Q3 2023 Revolve Group Inc Earnings Call

Good afternoon, My name is Julianne and I'll be your conference operator today.

At this time I would like to welcome everyone to revolves third quarter 2023 earnings conference call.

All participants are in a listen only mode.

After the Speakers' presentation, we will conduct a question and answer session.

To ask a question you will need to press star followed by the number one on your telephone keypad.

As a reminder, this conference call is being recorded.

I would now like to turn the call over to Erik Randerson, Vice President of Investor Relations at revolve. Thank you. Please go ahead.

Good afternoon, everyone and thanks for joining us to discuss revolves third quarter 2023 results.

Before we begin I'd like to mention that we have posted a presentation containing Q3 financial highlights to our Investor Relations website located at investors revolve dot com.

I would also like to remind you that this conference call will include forward looking statements, including statements related to our future growth and profitability and ability to generate cash flow macroeconomic trends and our competitive position our business operations and marketing initiatives and investments average spending per active customer category expansion international expansion.

Our inventory balance and management and our outlook for net sales gross margin operating expenses and effective tax rate.

These statements are subject to various risks uncertainties and assumptions that could cause our actual results to differ materially from these statements.

The risk mentioned in this afternoon's press release as well as other risks and uncertainties disclosed under the caption risk factors and elsewhere in our filings with the Securities and Exchange Commission, including without limitation. Our annual report on Form 10-K for the year ended December 31, 2022, and our subsequent quarterly reports on Form 10-Q, all of which can be found on our website at investors that revolve.

<unk> Dot com.

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

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

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

For non-GAAP measures used by other companies.

Reconciliations of non-GAAP measures to GAAP measures as well as the definitions of each measure their limitations and rationale for using them can be found in this afternoon's press release and in our SEC filings.

Joining me on the call today are co founders and co Ceos, Mike carrier, Nikolas, and Michael <unk> as well as Jesse Timmerman our CFO.

Our prepared remarks, we'll open the call for your questions.

That I will turn it over to Mike.

Hello, everyone and thanks for joining us today.

I'll begin with the recap of our third quarter results followed by updates on some key operating priorities and multiyear growth initiatives consistent with our focus on investing for the long term to maximize shareholder value.

Net sales decreased 4% year over year to $258 million in the third quarter, a slight improvement from the 6% decline in the second quarter of 2023.

We believe spending on discretionary products by our consumer demographic, that's being pressured by many factors, particularly in the U S, including persistent inflation compounded by higher interest rates reduced savings and significant uncertainty in the macroeconomic and geopolitical climate.

Net sales in the U S decreased 5% year over year net sales in international markets decreased 1% year over year.

Our relative outperformance in international was driven by exceptional growth in Mexico was offset by declining sales in Australia, and China, two regions impacted by economic challenges and currency headwinds.

By segment revolve net sales decreased 2% year over year with co announced styles like dresses detracting from growth against difficult comparisons.

Important to keep in mind that as previously shared.

We have operated with new inventory buys down by a mid teens percentage year over year through the first three quarters of 2023.

A highlight of the revolve segment is our accelerated growth in beauty net sales did validates our long term opportunity for category expansion Mike.

Michael will talk more about this exceptional execution of our beauty playbook in his remarks.

Gordon net sales decreased 14% year over year within the luxury sector that is recalibrating. After two years of extraordinary growth coming out of Covid.

Aspirational luxury consumers, who are flushed with cash 18 months ago, just don't have the same capacity to spend in the current environment.

As a relevant benchmark bank of America recently reported that its credit card data reflects a 16% year over year decrease in luxury fashion spending by U S consumers in the third quarter.

As we entered the year a top priority was rebalancing their inventory we achieved this objective in the third quarter that the spreads between our year over year inventory and sales trends were favorable in the third quarter for the first time in more than two years.

This very important milestone was driven by the revolve segment.

Where the year over year decline in inventory was steeper than the year over year decline in net sales by several points.

Shifting to the <unk> segment, while I'm thrilled with our successful effort to rebalance total complete inventory, which has been beneficial to cash flows the composition of our forward segment inventory is not yet optimal.

As mentioned on previous calls it will take longer to fully rebalanced inventory at forward considering the current challenges in the luxury industry as well as markdown restrictions from luxury brands that extended the timeframe for rebalancing our forward inventory.

