Q1 2023 Revolve Group LLC Earnings Call
Speaker 2: Good day everyone, my name is Lisa and I will be your conference operator today. At this time I would like to welcome everyone to Revolve's first quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise. And after the speaker's remarks there will be a question and answer session. If you would like to ask a question during this time simply press star followed by the number one on your...
Speaker 3: And thanks for joining us to discuss Revolve's first quarter 2023 results. Before we begin, I'd like to mention we have posted a presentation containing Q1 financial highlights to our investor relations website located at investors.revolve.com. I would also like to remind you that this conference call will include forward-looking statements.
Speaker 3: including statements related to various business operations and marketing initiatives and investments, our inventory balance and management, economic conditions and their impact on consumer demand, the impact of our new fulfillment centers, our future growth and profitability, market opportunities, macroeconomic and industry trends, and our outlook for net sales, gross margin, operating expenses, and effective tax rate.
Speaker 3: These statements are subject to various risks, uncertainties, and assumptions that could cause our actual results to differ materially from these statements, including the risks 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.
Speaker 3: our annual report on Form 10-K for the year into December 31, 2022, and our subsequent quarterly reports on Form 10-Q , all of which can be found on our website at investors.revolv.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.
Speaker 3: including adjusted EBITDA and free cash flow.
Speaker 3: 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.
Speaker 3: The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for superior to the financial information prepared in presented accordance with GAAP. And our non-GAAP measures may be different from non-GAAP measures used by other companies.
Speaker 3: Rick insiluations of non-GAAP measures to GAAP measures , as well as the definitions of each measure, their limitations, and our rationale for using them can be found in this afternoon's press release and in our SEC findings. Joining me on the call today are co-founders and co-CEOs, Mike Ternicolis and Michael Mente, as well as Jesse Timberman's or CFO .
Speaker 3: Following our prepared remarks, we will open the call for your questions. With that, I will turn it over to Mike.
Speaker 4: Hello everyone and thanks for joining us today. We reported mixed results for the first quarter of 2023 amidst an increasingly uncertain macro environment and against a very difficult prior year comparison.
Speaker 4: After better than expected start to the first quarter of 2023, then we discussed in February on our fourth quarter earnings call, consumer demand decelerated for the remainder of the first quarter, consistent with the U.S. Department of Commerce data shown a meaningful deceleration and consumer spending from January to March.
Speaker 4: This led to a 1% year-over-year decrease in net sales for the first quarter.
Speaker 4: On very positive front-to-off, we are making great progress on several key initiatives. We continue to make investments in the brand that we believe will benefit us over the long term. And despite the macro challenges, we made excellent progress on rebalancing our inventory position in generated exceptional free cash flow during the first quarter, further strengthening our balance sheet.
Speaker 4: With that as an introduction, there are three key messages I want to focus your attention on today.
Speaker 4: First, despite a macro environment that became more challenging as the first quarter progressed, we achieved excellent progress towards recalibrating our inventory. We believe we are on track with our objective of rebalancing our inventory position by the end of the second quarter of 2023.
Speaker 4: The spread between our inventory growth year-over-year and our net sales decline year-over-year decreased by more than 50% in the first quarter on a sequential basis compared to the fourth quarter of 2022.
Speaker 4: These favorable dynamics give us confidence in our outlook for gross margins improving the pressure levels we reported in the first quarter of 2023.
Speaker 4: Second, our significantly improved inventory dynamics helped us generate 49 million in cash flow from operating activities in the first quarter, or then double our cash flow generation for the full year of 2022.
Speaker 4: Our strong profitability and cash flow generation truly stands out within the fashion e-commerce sector and coupled with a 283 million in cash on the balance sheet at the end of the first quarter, we're in a position of strength to invest in our large market opportunity ahead of us, a time when many industry peers are forced to play defense.
Speaker 4: Challenging economic times like the current environment create opportunities for financial and strong companies to pretty best and further separate from the competition.
Speaker 4: And third, we are executing on several important growth, grand building and efficiency initiatives that we believe will further strengthen our foundation for possible growth over the long term.
Speaker 4: Particularly when the wind is at our backs once again.
Speaker 4: Michael and I will share our progress on several key initiatives throughout the organization, including technology, operations, marketing, and international.
Speaker 4: In such a dynamic period, I'm pleased that our teams have remained laser focused on the operational priorities I discussed on last quarter's conference talk. Now I'll shift gears to discuss highlights of our first quarter in more detail. Recall that during our Q4 2022 earnings call in February , we shared that our net sales in the first seven weeks of the first quarter of 2023, it increased year-to-year.
Speaker 4: I am mid single digit percentage compared to the same period in 2022.
Speaker 4: Trends decelerate later in the quarter, particularly in March, leading to our 1% year-to-year decrease in net sales for the first quarter of 2023.
Speaker 4: The monthly slope of our first quarter was consistent with decelerating monthly apparel retail sales data from the U.S. Department of Commerce.
Speaker 4: For further support for you that our core young consumer demographic is under more pressure today than she was just a few months ago.
Speaker 4: It's also important to keep in mind our difficult prior year comparison. Stepping back, our net sales have increased in a compound annual growth rate of 19% since the first quarter of 2019.
