Q2 2023 Revolve Group Inc Earnings Call

Good afternoon, My name is Andre and I will be your conference operator today.

At this time I would like to welcome everyone to revolve second quarter 2023 earnings Conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad.

I would like to withdraw your question Press Star one again.

At this time I would like to turn the conference over to Erik Randerson, Vice President of Investor Relations at revolve you may begin.

Good afternoon, everyone and thanks for joining us to discuss <unk> second quarter 2023 results.

Before we begin I'd like to mentioned, we have posted a presentation containing Q2 financial highlights to our Investor Relations website located at investors not revolve dot com.

I'd also like to remind you that this conference call will include forward looking statements, including statements related to our future growth and profitability market opportunities macroeconomic and industry trends business operations and marketing initiatives and investments in international expansion, our stock repurchase program growth in active customers our inventory.

Balance of management and our outlook for net sales gross margin operating expenses and effective tax rate.

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 Securities and Exchange Commission, including without limitation are.

And the report on Form 10-K for the year ended December 31, 2022, and our subsequent quarterly reports on Form 10-Q, all of which can be found on our website at investors that revolve dotcom.

We undertake no obligation to revise or update any forward looking statements or information, except as required by law.

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

We use non-GAAP measures in some of our financial discussions as we believe they provide valuable insights on our operational performance and underlying operating results.

The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP in 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 limitations and rationale for using them can be found in this afternoons press release.

And the rest of the SEC filings.

Joining me on the call today are 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 thank you for joining us today I'll begin with a recap of our second quarter results and then I'll conclude by highlighting our key operating priorities investments and growth initiatives. We are very excited about <unk>.

Net sales decreased 6% year over year to $274 million in the second quarter, a slight improvement from the 7% year over year decline in April 2023 discussed on last quarter's conference call.

As you've heard from many companies the U S remains very challenging for consumer discretionary spending, particularly for our younger consumer demographic.

Net sales in the U S decreased 7% year over year, partially offset by international net sales, increasing 4% year over year highlighted by exceptional growth in Mexico, which has become one of our most important international markets.

Our gross margin was 54% a meaningful sequential improvement compared to the first quarter was 49, 8% as expected gross margin remains lower compared to the second quarter of 2022, when our mix of net sales at full price was exceptionally high net income for the second quarter was <unk> 7 million or <unk> 10 per diluted.

Sure and adjusted EBITDA was $10 million or three 8% of net sales.

Our profitability was significantly lower than last year's second quarter, primarily due to the decline in net sales the lower gross profit year over year and continued pressure on operating expenses in large part due to a higher return rate.

We view the current macro environment is a near term headwind on our path towards resuming attractive growth rates and margins over a longer term horizon as we have demonstrated with our long term historical track record of attractive growth and profitability.

And importantly, challenging operating environments create opportunities for a financially strong and cash generative companies like revolver to further separate from the pack by continuing to prudently invest through the cycle awesome industry peers have no choice, but to play defense.

With that in mind I'll now recap several important growth and efficiency initiatives that we believe will further strengthen our foundation for profitable growth over the long term.

Yeah.

We are currently extremely focused on driving cost efficiencies within our global shipping and logistics operations to help offset cost pressures, resulting from a higher return rate year over year.

As an update on this important initiative. This week, we plan to launch a new process that we expect will drive meaningful efficiency gains for future periods by consolidating all returned shipments coming back from Canada to the United States and separately in the United Kingdom. We also just began to hold certain product returns in the UK for local repo film into UK customer.

Without shifting the products all the way back to the U S. As we historically have done.

This initiative, both reduces shipping costs and provides for even faster service to our valued customers in the region.

These are significant wins in two large international markets to demonstrate great execution and results in a short period of time. So we are focused on leveraging our scale to drive efficiencies and continued improvement in our best in class customer service most.

Most importantly, our team is aggressively pursuing a long list of initiatives that we're confident will help us gain significant further efficiencies in the coming quarters.

I look forward to sharing our progress in this area as we move forward.

We continue to expand the use of AI and machine learning across several key areas of our operations to drive growth and efficiencies.

During the second quarter, we launched a new type of AI powered merchandising that leverages image recognition to recommend visually similar items to customers illustrating impactful use case when consumers are looking at our product on revolve that is currently out of stock our AI technology engages with the customer to recommend visually similar items. This enhancement.

Notable conversion lift and are testing conducted prior to launch separately, we are continuing to advance efforts to integrate AI into our own brand design, which we view as an exciting opportunity to enhance creativity and accelerate the product development cycle.

We are also actively leveraging technology and evaluating solutions to optimize the return rate consist.

Consistent with our customer first focus our efforts to reduce return rates over time will not detract from the customer experience in the third quarter, we will be experimenting with several new initiatives, including our virtual try on in size comparison future tool that went live last month, and we're testing a wide range of tools and visuals to better communicate product finish such as <unk>.

Enhanced fit reading customer reviews detailed product did guides and video content within product detail pages.