Moving to key metrics as a company passionate about serving our customers incredibly well I'm excited and proud that we crossed the $2 5 million active customer threshold in the third quarter, notably active customers increased by 52000 in the third quarter, 53% higher than our growth in the second quarter of 2023.

The improved results benefited from year over year growth in new customers and an efficient cost of acquisition that declines year over year lows.

Most gratifying is that our net promoter and customer satisfaction scores were higher than in any prior third quarter for at least five years.

Not surprisingly average spending per active customer has decreased year over year in the current environment, we hear loud and clear that our customers absolutely love revolve we view the lower average spending per active customer is a temporary dynamic that will normalize over time as the environment improves.

Shifting to profitability, we are proud to be one of the only fashion e-commerce companies that generates consistent profitability and cash flow a meaningful competitive advantage that allows us to invest through business cycles.

Net income was $3 million or <unk> <unk> per diluted share a decline of 73% year over year. There was negatively impacted by an accrual for a pending legal matter or equivalent to <unk> <unk> per diluted share.

Adjusted EBITDA was $90 million, a decline of 46% year over year, which reflects the lower gross margin and continued pressure on selling and distribution and fulfillment expenses, primarily due to the higher return rate year over year, partially offset by increased marketing efficiency.

Important is our ability to continue to generate strong cash flows cash generated from operations and free cash flow were $12 million and $11 million in the third quarter of year over year increase of 25% and 33% respectively.

Our strong balance sheet enabled us to confidently invest our free cash flow into our $100 million stock repurchase program announced last quarter without sacrificing investment in the business. We deployed $12 6 million to repurchase approximately 907000 shares of class a common stock during the third quarter at an average cost of $30 87 per share.

Since we view the current environment is a near term headwind and 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.

Moreover, in a time when many fashion e-commerce peers have significantly reduced investments limit their cash burn are.

Long term mindset strong balance sheet and consistent cash flow generation give us the confidence to continue to invest throughout the cycle.

Our long term approach to investment decision should allow us to emerge in an even stronger competitive position when the environment improves.

With that in mind I will now offer updates on our important growth and efficiency initiatives that we believe will further strengthen our foundation for profitable growth over the long term.

We remain extremely committed to driving cost efficiencies within our global shipping and logistics operations. The successful launch I discussed last quarter of consolidated customer returned shipments from Canada to the U S and local repo Tim in for certain product returns in the U K have reduced cost as intended but were overshadowed in our financials by the higher return.

At year over year.

Building on our early success in the coming months, we plan to extend our local re fulfillment of certain product returns to Europe. We expect this initiative to reduce shipping costs and provide even faster service for our valued European customers.

I'm also excited by our innovation and establishing alternative shipping arrangements in certain U S regions that reduced our shipping costs in these regions, even further improved shipping timelines, particularly on the weekends.

It is early days, we see great potential for our many initiatives to drive efficiency and even further improve on our exceptional service levels.

With the increase in return rate year over year being such a headwind on our financial results Im spending a great deal of time and focus with the team on initiatives designed to reduce the return rate and make returns more efficient.

A recent survey on our product returns indicates that nearly two thirds of returns related to size and fit validating our opportunity to move the needle over time as we believe we can leverage technology to do a much better job of communicating that fit in sizing before the purchase.

Early results are promising the virtual try on in size comparison feature tool launched last quarter onward for handbags and accessories has shown excellent results in reducing return rates for customers, who engage with it.

We are planning to meaningfully extend the tools availability and have recently launched it on the revolve site as an AB test.

We have also recently launched product videos on the product detail page for several brands and very soon we will launch product fit guidance to test additional efforts to reduce the sizing uncertainty.

If these efforts prove successful the financial benefits should be compelling consider that for every one point decrease in our return rate, we would expect to realize cost savings of approximately 30 to 50 basis points and reduced selling and distribution and fulfillment costs.

Reduce the churn rate would also drive a higher net sales due to a lower percentage of orders being returned.

We're also very focused on further expanding our capabilities and growth opportunities within owned brands.

On recent earnings calls the softening consumer demand in recent quarters has led us to be more conservative in planning our own brand inventory buys since owned brand require a deeper inventory commitment per style that our third party brands.

And the lower mix of owned brands year over year is the driver of the gross margin decline I mentioned since owned brands have a much higher gross margin.

Nonetheless, we are excited by and continuing to invest in the long term potential and owned brands, which offer huge potential for product differentiation and margin expansion.

