Q4 2022 Revolve Group Inc Earnings Call
Good afternoon, My name is Chris and I'll be your conference operator today.
At this time I would like to welcome everyone to revolve is fourth quarter and full year 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'd like to ask a question. During this time simply press star followed by the number one on your telephone keypad.
If you'd like to withdraw your question. Please press star one again.
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 fourth quarter and full year 2022 results before we begin I'd like to mention that we have posted a presentation containing Q4 and full year financial highlights to our Investor Relations website located at investors that revolve dot com.
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 management, the impact of new fulfillment centers, our growth, including growth in active customers and product offerings market opportunities and related macroeconomic and <unk>.
History trends, 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 ended 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.
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 there are limitations on our rationale for using them can be found in this afternoon's press release and in our SEC filings joining me on the call today are our co founders and co Ceos, Mike Carroll, Nikolas, and Michael <unk> as well as Jesse <unk>, our CFO following our prepared remarks, we'll open the call for your questions.
With that I'll turn it over to Mike.
Hello, everyone and thanks for joining US today 2022 was the 19th full year since Michael <unk> founded revolve and I'm proud of our financial performance and the accomplishments our team delivered in such a dynamic operating environment. Our net sales for the year increased 24% to $1 1 billion, we delivered record growth in active customers and we generated.
Significant profitability and cash flow that further strengthened our balance sheet.
There are three key messages I want to focus your attention on today.
First our agility operating discipline and execution of key growth initiatives helped us deliver fourth quarter and full year results.
We believe continued to outperform industry peers and relevant benchmarks further extending our market share gains.
Accordingly, our combination of growth and profitability truly stands out within the fashion e-commerce sector and coupled with our strong balance sheet allows us to continue to prudently invest in our long term growth opportunity.
When others are forced to play defense.
Second while the macro environment remains a challenge for all companies in the fourth quarter, we made solid progress with our inventory dynamics and we believe we are on track with our objective of rebalancing our inventory position by the end of the second quarter of 2023.
The spread between our inventory growth year over year, and our net sales growth year over year decrease by more than 50% in the fourth quarter on a sequential basis when compared to the third quarter of 2022, and we continue to expect to exit the second quarter of 2023 with an inventory position that is balanced for growth and efficiency.
And third this year is off to an encouraging start which we believe further validates the power of our core competitive advantages and positions us very well for our large market opportunity over the long term.
<unk>, a very challenging comparison against our exceptional first quarter of 2022 I'm pleased to report that seven weeks into the first quarter of 2023, our net sales have increased by a mid single digit percentage new customer growth remains healthy year over year, we drove further sequential improvement in our inventory dynamics through the month of January 23, two.
Jesse will discuss in his remarks.
Now I'll briefly discuss highlights from our fourth quarter results in the face of many challenges, especially outside of the U S. Our net sales increased 8% in the fourth quarter compared to the prior year period, we achieved growth across segments revolve and forward and geographies domestic and international.
I am, particularly pleased <unk> delivered positive growth in international markets year over year, considering the significant currency headwinds discussed last quarter to make our product more expensive for consumers living abroad.
Currency headwinds and weaker macroeconomic conditions led to a meaningful decline in net sales in the UK and Europe in the fourth quarter two of our larger and most developed international regions stronger results in the middle Eastern Canada, as well as a large and growing contribution from emerging markets, such as Mexico, and India more than offset weakness in Europe and Australia.
Continued challenges in China in the fourth quarter.
Several of our emerging markets are benefiting from our investments to elevate service levels highlighted by India, where we recently established a revolve store within the NYCHA fashion marketplace, which enabled us to offer free shipping and hassle free returns in India.
Attracts more than 20 million unique visitors each month and is one of the fastest growing passion platforms in India, a market expected to overtake, Japan, and Germany to become the world's third largest economy by 2030, according to industry forecasts.
Net income for the fourth quarter was $8 million or <unk> 11 per diluted share and adjusted EBITDA was $14 million as expected profitability was significantly lower than our record Q4 performance in last year's fourth quarter due to reduced gross margins higher return rates and other cost pressures discussed on recent Investor Conference calls in 2000.
'twenty three we are focused on initiatives to drive further cost efficiencies across the organization to help offset the persistent cost pressures in the current operating environment.
With our long term focus I will now shift to a review of our accomplishments for the full year 2022 before briefly touching on our key areas of focus for the coming year.
Starting with our top line I'm excited that we crossed the $1 billion milestone of net sales in 2022 and very proud that we have delivered on our goal to grow 20% annually as disclosed at the time of our IPO growing through all the volatility and challenges of the past three years.
Our net sales in 2022 were $1 1 billion, an increase of 24% year over year and reflect a compound annual growth rate of 22% for the three full years since we completed our IPO in June 2019.
It's compelling to compare our growth trajectory during the three year period to legacy retailers offering premium price points, including higher end Department stores were reported revenue from some larger players who has been flat to lower than pre pandemic levels.
This comparison illustrates just how much the next generation of consumers is moving in our direction and how well our brands are connecting with her through our impactful and diversified marketing approach and we believe there remains a very large opportunity to gain further market share from these legacy retailers that generate tens of billions of dollars in revenue annually.
A key driver of our topline expansion was delivering record growth in active customers for the second consecutive year.
Our active customers grew to $2 3 million at year end 2022, an increase of 500000 or 27% serving as further validation of our large market potential.
And our customers propensity to spend with us and continue to expand our average order value was $304 in 2022, an increase of 12% year over year, driven by healthy expansion of average order values and revolve and forward.
Taking it down to customer metrics from day, one we've been hyper focused on the customer experience consistently raising the bar on service levels, our commitment to exceeding our customers' expectations continues to drive results as we delivered a record net promoter score in 2022 new.
On a year plagued with global supply chain and logistics challenges I am proud that our customer facing teams and fulfillment operations didn't skip a beat.
