that we are in the early stages working with Influencers I think the forward.
Offering and forward is known for is quite different than revolve. So we really have to build a playbook from a fresh perspective from the things that we do for the revolve playbook are directly applicable forward also had strength that we can't do that for the revolve. Aside. So there is a huge amount of overlap and that we will see over time, how we can completely integrated but we're very very early.
<unk> happy with the very successful transitioning of the revolve customer base over to forward and we will look to marry that with our marketing activities as we've been given the green light from our customers that.
They want more.
Your next question comes from the line of Michael Binetti from Credit Suisse. Your line is open.
For a color Michael Binetti.
From credit Suisse, Hey, guys, sorry, I was on mute there.
Can you hear me okay.
Yep Yep, Hey, guys. How are you. So I just wanted to thanks for all the help with the questions here. So given the comments you just made on delta related to the events.
Are you seeing in the data right now on the consumer side as the orders of the web hits in the areas, where you've seen the flare ups lately and any changes to behavior traffic conversion or.
On the composition of the categories. She staring in the basket and then.
Maybe for Jesse the revolve brand I think the gross margin on.
On the revolve brand is still down.
Down on a 2 year basis, and I know that Theres, a big changes go on buying them in the mix relative to where we were 2 years ago. You said owned brands will start to ramp here, maybe you could help us bridge that to 2 years ago, and then maybe the puts and takes.
We should think about as we model forward the revolve brand over the next few quarters.
Yeah. Thanks, Michael This is Jesse.
First in terms of Delta kind of regional state performance traffic and conversion.
Put up some record traffic numbers and that continued into strong July conversion was also really good and improved significantly year over year. So I think we're very optimistic we had a great quarter, both in terms of traffic and conversion.
That said there were some pockets of weakness throughout the quarter in those areas that had delta spike, but it was very volatile. So we saw a short.
Kind of a short lapsing, Australia and certain regions. We saw for example, Florida and Texas take a little dip, but then come back. So it starts to get really volatile and you look kind of state by state region by region, but I think overall, we're seeing the customer come back for those really core categories like dresses.
And that continued again through the month of July when Delta really.
Really first.
Kind of came became part of the conversation.
I think nothing significant to call out there yet and then maybe other point there is that those COVID-19 categories that really checked last year like beauty inactive continued to grow through the second quarter and into July so again back to that kind of product and assortment diversification, we feel really good going forward.
And then the second question on gross margin. It was a tick below that Q2 peak of 2019, I think just keeping in mind that <unk> of 2019 was a record quarter for full price at the time.
We had revolve festival dresses were selling at an all time high owned brands was in the mid 30% mix of the revolve segment. So that that added a lot to the gross margin profile and you compare that to this year. We're at a new record for full price debt owned brands at a significantly lower mix of that revolve segment.
Showing the I think the longer term opportunity that we have in gross margin as we continue to build up that owned brand platform.
Great. Thanks, Thanks, a lot from helped us.
Yes.
Your next question comes from the line of Edward <unk> from Keybanc capital markets. Your line is open.
Hey, guys. Thanks for taking the questions I guess first you.
Disclosed that you were starting to see kind of the expected difficulties of the iOS transition I guess any kind of color you can drive into that.
Has it driven a significant falloff in performance from those devices and then I think you guys also indicated that units were down just kind of curious what underpinned that given the overall strength of the business and then finally, we noticed that there is a higher number of preorder on site I guess kind of how should we frame that in context of the overall assortment and is there any risk to break.
Don Preorders. Thank you.
Sure. So I'll take the first part of that question and then pass it off to Jesse So with regards to the iOS advertising, we started to see an impact towards the end of the quarter. We didn't really see the impact initially when the transition first happened there was a very definite impact.
<unk>.
The good news is the overall strength of the business.
More than offset that impact and also we saw within the iOS channel the impact was very big in call. It.
Sub segments of the channel debt or more.
No kind of targeting dependent and then we actually saw.
