Q2 2022 Revolve Group Inc Earnings Call
Good afternoon, My name is Dennis and I will be your conference operator today.
At this time I would like to welcome everyone to revolves second quarter 2022 earnings conference call.
All lines have been placed on mute to prevent any background noise. After.
After the Speakers' remarks, there will be a question and answer session.
If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
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 revolves second quarter 2022 results.
Before we begin I'd like to mentioned, we have posted a presentation containing Q2 financial highlights to our Investor Relations website located at investors not revolved dot com.
I would also like to remind you that this conference call will include forward looking statements, including statements related to economic conditions and their impact on consumer demand in our business operating results and financial condition. Our current expectations regarding the continued impact of the COVID-19 pandemic on our business operations and financial results, including on our near term sales in.
Greater China, our growth, including growth in active customers and market opportunities and related macro and industry trends expected impact on delivery times from opening our first east coast fulfillment center, our marketing and technology investments and marketing events. The launch of our Remy Bader collaboration the extension of our brand Ambassador program to include forward.
Our freight costs and our outlook for net sales gross margin operating expenses and effective tax rate.
These statements are subject to various risks uncertainties and assumptions that could cause our actual results to differ materially from these statements, including the risk mentioned in this afternoon's press release as well as other risks and uncertainties disclosed under the caption risk factors and elsewhere in our filings with the Securities and Exchange Commission, including without limitation.
Our annual report on Form 10-K for the year ended December 31, 2021, and our subsequent quarterly reports on Form 10-Q, all of which can be found on our website at investors revolve dot com.
We undertake no obligation to revise or update any forward looking statements or information, except as required by law.
Our call today, we will also reference certain non-GAAP financial information, including adjusted EBITDA and free cash flow.
We use non-GAAP measures and some of our financial discussions as we believe they provide valuable insights on our operational performance and underlying operating results.
The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP.
Our non-GAAP measures may be different from non-GAAP measures used by other companies.
Reconciliations of non-GAAP measures to GAAP measures as well as the definitions of each measure their limitations and our rationale for using them can be found in this afternoon's press release and in our SEC filings joining.
Joining me on the call today are our co founders and co Ceos, Mike care, Nikolas, and Michael <unk> as well as Jesse <unk> our CFO .
During our prepared remarks, we'll open the call for your questions.
With that I'll turn it over to Mike.
Hello, everyone. We delivered strong results in the second quarter highlighted by record net sales increased 27% year over year gross margin expansion to record levels for our second quarter and continued strong growth in active customers. We delivered these results despite macroeconomic conditions that became more challenging as the quarter progressed.
Creating cost pressures that impacted profitability and also contributed to a moderate year over year growth trend in net sales in June and has continued into the third quarter.
With that as an introduction I'll briefly recap our results in.
In the second quarter of 2022, our net sales were $290 million or 27% increase year over year.
We added 124000 active customers during the quarter, the highest ever for a second quarter and representing 39% growth year over year.
Impressively growth in active customers in the first half of 2022 has already exceeded our total growth in active customers.
Full year in 2019.
Gross margin expanded approximately 30 basis points year over year to 55, 9%, an all time high for a second quarter, despite inbound freight costs remaining elevated.
However below the gross margin line, we faced increasing pressure on operating expenses that contributed to softer than expected profitability measures in the second quarter.
Our second quarter net income of $16 million and adjusted EBITDA of $27 million declined, 48% and 24% year over year, respectively against a difficult prior year comparison, when our net income increased more than 100% year over year.
Accordingly, net income and adjusted EBITDA were 28% and 42% higher than pre pandemic levels in the second quarter of 2019, respectively. Further illustrating our continued focus on profitable growth.
The increased cost pressures were mainly within selling and distribution and more specifically customer shipping expenses. There are two main reasons why these cost came in higher than expected.
First we incurred fuel surcharges on every package that we shipped to our customers and on return packages, our fuel surcharges in the second quarter, where more than <unk>, what they were in the prior year and had a material impact on the selling and distribution line item for the second quarter.
While our premium price points enable us to absorb these costs more efficiently than if we're operating at lower price points and we do expect some moderation in cost from the peak. These surcharges continue to create real cost pressure in the near term.
Second is our return rate, we had anticipated that our return rates would increase year over year as our product mix of net sales continued to normalize. However, our return rate has trended even higher than pre COVID-19 levels in the first half of the year. Historically the main factors that influence return rates include the mix of sales by category by geography by segment.
And the mix of full price and markdown sales.
One of the primary drivers of the higher return rate compared to pre COVID-19 levels is a fast growing percentage of our international net sales coming from countries like Canada, where we offer a hassle free returns a major growth catalyst that has resulted in Canada net sales quadrupling in just the past six quarters. Our return rate in Canada has approximately doubled since late 2020.
When we launched hassle III returns for Canadian customers.
Tradeoff will make all day long considering the exceptional growth of our localization efforts in the markets.
Another factor was our mix of full price sales, which have a higher return rate.
The mix of full price sales was higher than we anticipated for the second quarter and was significantly higher than in 2019.
And finally on a normalized basis, we did experienced an overall increase in the return rate this quarter due to what we believe is a shift in consumer behavior that is likely driven by the challenged macro environment effect on consumer sentiment.
Shifting gears to net sales performance by geography, our U S. Net sales increased 30% year over year outpacing international net sales growth of 14% from a year ago. Our international trends reflect continued strong growth in western regions like Canada, and the U K, where we've made excellent progress with our localization initiatives, partially offset by foreign.
Currency headwinds, resulting from the stronger U S dollar and temporary headwinds in China due to COVID-19 preventative measures.
As I mentioned earlier customer activity continues to be a bright spot our active customers are becoming more productive illustrating our success in capturing a greater share of wallet with us.