And our customers continuing to spend with us at full price to look and feel her best approximately 85% of our net sales in 2022 were at full price just shy of our record performance in 2021% six points higher than our best full price mix in pre pandemic periods.
We exited the year on a lower trajectory as we rebalance inventory in the near term.
Consistently high mix of net sales at full price over many years is a powerful driver of our profitable business model.
Our customer retention metrics provide further validation of our ability to connect with the next generation consumer and our best in class service levels.
For the second consecutive year of key customer retention metric performed above pre COVID-19 trends recall that once a year, we disclosed the revenue retention of our prior year customer cohorts defined as the revenue retention rate from the previous year for all existing customers, who had purchased from us in a prior year in 2022, our revenue retention of the prior year customer cohorts.
It was an exceptional 97%, meaning that even if we didn't add any new customers last year, our net sales would've remained nearly flat year over year.
Retention is an important driver of our business since tenured customers generate an outsized share of our revenue in any given year.
I'll wrap up with a discussion of some of our key priorities for 2023.
Our key focus is to continue to leverage our core competitive advantages of data driven technology operational excellence and the strength of our brands to drive growth and operating efficiency throughout the organization.
First we will continue to efficiently invest in our brands to grow our brand awareness customer base and strengthen the connection with next generation consumers.
We have some exciting plans in store for 2023 that Michael will cover in his remarks.
Second we will continue to expand our assortment into adjacent product categories, where we see exciting opportunities over the long term.
With the trust we have earned from our loyal customers our longer term goal is to be our customers' first choice for every category on occasion.
Third with our revenue scale now exceed $1 billion annually, we see opportunities to invest in operational initiatives to drive the dual benefits of improving service levels for customers, while driving efficiencies in our variable cost structure and exciting milestones that last month, we began fulfilling customer orders from our new East Coast fulfillment center, which will allow us to.
Reduced customer delivery timeframes and reduce costs over time.
We are also evaluating opportunities to launch small regional fulfillment centers in key international regions to provide similar benefits.
Fourth we will further expand our international presence, where we see exciting opportunities to further elevated service levels to drive growth through our localization initiatives, including expansion of hassle free returns all inclusive pricing launching new payment methods and further development of our websites and mobile apps.
Finally, we will further enhance our technology stack and leverage our advanced technologies, such as AI and machine learning that have become important and efficiently driving some key areas of our operations and customer experience when.
When Mike when I founded revolve 20 years ago, our data driven approach and internally developed technology were critical in enabling us to operate in an agile and sustainably profitable business from the outset. The data driven mindset remains firmly established in our team culture and has been a driving force in our leveraging of advanced technologies, such as AI and machine learning application.
The power key functions that revolves including fraud detection personalized product recommendations image recognition similar item recommendations and product attribute tagging we.
We believe our proven ability to effectively leverage technology to deliver results as a key contributor to our capital efficiency and our revenue per employee generation being more than twice the average level of revenue per employee among fashion e-commerce peers in the U S by our calculation.
Our annual net sales per employee based on the employee data we disclose annually has increased by more than 30% in just the past three years.
All told I believe our results and outlook demonstrate we're striking effective balance of navigating through a highly uncertain environment, while thoughtfully investing in our tremendous growth opportunity.
I'd like to thank our outstanding team for their incredible commitment strength and discipline that has put us in the enviable position we are in today.
I am very proud of how we've executed and I'm excited about the path forward now over to Mike.
Thanks, Mike.
Our ability to deliver 24% year over year growth in net sales in 2020 to achieving our long term revenue target in a very dynamic and fluid operating environment, all while maintaining a profitable and cash generative business that further strengthens our balance sheet to give us the flexibility to continue to invest in key initiatives to drive growth and continued market share gains.
Cash position at year end increased to 235 million with no debt.
Our ability to overcome countless business challenges to deliver profitable growth speaks volume about our leadership in our core competitive advantages that position us for continued success over the long term.
Acknowledging driven DNA proprietary technology infrastructure, our operational excellence and agility and our powerful revolve band in connection with the next generation consumer.
Since Mike talked about technology, and operational excellence I will spend a few minutes on the strength of our brands in connection with the next generation consumer that we continued to build as illustrated by our record growth in active customers in 2022.
Consistent with our strategic focus discussing the legal investor call in the fourth quarter, we continued to drive exceptional growth impact to consumer engagement video content cost and marketing channels.
Views on wheels.
But that year over year in the fourth quarter, and our new deals done Tic Tac increased by nearly 800% year over year.
Couldn't be more proud of how well our team navigate changes in the market and executed our bad luck will transition from our historically successful focus on at scale photo content.
We are today joining me Jody so should we didn't mind share now coming via engaging video content channel.
Also important we believe our fast growing engagement take taco meal, but theyre expands our bandwidth in Atlanta and to a larger audience and broader range of consumer demographics.
I know, many analysts and investors follow our aspirational and engaging content and social channels.
Those cash flow revolver and take that you may have noticed that we keep talking about we just picked up a social ecommerce platform that is growing rapidly in Asia.
Based on the overseas success in fact recently began testing the Tic Tac live streaming E Commerce initiative with U S consumers.
<unk> development now need a large and growing audience of consumers to initiate with all purchases directly on Tic Tac.
We have more limited set of vast elected to participate at this early stage reinforcing our position at the forefront of innovation and consumer engagement on social channels.
Shifting to a discussion of our impactful marketing events.
To be very active in elevating our brands with aspirational lifestyle events tended to excite and delight at EMEA customers partners and competitors.
In the fourth quarter, we hosted two events in partnership with industry, leading companies that we believe further validates the strength of our own fault.
Thanks.
In November we partnered with an iconic luxury ban push us outside of the fashion industry and marketing and brand building initiatives that is unlike anything we have done before.
We collaborated with question on locking events over multiple days impacting awareness regarding the customizable features on the question icon among covenant next generation consumers.