<unk> been a revolve segment gross margin at 55% reported today was in the same zone as the revolve segment gross margin in the third quarter of 2019, even though the owned brand mix of the revolve segment net sales in the third quarter of 2023 was roughly half of the owned brand mix in the third quarter of 2019.

This comparison illustrates the opportunity to drive margin improvement from owned brand expansion in the coming years. If we can continue to raise the bar through our ongoing investments.

Lastly, we continue to expand the use of AI and machine learning across several key areas of our operations to drive growth and efficiency I am excited about our current application of AI technology that allows our customers to visually search for similar styles without any keywords currently in beta testing the compelling user experience is especially relevant for driving discovery.

Among the tens of thousands of sales unresolved.

We're also gearing up to launch the personalized recommendations landing page for returning customers leveraging outstanding development work by our data science team to tap into our deep data insights. We believe the increasingly personalized <unk> experience will provide a more engaging and rewarding shopping experience and based on prior efforts could lead to improved conversion rates.

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.

Good afternoon.

In summary, while we face a multitude of challenges in the current environment, we will remain on offense.

Julianne: My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to Revolve's third quarter 2023 earnings conference call. All participants are in a listen only mode. After the speakers presentation, we will conduct a question and answer session. To ask a question, you'll need to press star followed by the number one on your telephone keypad. As a reminder, this conference call is being recorded.

We continue to focus on our competitive advantages of technology innovation operating efficiency and brand building to guide us through these uncertain times as we invest in the long term opportunity ahead of us now over to Michel.

Thanks, Mike and Hello, everyone. It's been a challenging few quarters contending with the macro environment and cycling the comparison against the period of pent up consumer spending coming out of Covid.

Erik Randerson: I would now like to turn the call over to Erik Randerson, vice president of investor relations at Revolve. Thank you. Please go ahead.

As a relevant benchmark consumer sentiment in the U S is currently 64, which is well below the consumer sentiment during the depths of coffee.

Erik Randerson: Good afternoon, everyone. And thanks for joining us to discuss Revolve's third quarter 2023 results. Before we begin, I'd like to mention that we have posted the presentation containing Q3 financial highlights to our investor relations website located investors.Revolve.com.

Nonetheless, it feels are a growth company, Mike and I are not satisfied with our current results.

Keeping with kind of difficult macro environment, we expect to outperform the benchmark as we have but most of the 20 years. Since we founded revolve we have some work to do our team is up to the challenge and I feel great about our early progress on growth initiatives and strategies that we believe opex, citing potential for our future our long history operating the businesses, how does that periods of macro challenge cannot.

Erik Randerson: I would also like to remind you that this conference call will include overlooking statements, including statements related to our future growth and profitability and ability to generate cash flow, macroeconomic industry trends, our competitive position, our business operations and marketing initiatives and investments, average spending proactive customer, category expansion, international expansion, our inventory balance and management, and our outlook for net sales, growth margin, operating expenses, and effective tax rate. These statements are subject to various risks, uncertainties and assumptions that could cause our actual results to differ materially from these statements, including the risks mentioned in this afternoon's press release, as well as other risks and uncertainties disclosed in the caption.

Present opportunity for market disruption.

<unk> financial position, our fast paced and nimble operating structure and our innovative entrepreneurial mindset. We believe we are well positioned to drive improved results.

I'll provide an update on what has me excited about our future.

First we have some impactful on the innovative band marketing Activations in the west by the fourth quarter into early 2024 that I'm truly excited about.

An element of a bad building in our event tank strategy at sustained nimble elegant fashion exciting.

Erik Randerson: Risk factors and elsewhere in our filing for the securities exchange commission, including without limitation or annual report on form 10k for the year into December 31, 2022, and our subsequent quarterly reports on form 10q, all of which can be found on our website and investors. Revolve.com.

For the fourth quarter and into early 2024, our capture this strategy and our efforts to attract the greatest impact from our passionate community of consumers Influencers and brands one of our cornerstone brand building events in the fourth quarter will be in the international region, where we see a great deal of opportunity for future growth in the years ahead. This follows on the heels of a highly successful activation.

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

In Mexico, where our third quarter sales and customer growth are again truly exceptional helped.

Erik Randerson: During our call today, we will also reference certain non-gap financial information, including adjusted EBITDA and free cash flow. We use non-gap measures as 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-gap financial information is not intended to be considered in isolation, or as a substitute for or superior to the financial information prepared into presented in accordance with GAP, and our non-gap measures may be different from non-gap measures used by other companies. Reconciliation of non-gap measures to GAP measures, as well as the definitions of each measure that are limitations in our rationale for using them, can be found in this afternoon's press release and in our SEC filings.