Shifting to international expansion, we recently appointed our first ever head of greater China to further strengthen our foundation for future expansion in the region.

Plan to further build out our local team on the ground in China to expand key relationships and brand awareness, which is important since the marketing and social media channels in China are different than in all other markets. We operate considering the size and importance of the China E. Commerce market. We believe now is the right time for us to invest in a more meaningful way.

Illustrate our growth potential in China I'm excited to share. The recall was that number six ranked fashion brand on Tmall global marketplace. During the month of June this recognition and success contributed to our continued growth in China in the second quarter and illustrates the level of interest in revolve in this very large market.

Lastly, and continuing on the international teams. We're also expanding our borders for talent acquisition after demonstrating during the pandemic did a distributed workforce can work very efficiently for many functions. We have begun expanding our hiring scope will be on California into select overseas markets in the past several months, we have successfully attracted talent protect.

Customer service and other functions and countries outside of the U S.

Citing because hiring engineers and a competitive U S market has historically been a real challenge for us due to our very high standards and hiring outstanding talent overseas provides an added benefit of being able to efficiently work on development projects around the clock.

While we expect this important initiative resulted in some cost efficiencies. It is not our primary focus we are most excited about is meaningfully expanding the available talent pool to even further raise the bar on our exceptionally high standards as demonstrated by our achievement of record net promoter scores every year for the past few years, we have recently opened our first overseas office.

To guide this important effort.

I am pleased with our team's execution on these important initiatives that are key building blocks for our continued long term growth and profitability.

Our long term mindset and strong balance sheet combined with our conviction in the strength of our business model and confidence in our team to execute to the short term challenges and over the long term that our board of directors authorized $100 million stock repurchase program.

Since we view the current environment is a near term headwind, we remain confident in our longer term opportunity to drive growth and profitability, we view stock repurchases as an attractive and accretive use of our capital.

We authorized the stock repurchase program with confidence to nearly $270 million in cash and no debt on our balance sheet gives us financial flexibility to remain opportunistic to invest in the business across multiple dimensions in our efforts to drive shareholder value.

In summary, while we certainly faced more near term challenges in the current environment, We will remain nimble and continue to focus on our hallmark of technology innovation operating efficiency and brand building to capture more share in that very large market.

We remain squarely focused on investing in the long term opportunity ahead of us leveraging our 20 years of operating experience and our competitive advantages to guide us through these uncertain times now over to Michel.

Thanks, Mike and Hello, everyone.

And numbers for the second quarter during a very challenging macro environment reflective of what we believe is a long term growth potential. Despite the short term challenges, but our strong business model and focus on the long term, we have been able to deliver unimportant operating priorities that should prove to be beneficial in the years to come.

And particularly it seems definitely momentum and driving efficiencies in our shipping and logistics operations.

Based on that to leverage AI to drive further operational efficiencies optimize processes and enable deeper connections with our next generation consumers.

People are connecting with customers a highlight of the second quarter was the unveiling of our first ever physical experience a publisher in Los Angeles inspired and curated by J&J Kendall Jenner destination launched earlier.

We'll showcase our brand and our luxury brand partners.

But opening reception hosted by Kendall Jenner and attended by many other meaningful.

Meaningful, but it has continued to gain strength and favorable word of mouth spread.

Any of our high value forward passengers flew into Los Angeles by the opening of that event demonstrating the strong interest among our most loyal customers.

The brand elevating experience has enabled us to engage deeply with ford customers connecting with them in ways never done before.

Traffic flow and customer interest have been great customer feedback has been exceptional.

A great deal on a consistent basis that customers love our selection and curation what are the long established luxury destination in the area. Many of our top four customers based in Los Angeles happened to adopt change.

Items online to try an interesting.

So can you try that they had previously purchased online.

This is Jim chatbot slower conversion demonstrating synergies with our e-commerce operation that we'll consider as we continue to evaluate whether physical retail the pace of our growth strategy long term.

Another takeaway from the experiences luxury customers truly embraced that.

Handbags are not new forward when you're offering discussed on prior investor calls.

During a recent data flow pop up we sold two trail continue to more than $35000 each single day.

The success of the floor of the new offerings further validates the mapper purely handling some of our customers as a result data this quarter, we plan to meaningfully expand our growth potential luxury resale by offering we need to have a much larger set of customers to evolve as well.

Finally, affording brand partners have been incredibly supportive of efforts to engage the community in a truly differentiated destination.

We have hosted around 'twenty impactful against window here and you got to your advantage for Saatchi.

Jewelry and Anastasia Beverly Hill, just to name a few with many events focused on our emerging beauty category. Additionally, several of our luxury brands have seen exclusive hospitals for the forward experience that are not available anywhere.

If you are in Los Angeles before August 13th please drop by and see us at uniform Melrose Avenue.

The second quarter was a very busy period of investment for brand marketing anchored by the successful bulk vessel in April that I talked about at last quarters Conference call.