Dissipating or more than 100 revolve brand ambassadors, who are beyond excited to get behind the wheel up questions first of all let's just split quite at the pace experienced center in Los Angeles.
The successful placement of extra ball back division generated tens of millions of impressions on social media and its highly doesn't push a website.
In December we partnered with another leading bank in a completely different done AT&T, which stood at close to borrow a Baldwin Jonathan Thanks, Danielle shall holiday pop up in social hub.
We have customers.
And brands.
Invitation only event was headlined by VIP attendee, who Couldnt, Chloe Kardashian Italia, Brian Olivia called though when you high level and Jean Michel many of whom are showcasing our latest winter collection.
In the days that followed we opened up revolves into that into the public enabling us to directly engage with our customers and build deeper connections with our entitlement aspirational lifestyle events.
Ill work Hasnt been partners incredible bands, including question and At&t's further validates our revolve banner mentum and powerful influence on the next generation of consumers.
Moving forward, our luxury destination, where we see a great deal of opportunity for growth over the long term forward.
Delivered 23% revenue growth in 2022, expanding on forward the credible 18% <unk>.
Growth in 2021.
Continued success forward has emerged as an increasingly important player in the luxury space.
So it has a distinct value point of view that it's truly captured the attention of younger luxury consumers luxury brands alike.
In addition, as evidenced by Kendall Jenner Sterling so its screen protector.
Relationships are incredible celebrities and pacemakers.
Angela.
Being important parts of a ball bad billings, historically, and we are increasingly leveraging that brand marketing models forward as well.
During the fourth quarter Kendall hosted two successful Florida fan.
But any kind of other impactful event in November to launch a new forward production.
From iconic designer Sean <unk>.
Our brand heat helped us organically attract even to this day.
Eventful, putting Megan Fox does your CAD, Chloe Bailey deviate and <unk>, who are covered extensively in the past and on social channels.
In the days that followed newest leverage around the world was funded by the very same jump all gaultier looks like candle, Megan and others gave you that launch events, which helped drive strong sales of these going forward.
And the second one you guys create a director candle continues despite exciting new ways to engage with our community.
Last month, the forward website began featuring new Q&A content from kind of the type of conversation with some emerging luxury designers, including a very hot band.
Kendall hand selected for forward last year after a shovel.
Looking ahead, we will continue to focus on cost cutting so it to a larger revolve customer base, including plans to walk us forward in some of our own bulk mining events. This year.
Great opportunities as broadband is still complementary drove also starting more focus on the discovery of Tianjin ready to wear styles, while Florida assortment is heavily weighted towards your statement pieces.
Handbags.
Wrapping up I'll expand on some of the key priorities like Alan in his remarks.
First we will continue to invest in our brands to grow our brand awareness customer base and even further strengthen our connection with.
The next generation of consumers.
Our investments will include extending our spending we can progress in diversifying our marketing channels highlighted by the incredible growth in video content I referenced earlier as well as driving further expansion of our proprietary brand Ambassador programme now available on revolve and forward we.
We will also continue to elevate the brand and our premier aspirational events by building on our momentum and partnering with major lifestyle brands.
Second we will continue to expand outside of our historical category strength to adjacent categories to solidify us as the destination for all aspects of our lifestyle supported by marketing initiatives to increasingly emphasize newer categories, where we see opportunity.
For instance, we recently hired an accomplished and experienced leaders for our beauty business.
Nearly twice as fast as the overall business with 2019.
Beauty is a great opportunity to grow our share of wallet among our extremely loyal customer base.
We have also hired new leadership at our men's business, we just quietly and nicely growing it's still a small source of revenue that we believe offers a great deal of opportunity over the long term.
And third.
We have done our first 20 years operating the business. We will continue to make investments that we believe will generate meaningful returns over the long term.
And then we have been focused on the customer.
In addition to continuing to gain market share as we execute on the key initiatives. We believe we are well positioned to continue to expand our position as a preferred destination for millennial and Gen Z consumers.
U S household net worth continues to increase.
Mike and I have more excited than ever about the opportunity ahead.
Believe platform the $1 billion milestone in annual revenue.
And just the beginning and we remain squarely focused on continuing to take market share and building a much larger and more powerful collection of brands that we have today.
You will not come without challenges, including our effort to offset cost pressures with efficiency gain and rebalancing our inventory position to drive gross margin, but we remain incredibly excited about lies ahead of us this year after many years beyond.
Now I'll turn it over to Jesse for a discussion of the financials.
Thanks, Michael and Hello, everyone. We are pleased with our fourth quarter and full year results, which demonstrated agility and navigating significant challenges in the short term, while maintaining an unrelenting focus on the customer and making disciplined investments that position us for continued success over the long term.
I'll start by recapping, our fourth quarter results net sales were $259 million a year over year increase of 8%.
Presenting a three year compound annual growth rate of 21%.
We are also segment net sales increased 9% and forward segment net sales increased 5% year over year in the fourth quarter.
By territory domestic net sales increased 9% and international net sales increased 1% year over year, despite currency and macro headwinds overseas.
Active customers increased by a healthy 91000 during the fourth quarter. This growth expanded our active customer count to $2 3 million, an increase of 27% year over year.
Our customers placed 2 million orders in the fourth quarter, an increase of 11% year over year.
Average order value or <unk> was $306, an increase of 5% year over year, and a decrease of 4% sequentially from $320 in the third quarter.
Shifting to gross profit.
Gross margin was 51, 4% a decrease of 339 basis points year over year, primarily due to a lower mix of net sales at full price and deeper markdowns compared to the fourth quarter of 2021.
The decrease in gross margin is directionally consistent with our commentary on last quarter's conference call, but did come in lower than our guidance range for the quarter.
Moving on to operating expenses.
Deleveraged 84 basis points year over year.
I merely due to a year over year increase generic churn rate as well as increased labor costs and investments made to expand our fulfillment network.