Helped by further advances in seven settlements that Chubb had another exceptional quarter of triple digit growth in new customers as we exit the fourth quarter and extending into 2021, we have a number of activities plan, reaching at both revolve and forward that we're very excited about it we will share more details on these plans at a later date.

We're also leveraging our core competencies and disruptive marketing and technology innovation to drive results and lay the foundation for future growth.

<unk> talked about how we are pushing act, our personalization and visual search on our websites beyond. This it is important to understand that we are testing the use of AI broadly throughout the organization and effort to drive growth and efficiency in the coming weeks. We will also be experimenting with AIG design images on our website and mobile apps, which is successful and prove to be a real game changer.

Erik Randerson: Joining me on the call today are our co-founders and co-CEO's Mike Karen and Colis and Michael Mente, as well as Jesse Timbermans or CFO. Following our prepared remarks, we'll open the call for your questions.

Many of our applications for leveraging and Michael <unk>.

Building on the success of our innovative AI Billboard campaign launched earlier this year.

Mike Karanikolas: With that, I'll turn it over to Mike. Hello, everyone, and thanks for joining us today. I will begin with a recap of our third quarter results, followed by updates on some key operating priorities and multi-year growth initiatives, consistent with our focus on investing for the long term to maximize shareholder value. Net sales decreased 4% year-to-258 million in the third quarter, a slight improvement from the 6% decline in the second quarter of 2023.

Finally on slide eight we will not stop a little volatile and you mentioned designers featuring new collections that were created entirely designed and.

Produced by the three winners out of the first ever fashion week looks at incredible LNG exclusively available for steel and evolve.

And as a company known for leading innovation on social channel and an exciting collaboration with take Tuck-shop showing a great deal of pilots in the early stages net sales generated in tip top shop increased meaningfully in the third quarter compared to the second quarter of 2023.

Mike Karanikolas: We believe spending on discretionary products by our consumer demographic is being pressured by many factors, particularly in the US, including persistent inflation, compounded by higher interest rates, reduced savings in significant uncertainty in the matter of economic and geopolitical climate. Net Sales in the US decreased 5% year-over-year, and Net Sales in International Markets decreased 1% year-over-year. The relative outperformance in international was driven by exceptional growth in Mexico that was offset by declining sales in Australia and China.

Even though we only made available a limited selection of products on take Blogshop, a key consumer you have to assess as a proven ability to create compelling content for social channel engaged with Influencers to drive awareness and impact combined with the conversion driven nature of the Tic type platform.

Looking forward, we see an exciting opportunity to further leverage our experience in that.

Platform and expand the range of of all products and category that will resonate with a large audience of gen Z consumers and content creators that take time.

To capitalize on the exciting growth potential within this new channel will be seen loss a series of live streaming content videos, intending to further engage that take that community with products inside <unk>.

Mike Karanikolas: Two regions impacted by economic challenges and currency headwinds. By segment, Revolve Net Sales decreased 2% year-over-year, with going out styles like presses detracting from growth against difficult comparisons. It's important to keep in mind that as previously shared, we have operated with new inventory buys down by a mid-teens percentage year-over-year for the first 3-quarters of 2023. A highlight of the Revolve segment is our accelerated growth in beauty net sales that validates our long-term opportunity for category expansion.

Tests and exclusive offerings. We also recently launched a dedicated type beauty count with beauty specific content that will also have a beauty focused store within tank top shop.

Beauty is a great category fit considering that take time.

Natural beauty community and that beauty is ideal for influencers to create compelling educational video content.

For years, the viral nature of take stock has been.

Powerful catalysts in the beauty category and now, let's take tux shop consumers can discover and purchase products in one place.

Mike Karanikolas: Michael will talk more about this exceptional execution of our beauty playbook in his remarks. Four Net Sales decreased 14% year-over-year, within a luxury sector that is recalibrating after two years of extraordinary growth coming out of COVID. Asprational luxury consumers who were flushed with cash 18 months ago just don't have the same capacity to spend in the current environment. As a relevant benchmark, Bank of America recently reported that its credit card data reflects a 16% year-over-year decrease in luxury fashion spending by US consumers in the third quarter.