Physical experience as well as all the time with them to deploy our best performing international market.

And generally hosted a weeklong brand activation with a series of events in Mexico City to showcase the revolve bandon lifestyle and spread the word about our outstanding service level have been integral to our growth in customer loyalty around the world events.

The event drove tens of millions of social media and personal passion, often emphasize consistent theme that going shopping in Mexico has never been.

As we launch.

Most exciting is that our impactful events served as a catalyst in driving this spike in new customer growth across Mexico, which had already been triple digit year over year growth territory, even before the event.

<unk> is now a top five international loggers, demonstrating how we can leverage our brand and operational excellence to capture the very large international opportunity.

Our impactful marketing has also contributed to the setup of <unk>.

That ratio.

Helps a bank collaboration with alcohol that is exclusively available on revolver continues to perform incredibly well.

We just had our fifth helpful job most successful yet.

Also license civil collaboration with model and social media personality, Sydney, Kimberly has resonated very well with the increasingly global customer base.

As mentioned on prior Investor calls, so I think with some of the men in eastern quarters combined with elevated inventory position entering 2023 tends to be more conservative planning all of that inventory buys. So all of that requires a deeper inventory commitment first album pipelines yet.

The success of our recent collaboration illustrates the power of our old grab topline et cetera.

Positive indications on potential long term.

I'll close with the update on our continued successful journey to expand into beauty and events scenario should offer exciting growth potential both categories continue to grow in attractive Batesville second quarter double digit growth on a combined basis benefiting from increased focus on triangulation.

Improvement towards brand assortment.

Can you be confident that once you optimize deposit categories. The business will follow because these are very large markets.

Considering that we ask our customers tried to potential by consistently exceeding the expectations.

We have several exciting plans and achieved on what the third quarter, particularly in the beauty category, which should help Judy.

One source of acquiring new customers.

It's noteworthy that some of our recent beauty bestsellers have generated a significant portion of the regional sales volume through our partnership with Topshop.

Early days it is exciting to see validation of the potential uptake talk that's a new channel for growth.

In closing the current environment is clearly impacting demand for many consumer discretionary items, particularly the apparel in the U S. But we take the long view.

Offense, energized and investing for growth and expansion for years to come.

I'm more excited than ever my confidence in the long term underscored by our recently announced $100 million stock repurchase program like Eni or nearly 45% of the outstanding common stock and we continue to see the significant runway for growth in the years to come.

Tom.

Want to express my sincere thanks to the team for keeping us at the forefront of innovation and maintaining an unwavering focus on the customer.

Now I'll turn it over to Jesse for a discussion of the financials.

Thanks, Michael and Hello, everyone I'll start by Recapping, our second quarter results and then close with updates on recent trends in the business and commentary on our cost structure as we look ahead.

Starting with the second quarter results net sales were $274 million a year over year decrease of 6% Linda.

Linearity of our net sales comparisons year over year was fairly consistent throughout the quarter.

We've also segment net sales decreased 4% and foreign segment net sales decreased 15% year over year in the second quarter.

The forward comparison reflect softening demand among our luxury customers, particularly in the U S consistent with commentary from several luxury retailers and brands in recent months.

Hi territory domestic net sales decreased 7% and international net sales increased 4% year over year.

Okay.

Active customers, which is a trailing 12 month measure increased by 34000 customers during the second quarter.

This growth expanded our active customer count to $2 5 million, an increase of 14% year over year.

In the near term, we expect to further moderation in our quarterly growth of active customers.

Our customers place $2 3 million orders in the second quarter, an increase of 1% year over year.

Average order value was $301 a decrease of 1% year over year.

Shifting to gross profit consolidated gross margin was 54% above the high end of our guidance range.

The decrease of 198 basis points year over year, primarily reflects a lower mix of net sales at full price compared to the second quarter of 2022.

Moving on to operating expenses fulfillment costs were three 4% of net sales slightly higher than our guidance of deleverage of 71 basis points year over year was primarily due to a year over year increase in our return rate higher wages for fulfillment center staff and utilization not yet fully optimized and our recently expanded fulfillment.

At work.

Selling and distribution costs were 18, 6% of net sales slightly better than our guidance. The increase of 68 basis points year over year reflects higher costs for customer shipments primarily due to the higher return rate year over year.

Aggressively pursuing initiatives, both to reduce our shipping and logistics costs and to address the increasing return rate.

Our marketing investment represented 18, 8% of net sales an increase of 91 basis points year over year, reflecting increased investment in brand building during a very active quarter for our impactful marketing events, including the Royal Festival and the many events at the Port.

General and administrative costs were $28 6 million or 10, 4% of net sales.

And year over year net sales growth.

Net cash used by operating activities and free cash flow in the second quarter negatively impacted by a 50 million dollar increase in inventory when compared to the first quarter of 2023 <unk>.

In part due to the continued pressure Annette fail.