Trailing 12 month period net sales per active customer were $488, an increase of 9% year over year.
This data is quite encouraging considering that new customer growth has been really healthy for the past several quarters and that revenue per customer tends to increase significantly over time.
Consider that in 2021 customers, who had purchased from revolve in a previous year represented 49% of our total active customers for the year, yet these more tenured customers generating 77% of total net sales for the year.
I'd also like to highlight that the significant majority of our newly acquired customers in recent quarters have purchased from us at full price since our full price customers consistently generate a higher lifetime values in customers acquired through markdowns.
Our consistently strong and profitable financial results also reflect our long term focus on building trust with the customer <unk>.
Core to building. This trust is operational excellence and exceptional service levels.
I am excited to share that we began operating our first east coast fulfillment Center, which we expect will raise the bar on our ability to delight customers with even faster delivery times for key east coast geographies, we've seen firsthand how much our west coast customers appreciate and value our one day delivery timeframes available for many regions surrounding our Los Angeles fulfillment Center.
The power and stickiness of compelling service levels is also clearly evident and performance within our international markets almost universally in international markets, where we've invested to elevated service levels. Our growth has accelerated in the months that followed.
To wrap up we believe our results for the past several quarters demonstrate that we are gaining meaningful market share and more importantly than just outpacing the competition, we're uniquely doing that while generating significant profitability and cash flow year after year.
Our ability to self fund the strengthening of our balance sheet year after year affords us a great deal of financial flexibility to invest where we see opportunities to drive shareholder value.
It's particularly important in an uncertain market environment like we are operating in today, where inflation is at a 40 year high end use consumer sentiment was at the lowest reading on record in June .
I am extremely proud of how well our team has navigated through this increasingly challenging macro environment.
Mike when I have seen multiple economic cycles over nearly 20 years, we have complete confidence in our team's ability to execute through even the most challenging environments as we demonstrated in profitably navigating through uncertainty in the early stages of the pandemic.
Our team and technology are battle tested and have emerged stronger through this volatile period, and we are primed and ready for what lies ahead now over to Michel.
Thanks, Mike before I get into the details of the quarter I want to pause on that with todays results. We have now crossed the $1 billion in net sales now.
Shelling 12 months period.
A huge accomplishment for not only me and Mike.
So the many employees that joined US along the way when we were doing $10 million $100 million or even $500 million just a few years ago, even after the IPO. Thanks to all of you and it's been fun challenging rewarding and even more.
We still have so much opportunity yet.
Now, let's be thinking about the quarter, we were able to deliver strong double digit growth in an environment that became increasingly challenging quarter progressed.
Taking at a level deeper our product category trends for the second quarter confirmed that our core revolve customer was getting out again and for us driving incredible growth in dresses with particular strength in special events.
He is traveling going to weddings and living the life to the fullest again.
So it is truly special cables in her life will all serve as a trusted source of inspiration and a go to fashion destination.
The reopening this year has been most evident in the revolve segment, where net sales increased 30% year over year in the second quarter. Despite the international headwinds.
To capitalize on the return of an active social lifestyle channel. This summer we kicked off the second quarter with exciting revival of a ball festival after that two year hiatus.
First of all in 2022 with Apple than ever on many levels and then highlights feature to our incredible lineup of hardware, including post Malone, Jack high level and below and the unbelievable caliber analyst attendees. We also hosted hundreds of influencers than ever before with our strategic focus on new network of content creators to further expand our reach and diversity.
All new social media channels.
I am pleased to share that we have made great progress in connecting with our consumers through these newer social media channels I'm, especially encouraged by the increased engagement with our compelling video content and take tuck in Instagram deals in the second quarter, new views of our two touch on it more than doubled sequentially compared to the first quarter of 2022 and nearly tripled year over year.
As I touched on last quarter, we are teaming up with the contracts that are in strip model any data to create a cycle all brand collaboration that will launch next week.
<unk> partnered with vessels several marketing activations over the past year and are following engagement compressed all that momentum is truly impressive.
Especially exciting is that this is our first owned brand collaborations truly expands our market potential and to inclusive sidewall. We have worked closely with Remington showed that we provide the best product and throughout the process. Remy has been sharing keno meant that the design and development process with a highly engaged on.
On the heels of revolve festival, we will continue to invest and actively create even further excitement for our brands with an impactful interest and lagging events building on our already strong connection with our next generation consumer.
The quarter got off to an exciting start with our <unk> activation.
Italy, and our team just returned from a successful brand ambassador events in the Dominican Republic, we have.
Several other events planned highlighted by our retention New York fashion week. This September .
And across the business, we will continue to invest heavily in a proprietary technology, which we view as a significant competitive advantage light team is constantly building out internal technology to drive increased conversion rates and revenue greater operating efficiencies and an even better experience for our customers.
Within just the past few months the technology and data science tools have developed proprietary until applications that leverage machine.
And a rich data set to further optimize the customer experience and drive further operating efficiencies through enhanced fraud detection and package optimization.
And on the site and continue to elevate our personalization product recommendation and search functionality and recently launched an application that Leverages machine learning algorithms to dynamically and in real time recommend outfits for our customers to complete the luck.
We're in the early innings of leveraging technology with some exciting projects in the pipeline that we believe will drive both revenue and operating efficiency in the amount of debt.
Shifting gears to forward, a Florida net sales for the second quarter increased 14% year over year against incredibly difficult prior year comparison of net sales increased over 150%.
Importantly over the last three years, our compound annual growth rate for forward net sales were 36% meaningfully outpacing industry benchmarks.
And we're continuing to innovate and invest.
An exciting development with our recent launch of Ford buyback, our proprietary resale program dedicated to speculate luxury shopping board buyback extends lifecycle of high end designer bags from covenant bans, allowing our customers to exchange their past practices for credit to shop, our full product offering.