Selling and distribution costs, Deleveraged 165 basis points year over year and remains a significant headwind primarily due to higher costs for customer shipments due to a higher return rate year over year and continued significant year over year growth in variable fuel surcharges.
Our investment in marketing was more favorable than the outlook. We provided on last quarter's conference call. Our marketing investments represented 15, 4% of net sales in the fourth quarter up from 13, 5% in the fourth quarter of 2021 below the 16, 6% in the third quarter of 2022.
General and administrative costs were $29 million in.
In line with our outlook provided last quarter.
Our effective tax rate was 24%.
17 points higher than in the fourth quarter of 2021.
The unusually low effective tax rate in the prior year comparable period, primarily reflects excess tax benefits as a result of the exercise of nonqualified stock options.
Net income was 8 million or <unk> 11 per diluted share an decrease of 73% year over year and was impacted by the meaningful differences in our effective tax rate.
Our gross margin and growth in operating expenses that outpaced our net sales grew year over year.
Adjusted EBITDA was $14 million, a decrease of 59% year over year.
Moving to the balance sheet and cash flow statement for.
For the full year 2022, we generated $23 million and net cash provided by operating activities and $18 million in free cash flow with both measures down significantly year over year from the exceptional cash flow generation in 2021.
The decreases in both measures primarily reflect lower net income, which included much higher tax rates and cash payments for income taxes increased by $20 million in 2022.
A lot of the other changes in working capital.
Looking forward, we expect significantly higher cash flow generation in 2023 based unexpected favorable changes in working capital, including our expectation that our receipts of new inventory will be lower this year.
Our balance sheet remains debt free and cash and cash equivalents at year end 2022 were $235 million, an increase of $16 million or 7% year over year.
Since June 32019, right. After we completed our IPO, we have increased our cash balance by $190 million.
Inventory at year end, 2022 was $215 million or 26% increase year over year.
To illustrate our progress towards rebalancing our inventory position.
Favorable spread between our inventory growth rate year over year, and our sales growth rate year over year peaked at 49 points in the second quarter of 2022.
Kris to 40 points in the third quarter of 2022 and decreased significantly to 18 points in the fourth quarter announced today.
Most encouraging.
Our inventory balances at the end of January 2023, and decreased by approximately $20 million from year end 2022.
I'm encouraged by our progress on our inventory dynamics and we remain confident that we are on track to rebalance our inventory by the end of the second quarter of 2023.
Now let me update you on some recent trends in the business since the fourth quarter ended and provide some direction on our cost structure to help in your modeling of the business for 2023.
Starting from the top despite a very challenging comparison in the first quarter of 2022.
I'm pleased that through the first seven weeks of the first quarter of 2023, our net sales increased by a mid single digit percentage year over year now.
Now as you think about modeling net sales for the full first quarter. Please keep in mind that in the back half of the first quarter of 2022, a year ago, we had an exceptionally active calendar the impactful marketing activations.
The revolve social club pop up that featured special event every night throughout March of 2022.
We believe a very strong finish to the first quarter. In 2022 also benefited from building consumer excitement last year heading into spring festival season. After a two year hiatus.
And considering the uncertain macro environment, we encourage investors to model moderation in our year over year net sales comparisons for the balance of the first quarter.
From the mid single digit year over year growth during the first seven weeks of the quarter.
We expect year over year comparisons in 2023 to become less challenging after the first quarter, especially in the second half of the year, However, and as shared earlier, we are planning for lower inventory receipts year over year in 2023, and we continue to face a very uncertain macro environment.
Shifting to average order value a key metric that influences net sales and operating efficiencies.
After two years of significant growth in <unk> during 2021 and 2022.
<unk> to moderate in 2023.
Our early expansion over the past two years has benefited from a variety of factors, including a growing mix of net sales in the dress category, which has now normalized back to pre pandemic levels.
And a very high mix of full price net sales, while still very healthy will further moderate in 2023.
Shifting to gross margin, we expect gross margin in the first quarter of 2023 of between 49% and 50%.
<unk> quarter decrease in gross margin that is consistent with typical seasonality.
Over the past several years, our gross margin has declined sequentially from the fourth quarter to the first quarter by an average of more than two points.
Though the first quarter of 2022, as an outlet, making it a more difficult year over year comparison.
We expect that our first quarter gross margin this year will be the low point in 2023.
For the full year 2023, we expect gross margins between 52 and 53%.
It's been a decline from our 53, 8% gross margin in 2022, primarily reflects our expectation that our full price mix of net sales in 2022, it will be several points lower than the exceptional 85% full price mix of net sales in 2022.
We continue to expect gross margin pressure in the first half of 2023 as we worked through our inventory position, especially in the first quarter, then becoming more favorable in the second half of the year.
Hello, gentlemen, we expected for the full year fulfillment as a percentage of net sales will be approximately two 9%.
Just with 2022.
Looking at the anticipated cadence throughout the year, we expect fulfillment expense as a percentage of net sales to deleverage year over year in the first half of 2023.
<unk> leverage year over year in the second half of 2020.
One factor influencing fulfillment efficiency.
We recently meaningfully expanded their fulfillment center capacity to support future growth.
<unk> is our customer experience and benefit our fulfillment cost structure over the long term.
Expansion of our fulfillment center capacity creates a temporary inefficiency headwind until their growth and expansion enables us to begin realized capacity utilization benefits over time.
Selling and distribution in 2023.
Selling and distribution costs represented 17, 5% of net sales for the first quarter.
17, 3% of net sales for the full year consistent with the full year in 2022.
We expect to return rates to remain elevated in 2023 contributing to continued pressure on shipping costs, partially offset by some expected logistics efficiencies, resulting from our new East coast fulfillment center as it scales over time Mark.
Thanks.
We will continue to efficiently invest in building our brands expanding our base of loyal customers and further strengthening our brand connection with our community.