For the six months ended June 30th 2000, twenty-three net cash provided by operating activities with $35 million in free cash flow is $33 million.

An increase of 42 per cent and 49% year over year, respectively.

Cash and cash equivalents as of June 30th 2023, or $269 million, an increase of $31 million or 13% year over year, Yeah. It was $14 million lower on a sequential basis compared to the first quarter of 2023.

Our balance sheet as of June 30th 2023 remain that free.

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

Starting from the top the.

Helpline pressure, we experienced in the second quarter has continued with net sales for the month of July 2023 down amid single digit percentage year over year.

We believe the uncertain macro environment continues to weigh on our customers purchasing behavior and consistent with the second quarter results. During July you over your net sales comparisons and the revolves segment continued to outperform the four of sickness.

Engineer with your net sales comparisons for our international business continued to outperform our domestic business.

Shifting to gross margin, we expect gross margin in the third quarter of 2023 of between 52 and 52.3 per cent and planning a much smaller European your decrease in in recent quarters.

85 basis points in the mid point of the range compared to a nearly two point year over year decline in the second quarter and an almost five point year over year decline in the first quarter of 2023.

For the full year, we are narrowing our gross margin expectations to arrange a 52 to 52.5 per cent.

Fulfillment continued topline uncertainty and higher than expected return rate are leading us to take a slightly more conservative view of fulfilling efficiency for the full year 2023.

We expect fulfillment as a percentage of net sales to be around 3.3 per cent for the third quarter of 2023, and now I'm just like a fulfillment to represent 3.3 per cent of net sales for the full year 2023.

Selling and distribution, we expect selling and distribution cost efficiency to improve on a sequential basis and represent around 18.3 per cent of net sales for the third quarter of 2023, and 18.3% of net sales for the full year 2023.

A slight increase from our previous hold your gardens, primarily reflects a higher than expected return rate.

The full year 2023 outlet for selling and distribution costs.

<unk> assumption that will generate increasing cost efficiencies in the second half of 2023.

<unk> from a variety of shipping and logistics efficiency measures we are pursuing.

These benefits will partially offset the negative impact of the expected higher return rate year over year.

Marketing.

We expect a marketing investment in the third quarter of 2023 to represent approximately 15.8% of net sales of.

Three point sequential decrease from the second quarter, and and 80 basis point decrease year over year compared to the third quarter of 2022.

For the full year 2023.

Marketing to be within the range previously communicated of 16 16.5 per cent of that sales.

General and administrative we expect Gina expensive approximately $29 million in the third quarter of 2023 and $159 for the full year 2023 at the high end of our prior pull your outlook range.

And lastly, we continue to expect our effective tax rate to be around 24% to 26% consists.

Consistent with the past several quarters.

To recap will review the current environment is quite challenging for consumer discretionary spending.

On delivering shareholder value over the longterm our.

Our team is investing significant time and energy into a broad range of exciting initiatives that we believe can extend our competitive advantages and benefit resolved for years to come, particularly as the broader macroeconomic environment Temporaries now will open it up for your questions.

Thank you at this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.

We'll take our first question from Anna and driver at me in My company.

Great. Thanks, so much good afternoon.

A couple of the modeling questions from US first on gross margin.

Trying to understand what drove the eight two guidance for the quarter and inventories are in pretty good shape at down to so what's driving that gross margin declines in the third quarter versus the previous guidance.

It has to be Directionally up is there any additional carryover at forward. Thank you guys are working through and then secondly, just on marketing has been managed really tightly and even a bigger dollar decline in three Q. So just curious how do you guys think about that tray down in preserving margin by managing marketing.

Down versus the company returning to growth and can you talk about some of the savings where are they coming from and how sustainable.

Thank you so much.

Yeah, Hi, this is Jesse I'll start and then maybe take it over to Mike and Michael for some of the marketing questions. There was a lot there has to be they'll start with gross margin. The guy down from Q2 Q3 sequentially is largely seasonality uhm, we typically see our highest margin and Q2 and then it takes a step down in Q3.

To the tune of you know anywhere from two to three point. So you know we can.

Feel like you know margin healthy margin is in line Uhm to your point there is some additionally, carryover from forward, we feel like inventory over all this healthy that.

<unk> between the sales growth and the inventory growth is compressed again this corner and down to four point. So we feel good about that but it is taking a little bit longer on the foreign side. So there is more I guess more compression on four than there is on the <unk> side.

So I think that covers gross margin and inventory of some of the other cost savings if you're referencing just the general cost savings a lot of initiatives at play the team's working hard on those and those are starting to take effect. If you look at the selling and distribution guidance that we've given that factors in some sequential improvement in that line item and and.

That will carry forward more importantly into 2024 and beyond.

Okay, that's really helpful I.

Yes on the marketing side should we expect a similar you know under 16 per cent run right as we look into next year as well as you guys are finding some of those efficiencies and thank you so much.

