Q3 2022 Revolve Group Inc Earnings Call

Again, I'd like to mention that we have posted a presentation containing Q3 financial highlights to our Investor Relations website located at investors don't revolve 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 are costs and inventory manner.

<unk>, our growth, including growth in active customers and market opportunities and related macroeconomic and industry trends our partnership with news collective our plans to expand Ford renew and introduced the Ford brand Ambassador program, our future events 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 Exchange Commission, including without limitation, our annual report on Form 10-K for the year end.

At December 31, 2021, and our subsequent quarterly reports on Form 10-Q, all of which can be found on our website at investors not revolve dot com, we undertake no obligation to revise or update any forward looking statements or information, except as required by law.

During our call today, we will also reference certain non-GAAP financial information, including adjusted EBITDA and free cash flow.

We use non-GAAP measures in some of our financial discussions as we believe they provide valuable insights on our operational performance and underlying operating results. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP and our non-GAAP measures may be.

Different from non-GAAP measures used by other companies reconciliations of non-GAAP measures to GAAP measures as well as the definitions of each measure their limitations and 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 Carroll to call Us with Michael <unk>.

As well as Jesse Timberlands, our CFO following our prepared remarks, we will open the call for your questions with that I'll turn it over to Mike.

Thanks, Eric and Hello, everyone, we delivered another quarter of profitable double digit growth in the third quarter of 2022 that further distinguishes revolve in the fashion e-commerce landscape. Despite the increasingly challenged macro environment.

Before I get into the details of the third quarter I want to provide a higher level view of how like when I think about our strategy as both operators and long term owners of the business.

We are a founder led investor first mindset that permeates throughout the organization.

With this perspective, we were able to constantly make disciplined investments that we believe position us for continued success over the long term even during periods of macro challenges.

Recent time period is no exception, where we continue to make key marketing investments and launch exciting new initiatives that further elevate our brand and build on the long term opportunity to capture market share.

We have a history of this while delivering growth and profitability positive cash flow and a healthy increase growing active customer base.

This mindset and focus on investing in the long term opportunity.

Even through turbulent times has been a key contributor to our track record of growth and profitability over the last two decades, and we believe it will continue to drive our performance well into the future.

Now getting into the third quarter results and.

In the face of many challenges we grew our top line double digits and delivered meaningful profitability and cash flow. Our net sales increased 10% in the third quarter compared to the prior year period on top of 62% growth in Q3 2021 compared to Q3 2020, we.

We delivered net income of $12 million and adjusted EBITDA of $18 million in the third quarter.

As expected profitability was lower year over year due to reduced gross margins higher return rates and other cost pressures discussed in detail on last quarter's conference call.

Accordingly, net income and adjusted EBITDA increased 25% and 22% respectively.

Respectively compared to the third quarter of 2019 further illustrating our track record of profitable growth even more important in such a turbulent environment that we are generating meaningful cash flow and further strengthening our balance sheet, we generated $9 million of free cash flow in the third quarter, a triple digit increase year over year.

Nearly 20 years of experience operating resolved as soon as the company is capable of generating profitability and cash flow during periods of economic volatility can become even stronger relative to the competition.

We ended the very disciplined in our cost and inventory management to maintain profitability yet we're not overreacting for instance, with the abrupt shift in consumer demand that we experienced in the second quarter of 2022, we took swift action to rebalance our inventory in a very strategic way to balance the moderation of our inventory levels with our focus on the customer experience.

<unk> and our long term margin potential while maintaining our very strong brand partnerships. There is still work to do get only a few months and we are on track with our plan and I'm very pleased with our progress with our inventory position grew only 2% during the third quarter when compared to the second quarter of 2022.

Successful execution of our marketing and merchandising investments led to growth of 84000 active customers during the third quarter, expanding our active customer base to $2 2 million, an increase of 34% year over year.

This is on top of the record growth in active customers, we reported in our third quarter of 2021.

We view our continued healthy growth in active customers is further validation of our large market potential.

Incidentally, even with our investments in the new East Coast fulfillment Center, we opened during the third quarter of 2022, we are still investing less than 1% of our annual net sales in capital expenditures and important driver of our capital efficiency and agility is our ability to leverage our proprietary internally developed technology instead of relying on capital outlays.

To purchase expensive and cumbersome technology systems from third party vendors that is a common approach among e-commerce peers. Our approach is completely and fundamentally different when we expand our fulfillment center infrastructure, we primarily leveraged our internal engineering resources to evolve and customize our own existing proprietary technology systems to meet.

Our specific needs and to support our best in class service levels for customers.

Shifting gears to net sales performance by geography, our U S. Net sales increased 10% and international net sales grew 12% year over year in the third quarter of 2022.

The international results are impressive considering the significant depreciation of the U S. Dollar during the third quarter, particularly against the British pound and the euro.

These currency movements present, a headwind to demand and considering that our pricing in local currencies is tied to the U S. Dollar.

Another words, when the dollar strengthens against the British pound.

Our product becomes relatively more expensive for customers living in the U K and.

And we can clearly see the negative impact on our monthly sales results in affected regions. Our net sales results in Europe , and the U K went from high single digit year over year growth during the month of July to negative year over year growth comparisons in net sales for the month of September coinciding with currency exchange rates, becoming much more challenging late in the third quarter.

That being said, it's also important to consider the broad macro challenges facing our European customers to provide a framework of the UK and Europe on a combined basis represented a mid single digit percentage of our total net sales for the first three quarters of 2022.