Mike Karanikolas: As we entered the year, a top priority was rebalancing our inventory. We achieved this objective in the third quarter that the spreads between our year-over-year inventory and sales trends were favorable in the third quarter for the first time in more than two years. This very important milestone was driven by the Revolve segment, where the year-over-year decline in inventory was steeper than the year-over-year decline in net sales by several points. Shifting to the forward segment, while I'm thrilled with our successful effort to rebalance total company inventory, which has been beneficial to cash flows, the composition of our forward segment inventory is not yet optimal.

Mike Karanikolas: As mentioned on previous calls, it will take longer to fully rebalance inventory forward, considering the current challenges in the luxury industry as well as markdown restrictions from luxury brands that extend the time frame for rebalancing our forward inventory. Moving to key metrics, as a company passionate about serving our customers incredibly well, I'm excited and proud that we cost the 2.5 million active customers threshold in the third quarter. Notably, active customers increased by 52,000 in the third quarter, 53% higher than our growth in the second quarter of 2023.

That's the beauty bad at the launch in the coming weeks just in time for the holidays.

Goal is to become the preferred beauty destination for our customers a big part of achieving this goal is having the right selection.

We believe that as we continue to optimize our <unk>, our loyal customers will buy more and more beauty from us because we have earned their address through our brand duration and best in class customer experience. We are off to a great start with a band additions I mentioned in <unk> Ah Brant interested in partnering with us in 2024.

Mike Karanikolas: The improved results benefited from year-over-year growth in new customers in an efficient cost of acquisition that declined year-over-year. Most gratified as in our net promoter and customer satisfaction scores were higher than in any prior third quarter for at least five years. Not surprisingly, average spending per active customer has decreased year-over-year in the current environment. Yet we hear loud and clear that our customers absolutely love revolve. We view the lower average spending per active customer as a temporary dynamic that will normalize over time as the environment improves.

In closing, while we continue to face challenges in the near term our team is energized by the opportunity to drive improved results across a wide range of a longer term initiatives that leverage the core competencies that served as well the past 20 years unexpressed, our heartfelt thanks to our talented team for the incredible effort and persistence, particularly in the last two years now I'll turn it over to Jesse <unk>.

Discussion of the financials.

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

Mike Karanikolas: Shifting to profitability, we are proud to be one of the only fashion e-commerce companies that generates consistent profitability and cash flow, a meaningful competitive advantage that allows us to invest through business cycles. Net income was $3 billion or 4 cents per diluted share at a client of 73% year-by-year that was negatively impacted by an accrual propending legal matter equivalent to $0.7 per diluted share.

Starting with the third quarter results net sales were $258 million a year over year decrease of 4% within an environment for consumer discretionary spending that remains quite challenging.

Revolved stigma net sales decreased two per cent and forward segment net sales decreased to 14% year over year in the third quarter.

By territory domestic net sales decreased five per cent and the international net sales decreased 1% year over year.

Mike Karanikolas: Simeon Siegel. But just in EBITDA was $9 million, and a client of 46% year-to-year, which reflects a lower gross margin in continued pressure on zoning distribution and fulfillment expenses, primarily due to the higher return rate year-to-year, partially offset by increased marking efficiency. Very important is our ability to continue to generate strong cash flows. Cash generated from operations in free cash flow were $12 million and $11 million in the third quarter. A year-to-year increase of 25% and 33% respectively.

Active customers, which is a trailing 12 month measure increase by 52000 customers. During the third quarter are active customers crossed the 2.5 million customer milestone for the first time.

An increase of 12% year over year.

Our customers place 2.1 million orders in the third quarter, an increase of 9% year over year.

The increase in orders placed was offset by a decrease in average order value or <unk> and a year over year increase in the return rate.

Mike Karanikolas: Our strong balance sheet enabled us to confidently invest our free cash flow into our $100 million stock repurchase program announced last quarter without sacrificing investment in the business. We deployed $12.6 million to repurchase approximately 907,000 shares of class A common stock during the third quarter, and an average cost of $13.87 per share. Since we view the current environment as a near-term headwind and remain confident in our longer-term opportunity to drive growth and profitability, we view stock repurchases as an attractive and creative use of our capital.

Yogi was $299 a decrease of 7% year over year against an elevated it'll be comparison of $320 in the third quarter of 2022.

There was the highest we have ever reported.

Shifting to gross profit consolidated gross margin was 51.7 per cent.

Slightly below or guidance range. The decrease of 127 basis points a year over year, primarily reflects a lower mix of net sales at full price and the lower mix of own brand net sales within Ah revolve segment compared to the third quarter of 2022.