Maybe in the market modeling quick before before my symptoms you know I think in that 15 to 16 and a half zone is you know wherever you wherever you like to be Uhm. There is volatility corner to corner Q2 of course is a is a larger investment quarter with revolve festival that typically falls in that quarter and then we had the 20th.

At the forward path. So there is quote unquote of volatility in that in that 16 per cent range is a good place to be and we are gaining more efficiencies on the performance marketing time in mind.

Yeah cause I really you know I would just make it was I thought it was brand marketing is free time independent depending on which <unk>, we want to do with your time.

Makes sense in my one of his opportunistic.

To put on the brand marketing, sorry to keep things, new and exciting and fresh so so that kind of drags behind me more than say hey, we want this quarter to come in at two per cent in that quarter to come in and adopt per cent.

And then we'll probably with marketing you know we want to continue to invest in marketing interview way. It's important for longterm growth. So there's gonna be plenty of dollars going towards that you know a particular brand marketing side with performance Martin We we talked about on the past calls how we were tweaking things to try to get a little bit more efficient there.

And I think we've made some good news there and hopefully that will continue through the coming quarters.

Well I'm Gonna try next question from Randy Conic at Jefferies.

Hey, Thanks, guys I just wanted to get a little more color first on the returned reached a strategy change your policy changes and give us some perspective on how meaningful you think those changes can be cause. It you know not the next quarter, but like let's say over the next four to eight quarters and improving efficiencies. There maybe you can give us a little bit more quantitative.

Impact there and then the other thing I just wanted to ask just around gross margin forward gross margins, obviously come in pretty significantly where's the bottom you've taken those gross margins and where do you. When do you think the bottom over the next do they think do you think they found with the next one to two quarters, just kind of give us a little help there as well thanks.

Yeah, So I'm gonna return rate side, we're not focused on policy changes at this 0.1 of the things that we are working on that we didn't.

Mentioned in in the prepared was the.

Yes, we are looking at a slight tweaks from a policy standpoint, you know first of all sorts of our customers, but the focus is on making changes that are gonna impact reach them read it a very helpful way for customers. We're hoping we can drive meaningful improvements. There. We we think we have great initiatives and projects would make a lot of sense that we're gonna be traveling to some of those and.

And the third quarter.

It's too early to say how much of an impact those sorts of investments can make we're we're extremely excited to see what they can bring to the table.

And then on the forward gross margin side.

I would prefer to Jesse in terms of any commentary on on how you guys should model one project.

Yeah, Yeah, I think you've got it <unk> you know we are we are close to the bottom there I'd say you know over to the next one to two quarters will be in this in this zone before things start to rebound and then I think.

Important to remember that last year, especially in the back half of 21 into the first half of 22 and especially in in the.

Two 222, we were checking at you know really record full price mix so that forward margin.

Both on record and revolved was you know I'm really healthy. So you know I I don't see if getting back to the high forties anytime soon but it you know creeping up into that made 40 range again over time, but to your appointment's been traveling out over the next one to three quarters.

Great and can I just ask one more last follow up here I was just on the commentary around the younger demographic trends.

Maybe give us a little more color on what they're doing or not doing our in terms of price hesitancy or category changes or adjutancy. There just give us a little more flavor of what they're doing or not doing it.

In terms of their shopping behavior. Thanks.

Yeah, So what we've seen as soon as you're sort of caution in terms of their discretionary spending last year will be reviewing greeted bullish about.

Sure and I'm very excited to engage in the in the world to ask with a coke with mock ups and and also a lot of them refresh your wardrobe.

And then there's kind of cycle, Sir so we're seeing a bit of a rebound the other way.

Wardrobe refresh cycle and also where consumers are putting their dollars were more dollars are going towards experienced Susan services and fewer dollars towards good is particularly discretionary goods, particularly among the younger demographic with them were aspirational demographic that.

Has to watch their pocket put a little bit more closely.

We'll go next to add why rumour at Piper Sandler.

[noise] Hey, guys. Thanks for taking the question I guess first just a click down on that return rate again are you seeing I know some of the increase return rate is due to mix shift and kind of more addresses but are you seeing kind of more of the you know I'm buying anything in return everything which seems to be more of a sign of a macro or is it still kind of more of the sizing issues that hopefully you can ameliorate with <unk>.

Over time.

And then as a as a follow up on the forward questions. I guess, you know I know lead times. There can be longer are you, taking a different kind of short to medium term position against that uhm luxury younger consumer that may be more impacted by some of these macro pressures. Thank you.

Yeah. So so on the return rate side, you know what we're seeing is is very macrobius it spans across categories across order types across customer types across <unk> merchandise and whether we look at recent towards a merchandiser. So your best sellers from one or two years ago.

We're seeing that you increase in return rates across the board right. So there's.

Not some kind of sizing difference or poor quality drinks or something like that going on it's pretty macrobius behavior and again, we're seen it in other retailers as well that said, if there's a ton of <unk>.