Importantly by comparison, our year over year growth in net sales remained healthy in key international regions, such as Canada, and the Middle East, where the foreign currencies have been much more stable.

Finally, our track record of profitable growth also reflects our long term focus on building trust with our customer portability and this trust is operational excellence and exceptional service levels.

During the third quarter, we received gratifying recognition for outstanding service levels in our key international market.

Revolve was recognized by and profiled in Singapore's largest English language daily newspaper, the Straits times for having the best customer service in the online women's apparel category. The publication highlighted revolves customer first culture use of technology in the buying process to stay on trend fast and free express shipping and hassle free local returns in Singapore.

Costs.

We're very proud of this recognition for our exceptional service levels that are a key competitive advantage and are a direct outcome of our growth strategy recall that in January of 2020, we announced service level enhancements in Singapore that were designed to further raise the bar on our international customer experience that led to a recognition.

Importantly, this example, as part of a broader success, we are achieving as an organization our customer satisfaction scores in the third quarter was the highest level in at least five years and we intend to continue to set the bar even higher.

Unlike many others, we undoubtedly faced challenges in the current environment and we have much more work to do we will continue with our Swift action to rebalance our inventory growth in a very strategic way, we will continue to be very disciplined in our cost management and we will continue to make investments for the long term.

So I believe our third quarter results demonstrate that we're are capably navigating through these uncertain times from a position of strength, while continuing to prudently invest in our long term growth opportunity. Thanks again to the entire team for their dedication and invaluable contributions to our continued success now over to Mike.

Thanks, Mike.

I'm very pleased with our ability to deliver double digit profitable throughout this quarter and I'm very excited about the compete momentum of our brands. The strong relationship with our network of partners and customers and the incredible performance by our team.

Active in the third quarter as we continued to invest in our future growth opportunities, including key brand building events that generate returns over extended periods of time.

Very pleased with the early results of active patients and pant launches and importantly, the positive feedback from our customers.

In September you attention New York during fashion week to house, an impactful weeklong activation further elevating our brands are engaging experiences intended to delight and excite our community influencers customers and partners.

The flagship event whats out there.

National Interactive and visually stunning the vault gallery that completely re imagined the traditional fashion with experience in the signature of the hallway and uniquely features real time shopping component.

<unk> tagging and bigger than ever with all gallery.

Blended installation featuring a curated assortment of emerging fashion designers this as DAU and for being partners showcasing their beds and dedicated basis.

We posted 9000 attendees at Reebok Gallery over four days, an increase of about 50% from our inaugural event. In 2021. In addition, we hosted a much larger group of high value customers that are off Yodlee and other fashion week event and what is that 2% of these high value customers telecom understate to be a part of our money can't buy experience with.

It was incredible to interact with our customers experienced their loyalty to the brand and here are going to get back at our level of service and their overall shopping experience. We also attracted participation from underway such as the last year, we collectively amplify that elevated experience in social channels with our dynamic and engaging content, particularly video.

To further capitalize on the powerful industry wide shift of video content for fashion, we diversified our influencer partners to increasingly focus on picked up native Influencers, who helped drive incredible growth and active cosmetics fueled by a very active month of September when we held several events during fashion week, a new title using the third quarter were more than 10.

Times higher than in the third quarter of 2021 meaningfully exceeding our expectations.

Shifting to a discussion of own brands during the third quarter, we further extended our market potential by introducing two new owned brand collection that rank among our most successful brand launches in our history.

Owned brands provides a powerful platform for us to internally develop products, where we see opportunities in the market based on our data driven approach to merchandising.

One area, where the opportunity for growth isn't the elevated on band Pas at premium price points in September we collaborated with supermodel Elsa Hot to launch an elevated brand called Healthsouth, featuring an average retail price of around $250 featured exquisitely on both revolve and forward. The collection was one of our best performing on plan.

Launches and we've seen in a number of celebrities during New York fashion week created with sustainability in mind I'll say is the elevated and creative expression Elses notes, we issued that Bill described that's being minimalist haven't we.

We also see opportunity in expanding our market potential new customer demographics.

Covered extensively in major past outlets such as assets Highwood. Good morning America people Us weekly and in style. We are pinned up the content creator and curb model, let me beta to criticize inclusive on brand collaboration exclusively available on our revolver.

Demand for the collections first shop in August resulted in many styles selling out right away in the second job doing fashion also performed exceptionally well most exciting outcome is that our collaboration with academic both resonates with our current customer and expands their own brand market potential into extended sizes, enabling us to attract new and incremental customer demographic.

In fact, approximately one third of all orders, while the Remy at some of our cash in the third quarter were new customers to evolve.

Now I'll talk about Chile innovative new channel for our brand building investments that are very excited to talk about today, we are announcing a strategic partnership that we believe has the potential to significantly more cost effectively expand their audience reach and increased engagement with our community of customers brand and influencers in exciting ways. We are collaborating in the creation.

The fashion Center mobile gaming and E Commerce experience.

Again that is effectively an elevated fashion peg round that will feature digital payable vendors of fashion and beauty items from revolve and forward.

We enabled platform will power players to become their own teeth.

By providing tools for creative expression, enabling them to connect their favorite football fans and engage with <unk> became the first shopping and dining experience collectible asset in detail shortly interactions we.

We are particularly excited about this opportunity to expand our reach and engagement considering that mobile gaming is the fastest growing some of the media on the planet and that 49% of mobile gamers worldwide.

<unk> into Google play of research.

Our partners Entertainment studio Mused collective, which is backed by Griffin, giving partners one of the worlds largest investment venture funds exclusively focused on gaming.