Mike Karanikolas: Moreover, at a time when many fashion e-commerce periods have significantly reduced investment to limit their cash burn, our long-term mindset strong balance sheet and consistent cash flow generation give us the confidence to continue to prudently invest throughout the cycle. Our long-term approach to investment decisions should allow us to emerge in an even stronger competitive position when the environment improves.

As you can see from our segment gross profit disclosures the year over year comparison for segment gross margin is more favorable at revolve then forward, which reflects the great progress we have made rebalancing the revolve segment inventory.

Mike alluded to you while we have made progress with rebalancing forward, we still have some work to do to fully optimized with a forward segment inventory.

Mike Karanikolas: With that in mind, I will now offer updates on our important growth and efficiency initiatives that we believe will further strengthen our foundation for possible growth over the long-term. We remain extremely committed to driving cost efficiencies within our global shipping and logistics operations. The successful launch I discussed last quarter of consolidated customer return shipments from Canada to the US and local refill film in for certain product returns in the UK have reduced costs as intended, but we're overshadowed in our financials by the higher return rate year-over-year.

Moving on to operating expenses.

Quick summary is that better than expected marketing efficiency in the third quarter was all set by our fulfillment expense and selling and distribution expense as a percentage of net sales coming in slightly higher than her outlook.

Fulfilling costs for 3.6% of net sales the increase of 56 basis points a year over year was primarily due to a year over year increase in a return rate a year of your decrease in I O V. A.

Increased rent expense and other costs of operating a recently expanded fulfillment network entire wages for fulfillment Center staff.

Mike Karanikolas: Building on our early success in the coming months we plan to extend our local refill film of certain product returns to Europe, we expect this initiative to reduce shipping costs and provide even faster service for our valued European customers. I'm also excited by our innovation in establishing alternative shipping arrangements in certain US regions that reduce our shipping costs in these regions, even further improved shipping timelines, particularly on the weekends. It is early days, you know, we see great potential for our many initiatives to drive efficiency and even further improve on our exceptional service levels.

We expect to realize the efficiencies on fulfillment expenses a percentage of sales in the coming years, as we grow into and optimize our increased fulfillment center capacity.

Selling and distribution costs were 19% of net sales the increase of 170 basis points a year over year is primarily due to the higher return rate and lower Aoki, we are aggressively pursuing initiatives, both to reduce our shipping and logistics costs and to address the increasing return rate.

Mike Karanikolas: With the increase in return rate year-to-year being such a headwind on our financial results, I'm spending a great deal of time and focus with the team on initiative designed to reduce return rate and make returns more efficient. A recent survey on our product returns indicates that nearly two-thirds of returns relate to size and fit, validating our opportunity to move the needle over time, as we believe we can leverage technology to do a much better job communicating the fit and sizing before the purchase.

Our marketing investment represented 15.4% of net sales.

Decrease of 123 basis points, a year over year <unk>.

Reflecting reduction in brand marketing investment and events in the third quarter of this year as compared to last year as well as a year over year efficiency and performance marketing investment as a percentage of net sales.

The reduced brand marketing investment year over year is largely due to a shift in timing from the third quarter to the fourth quarter with a very active calendar of brand building events in the fourth quarter of this year heading into 2024.

Mike Karanikolas: Some early results are promising. The virtual trion and size comparison feature tool launch last quote on forward for handbags and accessories is shown excellent results in reducing return rates for customers who engage with it. We are planning to meaningfully extend the tools availability and have recently launched it on our website as an AB test. We have also recently launched product videos on the product detail page for several brands, and very soon we will launch product fit guides to test additional efforts to reduce the sizing insert.

General and administrative costs for $35.2 million, including the $6 6 million dollar cool for a pending legal matter.

Excluding the legal accrual.

Our G&A costs came in slightly lower than our outlook for the third quarter.

Net income of $3 million.

Or four cents per diluted share was impacted by the cool for the pending legal matter equivalent to seven cents per diluted share.

Mike Karanikolas: Sunday. If these efforts proved successful, the financial benefits should be compelling. Consider that for every 1.1 decrease in our return rate, we would expect to realize cost savings of approximately 30 to 50 basis points in reduced selling and distribution in fulfillment costs. A reduced return rate would also drive higher net sales due to a lower percent inch of orders being returned.

The 73% year over year decline in net income was also impacted by the net sales decline a year of your decrease in gross profit and continued pressure uncertain operating expenses.