The losses, there offset by.
Some of the areas that's relied a little bit less on the unique targeting so.
I think it's still an evolving situation and we'll have to see how it plays out over the long run I think the net is that it.
It had some impact.
Likely.
Yes.
I mean, it was a kind of a Washington, maybe slightly positive but.
Think theres some risk that it trends a little bit negative over time, but I think we're happy with what we have seen that it wasn't necessarily as big an overall impact as we were.
Perhaps it could be.
Yeah, and then Ed you cut out there for a second can you repeat that second part of your question.
Yes, I was asking you had some commentary about units being down I was kind of curious what drove that and then finally on on the on preorder. It seems like it's increasing in terms of its prominence on our site is there a risk to breakage of some of those preorders. Thank you.
Okay, great and those 2 are really related.
Preorders is largely what is causing that decline in the units per order. So if somebody for example put.
2 dresses in their basket and there are both available on those 2 units would go into 1 order with the preorders. Those 2 units are broken up into separate orders that youre seeing a decline in the units per order in the current quarter given the higher level of preorders than we've had in the past.
To some extent some pent up demand there is the availability comes through on those preorders get filled but to your point. There's also some breakage, depending on how long those goods take to get to our facility that we.
We had some good receipts late in the quarter, so that really helped that.
We continue to investing in inventory, so we expect that to get better but there is some some risk of breakage, partially offset by that call. It pent up demand with.
Units waiting to be received and shipped.
Your next question comes from the line of Matt Koranda from Roth Capital. Your line is open.
Hey, guys. Thanks, I appreciate the color on the July results up 40%.
Wanted to see if you could maybe disentangle some of the trends you're seeing in July at revolve versus forward.
And then just any help on sort of <unk> transaction growth that sort of driving the net sales growth of 40% disentangle those would be helpful.
Yeah, Yeah sure so for July.
We mentioned we saw that.
<unk>, 40% 2 year growth continue from Q2 into July.
I think it's a similar theme to what we experienced in Q2, where we saw strength across the board. It was coming from domestic from international from both revolve and forward. We saw that dress mix continue to increase as she started going out again, you won't see that in the quarter on a blended basis because it did progressively increased throughout the quarter.
You'll still see dresses meaningfully lower than our historical kind of on call it that 30% range, but that ticked up through the quarter and into July.
On a on an order.
And a unit basis orders were up 52% <unk> was up 25% and then that was offset in part by the higher return rates. So we saw a return rate go up close to 50 per cent for the quarter. So that offset some of those growth measures that are pushing growth sales to net out to that.
Plus 60% year over year net sales and then the plus 40% 2 year net sales and then again back to that units per order comment that we just made.
The lower units per order are putting some pressure on net <unk> and Thats why you didnt see incur.
Increased sequentially from Q1 to Q2, but we do expect that to continue to increase as the mix shift to those higher price points and with the tremendous strength on the forward segment carries a significantly higher <unk> than revolve.
Your next question comes from the line of Kimberly Greenberger from Morgan Stanley. Your line is open.
Okay, great. Thank you so much.
Michael I wanted to start with you on owned brands.
2020, it sounds like it will be a year of growth for the owned brand business.
Can you just remind us where do you expect to own brands as a percentage of sales to set this year and then how what are some of the strategies to grow the owned brand business that you're planning to tackle next year. Thanks, so much.
Yeah, Hey, Kimberly just Jesse I'll take Scott, sorry, I'll take that second 1 first and then kick it over to Michael for the longer term strategy component.
We expect to be meaningfully lower as a percentage of the revolve segment for own brands. This year again, we started cutting back in the right. When Covid started last year and that takes some time to flow through so we expect to return to year on year growth in that mix towards the backend of this year, but you really won't see it come through until 2022, so for 'twenty 1.
Expect it to be meaningfully lower than the I think we're at 27% in 2020, and then I'll kick it over to Michael.
Yes, as you ramp up I think it would be important to note debt.