Speaker 4: year of our IPO. By region, net sales in the US decreased 5% year-to-year, while international net sales increased 16% year-to-year in the first quarter. Bear in mind that our US net sales growth in the first quarter of 2022 was exceptionally strong, creating a more difficult comparison. Thank you very much.
Speaker 4: I'm very pleased by the healthy international results, considering the continued currency headwinds in some of our larger markets such as Australia and the UK.
Speaker 4: Positive contributors to international growth in the first quarter, including China, which is benefiting from the reopening of the Chinese economy, so it was an easier year-to-year comparison from China lockdowns that began in the first quarter of 2022.
Speaker 4: the Middle East, and emerging markets such as Mexico and India.
Speaker 4: I'm particularly excited about Mexico, a market and join exceptional growth with net sales almost doubling year by year. Now ranking is one of our top five international markets.
Speaker 4: We have a series of marketing activities planned to drive you in greater awareness in Mexico. We already have the second largest social media following among our international markets.
Speaker 4: Net income for the first quarter was 14 million or 19 cents per diluted share. Adjusted EBITDA was 15 million.
Speaker 4: Our profitability was significantly lower than our performance in last year's first quarter, primarily due to the nearly 5.2 decrease in our gross margin year of a year. In while the macro environment remains uncertain, some of the pressure points on our P&L and recent periods should begin to ease in the coming quarters.
Speaker 4: The cost of air freight to import our own brand's products from China has decreased significantly.
Speaker 4: shifting from a headwind in recent years to its tailwind in 2023 as we look forward.
Speaker 4: And our top line contributions from China have also shifted. A headwind into a tailwind after the COVID restrictions were eased earlier this year. Lastly, it appears that we are now past the worst of the headwinds from variable fuel surcharges applied by major carriers to our customer shipments since the peak and jet fuel prices in the second quarter of 2022. Now, as mentioned earlier, I will provide brief updates on key options.
Speaker 4: Our team has already delivered early wins and optimizing customer shipping costs to some international regions. We're pursuing a much larger scope of cost saving initiatives that we believe has the potential to be impactful later this year.
Speaker 4: Jesse will talk more about this important effort in his remarks. We are continuing to raise the bar on service levels for customers, even while we focus intently on driving cost efficiencies. Our new Pennsylvania Fulfillment Center enables us to more quickly ship packages to East Coast customers, and we are also extending our best-in-class time frame for shipping orders the same day we receive them. For years, we have been working on the Fulfillment Center for years.
Speaker 4: Our service promise has been to process and ship orders on the same day if we received them before 3pm Eastern Time.
Speaker 4: We're now extending that same data fulfillment window to even later in the afternoon. We continue to expand the use of AI and machine learning across several key areas of our operations and customer experience, including fraud detection, personalized product recommendations.
Speaker 4: now extending that same day fulfillment window to even later in the afternoon. We continue to expand the use of AI and machine learning across several key areas of our operations and customer experience, including fraud detection, personalized product recommendations, image recognition, and product attribute tagging.
Speaker 4: As an exciting update on our progress, my client will talk about how we leverage AI technology to develop an innovative marketing campaign featuring outdoor billboards for our flagship revolve festival event held last month.
Speaker 4: and using these same AI designs we created a limited edition own brand product capsule.
Speaker 4: We also leveraged our technology stack to enhance the product's search results on our sites, elevating the user experience and conversion opportunities.
Speaker 4: by enabling customers to more efficiently find what they're looking for among our curated assortment. We are also leveraging AI to develop even further enhancements to our search capabilities.
Speaker 4: We are excited by internal demonstrations of further application of AI technology. We've shown a great deal of potential to drive impactful results in the future. We have advanced our efforts to cross sell the forward assortment to the much larger base of our costumers.
Speaker 4: Recently launched navigation enhancements on our report website, providing increased visibility to the forward assortment, have shown promising early results.
Speaker 4: We've also leveraged our technology foundation to increasingly enable Revolven for the sheer inventory for key brands, offer products for sale on both sites, handling more efficient inventory management and improved product availability.
Speaker 4: We are investing further to elevate service levels in international markets where we see a great deal of opportunity over the long term. We plan to deploy technology this quarter that we expect will accelerate website response time and key international markets.
Speaker 4: advancing our localization efforts. In the coming months, we are gearing up to expand our loyalty program to key international markets for the first time. Our loyalty program has been a great success domestically since introducing it three years ago.
Speaker 4: Like all companies, we face a myriad of challenges in the current environment, and we still have much more work to do.
Speaker 4: And yet, we are uniquely positioned with a profitable capital efficient and highly cast generative business model. We believe will allow us to continue to prudently invest in our long-term opportunity. We are very excited about it.
Speaker 4: Before I turn it over to Michael, I'd like to once again thank all our hard-working team members for your agility, resilience, and dedication to exceeding our customers' expectations every day.
Speaker 4: I'm going to go over to Michael. I'd like to once again thank all our hard work and team members for your agility, resilience and dedication to exceeding our customers' expectations every day. Now over to Michael.
Speaker 5: Thanks Mike and hello everyone. As always, our strategic focus is to create a strong and growing business for the long careful title.
Speaker 5: At the center of everything we do is our unwavering focus on serving our customer incredibly well, helping her deliver best life through being her trusted source of fashion inspiration. So it is gratifying that our active customer base have continued to expand at a healthier rate, building on our future growth potential considering the strong loyalty and retention and caring to assist with our customer base.