Making the process easier for consumers to understand what items are gonna work, great for them and we think we can make a meaningful impact in that zone, regardless of what's going on on the back of the side effects.

And then switching gears to forward and kind of where I'll look there.

Our outlook in in in the medium term is one of caution you know even the luxuries.

Luxuries.

Aspirational customer's going to reach you know.

And and that's reflected in our inventory purchase plans.

Thank you.

Our next question comes from Mark All shrank are at bird.

Good afternoon, Thanks for taking my question.

Is there anything beyond the macro you can point to that you believe might be contributing to the ongoing sales pressure I guess any opportunities you see from a product or marketing execution standpoint.

Thank you can move the needle in the coming quarters showed the macro remained headwind.

Yeah, we we think the primary headwind swimming on the macro side, but at the same time, our expectation is Tuesday, we outperformed the market right.

We believe we're not at the level of our performance we expect to be right. Now. So we're certainly looking in order to see what we can do certainly to assorted things to make sure we connect better with the consumer and that includes offerings. Both on the marketing side and then also the merchandise.

Thank you and then just following up on gross margin the lower outlet versus the prior forecast I guess.

Seasonality in the business he hasn't changed versus when you're guided earlier in the year. So just understand is is a more cautious gross margin outlook for the back half all the function of forward taking longer to clean up or is there any element of planning higher promotion that revolved so b to drive traffic and conversion. Thank you.

Yeah, no. It's it's it's in part and I would say, mostly that for a dynamic and just the the the timing around those you know those five and working through that inventory.

There is also a an element on on one brands uhm whenever Randy inventory correction periods, we we pull back on one brand more than on the third party given that we have to produce their band has a <unk>.

Much much more premium margin than that of the third party for that has an impact in the near term. So that is certainly part of it promotion and promotional activity out there, we still see it as being elevated especially in those higher price points and you know just the market is still being flooded with.

That luxury product and the combination of that with the consumer struggling as my tough though.

We'll go next to <unk> with U P S.

Hi, Thanks for taking my question, one just to reconfirm your third grade.

For the quarter was around 60 per cent, that's what I'm estimating so just wanted to.

<unk> confirm that number and then S. S. Bill look at a O V.

Oh V estimated pretty firm I was thinking maybe the a O V would decline simply because the mix full price might be much lower so how 'bout, you're looking at a O V for the next the rest of the good how are you thinking about that.

Yeah first on the on the return rate your your plus or minus in and and right zone. There at the at the 60 per cent Uhm, which of course is much higher than last year, and we can address that earlier and it'll be ever pleased with Aoki. It is coming in just a touch you know call. It a dollar or two lower than we had initially anticipated and that's larger.

Due to the softness on forward, which of course Teresa much higher.

Price Clinton resolved.

The full price is coming back it's it's not not at the levels of last year. When we were checking out those record full price levels. It was 85 per cent for the for your all your last year, we expect to be several points lower than that this year, but still at or above the pre pandemic 2019 level. So we forget about the shifting back into the phone.

This makes a O V as holding uhm this by some pressure from from the mixer for thrills.

Thank you so much.

We'll go next to Jim Daffy at Stifel.

Thank you good afternoon, I'm, hoping you can speak more about category performance beauty continues to grow which categories you've seen the most pressure from the consumer pullback in discretionary spend and then hoping you can discuss it in the context of the inventory we did inventory, yes <unk>.

But the your ears influenced by all the levels a year ago. So your days inventories is still elevated.

Yeah.

Categories.

And the pedal categories fashion apparel as well as jazz suspicious for us as a large category. So we'll be separate amount as you mentioned, it's growing and strong as well as handbags and accessory store at a high level, it's kind of like the butter apparel across and you guys might necessarily across the board.

Pipeline style for vacations and things like that.

Yeah, and then maybe on the.

Jen Yeah, you know, we're still planning conservatively for the balance of the year as Mike mentioned, you know this will be plus or minus in the same zone with you know new bike down in the double digits I Hope you feel good about the balance of the <unk> and your your inventory growth Despite top line coming in and saw.

And then we had initially anticipated.

Okay, and Jesse the gross margin guidance seems to imply infection in the fourth quarter. If I've done my mouth correctly is further inventory improvement central to delivering on that.

Yeah, I wouldn't necessarily say inflection you know probably plus or minus and his name is down a little bit lighter than in Q3 percent on a year over year basis, maybe that's what you're referring to an infection.

Q4 is when it has been that pulled back started to happen.

And and mixed or did you go ahead with it.

Into the into the Mark down.

Thank you.

Yeah.

We'll go next to send me an siegel at the M O.

Hey, guys. Good afternoon hope, you're having a nice summer.

Jesse did you or could you comment on a O V or ISP, maybe specifically for awhile vs forward to mitigate that Max could you also remind us of the sales cadence for the quarter from last year, maybe you had a contextualized digits July comment and then Michael or make any of them just how you're thinking about longer term active customer.

[noise] opportunity and just maybe but whether there's any meaningful difference you're seeing and.