Adjusted EBITDA was $9 million, a decrease of 46% year over year.

Moving to the balance sheet and cash flow statement inventory at September 30th 2023 was $203 million, a decrease of 5% year over year and done 1% sequentially from the second quarter of 2023.

Mike Karanikolas: We're also very focused on further expanding our capabilities and growth opportunities within owned brands. As shared on recent earnings calls, the soft and consumer demand in recent quarters has led us to be more conservative in planning our own brand inventory bias since owned brand required a deeper inventory commitment per style than our third-party brands. In the lower mix of owned brands year-over-year, is the driver of the gross margin decline I mentioned since owned brands have a much higher gross margin.

The year over year decline was one point steeper than our net sales decline illustrating the progress we have made in rebalancing our inventory.

Net cash provided by operating activities and free cash flow in the third quarter increased by a strong double digit percentage a year over year.

Mike Karanikolas: Nonetheless, we are excited by and continue to invest in the long-term potential in owned brands, which offer huge potential for product differentiation and margin expansion. Consider that our Revolve segment gross margin at 55 percent reported today was in the same zone as the Revolve segment gross margin in the third quarter of 2019. Even though the own brand mix of the Revolve segment net sales in the third quarter of 2023 was roughly half of the own brand mix in the third quarter of 2019. This comparison illustrates the opportunity to drive margin improvement from own brand expansion in the coming years. If we can continue to raise the bar through our ongoing investments.

For the nine months ended September 30th 2023, net cash provided by operating activities was $47 million in free cash flow was $44 million, an increase of 37% and 44% year over year, respectively.

We put our cash flow to work towards the new $100 million stock repurchase program announced last quarter.

We repurchased approximately 907000 shares of class a common stock during the third quarter at an average cost of $13.87 per share.

Approximately $87 million renamed available under the repurchase program at quarter end.

Mike Karanikolas: Lastly, we continue to expand the use of AI and machine learning across several key areas of our operations to drive growth and efficiency. I am excited about a current application of AI technology that allows our customers to visually search for similar styles without any keywords. Currently in beta testing, the Conclusion User Experience is especially relevant for driving discovery among the tens of thousands of styles on Revolve. We are also gearing up to launch the personalized recommendations landing page for returning customers, leveraging outstanding development work by our data science team to tap into our deep data insights.

As of September 30th 2000, twenty-three cash and cash equivalents were $267 million, an increase of $23 million or 9% year over year, and we had no debt.

Cash and cash equivalents decreased by $2 million on a sequential basis versus the second quarter of 2023 as a result of our stock repurchases.

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

Starting from the top the top line pressure, we experienced in the third quarter has continued with net sales for the month of October 2023 down a low single digit percentage year over year.

Mike Karanikolas: We believe the increasingly personalized site experience will provide a more engaging and rewarding shopping experience and based on prior efforts could lead to improved conversion rates. 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.

To assist in your modeling of our net sales in the fourth quarter of 2023, I want to highlight that our net sales comparisons are more difficult in the months of November and December on both a one year basis and on a multi or basis when compared to the October comparison.

Mike Karanikolas: In summary, while we face a multitude of challenges in the current environment, we will remain on office. We continue to focus on our competitive advantages of technology innovation, operating efficiency, and brand building to guide us through these uncertain times as we invest in the long-term opportunity ahead of us.

Consistent with the third quarter results during October year over year net sales compares.

Comparisons and the revolve segment continued to outperform the forward segment I would also like to highlight.

October net sales in the Middle East, which has been a girl Trevor for international were impacted by the war in Israel. Our Hearts go out to everyone affected at home and abroad suffering tragic loss and hardship surrounding the recent events in the middle East.

Michael Mente: Now, over to Michael. Thanks Mike and hello everyone. It's been a challenging few quarters, contending with the macro environment and cycling through comparisons against a period of tense-up consumer spending coming out of COVID.

Shifting to gross margin, we expect gross margin in the fourth quarter of 2023 of between 51.7 per cent and 52 per cent, implying a year over year increase in gross margin compared to the fourth quarter of 2022.

Michael Mente: As a development benchmark, consumer sentiment in the US is currently 64, which is well below the consumer sentiment during the depths of COVID. Nonetheless, as CEOs of a growth company, Mike and I are not satisfied with our current results. Even within a current difficult macro environment, we expect to help perform the benchmarks as we have spent most of the 20 years since we've done a revolve. We have some work to do.