Speaker 5: Our challenge 12 month active customers good oak 2.4 million in the first quarter may increase the 4% sequentially and 90% higher than the first quarter of 2022. Cloring right through the very difficult record cut comparison in the prior year.
Speaker 5: Moving forward, we believe we have a large opportunity to expand our customer base within our target demographic, both in the US and the international. Even more impressive is that we delivered the TELTIGO to the NAACC customers while at the same time delivering better than expected marketing efficiency in the first quarter.
Speaker 5: Shifting gears, I would like to discuss our culture of innovation I revolved.
Speaker 5: A key contributor to our rapid and profitable growth over the past 20 years is our ability to identify important shifts and opportunities, and leverage technology to create competitive modes around us.
Speaker 5: The Mar earliest base are internally developed technology, enabled to assemble a data driven merchandising, and drive the business in ways that remain a significant competitive defaulterator today.
Speaker 5: Years later, we were apying our deforefooted marking innovation and partnering with influencers to create bandwidth and impact the social media. We're delivering our internally developed technology to create a competitive advantage.
Speaker 5: And now today, I'm thrilled to acknowledge the parting efforts of our studio technology and marketing teams for creating what we believe was the first AI-generated Billboard campaign.
Speaker 5: entitled Best Trip is we stunning AI campaign celebrates our 20 year anniversary and was designed to fund a partnership with the AI Studio. Please don't matter.
Speaker 5: Our AI innovation has generated meaningful buzz on social media and major press outlets, such as Forbes, Road, New York Post, and Business of Fashion. Further, solidifying the role of the trailblazer in marketing innovation.
Speaker 5: The best trip AI campaign debuted throughout April on several billboards along the highway headed to Pond Springs.
Speaker 5: To teach a great position, turn to ensure that it would be seen by hundreds of thousands of festival goers driving a coach chelab, page coach, and of course, revolve festival last month.
Speaker 5: It was great to see our aspirational lifestyle burn proudly displayed front and center for such a large target and relevant audience. Also compelling is that we were able to efficiently produce and sell a limited edition capsule collection for the design CMDI campaign. Our own brand's team had already been testing ad-brewed design and relay technology innovations to drive further efficiency and pilot development.
Speaker 5: So it was really incredible to see our team leverage AI to bring pride to life at the first time. Over time, we believe AI design presents an exciting opportunity to create a more powerful, innovative and streamlined design process. Our conviction and truth set me about the potential for AI technology across the organization to help launch the first ever AI-fascinated glasses.
Speaker 5: AI-fascinated content will have the opportunity to sell their AI capsule collections on revolve. As a company, it's very important for us to see if it's cutting-edge technology development, testing and learning how to leverage these new technologies which is ingrained in our cultural DNA.
Speaker 5: Now let me shift gears and recap our highly successful revolve festival event held last month at an exceptional new venue. This year was particularly special for Mike and I because the timing of revolve festival coincided with our 20 year anniversary. We kicked out the week of revolve festival with an intimate 20th anniversary celebration in Los Angeles, attended by A-listers, VIPs and brands, including key fashion partners who have been with us since the earliest days.
Speaker 5: In true revolve fashion, the event grabbed headlines, particularly if felt this uncandled generous studying ensemble, highlighted by a sheer white form fitting a lie address from our forwardous urban that sold out on this immediately after all the favorable press. Once again, illustrating a powerful marketing impact that our brand partners are increasing criticism from the którzy definition.
Speaker 5: It was clear from the conversations and tell us that our intimate gathering just how much brand-new LLTVF earned with emerging brands and content creative partners over the years from our mutually beneficial relationships.
Speaker 5: We are truly grateful for the relationships we have built and to see the many businesses that belong with us in our journey. We are strong brand, our focus on the customer, our technology and data during foundation, and the support of our partners, we have nearly quadrupled the business from roughly $300 million in revenue in 2015 to 1.1 billion today. All festivals held over two days in mid-April and with an incredible event at the Wall Street Journal Club.
Speaker 5: Your series of events featured an even more exclusive and intimate setting while delivering a high energy vibe that was inspired by our outstanding lineup of musical acts.
Speaker 5: Headline performers included 21 Savage, Don Toliver, City Girls, Pink Pantherous, Weyler Ray, Zatvia, Amaray, Ira Star, and the trending Ice Bicep. Her first live performance, releasing a hit single with Nicki Minaj, debuted at number one of the Billboard charts. An important driver of impact and awareness was an incredible event attendance across the country.
Speaker 5: Bailey Beaver, Leonart of the Caprio, Emma Roberts, Travis Kelsey, Ua's Hamilton, Stormread, Lori Harvey, Sweeney, Leon Bridges, Camilla Morone, Madison Bailey, Stutie Waterhouse, Natalia Bryan, Marina Shake, Shane Mitchell, Noah Beck, David Dobbert, Christina Millionaire, and Tyga. To illustrate the scale of favorable impact on her brand, the week of Roval...
Speaker 5: with Revolve because of the strength of our brand and strong connection with the next generation consumers.
Speaker 5: We recently launched an exclusive shoe collection called JLo Jennifer Lopez and hosted an impactful marketing event with JLo that attracted more press than any launch event in our history, with all made possible by the combined strength of our brands. Chipped into an update on Forward, we have some exciting marketing plans for later visitors to stay tuned for detail in the coming months.