It enables us to expand our customer touch points and deepen our relationship with her while further strengthening the value proposition of our loyalty program members.
In addition to the credit loyalty members earn up to 2000.
For eligible handbags the exchange.
Forward buyback Leverages, I've announced customer experience and service capabilities to deliver an extensive assortment of handbags from our top luxury events at incredible value, including from the positive forward slate of director Kendall Jenner.
<unk> has been very exciting exceeding our expectations initial feedback from our luxury brand partners has been outstanding within just the first couple of lease each of more than 40% sell through of our initial inventory.
We also continue to execute the successful cost Michael after a stage as forward to a much larger base of all customers.
Capitalizing on strong customer loyalty and the highly complementary merchandising assortment between revolve and forward.
Ever since we launched our forward loyalty program last year, we had shipment increased overlap between revolve and forward active customer basis month after month.
And we are still in the very early innings with a long runway for further cross shopping between revolve and forward in the future.
In the coming months, we plan to expand our success the revolve brand Ambassador program, which launched last fall to include forward.
The forward expansion of the brand Ambassador program will leverage the same proprietary technology is of all 12 that momentum.
<unk> momentum in the revolve brand Ambassador program has been nothing short of incredible. So we have high hopes that a potential further forward brand ambassador program as well, particularly since <unk> has historically been less active.
Revolve in working with Influencers.
Stay tuned for this exciting launch in the weeks ahead.
To wrap up I am very proud of how well our team has navigated through the extreme cycles, the ups and downs in the past few years. We believe we have demonstrated a unique track record for outperforming the competition in times of disruption and volatility.
Our strong team operational excellent and data driven and customer essentially the question nearly everything we do.
While there is considerable uncertainty ahead I am extremely confident in the team and know that we are in a position of strength heading into whatever lies ahead with the economy.
We're excited about our future and believe we are well positioned against further market share, particularly with the legacy retailers in the months and years to come now I'll turn it over to Jesse for discussion of the financials. Thanks.
Thanks, Michael and Hello, everyone I'm quite pleased with our accomplishments in the second quarter delivered by the team within an extremely difficult economic climate that became even more challenging as the quarter progressed.
I'll start by recapping the second quarter results highlighted by solid top line growth continued strong profitability and rapid expansion of our customer base.
And we're doing it at scale net sales were $290 million a year over year increase of 27% and.
And an increase of 21% on a three year CAGR basis.
We've all segment net sales increased 30% and forward net sales grew 14% year over year recall that forecast is an extremely difficult comparison in the year ago period, when foreign net sales increased 151% year over year.
From a merchandise standpoint, the justice category represented 32% of total net sales an increase of eight points year over year and trended higher than peak levels in 2019, when justice generated 30% of net sales.
By territory domestic net sales increased 30% year over year outpacing international growth of 14% that was impacted by currency headwinds that negatively impacted our international customers.
Active customers increased by 124000 compared to the first quarter of 2022, our highest ever growth for our second quarter. This growth expanded our active customer count to $2 2 million, an increase of 39% year over year.
Looking forward, we continue to expect moderation and quarterly growth of active customers in the second half of the year as we cycle out of the Covid comparison periods for this trailing 12 month measure.
Our customers placed a record $2 2 million orders in the quarter, an increase of 27% year over year.
Average order value or <unk> was $303, an increase of 19% year over year that benefited from the exceptional year over year growth in dresses and the very strong full price sales mix.
Shifting to gross profit consolidated gross margin was 55, 9% our best ever margin for our second quarter, and an increase of 29 basis points year over year.
Moving on to operating expenses.
Only deleveraged 40 basis points year over year, primarily due to a year over year increase in our return rate as well as increased labor costs <unk>.
Selling and distribution costs were a significant headwind year over year coming in higher as a percentage of net sales than we had expected.
Primarily to our return rate trending above 2019 levels and to a massive increase in fuel surcharges that are included in our shipping costs for customer shipments.
To offer some context, our fuel surcharges increased nearly 60% on a sequential basis compared to just the first quarter of 2022.
Marketing deleveraged year over year as expected since we hosted our largest and most impactful brand marketing you've entered the year with all festival for the first time in three years.
Since the revolve festival investments, we're not in the prior year comparable quarter, our brand marketing investments increased by a meaningful a $9 million year over year. We view these investments as important studying the strength of our brands over the long term.
General and administrative costs also deleveraged year over year due entirely to a $5 million accrual in connection with the pending legal matter adjustments.
Adjusting for this non routine accrual, we achieved G&A leverage as our 27% net sales growth of <unk>.
The growth in the remainder of the G&A expenses in the second quarter.
Our effective tax rates were very different sort of year over year comparison, our tax rate for the second quarter of 2022, with 23% almost 20 points higher than the 3% tax rate in the second quarter of 2021 that included meaningful higher tax benefits.
Net income was $16 3 million or 22 per diluted share a decrease year over year that was impacted by the meaningful differences in our effective tax rate.
Cost pressures referenced earlier as well as the non routine accrual for the pending legal matter and G&A expense.
Please note that the legal accrual is reflected in net income net income as a GAAP measure, but was excluded the non routine items from adjusted EBITDA are non-GAAP profitability measure.
Okay.
Adjusted EBITDA was $26 9 million, a decrease of 24% year over year against a very difficult prior year comparison, adjusted EBITDA increased 70% in the second quarter of 2021.
Looking back to the pre pandemic period as a benchmark our adjusted EBITDA for the second quarter was 42% higher than the adjusted EBITDA reported for the second quarter of 2019.
Moving to the balance sheet and cash flow statement lower net income year over year and working capital changes led to negative operating cash flow and free cash flow in the second quarter.
These working capital changes primarily included continued investment in inventory, which increased $29 million during the quarter.