That will bring in and will be a much more diverse and multi dimensional diverse from a price point perspective from a category perspective from a kind of course categorization perspective, as well as kind of an aesthetic perspective. So I think that diversity will be really really important for us and also on a call to marketing I think we're continuing to learn and just continuing to get better at the way, we're working with Influencers withhold.
<unk>.
The collections that we have with Influencers are performing extremely well I think after having.
Alright, well I guess.
Choppy year on a full year with these influencer collections that we launched in the middle of 19, I think we've learned quite a bit. So we do have some additional kind of influence or type.
That is coming as well that we think will be very very powerful as well so.
On the macro level things will be quite similar on the new ones to level things will be dramatically evolved as we just continue to get better and better on what we're doing.
Okay. That's great color can I, just ask Mike a follow up on the Apple iOS changes.
I think you indicated that you just started seeing impacts late in the second quarter.
Any are you able to discern any impact on your business. It didn't sound like it really affected you on July.
Just any kind of early learnings from this apple iOS changes would be great.
Yes definitely.
As a whole it's a relatively minor component I think of our overall business picture, but it's not to say it can't.
It doesn't won't have some impact but we.
We've just been seeing really strong strength in general really improving throughout Q2, and then feel really good about the <unk>.
Trends so far in July.
So theres a lot of positive momentum in the business and so even if there's some offsets on the iOS side.
I think it's small in the Grand scheme of things.
The other thing also.
The advertising market is very dynamic and so you can see changes, sometimes and you really need a long period of time to say.
For sure what is it related to.
We did see again in those kind of very targeted.
Advertising sub segments are clear enough trend that we can say, yes. It had a substantial impact there, but then we saw a lot of growth in other areas of iOS advertising at the same time.
And then you have the backdrop of the general strength of the business.
It's kind of a wash as far as.
What you can conclude I think overall it is a net negative but I think it's also a.
A manageable 1.
Your next question comes from the line of Lorraine Hutchinson from Bank of America. Your line is open.
Thank you.
Jesse.
On the result, the cash is starting to build on your balance sheet can you just talk about priorities on on how does it come from.
Charles.
Yes, sure, yes, very pleased with the cash flow generation over the last year on the cash balance that we have now on really strong balance sheet.
Number 1 is investing back in the business.
Less than 3% penetrated in this in this target demographic that we're going after so still a long road ahead of us on that target.
So number 1 invest back in the business and you'll see that in Q3 with significant marketing investment you are starting to see that with inventory and you're also seeing it in the G&A with the investment in owned brands and the other areas to support the future growth and then number 2 behind that we will look at.
Opportunistic disciplined M&A.
We think there are probably pockets of opportunity out there, but we're going to be patient and careful as we look at things.
Your next question comes from the line of.
Bob durable from Guggenheim Securities. Your line is open.
Thank you good afternoon a couple.
Questions from me. The first 1 is in terms of the I mean, I guess the normalization on return rates can you give us any numbers around sort of where you are today or in your expectations in the back half of the year on on the resumption of a more normalized returns and then the second question is can you give us a little more color I don't know.
By country, but on the international performance as well would be helpful. What youre seeing there and even especially in July as well. Thanks.
Yes, sure I'll take the maybe the return rate 1 and then kick it over to Mike for International sales.
Return on rate has ticked up as we've seen the mix shift back towards those higher <unk>.
Higher return rate categories, like dresses and tops and the apparel for going out to put it in perspective pre COVID-19 back in the peak of kind of kind of going out in 2019, we were running at around a 55% return rate. It went down to 40%. This time last year as the mix shifted to beauty.
Again, the lower <unk> lower return rate categories.
It slowly ticked up to this quarter, where we saw just below 50%. So still not at that peak 55 per cent that we were at.
We do expect it to continue to go up slightly.
That mix continues to shift and like I said, we saw dresses continue to perform.
Especially on the back half of this quarter and then into July. So we should expect to return rate to tick up we are optimistic that we don't get back to that peak, 55% as we've.