In the first quarter, we expect our marketing investments represents approximately 14, 5% of net sales.
From 16% in the very active first quarter of 2022.
We expect marketing as a percentage of net sales to be the highest in the second quarter at approximately 18% relatively consistent with the second quarter of 2022.
For the full year 2023, we expect marketing to represent approximately 16% to 16, 5% of net sales a slight improvement at the midpoint of the range from the 16, 5% of net sales in 2022.
General and administrative.
G&A expense of approximately $28 5 million in the first quarter of 2023 and.
And between $113 million to $160 million for the full year 2023.
This implies a 1% year over year decline in G&A costs for the full year at the midpoint of the range.
Lastly, let me touch on our tax rate, we continue to expect our effective tax rate to be around 24% to 26%.
To recap while there is still significant uncertainty in the macro environment, we continue to take a disciplined and longer term approach to everything we do.
Our leadership team is exploring many ways to leverage our technology brands and operational excellence to be even more efficient in 2023 and beyond.
But these efforts proved successful we could potentially drive greater efficiency in our cost structure.
But our outlook.
To highlight just one example, we are exploring a multi million dollar annualized opportunity to reduce shipping cost by consolidating returned shipments from some of our larger international regions and in some cases to hold international returns in country.
And fulfill orders from them locally without ever returning the items to the U S.
We are continuing to strike a balance between managing operating expenses, while at the same time investing in our brands and other key growth initiatives that are critical to maximizing our long term growth potential.
Guided by Mike and Michael our two largest shareholders who own nearly 45% of our common shares. We believe this is the right strategy to drive value for shareholders over the long term now we will open it up for your questions.
Thank you.
Like to ask a question. Please press Star then the number one on your telephone keypad.
Our first question is from Oliver Chen with Cowen Your line is open.
Mike and Jesse.
Regarding the current inventory situation.
Whats the head in terms of what's the nature of the composition that you have that you're working through and on your comments on trends quarter to date, the mid single digit, but what's happening with <unk> there.
Any implications for as we forecast the rest of the year. Thank you.
Yes. This is jesse thanks Oliver.
In terms of the inventory we feel good.
Based on the progress we've made as we discussed from the peak in Q2 down to where we were in Q4 and even more importantly that $20 million reduction in January .
As we've said in previous calls we feel like the inventory is good is healthy we're working through it.
We're geared up and ready for the kind of our peak festival season. It is skewing higher on the forward side as we talked about in the past it takes longer to work through that forward inventory than the revolve inventory starting to make some progress there now in the first quarter.
We're all good competition.
And then.
And our results to date on revenue and <unk>.
<unk> talked about in the prepared remarks, we don't expect that significant year over year. The increase that we've been experiencing in the past two years.
The low to mid single digit increase in <unk>.
Q1 is lower seasonally with.
Your margin higher markdown mix in Q1.
It will be kind of lower in Q1 compared to other quarters of the year, but still for the full year 2023, we expect a moderate increase in daily.
Okay, and a follow up on private label and private label capabilities any thoughts there in terms of where you are and what inning and what capabilities.
See ahead and as we think about the marketing spend in marketing as a percentage of sales and what happened this quarter and what were you seeing that led you to make decisions around it.
Changes there thank you.
Okay.
With regard to with regard.
We got to all brands I think I'd say, it's still very very early innings of a lot of rapid and then really been focused on historically core categories and lastly, we know that theres a lot of opportunity all across the board I think this is really also reflects.
Revolve is large opportunity to expand categories in different aspects of independent reps in the closet.
<unk> added about their past three launches have been absolutely awesome.
Elsa Remy 10 million Hewitt, So I think there's a lot of opportunity there are questions gets modulator and periods of conservatism.
I'm sure everyone's familiar with the cutback in own brand during Covid and then attack period like this we're being conservative as well, but long term.
As excited as ever.
Yes, and then with regards to marketing Oliver were you talking.
More Q4 marketing their Q1 marketing.
Both in terms of just strategies and also the CAC trends that youre seeing.
With some of the volatility in the marketplace and conversion rates and IBSA.
Yes, definitely so I'll start with talking about digital and performance marketing so.
I think we have seen the worst of the IBSA impact from what we can tell there isn't really further degradation as a result of idea today that that kind of leveled off.
And then in terms of overall spend levels.
We stayed fairly aggressive with marketing through the fourth quarter.
As the quarter ended and then into Q1, we pulled back on the aggressiveness of bids and we've been investing more into optimizing the marketing mix.
We were hopeful that will bode well for marketing expenses in the coming quarters and coming year.
Those are kind of the general trends, we've seen on performance in digital.
With regards to the.
The brand marketing.
Maybe Michael you want to jump in.
Talk about that.
Yes, sure post pandemic.
Yes.
Or kind of historic kind of activities missing we returned to very much the similar activities as we've done in times past now that that.
Ill leave it at that moment.
Looking forward, we think it's a very exciting time to really think further ahead, so there'll be a lot of different innovation different ideas and different like.
Concepts, which will which will affect cadence, which also.
All of our storytelling and such so it'll be moving forward it will be a mix and I think that youre very familiar with.
As well as a whole range of dividends that will be approaching so it'll be a fun year.
It sounds exciting best regards.
Thank you.
The next question is from Mark Mark All Schrager with Baird. Your line is open.
Great. Thank you for taking my question.
Just hoping you could share some thoughts and learnings regarding the health of your customer and appetite for ongoing appetite for fashion categories with the inflationary pressure.
Looks like the quarter finished a bit stronger than you expected in the mid single digit quarter to date.
Encouraging as well.
And then <unk>.
Jesse.
You called out some reasons why things might decelerate in the back half of the quarter, but if I recall correctly things actually.
Decelerate in the back half of the quarter first quarter last year, setting up maybe a bit of an easier comparison so.
Is there a scenario where things could hold on hold or even accelerate from here.