Users led by Amber dissolve.

Deep experience in leading platform e-commerce, and innovation initiatives being taken brands used co founder and chairman Therapeutics, formerly of covet fashion, a leading fashion mobile gaming platform that grew to more than 3 million active users and has been downloaded more than $78 million. According to data that AI.

Covet fashion generate more than $225 million in lifetime revenue for electronic Arts acquired the franchise last year.

I'll conclude with an update on forward.

Altria destination, where we continue to see a great deal of opportunity for continued growth.

Net sales for the third quarter increased 17% year over year and encouraging results in the current environment and considering the prior year comparison as well to illustrate how well we are executing against a large opportunity in front of us and luxury over the last three years, our compounded annual growth rate for Fortinet sales is a robust 35% and deferred business is about two and a half.

Times the size it was three years ago.

One area of forward growth that we view as an exciting new opportunity is resale.

Last quarter I talked about our new Ford buyback program proprietary resale program dedicated to circulate and luxury shopping where we are offering to repurchase handbags with what customers in exchange for credit on our site starting repurchase initiative has opened up a brand new opportunity in retail for the first time enabled us to attract and retain customers interested in purchasing <unk> handbags.

Within a new and dedicated section of a forward side called slowed with you.

Thrilled to share that customer interest in handbags in the early going has exceeded our expectations.

To build on our early success, we are investing to further expand the Florida program beyond supply from our own customers participate when the forward buyback program in the coming weeks, we will begin testing the resale of handbags sourced from third parties, but thats, just the piano handbags, including from the world's most coveted luxury brands.

Our investments in forward include further elevating the brand through our partnership with Kendall Jenner and forward as creative director and.

In September handle all that data is Mr, Florida, and New York to celebrate the new forward fall campaign that Kendall herself deducted.

Timeshare stepped behind the camera and home all that Stuart's creative director.

Closely with GQ Global editorial director will Welch.

Rent was attended by VIP, pacemakers, including and leave out accounts and Dr. Devin Booker and certain Clarkson coupled with the soon to be introduced towards brand Ambassador program I touched on last quarter.

Initially launching our next few weeks.

Setting growth initiatives afford to have the confidence in.

And our future.

There is no denying that we are operating the challenging environment. We are very much up to the challenge is it's a great opportunity to further step away from our competitors.

We have an outstanding leadership team, including many leaders who have been with Mike in my 10 years or more of a strong balance sheet and we have a business at the top of about 18 out of 19 four years. Since we have founded the company. This gives us the confidence to focus on the long term and continue investing in exciting growth initiatives that we believe will maximize shareholder value over the.

Long term, that's our technology driven DNA operational excellence.

Our brands in connection with a next generation consumer we believe we are well positioned to capture market share now I'll turn it over to Jacky for a discussion of the financials.

Thanks, Michael and Hello, everyone. We are pleased with our accomplishments in the third quarter as well as our exciting progress building on our long term growth initiatives all delivered by the team within an extremely difficult economic climate.

I'll start by recapping, the third quarter results highlighted by double digit topline growth continued profitability and healthy free cash flow generation further strengthened our balance sheet.

Net sales were $269 million a year over year increase of 10% and an increase of 20% on a three year CAGR basis.

As a reminder, our net sales in the third quarter of 2021 had increased 62% compared to the third quarter of 2020 and have even grown sequentially from net sales in the second quarter of 2021, which is not our typical seasonality, creating a very difficult year over year comparison.

Revolve segment net sales increased 9% and forward net sales grew 17% year over year.

By territory domestic net sales increased 10% year over year and international net sales increased 12%.

Might the currency headwinds that became progressively more challenging throughout the third quarter.

Active customers increased by a healthy 84000 compared to the second quarter of 2022. This growth expanded our active customer count to $2 2 million, an increase of 34% year over year.

Through the first three quarters of the year, we have already added more active customers in 2022 than in any prior full year in our history.

Looking forward, we continue to expect moderation and quarterly growth of active customers in the fourth quarter of 2022, and especially in the first quarter of 2023 for the trailing 12 month metric.

The reason the first quarter of 2023 will be a particularly challenging comparison is that we achieved exceptionally strong record growth in new customers in the first quarter of 2022.

Our customers place 2 million orders in the third quarter, an increase of 7% year over year.

Average order value or <unk> was a very healthy $320, an increase of 16% year over year.

Shifting to gross profit consolidated gross margin was 53% a decrease of 211 basis points, primarily due to a lower mix of net sales at full price year over year.

The decrease in gross margin is directionally consistent with our commentary on last quarter's conference call, but did come in slightly lower than implied by our guidance range for the quarter.

Moving on to operating expenses.

Selling costs, Deleveraged 64 basis points year over year, primarily due to a year over year increase in our return rate and the resulting mix of units processed as.

As well as increased labor costs and costs related to the expansion of our fulfillment network.

Selling and distribution costs, Deleveraged 158 basis points year over year and remains a significant headwind that.

Importantly came in at a lower percentage of net sales on a sequential basis than in the second quarter of 2022.

For shipping packages to customers represent the majority of this line item and these costs remain elevated year over year due to a higher return rate in 2022 and significant year over year growth in variable fuel surcharges, including every package shipped through our carrier partners.

Marketing leveraged by 265 basis points year over year better performance than implied by our outlet commentary last quarter.

Primarily due to lower but still significant brand marketing investment year over year highlighted by the very successful events held in September during fashion week that Michael talked about.