Our inventory investments are reflective of our efforts to keep pace with the robust consumer demand we have experienced over the past several quarters. However, with the demand trends shifting during the second quarter as discussed our inventory balance ended the quarter in a place that is higher than we would like.
While we feel good about the quality of inventory and the overall balance is elevated and we are working diligently to bring it back in balance.
Impacting our cash flow was significantly higher cash payments for income taxes, which increased by $14 million year on year and sequentially compared to the first quarter.
For the six months year to date period net cash provided by operating activities was $24 million and free cash flow was $22 million with both measures down significantly year over year from the record cash flow generation in the prior year period.
Our balance sheet remains debt free and cash and cash equivalents as of June 32020 were $238 million, an increase of $18 million from June 32021.
Lower than the first quarter of 2022.
Weather has understandably been quarter to quarter fluctuation consider our cash generation over the three years that we've been public.
The cash position on our balance sheet at quarter end with more than five times higher than our cash position three years ago on June 32019, just after we completed the IPO.
And this cash generation was purely operational without external financing are clear and powerful indicator of our operational strength and scale.
Now let me update you on some recent trends in the business since the second quarter ended and provide some direction on our cost structure to helping your modeling of the business.
Starting from the top as Mike mentioned, there is a great deal of laying on a consumer today with inflation at a 40 year highs and U S consumer sentiment, reaching a record low point in June .
It's also important to recognize that our customers are younger and earlier in her career and income progression.
Often spending a disproportionate share of her wallet on discretionary apparel.
The weak stock market could also have a dampening influence on consumer discretionary spending, but the higher income luxury consumer.
These pressures mounted as the quarter progressed negatively impacting consumer demand and our top line.
Particularly in June and continuing into the third quarter with net sales growth of approximately 10% year over year, but the month of July .
Given the uncertain macro environment and considering that our comparisons are more difficult in the second half we encourage investors to model further moderation in our year over year net sales comparisons for the balance of the third quarter from the approximately 10% growth in July .
And since our net sales growth rate accelerated through 2021 and with the economy looking uncertain at best we continue to expect the fourth quarter to be the most difficult comparison of the year.
Shifting to gross margin, we are very pleased with our gross margin performance.
Exceeded our second quarter outlook provided just last quarter, despite continuing headwinds on inbound freight costs.
A key driver of our strong gross margin performance for the past two quarters has been full price selling at record levels. However, consistent with the outlook, we shared coming into the year, and particularly with greater inflationary pressures and very low consumer confidence. We continue to expect our mix of full price sales to moderate in 2022.
We expect this moderation to begin in the third quarter and further moderate in the fourth quarter on a sequential basis, while still remaining higher than pre pandemic levels for the full year 2022.
As a result for the third quarter, we expect gross margin of between $53, five and 54% and we expect the fourth quarter gross margin to be sequentially lower than the third quarter.
Fulfillment, we now expect fulfillment expense of around two 7% of net sales for the full year 2022, consistent with our performance for the first half of the year.
We continue to view our fulfillment operations that is extremely efficient from a cost and performance standpoint within the context of the broader industry, particularly in the current environment.
Selling and distribution, we now expect selling and distribution costs as a percentage of net sales to remain around the 18% range for the rest of 2022.
Relatively consistent with the second quarter of 17, 9% of net sales.
This higher run rate than our previous outlook is due to a return rate trending higher than 2019 pre pandemic levels and to the exponential increase in fuel surcharges that I talked about earlier marketing late.
Late in the second quarter, we began to feel the effects of the weaker consumer and our marketing efficiency measures with many consumers coming back in the current environment, we are simply seeing a less responsive consumer.
We now expect our marketing investment to be in a range of approximately 17% to 17, 5% of net sales in 2022.
Up from our prior outlook of 15, 8% of net sales as we assume that marketing efficiency will remain challenged in the near term.
For the third quarter, we expect marketing to represent approximately 18% of net sales down from the 19% in the third quarter of 2021.
General and administrative we now expect G&A expense of approximately $115 million for the full year with the increase from our prior estimate entirely due to the $5 million accrual I mentioned earlier related to a pending legal matter.
For the third quarter, we expect G&A expense of approximately $29 5 million.
Lastly, let me touch on our tax rate.
Absent tax benefits in future quarters, we continue to expect our effective tax rate to be around 24% to 26%.
While we anticipate a very challenging macro environment in the months ahead, we are confident that with our strong brands and operational excellence. We can navigate through these short term challenges and continue to gain market share.
And we believe we remain well positioned to deliver on our long term profitability targets over time.
With that we'll open it up for your questions.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad well pause for just a moment to compile the Q&A roster.
And your first question is from the line of Edward <unk> with Piper Sandler. Please go ahead.
Hey, guys. Thanks, very much for taking my question I wanted to make that a little bit.
Now you said, obviously that levels out a little higher than you would like can you talk about how long you think it'll be at to get the order book Resize actions, you're taking and I guess, how much of it is influencing order book versus taking markdowns on inventory.
Inventory that's already on the balance sheet. Thank you.
Yes, so it's all hope we feel good about the quality of our inventory. We think it's good stuff thats generally going to retain its value. We just have too much of it.
A lot of that is because of destocking demand that we saw in the quarter.
Q3, so from our perspective, we want to work through it at a measured moderate rate. We think it's good inventory. So we don't feel the need to do excessive markdowns at the same time, there's going to be some level of activity that will decrease gross margins. So you should expect to see a little of that throughout the year.
In terms of when the inventory position right sizes.
Certainly, it's our hope that by the end of the year will be in a much better place on inventory, but it is an uncertain environment. So we're going to have to see how everything plays out.
Thank you.
Your next question is from the line of Mark <unk> with Baird. Please go ahead.
Good afternoon, Thanks for taking my question.