Speaker 5: One of the areas that has been a real bright spot is our recently introduced Ford venue, the section of Ford dedicated to circular luxury shopping where we saw pre-owned handbags from coveted luxury brands. Filled from the early effort, GUMA was 50% on a sequential basis in the first quarter, from the fourth quarter of 2022, and Renew has attracted many new customers to the Ford brand.
Speaker 5: and revolver in the queue to make their beauty products available on the forward as well. It's been an opportunity.
Speaker 5: On wrap up with an update on meeting where our year-of-year growth in the first quarter remains solid in the low double digits.
Speaker 5: The major focus of the RUDE strategy for the near term is to attract the right selection of beauty brands on the site. I am confident that having the optimal beauty storm in UltraGRA and exciting growth opportunity over the long term is simply because our customer loads are involved and we consistently exceed expectations. As context, you know that when we launch a major beauty brand, it moves the needle.
As a small number of V brands currently drive a high share of our beauty volume, we are very excited about the pipeline and high impact beauty brands we expect to be onboarded this year. An exciting development with lunch is Courtney Cartesian's wellness brand Lemmy, Unrevolving February . Months before distribution through any major beauty retailers, lunch and revolve is very well in the early going, but by Courtney really leaning into marketing on his social channels.
For example, we enforce the powerful revolved brand, community, trusted relationships, they have no taste makers. In closing, it is clear to me that we remain in a highly uncertain operating environment as Michael did to. Not surprisingly, consumers are dealing with persistent inflation pressures, which will lead to some reduction in our customers for the benefit of the spend.
evident in our average spending practice customer. Despite the challenging macro environment, we are continuing to play offense, building an already solid foundation that will support our future goals when the environment improves in our spending returns.
I'm super energized by the energy and level of innovation throughout the company.
continue to push the boundaries, leveraging new technologies and marketing techniques. Our entrepreneurial team culture is in full force as we pursue our goal of being THE fashion destination for the next generation consumer.
I will turn over to Jeff D. for a discussion of the financials.
Thanks, Michael, and hello, everyone. We encountered our share of challenges in the first quarter on top of a very difficult prior year comparison. In such a dynamic environment, I am pleased that our operating discipline enabled us to achieve significant progress in recalibrating our inventory position while generating exceptional cash flow where their strengthening are already pristine balance sheet. We'll start by recapping our first quarter results.
Net sales were $289, a year-over-year decrease of 1%.
They shared on our earnings conference call for the fourth quarter of 2022, the first quarter of 2023 began on a high note with year-over-year net sales growth in the mid-single digits through the first seven weeks.
However, our net sales trajectory decelerated in the last six weeks of the first quarter of 2023, consistent with a variety of public data sources reporting software consumer spending on discretionary items during February , and particularly during March.
Looking at our first quarter of 2023 results over a longer time horizon, our net sales have increased at a four-year compound annual growth rate of 19% when compared to the first quarter of 2019.
Revolve segment net sales decreased 3% and forward segment net sales increased 5% year year in the first quarter.
By territory, domestic net sales decreased 5% and international net sales increased 16% year-a-year. The US based a much harder comparison that the US grew more than twice as fast as our international business in the first quarter of 2022.
Active customers, which is a trailing 12-month measure, increased by a healthy 84,000 customers during the first quarter. This growth expanded our active customer count to 2.4 million, an increase of 19% year-of-year.
Our customers placed 2.3 million orders in the first quarter, an increase of 6% year-of-year. Average order value was $288. Flat year-of-year.
Shifting gross profit. Consolidated gross margin was 49.8% at the high end of our guidance range, and a decrease of 468 basis points year-rear, primarily due to a lower mix of net sales at full price compared to the first quarter of 2022.
We exited the first quarter with a more balanced inventory position, which gives us confidence in the improving gross margin outlook in future quarters.
first quarter with a more balanced inventory position, which gives us confidence in the improving growth margin outlook in future quarters. Moving on to operating expenses.
increase in our return rate, as well as increase labor costs and investments made to expand our fulfillment network.
The software revenue trend was also a headwind for full-fillment efficiency year-on-year due to decreased utilization of our expanded fulfillment center capacity. Selling distribution costs do you leverage two points to your year and we're higher than expected. And merely due to elevated costs for customer shipments cost by a higher return rate year-a-year.
and continued year-round growth in variable fuel surge charges.
We are very focused on reducing the significant negative impact on our profitability from these increased shipping costs with several initiatives in place and more being developed and tested.
Marketing was more efficient than the outlet we provided on last quarter's conference call. Our marketing investments represented 13.7% of net sales in the first quarter, an improvement of 225 basis points year-to-year.
General and administrative costs were $28 million, slightly lower than our outlook tried and last quarter.
Our effective tax rate was 25%, 3-point higher than in the first quarter of 2022. Net income was $14.2 million, or 19 cents per litre share. At decrease of 37% year-over-year, it was impacted by the lower girls margin and growth in operating expenses. Partially offset by an increase in other income due primarily to an insurance reimbursement.
Adjust the dividal with $15.90 at decrease at 52% eorevere.
Moving to the balance sheet and cash flow statement, our cash flow in the first quarter was exceptional and benefited from favorable working capital dynamics.