The new customers versus the prior thanks, everyone.

Yeah. Thanks to me in and I hope, you're having a great summer as well on the a O V. I would say we commented on it a little bit earlier than that you know, we're we're happy with where it that despite Ford coming in you know it's up to the minute I anticipated and forward of course carry that higher higher price point. So you know within one per cent of being flat year over year.

You know, we're happy with that's it for sorry revolved is holding up better than forward for it is where we thought more decrease in the a O V. So.

So some dynamics at play there and that kind of feeds into inventory discussion and kind of softness in the luxury.

<unk> consumer and working through that inventory.

And then on the seasonality who are kind of month to month sees nowadays because where you were going on the <unk> plus or minus in the same town for July August September you know within a coin or two on your vehicle.

Last year.

Yeah and on the new customer side of it I think that's certainly one of the bright spots in the current environment and we're continuing to attract new customers at a healthy rate July new customers King and.

A very solid number and in in general or a retention on our cohorts has been good.

Since we're copying periods in 2021 in particular, but including parts of 22 that were elevated over historical norms on some of those awkward retention numbers offer both new and existing customers. So yeah, there's been a pullback in consumer spend among our demo we're.

Really happy to see that we're continuing to attract and bring a new customers at a healthy rate.

Perfect. Thanks, a lot guys best luck for the rest of Europe .

Thank you.

Our next question comes from Cheney and sister at P. T I G.

Hi, you've got Ethan Saggy on Virginia, and can everyone hear me okay.

[laughter].

Yep.

Okay. I just have one question for you guys I'm. Just curious you know we're student loan repayments resuming in the fall how are you thinking about that with regards to your planning an outlook for the back half of the year.

Yeah, we are being.

<unk> Oh, sorry.

Like if you want to jump in.

The planning perspective, being cautious you know and that comes through on the inventory.

And continuing to you know until we see some green shoots there I'm, taking a more conservative stance and you know to some extent you know we feel like maybe some of that student loan kind of that looming student loan repayment is already impacting the consumer in her or buying behavior.

Alright, that's it for me thanks.

We'll go next tolerate Hutchinson at Bank of America.

Thank you good afternoon.

Have you spoken about a lot of initiatives around the selling and distribution expensive can you talk through the timing of when you think some of these mitigation strategies will kick in and then what's the longer term goal for this line item. Thank you.

Yeah No. We're we're pleased with the progress there I think we commented last quarter that we've got a couple of dozen individual initiatives against this line item you know of course, all that different sizes and scales and timing uhm, but they're already starting to kick in if you look at the selling and distribution costs per order. That's down you know in the in the mid single digits low Singleton.

<unk> year over year, so it's already starting to take take effect uhm and offering some of that return rate pressure or at least not occur order slash per unit basis. We're also starting to get some some relief on the fuel surcharges. If you remember last year Q2 is when that fuel surcharge really piqued and it started this step down in Q3 Q.

For a little bit more in Q1, and now even more in queue to yourself and feel good about the progress there and then if you're kind of back into where we think the back half of the year is gonna be working from our 18.6 per cent. This quarter 18, three next door and then 18 three for the full year that implies that there is some efficiencies starting to take place in the back.

Half of this year, but more importantly into next year and the goal there is to get the number to be back in you know at least the highest 17th uhm over over the midterm.

Thank you.

We'll go next to Oliver Chen at T D count.

Okay.

<unk>, thanks for taking our questions.

Curious about more internationally plans it looks like you're investing a caucus on country.

Large back.

Back International.

Perfect time.

Also curious time at specifically.

<unk> four thoughts of of all of them for potentially and if you've seen any sort of different noticed of all.

The customer demographic behavior inside I'd like to say thank you.

So so long term, we think international is a huge experienced an opportunity for us. We we would hope longterm to achieve a third of sales or more perhaps approaching 50 per cent, but you know those those are long term aspirations and there's many steps from from here to there China in particular, he was a huge market, where we feel like we have in our brand hasn't penetrated.

In the same way as the U S, but we feel like in the echelons of Chinese Influencers, who matter. We we do have penetration and and we're really excited about the new head of greater China that we brought on cause I was allowed to be operational expertise on the marketing side to help us automatic <unk> to release market the revolt Brandon.

A much bigger and broader way than we have historically, so that's a huge opportunity for us obviously, each one is an incredibly huge market for.

For for luxury and also aspirational luxury as well so our our hopes isn't it over the coming years, we can grow that into a huge market, but we'll keep you posted.

Upon receiving the first upload many in terms of the expansion of the brand marketing in China and.

He was probably going to be sick.

Six to 12 months before we start to see some of the initial congresswoman this new steps.

Alright, thank you.

Well I'm Gonna try next question February Patel at Raymond James.

Hey, guys. Good afternoon, just to follow up on earlier question on promotions can you talk about the outlook. As you think ahead because inventories are in better shape now, but you know if the environment does end up being.