Yes, maybe I'll take the second piece first.
Year over year basis last year, it did appear that things.
It got easier.
Make for easier comps this year, but you really have to look at that three year comp last year and compare back to 2019, because 2021 with kind of that inflection point in March where things were coming out of Covid, so kind of really paying attention to those three year comps, we do anticipate tougher comps for the balance of this quarter and we've already seen it in kind of the back half of that seven weeks.
January started off stronger and then it.
It started to get weaker relative year over year and that kind of the last three weeks of that seven week period.
So definitely encouraging everyone to factor in some moderation there in the growth rate for Q1.
And then maybe I'll pass it over to Michael for the consumer.
Yes, so in terms of the consumer.
I think we've seen things moderate a little bit in terms of.
Weakness in <unk>.
Salaries, but overall, we think our consumers not in.
In the place he was certainly a year and a half ago in 2021.
Things still feel a little rough out there for her and revolve markets aspirational consumers that are.
Looking to live their best life, and often are kind of spending a very large portion of their disposable income against.
Against fashion and travel and some of our products.
So right now things are a bit tight for her confidence in the future isn't as strong as it was a year and a half ago and we've been seeing that in the numbers of the past couple of quarters.
So one thing I'm sorry.
That is that this is really compared to a year ago, you and a half ago, where money was falling from the sky and people were spending and people haven't been out in a lot of pent up demand with zooming out I think our consumers very engaged with our brand and is still continuing to come to but for all the things that she is loved and we also see a lot of opportunity to continue to expand that.
Zooming out and taking a broader Lindsay I think we're in a great spot.
The next question is from Edward <unk> with Piper Sandler Your line is open.
The click down a little bit on forward for a second I. Thank.
Thank you for all the comments on <unk>, just trying to understand the implication of kind of taking a little longer to clear out some of that excess inventory. How do you feel about the forward business in the short to medium term here.
To your point earlier that it has been a left to Lv will it not be a lift in I guess for the balance of the year and then finally.
Are there any other things we should think about from a seasonality perspective as you kind of adjust the marketing this year. Thank you.
Yes.
Revolve, we expect both businesses to grow in a fairly similar zone.
This year, so we wouldnt model in.
Yes.
And EOG lift due to the mix shift there as Jesse mentioned, we're still seeing some increase on the AWS side, just I think compared to the previous year those price increases in place rate increases for the consumer have moderated.
Quite a bit so that debt.
Expect investors to model on their side.
Yes, maybe on the seasonality.
We hope to get closer to that pre pandemic more normal seasonality and you can see that in our marketing numbers that we guided towards in the prepared remarks, where Q1 is lighter.
And then Q2 is our typical peak season with revolve festival in a lot of activity there so that'll be in that 18%.
Percent zone.
And then in terms of the sales as well, we would hope to get back to some kind of normal seasonality, where you see Q2 is the peak followed by Q3, and then you got Q1 and kind of Q4 on the low end of the bookends there.
Comp just because of course, we will we're facing a really tough comps in this first quarter and then call. It halfway through the second quarter before things start to ease up in the back half of the year.
The next question is from Anna <unk> with Needham <unk> Co. Your line is open.
Great. Thanks, so much and good afternoon guys.
Two questions from us regarding the owned brand penetration I think you said, 22% last year significantly below even 2020 levels can you talk about what's the realistic level of penetration should thinking about for 'twenty three of how have owned brands performed and what do you see as the gross.
Margin differential there versus third party and then curious what are you seeing with your return rate quarter to date and perhaps if you could elaborate on the returns initiatives that you mentioned thank you so much.
Yes, maybe I'll go in reverse order their return rate.
It did tick slightly lower in <unk> as compared to three <unk>.
It's largely seasonality, where we see a low return rate in the fourth quarter, we're not anticipating a decrease in the return rate in 2023, and we're kind of baking in this elevated return rate going forward with some seasonality elements. There when you see a high return rate in Q2 for example in flex.
Fluctuates with full price markdown mix and such.
And then the differential on the owned brand versus third party margins, we don't talk specifically about that other than to say that the owned brand margin is meaningfully higher than the third parties.
And with regards to penetration.
One thing this morning.
Under that in periods of conservatism the depth of Covid as well as a period right now don't bands, where we cut back where the units per style is greater than what we're able to do with third party with third party, we can live by.
Four to six units with style. So in periods like these we do definitely modulate down and we will ramp up as the customer and the economy.
A little bit more confidence in that zone.
Okay.
Okay.
The next question is from Rick Patel with Raymond James Your line is open.
Thank you and good afternoon, everyone can you provide a little more color on the impact of freight I believe in the past you've indicated that you wouldn't see a more meaningful benefit until later in 'twenty three but just given the outperformance in sell through velocity being a little bit better than you expected three months ago do you see the potential for the freight benefit to be a little bit more.
Front end loaded.
Yes, I would say always potential not factoring that in yet, though we are still facing even though fuel is a piece of that until has leveled off its kind of level with Q3 its off of the peak in Q2, but it's still up 78% year over year in Q4.
That is still a headwind and then we have return rate, which is the biggest factor there.
Actually on a year over year basis, Thats increased significantly and made a really big impact on selling and distribution within that line item.
We are ramping up the east Coast distribution center, which will provide some relief, but that'll take some time to play out so we're still holding to that back half before we start to see some efficiencies there.
The next question is from Michael Binetti with Credit Suisse. Your line is open.
Hey, guys. Thanks for taking my questions.
Just I just wanted to check on the January inventory number and the sales trends you pointed to and I think you said January was stronger than February I think I think that implies youre on track for sales to inventory that ratio of flipping back to positive in the first quarter I think that'd be the first time since early 'twenty. One so I just wanted to check that.
Yes, I think flipping back to positive is probably aggressive we're still looking at that Q. During Q2 at some point at least by the end of Q2 before before that normalizes.