General and administrative costs were $28 $5 million and also came in lower than the outlook. We provided on last quarter's conference call.

All in despite some incremental fulfillment cost pressure our cost structure came out better than expected reflective of our disciplined approach to cost management.

Our effective tax rates were again very different for the year over year comparison, our tax rate for the third quarter of 2022 was 26% 12 points higher than the 14% tax rate in the third quarter of 2021 that included meaningfully higher tax benefit.

Net income was $12 million or <unk> 16 per diluted share a decrease year over year that was impacted by the meaningful differences in our effective tax rate.

<unk> gross margin and growth in operating expenses, but slightly outpaced our net sales growth year over year.

Adjusted EBITDA was $17 7 million.

A decrease of 18% year over year.

Looking back to the pre pandemic period as a benchmark our net income and adjusted EBITDA for the third quarter were 25% higher than 22% higher than the net income and adjusted EBITDA reported for the third quarter of 2019.

Moving to the balance sheet and cash flow statement operating cash flow and free cash flow increased significantly more than 400% year over year and was helped by our team taking swift action to moderate inventory growth in the current environment.

For the nine month year to date period net cash provided by operating activities was $34 million and free cash flow was $31 million.

With both measures down significantly year over year from the exceptional cash flow generation in the prior year period.

The decreases in both measures the year over year, primarily reflecting lower net income which included much higher tax rates and cash payments for income taxes did increase by $14 million in 2022.

As well as the increased investments in inventory during the first half of the year.

With the demand trends shifting lower in the current macroeconomic environment beginning in the second quarter, we moved quickly and decisively to bring inventory back in balance.

Theres only been one quarter, we are pleased with our performance thus far and we are continuing to make further adjustments.

The strong cash flow generation has further strengthened our balance sheet and liquidity our balance sheet remains debt free and cash and cash equivalents as of September 32022 were $244 million.

An increase of $22 million or 10% from September 32021, and an increase of $6 million or.

Or 3% from just last quarter.

Looking back further our cash position at quarter end was nearly five times higher than the cash on our balance sheet three years ago as of September 32019.

And this cash generation with operational without any kind of major financing events, providing a clear and powerful indicator of our operating strength and ability to generate cash through business cycles.

Now let me update you on some recent trends in the business since the third quarter ended and provide some direction on our cost structure to help in your modeling of the business.

Starting from the top.

It's a very uncertain time for consumer spending globally with persistent inflation weighing on consumer confidence macro pressures on consumers in key markets like Europe , the UK and China.

Increasing foreign currency headwinds that became even more pronounced as the third quarter progressed looking at our net sales trends early in the fourth quarter through the month of October net sales increased approximately 3% year over year against a more difficult year over year comparison that we faced in the first nine months of the year.

Trends in October were better domestically than in international markets as net sales in regions, where we face significant currency headwinds such as the UK and Europe have trended lower in recent months.

Given the uncertain macro environment and considering that our year over year comparisons are even more difficult for the balance of the fourth quarter. We encourage investors to model further moderation in our year over year net sales comparisons for the balance of the fourth quarter from the approximately 3% year over year growth in October .

As a basis of comparison recall that our net sales in the fourth quarter of 2021, a year ago increased 70% year over year, all around the topic of year over year topline comparisons looking ahead to 2023 for modeling purposes based on what we know today. The first quarter of 2023 will be by far our most.

Challenging comparison for net sales in 2023, since we had such an incredible first quarter of 2022.

We expect net sales comparisons in 2023 to become progressively easier thereafter, following the first quarter of 2023.

Shifting to gross margin consistent with the commentary on last quarter's conference call. We expect our gross margin for the fourth quarter of 2022 to be sequentially lower than the third quarter of 2022, primarily due to our expectation for a lower mix of full price sales on a sequential basis versus the third quarter of 2022.

As a result for the fourth quarter, we expect gross margin of between 52, 5% and 53%. This implies a decrease of approximately two points year over year at the midpoint.

The same year over year decline in the third quarter.

Looking beyond the fourth quarter, we expect continued pressure on gross margin in the first half of 2023, and we continue to work through our inventory position.

We expect fulfillment expense of around 3% of net sales for the fourth quarter of 2022, consistent with our performance for the third quarter, selling and distribution, we expect that selling and distribution costs as a percentage of net sales in the fourth quarter to be relatively consistent with a 17, 3% in the third quarter and.

And slightly lower than our outlook provided last quarter.

Marketing, we will continue to invest in building our brands and even further strengthening our brand connection with our loyal customers.

We expect our marketing investment to be between 16% and 16, 5% of net sales in the fourth quarter.

Your year over year, but lower sequentially versus the third quarter of 2022, and also lower than our prior outlook.

Of note in.

In the third quarter, we saw some early signs of advertising prices decreasing likely due to marketers reducing investment in the current economic environment.

General and administrative we expect G&A expense of approximately $29 million for the fourth quarter.

The expected increase in G&A costs year over year reflects investments in our team. We have made this year to support our continued growth and expansion. We believe we operate very efficiently illustrated by the nearly two points of G&A leverage we have achieved in just the past three years.

And Directionally speaking, we expect the rate of year over year growth in G&A expenses to moderate in 2023.

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%.

We continue to anticipate a very challenging macro environment in the months ahead, and we will remain disciplined in our cost management, while prudently investing in key initiatives and keeping an unwavering focus on the very attractive market opportunity ahead of us over the long term.

We are confident that with our strong brand healthy balance sheet and operational excellence. We can navigate through these short term challenges and continued to gain market share with that we'll open it up for your questions.