I wanted to start just a bigger picture question on the revenue growth outlook, I guess, a pretty wide gap between what's implied for the growth rate in Q3, Q4, and the longer term plans for 20% plus.
We didn't have a crystal ball on the macro but just hoping you could provide us with a little bit more color on how youre thinking about the medium term growth outlook for the company with this weaker macro backdrop and also how youre planning spending and the level of flexibility, we should expect as we model out the margins. Thank you.
Yes, so with regards to the longer term growth outlook, we feel very confident in that certainly in the short term.
In the medium term if you will if you're looking a couple of quarters out we continue to see challenges.
Challenged macro environment, and softening consumer demand and so that should certainly be reflected in expectations for for upcoming growth in the next quarters.
From our perspective.
Yeah.
The softening consumer demand, we're seeing currently doesn't have any impact on the long term trajectory and long term storage, obviously, we've been through.
A pretty choppy macro environment, the past two years, and unfortunately were seeing a little bit more of that but it doesn't really change any of our plans are our 2023 outlook.
Thank you maybe just a quick follow up there.
Obviously, all saw the flexibility in the model as you manage through the pandemic.
I guess, how would you approach marketing any differently or would you approach marketing differently as we enter this slowdown last time, we had events totally shut down consumer shut down and buying key elements of your assortment I'm. Just wondering how you think about think about marketing in a slowdown scenario.
Yeah. It's interesting I think last time was a very unique situation in terms of the level of depth, a change to consumer behavior as well as our ability to execute events.
Said, we generally like to go with kind of where the winds are going in the revolve brand is centered around consumers looking and feeling great and living their best life, and certainly right now consumers aren't feeling that way. So I think it's a balance of continuing to invest for the long term, we have some really exciting events and investments that we're going to be making in Q3 that we plan to continue.
Do we think those are great investments, but as well as taking into account what is the best timing for those investments in general.
Yes, Michael.
As Michael mentioned speaking.
Other thing I would add is that.
It's really tough.
Tough to the balance sheet is extremely strong. So we'll also be opportunistic one thing I'm, but before I do very much though is that in more challenged economy Theres definitely.
Less competition for certain resources, whether it be employee talented that'd be marketing resources book digital performance marketing, our brand marketing with Influencers and such there will be very opportunistic to really not lose focus of staying long term minded and then doing what we think is best over the long term. So it could be a great time for us in that regard.
Okay.
Your next question is from the line of Camilo Lyon with BTG. Please go ahead.
Thank you I was hoping you could unpack a little bit more about that.
The components of the deceleration that you saw unfolds here at the end of the quarter and into the start of Q3.
Specifically around like basket sizes category changes frequency trade down anything youre seeing.
And.
How we should think about the assortment changes if any.
Outside of the inventory rationalization that you're contemplating.
To me a more.
Kind of inflationary sort of compressed environment.
Yes, so generally the slowdown that we saw was fairly broad based in nature and that said there are some interesting takeaways. One is actually that the higher price items are holding up better than some of the mid and low priced items.
That's not to say some level of discounting will come into play, but it seems clear from our consumers that those levels are holding up a bit better.
Sure.
I think in terms of other trends also on the traffic side, we're seeing that not hold up as well as conversion rates and revenue per session, which I think is consistent with the remarks, we made about we feel like the inventory. We have is good we just have a bit too much of it.
Yeah, and then just you maybe I'll just add a couple of things to that we did see it get progressively more challenging as the quarter progressed as you recall we were.
Communicated the April that's growing at plus 30% and then closing the quarter of course lower than plus 30, you can see how that played out and then with July up plus 10.
Really started to hit us in June is going to really start to see that macro pressure.
And then also across the geographies, we have seen more challenge internationally with the strong U S dollar putting more currency pressure on that international customer and then also COVID-19 lockdowns and other challenges internationally that didnt have as big of an impact domestically. So.
Domestic.
Currently outperformed this quarter.
Got it and then just one follow up if I could is there a <unk>.
Anything to incentivize.
Lower return rates.
So maybe help out on that cost side or are you contemplating flowing through some of those cost pressures to your consumer to alleviate the margin pressure that you are absorbing.
Mike here.
No.
We're not looking to do any sorts of things that would decrease the consumer expense or add cost to the consumer side.
While the increase in return rates certainly did pressure the <unk>.
So a bit particularly in conjunction with.
Really unusual historical fuel surcharges. The model is still quite profitable right and we talked about how in Canada. The results. We saw invest in the customer experience. So that said, we are investing a lot of time and attention into ways to reduce the return rate, but just not in ways that pass the costs along to consumers the ways in which it makes it more likely they're going to get what they want.
Or easier to make the decision to keep to keep what they want.
Your next question is from the line of Michael Binetti with Credit Suisse. Please go ahead.
Hey, guys. Thanks for taking my questions here I was wondering if you could help us unpack the.
The upside in the quarter here, a little bit significant contributor in the second quarter, but the order frequency, we see coming down obviously on a tougher compare I would expect I'm just I'm curious Jessie what you're expecting.
In the back half I mean, some of the and some of the metrics. There is mix maybe continues to stabilize and then I'm wondering I'm. Good good work on the customer growth being strong I know you mentioned that you think it moderates, but if we take the 10% July total revenue growth rate in.
<unk> moderated further.
It's just hard to see but is there a chance we see a minus sign on revenues and one of the next two quarters considering the cadence you gave us such as it's a little counterintuitive with the consumers where you have them today, the customer growth rate, where you have it today, but.
But you did you did caution us to that it would slow a little bit so.
Yeah, Yeah sure. So on the <unk>, a few things playing into that so number one with a strong full price mix came in stronger than we had anticipated we've been communicating for the last several quarters that we will see some shift back to markdown on our record high full price mix that we've been experiencing but continue to hold really strong through the second quarter. So that's one.
Ponant.
The other component is the mix of Jefferies.