Net cash provided by operating activities was $49 million and free cash flow was $48 million, which was our second highest for any first quarter, yet declined compared to the first quarter of 2022, primarily due to lower net income year over year. In just the first quarter of 2023, we have already generated more than twice the net income year over year over year.
the amount of operating cash flow than all of 2022. The strong cash flow generation has further strengthened our balance sheet and liquidity. Cash and cash equivalent as of March 31, 2023 were $283 million, an increase of $49 million or 21% from year in 2022, ending increase of $13 million or 5% year of year.
Our balance sheet as of March 31, 2023 remains debt-free. Inventory at March 31, 2023 was $190 million, a sequential quarter decrease of $25 million from year end 2022.
As a result of this significant inventory reduction in the first quarter, our inventory moderated to a 6% year-over-year increase.
narrowing the unfavorable spread between our year-over-year inventory growth and year-over-year net sales growth to only seven points.
We remain confident that we are on track to rebalance our inventory by the end of the second quarter. Now, let me update you on some recent trends in the business since the first quarter ended and provide some direction on our cost structure to help in your modeling of the business.
Starting from the top, the top line pressure we experienced late in the first quarter has continued, as net sales for the month of April 2023 decreased by approximately 7% year-to-year. We believe the uncertain macro environment is increasingly weighing on our customers purchasing behavior.
Shifting the gross margin. We expect gross margin in the second quarter of 2023 of between 53 and 53.5%.
up from the first quarter of 2023 Gross Margin reported today. Yet lower year-over-year as we expect to reduce mix of net sales at full price this year. Importantly, the year-over-year declining gross margin implied by our outlook for the second quarter of 2023 is about two points lower than the year-over-year declining gross margin reported for the first quarter announced to them.
For the full year 2023, we continue to expect girls margin of between 52 and 53%.
Fulfillment. Primarily as a result of the increased top line uncertainty, we are taking a slightly more conservative view of fulfillment efficiency.
We now expect fulfillment as a percentage of net sales to be around 3.2% for the second quarter of 2023.
We continue to expect slight sequential improvement on fulfillment efficiency in the second half of the year, resulting in fulfillment as a percentage of net sales of approximately 3.1 percent for the full year 2023.
Selling and distribution. We expect selling and distribution costs to represent around 18.7 percent of net sales for the second quarter of 2023 and 18 percent of net sales for the full year 2023.
The increase from our prior full-year guidance primarily reflects a higher than expected return rate that we believe is influenced by the challenging macro environment. As a result, we are now assuming a higher return rate in 2023 than was embedded in our prior guidance. Importantly, our outlook for the full-year implies sequential improvement in the back half of the year. There are three key drivers of the sequential improvement we expect in the back half of the year for selling additional...
of others, shipping and logistics efficiency measures we are pursuing.
However, we are factoring in an elevated return rate in the near term, which will partially offset some of our efficiency measures and contribute to continued pressure on shipping costs.
Marketing. Our marketing efficiency in the first quarter of 2023 was partially due to a reduction in brand marketing events this year compared to the very active events calendar in the first quarter of 2022.
By comparison, we expect a second quarter of 2023 to include a larger investment in brand-vendee events year-a-year when compared to the second quarter of 2022.
As a result, and consistent with our commentary from last quarter, we expect our marketing investment to be the highest of the year in the second quarter of 2023 and to represent approximately 18.5 percent of net sales.
For the full year 2023, we expect marketing to be within the range previously communicated of 16 to 16.5% of net sales. General and administrative. We expect GNA expense of approximately $29 million in the second quarter of 2023 and between $113 to $150 million for the full year 2023. Unchanged from a prior full year outlook. The full year outlook.
And lastly, touching on our tax rate, we continue to expect our effective tax rate to be around 24 to 26 percent. Consistent with the past several quarters.
To reach out, while the current environment is challenging led by Mike and Michael's long-term mindset, our leadership team has energized behind a wide range of exciting initiatives that we believe will benefit Revol for years to come. After delivering exceptional girls in the past two years, our key focuses are active evaluation of how we can leverage our technology, data-driven approach.
and operating excellence to take advantage of our increased global scale and driving further operating efficiencies across the organization. Now 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, please press star then the number one on your telephone keypad.
We'll pause for a moment just to compile the Q&A roster. Your first question comes from Oliver Chen with TD Cowan.
Your first question comes from Oliver Chen with TD Cowan.
I'm Mike Mike and Jesse regarding the softer revenue trends and what you see ahead of which classifications were more concerning and also your inventory spreads better. But what do you think about going forward in terms of the promotions and markdown cadence and what risk factors are you monitoring there in terms of what's embedded in your guidance? Do you expect the trends on an ongoing basis to continue to be fairly volatile? Thank you. Yeah, so with regards to classifications all over, are you just wanting more color on kind of cross different segments, you know, with a geography, are types of merchandise or what are your friends doing there? Yeah, I think the categories that were softer and if they followed.
patterns that would help us get a feel for what's happening with the customer and what's driving some of the softer trends.
Yeah, definitely. So, you know, if you look at my kind of category as well as customer segment, there's a couple of call outs. You know, one would be that certainly the, their aspirational customers versus the high end customers, there was a bit more softness there, but we don't also emphasize the softness was fairly broad based. So it's not to say we didn't see impact on the high end. You know, within the merchandise category, you know, I think, you know, if you look at a parallel that's more going out oriented, you know, there was a bit of an overshoot or peak last year. And so we saw some rebound in the opposite direction.