Thank you 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.

We will take our first question from Randy <unk> with Jefferies.

Yes.

Yes, Thanks, a lot guys.

I want to first go to you.

About.

Gross margin guidance.

Okay.

So we.

We made some good progress on the inventory growth relative to sales growth in.

In the third quarter relative to the second quarter. It sounds like you're continuing to make that progress when could you expect.

The inventory growth to come in line with sales growth would it be by the by the end of the second quarter of next year, such that the markdown pressure.

Should abate in the back half just want to get too active.

I can give on how you think about the cadence.

Growth relative to sales growth first thanks.

Yes, sure. Thanks, I mean I think.

I think you are in line there.

Mike said, we made good progress we're on plan in terms of rebalancing inventory and bringing it closer in line with the sales growth, but it does take some time, especially on the foreign side, we would expect the bulk of the the positive impact there and bringing that closer in line money into 'twenty three.

Especially but by the time, we hit the end of the second quarter of 2023.

Got it and just to follow up there you feel like you'd be more comfortable with those.

Those gross margins being able to improve in the back half as they go up as a comparison.

First with the.

The inventory being matched up.

Yes, yes, yes.

Matt.

The first half of 'twenty, two 'twenty three before it eases up when we start to see some gains in the back half of the year.

Got it Okay and then just last question more for Mike and Michael.

Just kind of.

Perspective, if you could on just how the consumer your consumers may be chosen.

The notable changes that youre seeing in that consumer across the two different businesses.

She becoming more price sensitive or not is a frequency changing at all any kind of more.

Either quantitative or qualitative aspects of how things would.

It would be super helpful to the audience. Thanks Scott.

Yeah. The only thing that really noticing is that our core customer premium customers still strong we've seen <unk> over this quarter, but we have seen that kind of the lower priced customers little bit softer. There. So I think we're seeing like a mix tell it to world that which we'll see in <unk>.

Not surprising at all I think as the economy gets better I think we'll see strength increasing across the board. So I think that's probably the one thing that we're seeing at the moment.

Got it thanks, guys Super helpful.

We'll go next to Oliver Chen of Cowen.

Alright, thank you.

Guarding the comments very helpful. The comparisons do get tougher.

Would you generally think about normalization towards your longer term growth algorithms and how that may manifest as youre attractively picked up a lot of new customers.

Then second question on web three some of the themes of web III include decentralization and the evolution of different kinds of platforms as well as crypto just what should we understand that customer may be different from your existing customer to a younger customer, but the video games are so significant.

Love the vision and the implications for financial modeling if you have any.

And last question on promos it sounds like Youre working through inventory to the <unk>.

And what's your happy about but would love your diagnosis that promotional environment and how you're competing in what your prepared for thank you.

Yeah definitely.

Or Mike here, So I'll take the first part as far as how we think about the growth rate in.

Normalizing and kind of how it compares to that long term trend. So on a three year basis were essentially in line with our long term target and obviously theres a lot of noise in between with Covid lows and then a huge rebound last year potentially over shooting a bit towards towards towards online and kind of aspirational items and so we're.

We are a bit short of that long term target in the current period that will likely continue for a few quarters.

Current macro weakness in comps where it themselves.

But I feel good about the momentum of the business and.

Kind of continuing to achieve that long term growth target of 20% plus.

On the West three stuff, Michael you want to talk about that more.

Yes, 1000, but that I think at this point in the game is going to be.

Far too early to model the financial implications at all for the long term, but I think it's very important for us to really you know stay innovative and stay at the forefront of what's going on to me. It is very similar to what Mike and I. We started the company 20 plus years ago. There was a lot of.

Doubts about the future of e-commerce.

A lot of Doom and gloom, but I think that was where we saw the opportunity and I think it's important that we're continuing to invest and keep an eye out for.

Over the next 10 to 20 years with regards to decentralization I'd love to have a longer conversation with you offline on a tip up too many competitors about what we have in the roadmap there, but I think there are some.

Exciting kind of opportunity to share that this new platform provides the best path to providing a broader platform for them.

A decentralized.

Product development I think it's a super excited about what we're doing here.

And then the last part of your question.

The promotional environment, we've certainly seen the promotional environment get more intense as the year has progressed and we expect Q4 this year to be pretty heavy promotional wise.

Yes.

<unk>.

<unk> always been where we feel like revolve is not as influenced by what others are doing although we're certainly influenced by kind of more broader macro sentiment and or kind of broader sales trends.

You saw them in the third quarter, where the revolve gross margin held up pretty well and we took a bigger hit on the gross margin side.

We are definitely expecting intense promotional periods in the fourth quarter.

And we'd love to get ahead of that a little bit with some increased markdowns in the third quarter, but that will definitely be.

Some some pressure there on the promotional side and as reported in the fourth quarter.

We will take we will take our next question from Mark all swagger at Baird.

Great. Thanks for taking my question.

With respect to the guidance. It does seem like you have a bit more confidence in your ability to manage the costs versus what the macro demand backdrop might look like.

Here is evident in our cost discipline and Q3 as well as the guidance for Q4. So I'm wondering if you could just share any high level thoughts on how investors should be thinking about the range of margin outcomes for 2023 as you navigate this more on certain macro I think the guide implies roughly an 8% EBITDA margin. This year, but you also pointed to some.

Ongoing headwinds in the first quarter so.

I know you probably don't want to get too specific but spending any high level thoughts or framework would be helpful. Thank you.

Yes.

Yes sure this is Jesse.