<unk>.
Higher than last year of course, 32% versus that 24%, but also higher than the pre pandemic quarter of <unk> 2019.
Positively impacting and then even within dresses the more special events.
Occasion, where adjusted as having a higher price points.
We also saw the mix shift between revolve in Florida to revolve outperforming forward. This sorry.
Opposite sorry that was a pressure point.
And then just overall price increases and now we're seeing kind of mid to high single digit price increases or just kind of naturally flow through from our third party vendors and then we adjust own brands accordingly.
And then the forward growth.
Outlook for the next couple of quarters.
Scenario planning and there is certainly a scenario that the minus in front of it but there's also no other.
The scenarios that we're working through.
Really dynamic environment right now so.
Just kind of.
Scenario planning at this point.
And did you say the surcharges I think accelerated in <unk> are you are you anticipating that level of surcharges to be stable <unk> levels in the back half for it looks like some of the <unk>.
Some of the commentary we've heard around the space has heard some loosening up in that.
Freight and surcharges are you expecting this level of intensity to continue.
Yes, we are seeing it I don't know soften maybe a strong word but definitely moderate.
We're not banking on significant alleviation on that front for the balance of the year, but.
Maybe more hoped anything that it does continue to you.
Come down and give us some some release there.
Okay. Thanks, a lot.
Your next question is from the line of Ana <unk> with Needham <unk> Company. Please go ahead.
Great. Thanks, Good afternoon, guys and thanks for taking our questions.
One quick question and a follow up if I may could you remind us what's the percentage of your core demographic of wallet spend.
<unk> and accessories.
It's higher than average.
Some of the older demos, but just curious if you have any update there and secondly, our balance sheet is in great shape.
Max levels and pretty low can you guys talk about how you think about use of cash is share buybacks something that the board would consider thank you so much.
Okay.
Yeah, So Jeff as we talked about on the prepared remarks, and our customer is younger sheet earlier in her career and income progression, so not putting a specific percentage on that but she does spend a disproportionate amount of her wallet on apparel and on discretionary apparel.
And then on the use of cash to your point really strong balance sheet as you compare.
Compared to a few years ago, when we went public.
Feel really good about that number one you too is really putting it back into the business and we think that's the best return on investment and Thats back to you. Some of the earlier comments on marketing, we're going to be opportunistic we're going to keep pushing.
We are going to tightened skus in some areas, but really continue to invest for long term.
Number one use and we do have kicked around other alternative uses for that cash return to investors, including.
Buybacks, but I'll.
So looking at opportunistic M&A as well when we looked at a lot of things.
And hopefully go back to Michael's point on maybe some opportunity in this time.
There could be some interesting things over the next quarter.
Quarters two years.
Your next question is from the line of Oliver Chen with Cowen. Please go ahead.
Hi, This is John on for Oliver. Thank you for taking our question.
Just curious to know what you are seeing in terms of the promotional environment currently and your strategy. There and also hospital think about their retail channels in the second half.
That trend higher.
Probably that will be smaller in the back half so any color will be helpful. Thank you.
Yes, so in terms of the general promotional environment, we are seeing it get a lot more promotional out there.
With other apparel retailers in this space, including companies that that are kind of closer to us.
So we think that sort of thing does affect general consumer mindset and as we mentioned.
Based on what we're seeing and certainly based off the consumer sentiment surveys to consumers not showing great right now.
But just to kind of.
Double down in my earlier comments, we think the inventory that we have is quite good we do have too much of it.
Consumers arent going quite as good right now so there'll be some level of increased discounting but.
But we don't plan to do anything, particularly significant on that front at this time.
Yes, and then on the return rate we are.
We're factoring in that elevated return rate for the balance of the year.
Yes.
There are some potential benefits not encouraging you to model the benefits in but as we see mix shift out of full price and markdown Mark John generally has a lower return rate.
Full price product and that is one of the pressure points on return rate over the last several quarters. So if we do see that shift out of full price back towards markdown there'll be some alleviation on the return rate there and then also mix.
As I mentioned really record mix of dresses in the quarter at that 32%.
Mix shifts back to some of those other categories switches.
Keith there.
There could be some relief on the return rate there.
Yes.
But as I mentioned factoring an elevated return rates as we look ahead.
Your next question is from the line of Laurent <unk> with Morgan Stanley . Please go ahead.
Great. Thanks, I, just wanted to double click on inventory level, a bit more and I guess when you say you hope to have worked through by the end of the year, what sort of year over year growth rate are you looking to.
And the year and then how are you thinking about or planning your inventory buys into 2023 that is it fair to assume that if you get back to 20%.
Youre buying too and then just lastly, the inventory valuation adjustment and the SEC.
Quinter gross margin just any more color on that and how large it was.
Yes, so I'll take some of the first parts of the question and then maybe just you can.
Hamilton.
Elements at the end.
<unk>.
As far as inventory levels, we're targeting I wouldn't want to guide to a specific level because again the economic environment is pretty dynamic right now, but we're certainly looking to be in a better position with regards to turns of inventory and also kind of right sizing incoming inventory shipments versus the level of demand that we're currently seeing.
So that's kind of our goal as we exit the year looking at 2023.
First half of the year, we are definitely looking at moderate inventory purchases.
At this time it is.
Sure.
How many quarters, it's going to take to work through the softening consumer demand. So we want to err on the side of conservatism certainly to open up the year.
Yes, and on the inventory valuation adjustments, that's really business as usual, we're making adjustments every month every quarter.
That said when youre going into times like last year, where we're kind of chasing the demand.
And have lower inventory balance there as well.
Less of that valuation adjustment and in times like this where the demand falls off and there is an elevated inventory balance that.
Business as usual so larger this year than it was in the prior year, but it balances out over time.
Your next question is from the line of Jim Duffy with Stifel. Please go ahead.