If you look at that kind of category as well, the customer segment, there's a couple of call outs. One would be that certainly the aspirational customers versus the high-end customers, there was a bit more softness there. But we'd also emphasize the softness was fairly broad-based. So it's not to say we didn't see impact on the high-end. Within the merchandise category, I think if you look at apparel that's more going out oriented, there was a bit of an overshoot or peak last year. And so we saw some rebound in the opposite direction.
Obviously in an uncertain macro environment there is continued risk around inventory levels and gross margins and things of that nature but it's something that we're laser focused on and being very active on. Okay, last question Mike, on customer acquisition trends. And what you saw was that more concerning in terms of new versus existing cohorts, indoor, there's been a lot of volatility in CAC and also less productivity in their performance marketing. Is there any color in terms of what you've been seeing with that?
Yeah, so the first quarter was actually good by a number of marking metrics. I'm going to prickly-cack was favorable versus prior periods. New customers were generally strong. It was just, again, offset by a broader base weakness. As you saw in the numbers, we pulled back on marking a bit in the first quarter, which certainly had some impact on the overall trends. We hadn't wanted to pull back on marking too much until we felt the human term position was in a better place, and again, we filled it up the process.
there. So that's when we had some impact on the trends and also an increased level of
of kind of new marketing techniques and marketing experimentation had a little bit of an impact also that's something that we didn't want to play with too much when inventory levels were elevated before but we were a little bit more free to do that in the first quarter which is has some you know a call it minor impact in the current quarter but is overall good for the long term.
need your retailers pulling back on overhead and we're hiring engineers at this point. Obviously, you need an approved and cost-vision way as we always do, but overall increasing investments. In a tech and we think it's a huge opportunity over the coming quarters and coming year and excited to hopefully every quarter have something new to share with you there. The only I think that would add us up to that, you know, all about like completely agree with us. It's really into some of the really nice categories. I think, you know, coming up for the Valve Gallery, which will be an H2, will be the first time we integrate Reno Men's as well as the first time we integrate Beauty as well. So there's, you know, longer term categories that we think will be, you know, very, very crucial to our long-term success over the next ten years or so.
that we are everything that always sets up anything with our core activities and getting more serious about so there'll be a lot more of that we won't be getting lost shy by it from a bunch of opportunities during you know
I think this. For sure. And the only other thing in my layering without getting, I guess, too detailed, but there's areas of the business, whether it's like the marketing experiments that I alluded to in the first quarter, and also other areas related to, you know, kind of call it the efficiency of those opportunities that.
We're increasing our investments in, and in the short term, are more likely to have a slightly negative effect right whenever you do.
I think for all of us to be active. We'll take our next question from Randy Connick with Jefferies. Hey, thanks for taking my question. I guess, Jesse, maybe you could give us some perspective on just how, if you're trying to think about various outcomes for Topline, I know you're not going to get a quantification specifically, but is there a way you could give us some perspective on how we should be thinking about differences in a range of outcomes in average order value, number of orders, or something to that effect that we can kind of get a sense of how you're thinking about a range of outcomes for the Topline? That would be super helpful.
Yeah, yeah, you know, it is still highly uncertain out there as we've talked about. And that's why we're only giving the kind of actual results through April , which we're down 7%. You know, that said, some additional color. I think, you know, we're still confident that AOV can have a modest increase this year. We're pleased with the flat AOV year on year.
with the significant decrease in full price mix. As expected, full price mix shifted down significantly year over year, coming off those record highs of last year. So to get a flat AOV in this quarter, we were pretty pleased about. And then we're already seeing the full price mix shift back with the inventory rebalancing.
So it's so good there. Customer acquisition has been healthy, CAC has been healthy. The majority of the new customers will be acquired. We're at full price. That said, the growth really came from the markdown, given the shift to markdown that we saw this quarter. And then, you know, I think the uncertainty out there is real. And...
given that we're starting off at a minus seven for the quarter. We're kind of in the zone of, you know, it could be slightly negative to you slightly positive for this second quarter, depending on how this next two months play out. Comps do get easier on a one-year basis, but on a multi-year basis, if you look back 22 versus 2019, they're still tough. So, you know, I think we just got to keep, you know, stay on the offense, keep doing what we're doing and kind of work through this moment in time we're in.
Got it, and then you give us good perspective on how you're thinking about the selling and distribution line as percent of revenue You know for the year I assume so when you think about maybe stepping back and looking at the return rate as an impact you know impact with line items
Where are, can you just do this in perspective on where we are in that return rate by goal and how should we be thinking about that over the next couple of years? Is there a meaningful opportunity to over time and prove that return rate? Just how should we be thinking about that? You're not just a balance this year, just kind of thinking out more into the long term future.
You don't have a very psychotic impact or it doesn't have a special impact on an margin. Yeah, maybe I'll address the first part in this kind of talking about the current quarter and return rate and what we've factored into the guidance and then kick out over to Mike for the long-term opportunity on return rate. We did see an elevated return rate for the quarter. Higher than we had initially expected. And we did see it increase as the quarter progressed.