I think it probably works best without getting too specific just kind of work through the line items and give some color. There. So no on Randy's question, you talked a little bit about the gross margin pressure continuing through the first half of the year and next year and then easing up in.

Some gains in the back half of 2023.

<unk> brands has increased moderately from that 20% that we exited or have had in 2021. So that it continues to build there will provide some benefit, especially as we progress through 2023.

If we look at fulfillment.

We are we are pressured at the moment with high return rates, we did move into a new facility. So there is some short term cost pressures there and we would expect to get some moderate level of efficiencies as we grow into our space and maximize that with scale.

And that will also benefit to some extent on the selling and distribution line item as well.

Secondly, on the selling and distribution again, a lot of cost pressures there from the return rate fuel surcharges and just macro dynamics again.

Very variable line item.

But we do expect to get some efficiency there overtime hopefully fuel is shorter term in nature.

Marketing continue to keep the pedal down investment in marketing.

Similar to what we've done in the last couple of quarters and then finally G&A.

As we mentioned in the prepared remarks that that rate of growth will moderate in 2023, we made some pretty meaningful investments this year coming out of October , but that will moderate and come back in line. So we should get.

Similar to what we've seen the last couple of years without two full points.

2019, so hopefully that helps give some some color into 2023 to the extent, we can and then to your point the macro.

Line is very uncertain.

Okay.

Thank you.

Yeah.

We will go next to Michael Binetti with credit Suisse.

Yeah.

Hey, guys. Thanks for all the detail.

Jessica can you unpack that 3% in October please a little bit of a deceleration in the multi year rate just what's going on on the ground that you are seeing that.

That you want to isolate for us here to help us think about the trends in the quarter and then.

I'm just trying to think about customer growth versus order growth of all of that I know I know customers is a trailing 12 number but 34% growth.

We can make some inferences there on the quarter can you help us understand that growth rate versus orders up 7% in the coal in the quarter and I'm wondering if you are seeing.

A new customer that you think is going to require some higher level of discounting going forward or anything like that just just given that I don't I don't I don't.

Didn't expect the customer growth rate to be as strong given some of the dynamics last quarter.

Yes, yes, a few things I guess, maybe starting from that.

Back and working in reverse.

Active customer again being a trailing 12 month number we are picking up the benefit of a couple of really strong quarters, especially Q1 of 2022. So we do expect that rate of growth to moderate.

Into Q4, and then especially into Q1, so that 34% will come down and again these things will start to converge as things normalize.

Normally youre seeing and get out of these crazy times.

And then on the order side, the order versus dollars and active customer.

We are seeing that in <unk>.

Combination of.

Inflation price increases and that kind of mid to high single digit range, but also her shifting to higher price point products and then also.

I'll, let Michael mentioned.

Higher pipeline product holding up better than the lower price point and you can see that in our Florida results and then also.

Within revolve you can also see justice checking really well and then within some of the other categories handbags.

And maintenance she is doing really well and within the fashion apparel category. Some of those higher pipelines doing better relative to the lower price point categories. So a lot of dynamics at play on that side and then the trends.

In Q3, and as we as we entered Q4.

So as we mentioned July was plus 10, the comps got harder we closed the quarter at plus 10. So it was pretty linear through the quarter. Despite some more more tough comps in August and September and also international getting progressively more challenging with the currency movements within the quarter.

And that.

Led into Q4, and we continue to see that currency and international pressure there so domestic outperforming international in the fourth quarter.

October was one softer than what we experienced in Q3.

When you look at one year and multiyear comparative.

Yeah.

Thanks, a lot guys.

Okay.

We will take our next question from Ana and JV at Needham <unk> Company.

Great. Thanks, so much good afternoon, thanks for taking our questions.

Follow up on the previous point, though on October being a little bit softer.

Can you maybe talk about what you're seeing by brand is that more traffic or conversion.

Any surprises from October and then secondly on inventories are great to see progress being made there.

Maybe talk about your comfort with the carryover levels by brand it sounds like forward, maybe it's a little bit heavier than revolve right now and how do you guys think about inventory buys for 'twenty three thanks, so much.

Yes.

And marketing not because it was you know on financial decision, but we realize is running our second annual <unk>.

Gallery, we were able to accomplish you know even more with the first time, we do something of course, you know a lot of experimentation.

<unk>. So the second time around <unk> understood would work best we understood where to travel understood where a double down and ultimately we were able to achieve better results in a decreased spend so very very proud of the team. This was not let's ship I naturally it was let's do our best let's make sure we do what's important and they continue to invest it must be disciplined and and get better.

And I think that's what exactly happened this quarter.

Thank you.

We'll go next door talent Raymond James.

Oh. Thank you. Good afternoon, everyone can you talk about the outlook for it will be going for it just curious, but the right way to think about the mixed impact of revolve versus Ford and.

And the work that you need to do on managing inventory and then secondly, I was hoping to ask a follow up question on margins. So uhm any additional contacts you can give on the margin pressure and three Q in the fourth quarter guide related to hire supply chain caught in the fuel surcharges would be helpful. I think you mentioned that gross Martin.

And will be under pressure in the first half curious if that means that evening supply chain pressure will be more of a back half twenty-three tailwind.

Yeah on the first one and the.

Sorry and I.

Just lost the first one.

<unk> sorry can you repeat the first part again and I imagine that's with a K O V. Yeah just.

Especially out look on <unk>.

Nothing like that.

I'm a really good game there you know the last several quarters and that the combination of <unk> for me really well higher price purchase price points, performing really well and and the full price makes we've been operating out you know really record levels of full price for the last several quarters it came down.