Hello. Thank you good afternoon, I wanted to ask a little bit more about the shift in demand that you've seen in June and quarter to date can you speak how that's manifesting in both new customer acquisition and also maybe speak to some of the behavioral changes you're seeing with the heritage customer base.
Yes, it's really Oh, sorry go ahead ma'am.
Yes, it's really across the board.
I think points to.
But what we believe is just the macro factor playing into the demand.
It's not new customers down relative to where they were in that peak Q1 period.
Lower year on year growth, but repeat customers performing relatively.
The same is that so.
Really broad based no change in <unk>.
Call it loyalty.
Kind of retention rates or anything like that is still a very strong customers coming in asphalt prices I think thats going to play out really well over the long term, but we do believe it is largely macro.
And like I said, it did get progressively more challenging as the quarter progressed in particular June and into July as we disclosed.
And Mike mentioned, it as well, but seeing more pressure on those the lower end prices than kind of mid slash premium method to the luxury price points.
Your next question is from the line of Lorraine Hutchinson with Bank of America. Please go ahead.
Thank you and good afternoon.
I wanted to just.
Crystal more clarity on the difference between the behavior of the revolve and forward customers understand that the comparisons are very different.
And metrics.
That would illustrate.
Hello.
Better or.
Those two tiers or behaving differently in this inflationary environment.
Yes, I think from a quarterly trend results perspective, we saw actually forward.
DSO in a greater way, but as you mentioned, it's really important to note just the incredible comp for it was coming off of close to 150% year over year. So we think thats a huge role in the Ford results as well as we think forward was a bit more impacted both businesses were impacted reported a bit more so by some of the currency pressure.
Pressures, making forward products, which generally come from a lot of big name brands at least more so than revolve less competitive competitively priced in some international markets.
That said, we think towards trajectory momentum is great and.
We see it holding up relatively well, but certainly.
Impacted by the comps in particular, but also by the same macro kind of sentiment shifted where we're seeing the impact grew loans.
Your next question is from the line of Rick Patel with Raymond James. Please go ahead.
Good afternoon, and thanks for taking the question.
Can you provide color on your expectations for gross margin for revolve versus forward for the rest of the year I'm. Just curious as we think about elevated inventories it skews more towards one banner versus the other and also if theres any other puts and takes to call out for gross margin across each of those segments.
Yes, I think.
Pressure on both segments, they've both been operating at really a retro and full price mix and also really high markdown margin and that markdown mix. So we do expect to see increased pressure there. Both just naturally as we've communicated over the last couple of quarters, and then with an increased promotional environment out there that does get more challenging.
And then layer on top of that inventory.
Position that we mentioned about.
We think over time and good luck next couple of quarters still strong relative to previous periods.
Especially on the <unk> side, 47% down from that 49 that we did last Q2, but yes.
Call it five points higher than our kind of pre Covid era.
Really good progress by the <unk> in general.
And strong margins.
But it is a it is a dynamic environment. There is some seasonality there to where Q2 generally are our highest margin quarter and that's in part due to the mix of gesture.
Naturally comes down in Q3 and in Q4 as well.
But I think the biggest factor there is that full.
First markdown shift.
And you touched on taking pricing up mid to high single digits, but it looks like markdowns will also increase that to address inventory. So.
Can you help us with where the shakes out I'm curious if pricing ends up being a year over year tailwind or a headwind as we think about the back half.
Yeah.
I think it probably balances out I think is the bigger impact on AAV is probably mix shift coming.
Coming off a peak quarter address I think you can see that historically two in pre COVID-19 periods.
We do expect price increases to moderate in the back half of the year into 2023 and now we're starting to see those come through it takes some time for them to come through and like you said offset by this shift chief markdown.
Yes.
Plus or minus so nothing significant to call out there.
Thank you.
Your next question is from the line of Simeon Siegel with BMO capital markets. Please go ahead.
Thanks, Hi, everyone. Good afternoon.
Yes, what did inventory growing units rather than reported dollars and then I don't know if return product ends up back in inventory. So we can think about the accounting around just let me know, but any way to gauge what return product represents as a percent of your ending inventory and just whether there's been any meaningful difference in that percentage versus prior years. Thank you.
Yes, yes, the unit growth in inventory is much less than the dollar growth.
And part of that is mixed.
The mix between Florida, and revolve and then part of that is just the price increases that we talked about and also part of it is just that mix shift from last year, where we were chasing inventory into those specialty then going out categories are now being stocked in those higher price point Justice and special event categories like Mike said, we think the inventory is good.
Too much of it in with demand shifting so for escalating.
It left us in an elevated position.
So units.
Inefficiently.
Dollar growth.
And then you're right the returns.
In units go back into inventory.
That is elevated as the return rate is higher.
And the same proportion that you would see.
In pre Covid levels of course in the Covid time, when return rates are significantly lower in the mix was different.
Much lower mix of that returned inventory coming back in and on that point I think important to call out we don't talk about it a lot.
Full price sales of that returned inventory, it's really close to the full price mix of the initial the initial outgoing.
Sales so.
Back to the kind of held up inventory that we made.
Not an inventory pressure point per se.
Your next question is from the line of Tom Nicotine with Wedbush Securities. Please go ahead.
Hey, guys. Thanks for taking my question.
So when you look at your overall.
EBITDA margin.
Before COVID-19.
It was kind of a high single digit.
Our range.
Yes.
Just on the inputs you gave us guessing it looks like it's probably going to be something like.
<unk> be up 200 basis points below that this year.
Like how do we kind of think about the bigger picture margin structure for this business.
Do you think that over the long term.
High single digit margin business do you think.
At some point you can get to the double digit margins you had during the pandemic.
How do we kind of think about.
Margins in a more.
That's a normal environment.