I think just a couple things, you know, more granular on the seasonality. We typically see March, you know, about 20% higher in dollar terms than January . We didn't see that this quarter. It was only about 10% higher than January on a gross basis. And then when you factor in the return rate, March was actually 6% lower than January . So you can see the impact, not only of the macro consumer.
impact in March, but also that increased return rate as the quarter progressed. And then we also saw increased return rate across segment and then across categories as well. Even the lower return rate categories like handbags and then even beauty saw an increased return rate. So we do attribute a lot of this kind of near-term pressure to the macro environment. And that's why we've taken up the fulfillment a little bit and we've taken up the selling and distribution pretty meaningfully in our guidance. And as we're...
the longer term.
focus on making it easy for customers to return to lead within the industry in that process. And that's generally something that we're not going to compromise. We feel like there's a lot of long-term opportunity there. It's something that we've repeatedly said. But it hasn't been the biggest area of active focus. There's been some focus on it.
over the long term and hopefully earlier than that we can make some impactful changes that reduce return rates in a win-win way for the consumer and for us. On top of that, certainly Jesse talked about the transactional cost efficiency that we're focused on. We're laser focused on that. That's one of our key priorities this year and we're looking to drive those down significantly.
progress you've made on making that fulfillment and return process a little bit more margin efficient globally. Thank you.
Yeah, yeah. On a year-over-year basis, the kind of shift to international or kind of the localization of international didn't have a meaningful impact. You know, we continue to make improvements there for the customer, but the big shift there were over a multiyear period. So if you look kind of a pre-COVID, you know, 2018-19.
compared to 2023, that's where you see the significant impact from the international localization. But on a year-of-year basis, we saw relatively consistent increase in return rate again across segments and GOs and categories. So I wouldn't call that out as a big factor this quarter. And we continue to make progress on those and this kind of cost reduction.
to reduce those cuts and optimize the shipping length.
Again, not expecting huge impacts this quarter, more towards the back half of the year and just really setting us up well for 2024. And we'll take our next question from Rick Patel with Raymond James. Thank you. Good afternoon, everyone. Can you provide additional color on international performance?
for the quarter, a big, cool driver in the quarter, coming off of a really difficult comparison, but just in general, we saw a lot of great momentum there. Europe has been...
A market has been struggling a bit, as with other Western markets, whether it's certainly domestically, our sales momentum's not what we want it to be. Other Western markets like Australia and the UK, also kind of not where we want them to be. So I think within those Western markets, things have just generally been soft from a macro standpoint, but.
You know, more broadly globally, there's definitely those bright spots, including Middle East in Latin America where we've been making investments. And that's really nice to see, you know, those investments paying off in regions that don't have the same currency headwinds or some of the same economic headwinds as the Western market. And also a question on A.M.
Now, any art pieces is that, and I can clearly, every aspect of the business, as you can see, we're kind of like whiteboarded and then brainstormed there. So we think that there's possibilities in some departments for a strong needle mover, within the next 12 months or so, but also anticipate continued acceleration across board. We've literally gone through every aspect of the organization, and we think some of the first, first pieces of the impact of the business, the most is gonna be in our fashion design zone. We've already started.
So it's really exciting time for me, Mike and I, I really reminded of the, you know, 20, 25 years ago, early internet data, sort of, saw the clear long-term trend was there, that's specific to how they could play out, of course, will evolve over the ages, but we think that we're positioned well to take advantage of the next wave of technology. We'll take our next question from...
and kind of have you seen any impact from some of the promotions that we've seen across the luxury space?
have you seen any impact from some of the promotions that we've seen across the luxury space? Thank you.
Yeah, I think consistent with what we've talked about before, it does take longer to write the shift on the forward side than it does on revolve. So we feel really good on the revolve side. Forward still has a little ways to go, and that's where we're sticking to the end of Q2 before we feel like we're in a kind of a rebalanced position. So right now—
For an inventory does over index relative to the sales mix on revolving forward. And I think promotions do have an impact, have had an impact and I think we'll continue to have an impact as everybody works through their inventory, the uncertain and challenging macro environment. But we're working through that and we typically don't respond on a head-to-head one-to-one basis on the promotion. It's more about working through our inventory and getting it in the right place. Maybe one other follow-up. I guess, have you?
have you seen enough from a weakening consumer macro perspective that makes you want to tilt your assortment within Core Evolved to more entry price point or lower price point versus kind of where it had been migrated to? Thank you. Yes, so we're always mindful of consumer shopping behavior and there's certainly not going to be any shifts that dramatically change our position in the marketplace, but certainly hit the edges as we kind of tactically react to where...
Consumer demand is strongest versus softest, where we're constantly optimizing the mix, and that'll continue to be the case. Thank you. We'll take our next question from Jim Duffy with Steve Hull. Thank you. Good afternoon. I wanted to start asking about inventory and promotion. Q1 showed some aggressive actions on the inventory. I'm curious, did the inventory progress had cdure expectations in the quarter? And then even with leaner inventories, do you expect you'll need the sustained promotion to remain competitively relevant?
We're constantly optimizing the mix and that will continue to be the case. Thank you. We'll take our next question from Jim Duffy with Stiefel. Thank you. Good afternoon. I wanted to start asking about inventory and promotion. Q1 showed some aggressive actions on the inventory. I'm curious, did the inventory progress exceed your expectations in the quarter? And then even with leaner inventories, how do you expect you'll need to sustain promotion to remain competitively relevant?