Oh of course, that's still operating a higher level than the pre Covid era.

So on that front.

We expect the higher price plans can be performed well addresses is great for us as we go into the queue to <unk>, but it's typical T. Keven, we generally generally C E O. These increase.

We'll see some moderation there so I don't think we'll see the you know the expansion that we've seen the last couple of quarters, given the shift from the record full price into mark down, especially as we enter.

Carter and into the first half of 2023.

And then the <unk> alright.

Alright, and how that impacts emergency we are seeing some softening on that front sequentially from the second quarter still running you know two three X, depending on which period you pick higher than.

The prior year period in pre Covid levels. So you know, it's coming down how fast it comes down we're not sure yet so probably wouldn't factor too much into that until you know and that <unk> 2023 time zone and also important to to.

Can you also check that against the <unk> you know, we do run out premium <unk>. So you know the phrase is a challenge onions on site as well, but not to the extent.

It is on the lower price point players out there. So you know, it's a smaller percentage of the cost of goods sold.

We'll go next to Jim Daffy <unk>.

Thank you good afternoon <unk>.

Two lines of questioning from you guys first question on the pressure that you're seeing on order attractive customer Jesse touched on this earlier, but I'm curious if you could isolate the falloff in orders proactive customer to a particular cohort or type of customer or if there's any analysis it should lay down that.

Yeah, nothing nothing really call. It that we did see a small decline sequentially on that orders practice customers still running higher than we are experiencing uhm trees have it so I'm still a really healthy number but we did see a decline there and again, there's a little bit of you know picking up these active customers from that record Q1.

Timeframe, but nothing nothing to call out on a cohort they continue to perform a really consistent overtime.

You did see the COVID-19 pressure and all cohorts getting compressed means by the 2021 rebound in all cohorts expanding you can see that in the retention numbers, but nothing to call out on a on a specific cohort I'm really optimistic with the customer that required over the last couple of years and retention rates holding you know at whether you've been historically.

<unk>, we have you know.

Call. It 19 years of cohort data so it really good data set to to read.

Okay. Thank you for that I also wanted to ask about performance marketing effectiveness can you speak about how consumers shifted video is influencing marketing year old and therefore allocation of your performance marketing spent.

Yeah. So the consumer urge you to video has definitely been a factor in this area that we've been ramping up investment and it's still promote pure performance broken standpoint, a fairly small person, but we do I think where it's made a much bigger impact is on the brand marketing side, where we've seen huge growth in video oriented platforms.

<unk> broke tenex compared to the prior period.

You're over here and then even on even scream itself right with the shift to real so really big shift from the brand marketing side and I'm starting to see some <expletive> on video, but still more focused on kind of the static ads.

We'll go next to <unk> capital.

Okay.

Hey, guys. Thanks.

How would you characterize the sort of the number in depth depth of promotions on both sides relative to pre pandemic levels that I have a follow up.

Yeah. So I think it depends kind of what you know period, you're looking at but you know suggest used earlier point full price sales mixes still is all very healthy and higher than the than pre pandemic levels revolve. It as we talked about you know, we we think we have a better bill.

Two minutes through that inventory without taking significant levels of markdowns and then for it is a little bit more subject to competitive pressures and whatnot. So.

Certainly <unk>.

<unk> I think versus what we would consider.

A kind of normal economic environment on on a go forward basis, you know our our our markdowns are elevated versus where we'd like to be but you know we think that'll take a couple of quarters to work through it and then we expect to see that but the margins bounce back too close to where they were and and kind of the pandemic high pitch.

But but you know, it's really not quite there because I was a unique period.

Okay. Thanks for that and then just return rate.

Chris How you guys would characterize those and how they tried it into October it seems like you know potentially we're seeing it down take just a touch in the third quarter relative to the second.

But just was wondering if you can kind of characterize the latest in terms of returns and expectations for return rate. So that a go forward basis.

Yeah, I think we'd characterize it as you know <unk> remain elevated at least and you know the near term a couple of things that play. There. Just you know as a reminder is that if you compare to pre COVID-19 levels were running a couple of points higher that's number one due to the international localization and higher return.

And asked me what you think it's a great thing and is it really extended marketplace, Canada, you know it was going triple digits. After we.

Launch the localization there.

<unk> is another factor you know smaller than the international factor, but the full price to carry higher higher return rate maybe in the near term. There's some relief uhm given the shift to mark down uhm, but not banking on too much. There and then we are you know for the last couple of quarters. It started <unk>.

And if you could come in to the last part of what we did see just kind of macro kind of return pressure outside of just shifted mixed in international. So we're factoring that at least for the short term and then over the long term will continue to look for ways to reduce that.

Benefit of both resolved and the customer importantly.

We'll go next door tampering young at Barclays.

Great. Thanks, Mike you mentioned the deterioration in international throughout the quarter in part because of USD pricing. It seems like F X volatility is going to be here for awhile or certain that something you're going to have to continue to contend with are you, making any changes in how you think about pricing for international too maybe alleviate some of that volatility or is that just pretty much.

Sure given the size of the business.

Yeah, we are maybe.

Maybe two stone understatement to see we are making changes, but we are currently analyzing making changes and we make some make some changes there. So so we're.

We're we're doing some analysis on.

The benefits and costs of of subsidizing the currency pressure a little bit.

Also considering you know maybe you know a little bit more than you can in the future, but you know at the end of the day currencies could go out because they could go down and we're prepared for for either scenario in the short term and we've seen this historically internationally when when the currencies are working against US. It applies that that short term pressure, but yoga longterm trajectories very healthy and.