Yes, yes, we still feel good about our 14% EBITDA target overtime.
We are facing.
A unique time with cost pressure, so maybe if we take it line.
A line by line. If you look at gross margin, we've been delivering around that 55% gross margin, which was our target and theres going to be quarter to quarter fluctuation, but we still feel good about that 55% gross margin target, especially given that owned brands as it was 20% last year, we hit our peak at 36%. We still think there's a lot of room to go there over time, and we're going to do that.
At a moderate pace, but.
So feel good about the gross margin and then if you go chiefs fulfillment.
Call it.
207, and that compares to $3 three in the pre Covid era, so gaining really good efficiencies there and you just kind of continuous automation improvements whether that's the automation here at weyerhaeuser expanding into the east coast warehouse, which we do think will.
Provide efficiencies overtime, we think there is room there.
The selling and distribution, we're just in a really unique and challenging time right now with those fuel surcharges in inflation. So that's been a real pressure point not just the year on year, because you have the additional factor return rates and low return rate last year versus the high return rate this year, but even on a post COVID-19 versus pre Covid comparison.
Significantly elevated fuel surcharges, and therefore costs that's feeding into that in that line item is two thirds shipping. So it has a really meaningful impact there.
We do what we can there that's one of the line items, that's less in our control. So we have to manage through this time that we're in and then marketing.
Marketing demand coming off as we progressed through the quarter.
Elevated levels, we want to continue to invest in the brand marketing events really build the brand.
Performance marketing is more expensive than theirs.
<unk> cost pressures there over time, especially if you look over a three year period from pre to post COVID-19.
We want to keep the pedal down I think there is efficiencies to be gained over time with scale.
Specially on that brand marketing component.
And then the last one is G&A, which is largely call it fixed or at least semi fixed.
We're really tied on that on that line item so overtime with the top line growing we expect to get some pretty meaningful.
Efficiencies out of that that line item so.
And then like I said still feel good about our 14% EBITDA target over time of course.
It's going to be it's going to be challenging couple of quarters.
Got you that over the long run.
Your next question is from the line of Matt Koranda with Roth Capital Partners. Please go ahead.
Yes.
Hey, guys, maybe just attacking the promotional environment question in a different way is there any way you can just share your thinking around your markdown approach in the second half that your commentary I guess suggests that youre going to be a little bit more Q4 weighted and promotional holiday.
I guess the simple question is why not just marked down now.
No.
In the near term, what's the advantage to ramping and the promotions and the current macro environment.
Yes, maybe I'll maybe.
I'll take the second part and then you can hit on that.
Kind of I think it was probably related to my comments on the kind of sequential movement in the margin that's more related to the full price markdown mix and that dynamic in working through inventory not necessarily.
Higher.
Intentional promotional push in Q4 versus Q3.
Okay.
Alright.
I'm sorry go ahead sorry.
There is an element of seasonality certainly from from two to four to Q3 from a strategy standpoint, we're not trying to kick the can down the road or anything we just want to take a measured approach.
Given that we think the inventory is quality inventory and so that means the markdowns will happen over time, and yes accumulate over time as well, which is the other reason youll see kind of more impact on Q4, but we found that historically taken a more measured approach.
Versus just putting a bunch of stuff on mark out all at once so it tends to be more effective for us.
Okay, That's fair and then on selling and distribution if I could.
On the deleverage 390 bps roughly year over year.
Could you just breakout cleanly for us just maybe how much was fuel surcharge related versus the higher return rate or how can we quantify these higher return rates.
In the current quarter and then on the original well if I could.
Any color quarter to date in terms of the change in returns.
It's still running at the same rate we were on to Q.
Yeah Yeah.
Yes.
Roughly the same level.
I would say, it's not significantly increasing or decreasing so I wouldn't factor any big movements from Q2 to Q3.
And probably the best way to.
Quantify that or kind of bifurcate the impact of return rates versus the feel is really looking at selling and distribution.
Kind of pre Covid, so looking at 2019 level versus.
Today's level, where the return rate was closer still a notch higher than it was back in the 2019 era.
Probably.
<unk> to that.
So if you look at that.
14, and a half versus $17 five and there is price increases that happened over time and a mix shift towards.
International with those return packages coming in.
That's a significant cost pressure and with that localization.
Probably the best way to kind of break it out.
And then maybe a different way on that.
Another.
Maybe data point, if you look at that selling and distribution.
We think about two thirds of that is freight.
Probably 25% is the return returns come in.
Slower and cheaper method in the outbound shipments so.
Kind of clarification that shipping component of the selling and distribution and then into those two may be helpful.
We have time for one final question and it comes from the line of Noah's African from Keybanc capital markets. Please go ahead.
Thanks for taking my question.
Are there any P&L benefits, we should be thinking about in the second half and of course longer term related to the opening of our east Coast D. C and if return rates were to remain elevated in the second half should we expect less of an impact relative to operating with a single DC. Thanks.
Yes over time.
Benefits, both on the outbound being able to ship to customers closer.
From that distribution center versus shifting all the way from la to the East coast.
Im going to be 100% of the inventory, but there is a small impact there and then on the reinsurance side as well as being able to accept returns in that facility, whether thats from kind of the eastern region of Canada or the U S.
And taking the inventory into that facility and then whether keeping it in that facility or bulk shipping it back to la and redistribution. So those are probably the most the.
A couple of more more meaningful benefits of that I wouldn't factor anything in this year and Theres always some.
Our costs and it will be on the fringes, but over time, we think it is is meaningful.
And then thank you.
Was there a second part.
Yes.
I don't think so.
And Thats all the time, we have for questions today, I'll turn the call back to management for closing remarks.
Alright, well, thank you everyone for joining us today.
We can support us in our journey towards building one of the world's biggest fashion brands.
Okay.
This concludes today's conference call you may now disconnect.
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