Yeah, I would say the inventory progress is roughly in line with our expectations, despite softening on the top line that we did not expect late in the quarter. So I think we're really pleased with the inventory progress, despite the softening top line. And we'll just have to kind of read the landscape as we go through the year. Make sure we get about the inventory. We'll feel like we're rebalanced at the end of Q2, and we'll kind of manage accordingly. But again, we typically don't respond, again, head to head.
are you seeing in the mix between
full price and promoted goods? Yeah, I think generally I'd say they're responding as we would expect to the markdowns, and I think also responding on the flip side as we're now shifting back into full price. And we're already seeing a pretty meaningful, you know, kind of…
reversion back to that full price – not to the record levels we were at last year, of course, but you can see that in our gross margin guidance that we gave for Q2. So, again, just managing accordingly and responding to the customer. We'll take our next question from Chad Tevibaugh with Needham & Company.
Hi, it's Chad on Forana. Just on the better forward growth in the quarter, can you talk about what's embedded for 2Q and what you're seeing with the more luxury consumer? And then additionally with the moderating inventory at the end of 2Q, should we think about inventory being more in line with sales in the back half of the year? Thank you. Hi, from We Movie, we are very excited.
Yeah, no comment really on the expectation for forward beyond what we saw in April , which was a kind of a slight sequential improvement on a one-year basis versus March, but again, on a multi-year basis, still a detail across the board. And then – Yeah, no comment really on the expectation for forward beyond what we saw in April , which was a slight sequential improvement on a one-year basis versus March, but again, on a multi-year
And Ford is just much more volatile on a month to month and quarter to quarter basis, which is why we want to stay away from giving too much color on the expectations there for the balance of the year. And then inventory and lineless sales, again, that was our expectation that is around the middle of this year that those two would converge closer.
I know you mentioned the lower inbound freight starting to kick in. Anything else to call out there just on the costing environment? Thank you.
Yeah, for the own brand mix, I wouldn't expect a meaningful increase in the mix this year versus the last year. I think that is more of a probably a 2024 dynamic. In times like this when we're rebalancing inventory and given the depth that we need to produce and to run the own brands, that has a more meaningful effect.
pullbacks in on the third-party side. So not expecting a meaningful increase this year on a full year basis. More kind of comparable even, you know, throughout the balance of this year to what we had last year. And then the margins are holding strong. Freight has that inbound freight on own brands has returned.
close to pre-pandemic levels, but keep in mind that given the higher price point that we operate at, that premium price point, the freight is a much smaller percentage of the cost of goods sold, than maybe for others. It does have a positive impact, but it's not as meaningful as you might otherwise think. And that margin is still significantly higher than a third-party margin. We'll take our next question from Tom.
normal? Is there anything else like mix related we should think about that starts becoming a good guy? Just can you just help us sort of understand the progression of what's marked?
Yeah, no, that is the primary driver shifting back to a healthier, full price, mixing Q2. And we see that, you know, that's typical for any year, but especially this year, as we may significant progress on the inventory in Q1, and then in a healthier place in Q2. So there's both a seasonal aspect and then our inventory.
But I would say the primary driver is that full price mix component.
Got it. Thanks, Jesse. We'll take our next question from Matt Corando with Roth MKM. Please go ahead. Hey, guys. Good afternoon. Thanks. A lot of finesse unanswered, but just wanted to cover engagement.
in what categories are you seeing new customers enter the active user base, anything that's changed there, any callouts that's given the different economic environment. Lauren. Yeah, I wouldn't say there's any major changes from some of the trends we've seen in earlier quarters, but a couple of callouts. So one would be that.
Marked down products were particularly strong in new customer acquisition and that's generally true historically. So that was certainly one reason we saw strong new customer growth in the first quarter and then also beauty. And again, the same quarter is previous quarter's beauty's been a growth area for us and that area is typically more efficient for us in driving new customers and so we saw strength there as well. And we have time for one more question.
Just whether it's the returns, the margin, the AOV, etc. So just curious if you're seeing anything interesting learning-wise or discrepancies with the new cohorts. Thank you. Yeah, we're not seeing anything particularly different from from the new cohorts versus previous cohorts. You know, certainly depending on how we bring in a new cohort there can be some...
returns, the margin, the AOV, etc. So just curious if you're seeing anything interesting learning-wise or discrepancies with the new cohorts. Thank you. Yeah, we're not seeing anything particularly different from the new cohorts versus previous cohorts. You know, certainly depending on how we bring in a new customer, there can be some you know, some differences.
over time, but in general what we're seeing is consistent with what we've seen historically as far as our expectations from those consumers. It relates to return rate, typically new customers actually tend to have a lower return rate than the return in customers. So that wasn't, you know,
over time, but in general, we're seeing as consistent with what we've seen historically as far as our expectations from those consumers. It relates to return rate. Typically, new customers actually tend to have a lower return rate than returning customers. So that wasn't, you know, that didn't have any impact on the increase in income.
return rate in the first quarter. Okay, great. Thanks a lot guys. Best of luck for the rest of the year. Thank you. And that's all the time we have for questions today. I'll turn the call back to management for closing remarks. Thanks for joining us for this quarter guys. Obviously, you know a lot going on in the business, a lot going on in the world, but very excited to look at the organization. Looking forward to next quarter to show you continued results, both operational results and financially. Thank you and that does conclude today's presentation. Thank you for your participation.
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