You know and I think as soon as consumers adjust to the new reality of the exchange rates will be in a very good place.

Great. Thank you.

No one was next to Edward room at first Chandler.

Hey, guys. Thanks for <unk> <unk>.

Couple of quick ones for me I guess first can you give us a quick update on where you are interested penetration route the historic norms I know that that's obviously if it had been for returns to kind of link it back to that and as a follow up to your last question I'll return rate specifically I know you can call. It this macro related with term pressure.

Second Quartersaw light inflationary pressures I just need any reduction in the consumer that's just returning the entire order or that usually is about macro related. Thank you.

Yeah on the first of all I'm just makes it that the 231 per cent. So it take higher than you know a couple of points higher than last year plus.

Plus or minus in line with the pre COVID-19 level. There are some seasonality there as well I mean typically to the higher dress makes sense and Q2.

In line tobacco everywhere.

And then returned nothing nothing.

Nothing really to call out there in a significant change of you know kind of full or partial or that we are seeing units per order increased slightly so that's a benefit on some of the other costs.

Can be impacting return rate as well.

Thank you.

<unk> Alright securities.

Hey, guys inside package with that one but.

Alright.

So Jessie I believe before you know when you were talking about a bunch of takes for 2023 margins. Yeah. I think it said something along the lines of thought keeping the pedal down on on marketing.

Does that suggest to you know.

Maybe another year, maybe deleverage I'm, a marketing and just.

High level, how should we think.

Think about the <unk> Ah.

Line item.

And <unk> and <unk>.

Tailwind to EBITDA margins, rather than rather than I have been.

Yeah, Yeah, I think yeah that kind of gets get that you know what we're expecting on the top line for 2023, which is you know kind of well.

Well very uncertain. So at what point, we start to get leverage is unknown at this point I think the team that you know performance marketing is variable will continue to you know.

Balance that on a day to day week to week basis, the brand marketing is.

More structured more fixed and also part of that is opportunistic so will continue to make those investments and that's where you're gonna get some balls around the corner to corner and the appointment, which we start to get leverage on that line item is you.

We will at some point, but can't comment much beyond that on timing.

We'll go next to <unk> capital markets.

Thanks, Good afternoon guys.

Sorry, if I missed us I think to be a general color and moving pieces for Q4 top line and he just more granularity you're willing to to get you for what you expect for Fork you and once you revenues and be applied active customer growth bedroom with a <unk>.

Yeah. So you know we dictated October grew at three per cent on slightly more difficult <unk>, even harder in the queue for if you call back to.

Q3 of last year's color. We said October grew at roughly the same rate as Q3, which was 62 per cent closed four Q at 70 per cent.

You'll get to a tougher can't dynamic in November and December . So that's on Q4 and then he won again you know just doing that to highlighting that this is this will be a very challenging one year <unk> quarter, you know so expecting ongoing challenge that in one year basis, and then ask the customer similar dynamic at play.

<unk> with the added complication that that trailing 12 months number as we start to drop you know, especially if you're going into Q1 of 2023 and me drop that Q1 of 2022.

<unk> uhm that'll be very challenging. So you know if you work from the <unk> 34. They were at four Q3, you Gotta go down in queue for that will continue to go down in Q1.

And probably in the queue to you before we start to start to normalize.

Okay, and then how much <unk> what was the ending inventory growth.

$5.

Oh <unk>.

Do you know offhand, what you're ending inventory growth was in units rather than dollars yeah.

Yeah, Yeah, we do we're not disclosing the specific number but it was much lower than the dollar rose and also the sales growth to inventory differential on a unit agent is tighter than the dollar basis.

Okay, Great alright, Thanks, a lot guys best of luck for the rest of the year.

Uh-huh.

And we have time for one more question I'll I'll take that question from Janet <unk> J J K research associates.

Mm. Thank thank you so much for for taking my question is <unk> I'm wondering about your inventory levels. If we should expect another significant kick down at the end of the year.

And I also one day at that point, you felt that they would be lined and at appropriate levels and lastly, if you could comment on numerous levels. You over here you have a very fashion forward customer and I'm wondering if perhaps lower levels of new product.

<unk> sales and for quota today. Thank you.

Sure sure.

<unk>, our view as far as good as the first quarter is lower than me for your balance you'll be receiving them within the range of outcomes, but you know it depends on some of the demand dynamics within two four and other factors. So well cause you don't shakes out, but we're pleased with the director and the progress we're making it again, we're gonna balance managing that that that the the inventory levels with maximizing.

Longterm urgent attention.

So it was an M with regards to kind of the newness and freshness right that that's one of the key things right. The email once in terms of customer experience and making sure we have enough new fresh inventory. So we feel good about the the new inventory that we're bringing in in the re orders of the great products that they were bringing in and and we've been very careful not to kind of.

Shortchange that area of the business just a moderate inventory positions. So so.

There's certainly been some movement at the margins are particularly given the routine overall lower demand levels in general, but I wouldn't say, that's a significant factor in that.

Levels.

[noise] and that's all that time, we have for questions today, I will turn the call back to management for closing remarks.

Hi, Michael here, you know definitely you know challenging macroeconomic environment, but we're really excited about the the challenges and opportunities ahead. I think this is the type of environment. When we started the business that type of environment that set us up for an incredible run close to 2008 2009, and we're seeing a lot of opportunity in this call.

Day, so is that it for all the challenges and opportunities to come.

And this concludes today's conference call you may now disconnect.