But we feel good about the progress there and especially heading.
Heading into your into 2023 with that $20 million reduction.
Right.
The bigger picture questions. I think you told US Okay, you said inventory will be aligned in Q2.
Are you I guess to look at it another way when do you think the depths of inventories will be clean enough for you guys, where it doesn't impact the future orders.
Yes, I'd say thats still call. It in that mid year timeframe, you are already starting to book into that mid year zone. So yes.
I think it's still haynes right in that middle of the year.
And again keeping in mind that forward has such a long lead time that that again on the flip side will take longer to play out.
Is that sort of the.
The inflection point there is closer in on the revolve side of the business.
Alright, yes exactly okay.
Okay very helpful. Thank you.
Great.
If you look at the composition of the inventory.
The sales mix of forward and revolve versus the inventory mix of forward and resolve the inventory mix is much higher than the sales mix. So that's another way to kind of triangulate around it.
Okay.
Can I just ask you inventory anyway breakout dollars versus units at the end of the quarter.
Yes, maybe not specifically, but if you think about that 18 point differential between the net sales growth in the inventory growth. The unit growth on inventory was much lower but of course the sales unit growth was also lower but.
Call it it's.
Not half of that differential that close to half of that differential.
Lower on a unit basis than the sales basis.
Okay. Thank you very much.
The next question is from Lorraine Hutchinson with Bank of America. Your line is open.
Thanks, Good afternoon, as you move through the excess inventory what type of customer is buying on discount is it an existing customer looking for value or maybe a new customer who might trade up into full price.
Yes.
Mix of the two.
As we look at our mix of new customers and kind of where we acquired them for off price versus full price versus our sales mix.
Generally markdown products are a bit more effective.
The new customer acquisition, but it's not an extreme and.
So ultimately, it's a mix of those existing customers and new customers that we bring and then hopefully over time, we can trade up.
And you had commented last quarter about the lower priced consumer a little softer than the higher end is that relationship holding up three.
Through <unk> and into the first quarter.
Yeah, Yeah, I think it holds consistent with what we said on the.
On the prior call.
If you look within that full priced or higher priced items are holding up better than the lower priced items that said with the with the heavy.
Any movement of inventory into that markdown markdowns of course did outperformance you can see in the margin, but if you look just within the full price category than the higher end didn't hold up better.
Thank you.
The next question is from Simeon Siegel with BMO. Your line is open.
Thanks, Hi, everyone. Good afternoon.
Jesse any way to quantify the moving pieces in gross margin embedded within your <unk> and full year guide any.
David thoughts on long term gross margin rates and then just curious how youre thinking about inventory turns for next year. Thank you.
Yeah.
Maybe on the <unk>.
Breaking it down a little bit more you know, we'd expect to evolve to be in that 55% down forward to be more in the kind of low Fourteens zone.
The year over year impact is largely due to the full price mix. We are checking at 85%, which is just off of the record high of 87% in 2021. So we expect that to come down several points. If you go back to even pre COVID-19 levels. We were at 79, which we felt good about.
We can do better than 79, but it's not going to be at 85. So that's the biggest factor there.
On the margin and then exiting the year in a much healthier place as we work through the inventory in the first half.
Turns we expect much better churn in 2023.
Given one inventory recalibration.
And then again, just kind of back half trends and getting things normalize.
The next question is from Janine Stichter with <unk>. Your line is open.
Great. Thanks, so much I wanted to ask about the G&A I think you said down 1% year on year on the midpoint. If you could just talk a bit about where those savings are coming from I think it's the first year, we would have down G&A with the exception of the Covid here. So just some thoughts on your expense philosophy there.
And then as a follow up and just was curious how youre thinking about inventory in the channel it sounds like you're making nice progress on your own inventory, but just curious what youre seeing from an overall industry wide promotion holiday standpoint. Thank you.
Yeah on the G&A front.
That's starting to level off, but that's coming off of a really robust investment cycle coming out of Covid. We are keeping up with that just really robust demand in rebuilding the team et cetera.
So this is more of what we'd expect going forward. If you look over the course of the last three years from 2019.
<unk> gained three points of leverage on that G&A line item. It's we call. It semi fixed it's kind of two thirds salaries and wages. So as we get into a more.
Normalized growth cadence, we can get leverage there in the next few years.
And then promotional activity.
You guys know just as well as we do.
It's been an elevated it was elevated in Q4 is going to ramp towards the back half of Q4.
Continued into Q1, I think as everybody works through their inventory positions, but.
I guess, it's as we expected higher.
Higher year on year, especially and then kind of a little bit higher than 2000 kind of pre pandemic 2019 levels.
The next question is from Jim Duffy with Stifel. Your line is open.
Hi, This is Peter Mcgoldrick on for Jim Thanks for taking my questions.
You added a half a million new customers in 2022 can you talk about any cohort differences compared to your season customers.
Any distinction in channels of acquisition full price engagement or frequency frequency of purchase to call out.
Yeah, obviously things can change quarter to quarter mix shifts in different marketing channels and whatnot, but by and large the cohorts look similar to cohorts.
In the past.
Part of what I mentioned earlier, obviously with more markdown merchandise you got a bit of a larger portion of them coming on the markdown side.
But but again not in any sort of extremes.
I think other differences beauty has really been a very nice customer acquisition source for us and we saw that in particular in the fourth quarter and that's an area of the business that we have been expanding has been growing at a healthy rate and we hope to do so.
For many years to come.
Okay.
The next question is from Dylan Carden with William Blair. Your line is open.
Thanks, a lot.
And I think through the spread between the degradation in the adjusted EBITDA margin and the free cash flow margin of these last three years.
Is there some inefficiency in the model.
Now that its at a certain scale and kind of reading the body language on sort of necessary investment and additional fulfillment capacity.
You might see in these next couple of years I mean, your overall capex as it relates to sort of relative top line is still pretty low but.