<unk> like it is now how are you thinking about the use of promos going forward and I'm curious what gross margins in bed in terms of discounting in the back half versus last year.

Yeah, I think on the promotion comment that was more of a macro comment and that we do see elevated promotions out there still and and on top of the pressured consumer that said, we tend to kind of please our own trial when it comes to working through that inventory, we don't necessarily compete head to head with.

Others on the promotional France, especially on revolve you know more so on the foreign side, where there's more comparable product and more more softness there, but yeah. We worked through the inventory you know fairly well over the last several quarters and feel good about the healthcare so will continue.

Continue on this path and be conservative in the device for the back half of the year until we see some some green shoots again.

You know and our expectations are factored into the emergency line to begin.

And can you talk about the savings related to efficiency and shipping and let just uhm. It sounds like it's that's factor in the guidance also but just curious how much of a tailwind is would be and you know how meaningful this could be as we think about margins beyond this year.

Yeah, Yeah, I'm working from the 18 six of this quarter getting to an 18 three for the full year implies you know already some some efficiency games. This year and that will continue into next year is a lot of these initiatives. It didn't start to kick in and we'll start to kick in until until the back half of the year and then go there to get that back into the.

Seventeens over time, you know not commenting on you.

Exactly when that is but I would say over the you know kind of over the midterm. We think we can get there you know you know next year at some point, maybe the full year doesn't quite get there, but uhm next year at some point and then we have to talk to about fulfillment yet either.

Sort of a capacity utilization gains to be had there uhm. So there'll be further efficiencies, especially as we head into next year and and optimize the.

Is on our fulfillment network layer and more more automation more processes and and just efficiencies with scale as we lost this increasing return rate and get back into growth.

Thank you.

Next we'll go to now is asking at Keybanc capital markets.

Hi. Thanks. This is Ashley on for now it's one on international growth and then you'd like to cut out in Mexico, and China perfect strength registering firstly are there any countries.

Maybe highlight that accounting software out to check meditation.

And then with a share buyback does that take the possibility for M&A off the table for now or how're, you thinking about the opportunity there.

Yeah definitely so in terms of software Margaret said generally we're seeing the western more developed markets softer which includes obviously the the U S is robin on the international side, those western Margaret So Europe , UK, Canada, Australia, generally a lot softer than.

Like to see.

And then in terms of the.

You know what's on the.

Sure My back and the M&A it doesn't take him any off the table, but certainly we feel like you know we we have I hope we can ask physician and we recognize this is a great opportunity to put some of that cash to working what we believe will be accretive way and it's one of the luxuries of being such a cash business, where we're able to achieve.

<unk> at the same time, where we feel like we can invest and grow the business at the same time as returning couples who are shareholders.

Alright, thank you.

And we will take our final question from Janet Kloppenberg J J K research associates.

This kloppenberg. Your line is helping you may have yourself muted.

Hi can you hear me now.

Yep.

Oh hi.

Hi, I I <unk>.

A lot of questions have been asked around me inventory, but I was just wondering if you could talk a little bit about selling.

Selling translate where you are happy with the response rate and where the full price selling is correct and if there's any direction I'll change and and what's your core customers are spending money on fox or cancel versus transfer for you know had a voice like that successfully et cetera.

And I was also wondering if you could break that segmentation down between the domestic customer and the international customer. Thank you.

Yeah.

You know we feel good about our inventory physician because we're seeing this slowness you know across the board, it's definitely not too much of that any more of that would you like we have the right merchandise inappropriate.

<unk> just you know not top line and demand is just not quite there.

They always gonna start pulling out clothes, and we continue to see you know going out Jessica the unfortunate but of course being in the summertime and all the time, we received needed more casual warm weather you know casual clothes vacation called and things like that so historic stress extremely good about you know the development of some of the more Nathan category.

Let me start with you that it is known for quietly making progress you know behind the scenes in that as well and maybe I'll, Let me know Michael Jesse to the international test.

Or differences.

Yeah on the international started a business are you in those developed markets were seen something similar receive unlimited domestic side, which is you know what once you account for.

The very big macro shifts in demand from you know.

Covid periods as opposed to an.

Explosion, and and going out clothes, where where where it can be seen across the board. The demand is not quite where we'd like it to be but you know we we feel good about our progress with with our various initiatives on the inventory printed involving inventories are very healthy place and then some of those longer term here is not <unk>.

Two new to show growth evening.

Snack regarding this that's a bit tougher for us.

And that is all the time, we have for questions today, I will turn the call back to management for closing remarks.

Thanks, everyone for joining a call. It's clearly a turbulent time, but you know I can assure you that we're very very focused at quite quite fleet. Despite our you know top my numbers are financial results with this cold it might be a hawk and we wanna be quite pleased with the progress, we're making furniture, so excited and joining.

Join with you guys and in two months time.

And this concludes today's conference call. Thank you for your participation you may now disconnect.

Please wait the conference will begin shortly [music].