We've broadened the assortment and she sees this now for more than just that dressing going out but for beauty active lounge and some of the other categories that really check during COVID-19.
Yes.
The international regions. So in general I'll, just start by saying <unk>.
The board in all of our major international regions, we saw.
Pretty robust growth.
Kind of region by region in terms of highlights.
I'd say, Canada, probably the biggest highlight with triple digit growth in Canada on both the revolve and forward.
Segments overall as a whole.
On.
We saw some nice acceleration in the United Kingdom, China continues to be strong.
So in general really good results, Australia, we had strong results as well although ask Jesse noted we did see some impact towards the end of the quarter briefly on a regional level.
Our Australia was implemented Lockdowns, we saw very clear impact the trajectory there, but as a whole we're seeing.
Robust results across the board.
And then hey, Bob if I can add 1 more on that that ties the return rate and international together.
As we've added on the localization of these international regions, we have seen the international return rate go up.
Thats, a very positive indicator both in demand net sales and customer experience. So as we continue to localize. These international regions, which is really really driven some phenomenal growth, especially in cash.
Canada and most recently, we would expect some impact on the return rate there, but a net positive to the ending net sales.
Okay.
Your next question comes from the line of coming on line from <unk>. Your line is open.
Thank you.
Going back to the marketing and the.
The step up in investment that Youre talking about.
What's the best way, we should think about the returns that youre seeing on that marketing investment I think in the prepared remarks, you talked about.
On the vacation categories responding to the group.
All summer.
On marketing events and you posted.
Is it an immediate return in in.
In quarter that we should be thinking about when.
When you step on the smoking or was there a little bit of a lag to it.
Sure definitely so the step up in marketing that we're planning specifically for Q3 relates to brand marketing investments, which we always view as much longer payback time investments.
It's an area that we have gone later on in the past.
12 to 18 months really just starting to ramp back up in Q2 so.
We have some really exciting opportunities we want on leverage but they are longer term investments, meaning youre not going to see that.
Immediate impact in Q2 at least from kind of a full ROI perspective, we believe the payback period is much much longer but these are the right investments to make.
But.
Certainly it sounds like there is no impact either right and so we think in Q2 in particular those brand marketing events.
Alongside our inventory selection really signaling to our consumer debt.
But there are ways to go out and have on again and liberal lifestyle. It was important to the success of that quarter and it will be important to Q3 as well.
Got it thanks, so much.
And we'll take our last question from the line of Susan Anderson from B Riley. Your line is open.
Hi, it's Alex on for Susan just a question on the beauty category, how big is that compared to your overall business and what is the customer profile for that category is it new customers to revolve or is it existing customers moving into that category any details on that.
Yes beauty.
Again going back to the depth of Covid duty checked really well. So it went from running at about call. It 152 per cent of the business pre COVID-19 up to 6% of the business again in the depths of Covid last year. It has come back down as a percentage of the business to call it 3% plus or minus this most recent quarter, but still drilling and.
It's growing on top of triple digit growth last year. So we think there's a really great long term opportunity therefore, the beauty category.
And the customers coming there it's been a really great new customer add driver so customers coming in at that lower <unk>. We're seeing them then come back and purchase at higher <unk> over time, it's a great add on item. So from that perspective, you know there is some repeat or existing customer activity, there as well, but we do see it as a it's a really good customer.
2 of them.
And there are no questions over to Paul on at this time I would now like to turn the call back to the management quarter closing remarks.
Thanks, everyone I'm really proud of our results and momentum and even more so for continuing to.
Sue and capture the huge long term opportunity that lies ahead for us.
Thank you all for your continued support through.
These turbulent in challenging times and thank you to our team for executing incredibly well deliver these record results and we look forward to.
Mean with sickness investors and reporting our progress in the weeks and months ahead.
This concludes today's conference call. We thank you all for participating you may now disconnect.
Revenue.
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