How are you thinking about getting the free cash flow profile.
Maybe from a more efficient from an efficiency standpoint.
Yes, I think we are.
Somewhat unique period, right now right where inventory levels are.
A lot year over year, and that's by and large.
Just drive rate.
The difference between free cash flow margin and so any in periods, where inventories climbing youre going to see that conversion ratio not look as good historically, we feel great about our track record of converting EBITDA into free cash flow, we have very low capex historically, we don't expect.
That.
Greece in any significant way going forward and obviously, we'll be opportunistic never say never but we don't expect.
Things to change on that side, we have very few adjustments to our adjusted EBITDA versus EBIT versus a lot of companies out there.
So.
I don't think there should be any body language around there, but if we sent the wrong body language.
We'd like to clarify.
No I guess, if it means that it sounds like youre investing and fulfillment capacity and I'd say, that's going to spike up meaningfully but is there a certain inefficiencies.
It's spelled out 2% free cash flow margin at the end of last year down from 12% three years ago EBITDA has gone from 10% to eight so I get the inventory overhang, but is there a need here for some sort of greater efficiency in distribution and fulfillment taken aside and some of the general operating deleverage in the model I guess deals in that question.
But I'm happy to take that offline I guess, maybe its too in the weeds.
<unk>.
This is the last question I have you any update on the cross selling initiatives between forward.
And revolver and just sort of following from that.
Higher levels of retention that you're seeing is there a natural.
Go forward new level of marketing spend that you think the model can withstand.
As you kind of seeing those initiatives play out thanks.
Okay.
Yes, so with regards to the revolve and forward we feel very good about the.
Cross selling initiatives, we have there thats a huge long term opportunity for us and an area, we're going to continue to invest in a big way.
Talked about on previous calls how it is.
Essentially mid single digits.
Percent of overlap and we think in the future it can be.
Much much larger than that so we feel like that.
Very large portion of revolve customers are shopping the products on forward and so that's a huge opportunity for us.
And then just to kind of I guess turned turned back to the <unk>.
Model question I think Jesse hopefully gave some good color in his comments there, but I just want to reiterate we're very confident in that 14% long term margin.
In the current period were not pleased with the gross margins that we delivered we expect that the inventory position.
Normalizes at those gross margins are going to go back up significantly.
Also owned brand continues to be a big long term opportunity to gain gross margin and share their operating leverage Jesse mentioned, gaining 300 basis points on the G&A side over a multiyear period.
As well as additional efficiencies and that does conclude right scale.
On the distribution side. So that is something that we think is an opportunity to do something that we're focused on.
I just wouldn't necessarily say the model needs. It. So much is obviously to maximize the economic opportunity for investors, where we're certainly going to make sure we're maximizing those opportunities on the scale side.
We have.
With distribution.
Yes, and sorry, not to drag this went out longer but also keep in mind the tax rate in those cash tax payments.
Of this year versus the last couple of years, where we experienced a much lower tax rate that has a drag on the free cash flow. So that's where you are you also seeing a bigger differential this year between the free cash flow on the adjusted EBITDA.
The next question is from Matt Koranda with Roth Capital. Your line is open.
Hey, guys. Thanks.
I just wanted to get your thoughts on active customer growth and how we should be thinking about it for 2023 after such a good couple of years for net adds.
It doesn't seem like you're particularly leaning hard into marketing this year just given the.
Guidance you gave so just curious the levers you have to pull and sort of how we should be thinking about growth in active customers.
Yes, I think it holds consistent with our previous remarks on other calls were.
Because it is a trailing 12 month number you have some comp dynamics there.
And as we get closer towards the middle of 2023, we would expect that.
Active customer growth to converge closer to the net sales growth.
Given the really robust adds in Q4.
I think where we're confident we can keep that active customer growth to a positive number throughout 2023, So we feel good.
Keeping in mind that Q1 of 2022 is kind of an all time record not just for sales, but for new customers as well.
Okay time for one more question, which is from Tom <unk> with Wedbush Securities. Your line is open.
Hey, guys. Thanks for squeezing me in here just.
Wanted to ask quickly about the owned brands.
Yes.
Okay.
Penetration ticked up a bit in 2022, but still well below where you were in 2019.
I just wanted to.
Get your thoughts on how we should think about <unk>.
Own brand penetration what that does that.
This margin over time et cetera.
Definitely yes.
Period of conservatism in it.
Inventory being where it is but were.
We're working through in the past our peak Adam.
But still been in a period of conservatism. So we definitely will scale back old band because it is kind of like one of the highest average for reducing inventory, while maintaining a broad consumer offering.
As we work through inventory in the U S looking to beyond we won't.
We won't really see it too much in 2023, but beyond we'll see the ramp up of home brand as well kind of back to our historic core and such.
Long term wise, we think there is an incredible amount of opportunity alright capabilities have been quite a quite a bit over the past few years during the COVID-19 years. So theres a lot of more capability in categories that didn't touch so feeling as optimistic as ever in that though.
All of our recent.
Drops have been awesome to help the brand is doing absolutely incredible and expanded into categories and price points that we werent engaging and historically the rent collection with lots of as well in terms of.
Broader size ranges and the most recent job with Matt Hewitt, which was focused on less.
Outflows most physically.
They get it.
That's just been optum as well so it really has been kind of like the early formula like the next stages of bed expansion.
That's all the time, we have for questions today, I'll now turn it back to management for any closing remarks.
Okay. Thanks, guys for joining us on this quarter and final year hitting that $1 billion in annual revenue, it's not something I always dreamed up and we were finally.
Finally about to achieve that which is awesome this coming year.
Post pandemic post kind of crazy.
Crazy economic times will still be a very.
Exciting interesting year, where it will be celebrating our 20th anniversary this year and.
And we have a lot of in tune and we're very excited for next quarter and beyond as we think about the next 20 years.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
Please wait the conference will begin shortly.
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<unk>.