Taking into account our third quarter performance, we have fine tuned our gross margin outlook for the full year 2023.

Between 51.8 per cent and 51.9 per cent.

Michael Mente: Our team is up to the challenge and I feel great about our early progress into our initiatives and strategies that we believe offer exciting potential for our future. Our long history, offering the businesses how to set periods of macro challenge can often present opportunity for market disruption. With a strong financial position, our fast pace and nimble operating structure, and our innovative entrepreneurial mindset, we believe we are well positioned to drive improved results.

Fulfillment.

We expect to fulfillment as a percentage of net sales to be around 3.6 per cent for the fourth quarter of 2023, and now expect fulfillment to represent 3.5% of net sales for the full year 2023.

Selling and distribution.

We expect selling and distribution costs for the fourth quarter of 2023 to be approximately 19% consistent with the third quarter results and 18.7% of net sales for the full year 2023.

Michael Mente: So I will provide an update on what has been excited about our future. First, we have some impactful and innovative band marketing activations in the work for the fourth quarter into early 2024 that I'm truly excited about. An important element of our band building and our event planning strategy is the state and in bull be relevant, fashion exciting. Our marketing plans for the fourth quarter and into early 2024 capture the strategy and our efforts to drop the greatest impact from our passionate community of consumers, influencers and brands.

The slight increase from our previous full year 2000, twenty-three guidance, primarily reflects a higher than expected return rate that has overshadowed early efficiency gains, resulting from our shipping and logistics efficiency measures.

Looking beyond the fourth quarter in 2024, we believe we can begin to benefit from our concerted efforts to drive efficiency in our shipping and logistics operations globally.

Michael Mente: One of our cornerstone vendeling events in the fourth quarter will be in an international region where we see a great deal of opportunity for future growth in the years ahead. This follows on the heels of a highly successful activation in Mexico where our third quarter sales and customer growth are again truly exceptional. Help to buy further advances in service levels that show up in another exceptional quarter of triple digit growth in new customers. As we exit the fourth quarter and extending into 2024, we have a number of activities planned featuring both revolving forward that we are very excited about.

[noise] marketing.

We expect our marketing investment in the fourth quarter of 2023 to represent between 17% and 17.2% of net sales.

For the full year 2023, we have narrowed our expectation for marketing investment to represent between 16.2% to 16.3% of net sales, which is unchanged at the midpoint from our prior full year range.

General and administrative we expect G&A extensive approximately $29.6 million in the fourth quarter of 2023 and $121.5 million for the full year 2023.

Michael Mente: We will share more details on these plans at later date. We're also leveraging our core competencies in disruptive marketing and technology innovation to drive results and lay the foundation for future growth. Mike talked about how we are leveraging AI for personalization and visual search on our websites. Beyond this, it is important to understand that we are testing the use of AI broadly throughout the organization and effort to drive growth and efficiency.

The increase in our full year G&A outlook is entirely due to the 6.6 million dollar cool for a pending legal matter recorded in the third quarter.

And lastly, we continue to expect our effective tax rate to be around 24% to 26% consistent with the last several quarters.

Michael Mente: In the coming weeks, we will also be experimenting with AI design images on our website and mobile apps, which is accessible to prove to be a real game changer. We see many more applications for leveraging AI in the marketing realm building on the success of our innovative AI build board campaign launch early this year.

To recap we are laser focused on the large market opportunity ahead of us leveraging our strong financial position and consistent with our focus on the long term, we will continue to prudently invest in a multitude of initiatives that we believe can extend our competitive advantages and maximize shareholder value in the years ahead.

Michael Mente: Finally on Friday, we will launch thousands of revolved from three emerging designers featuring new collections that were created entirely using AI design. Produced by the three winners of the first ever AI Fashion Week, looks are incredible and will be exclusively available for sale and revolved. And as it can be known for leading innovation on social channels, it is exciting to see our collaboration with Tik Tok Shop showing a great deal of promise in the early stages.

I will open it up for your questions.

I think I'd like to ask a question. Please press star followed by the number one on your telephone keypad try your question. Please press start one again.

Our first question comes from Edward You Roma from paper Sandler. Please go ahead. Your line is open.

Hey, good afternoon. Thanks for taking the question I guess first I wanted to understand a little bit more about tick tack shops is it your sense of this isn't incremental customer or is this a customer that would maybe I've seen a media on Instagram then go onto the site and I'm trying to understand maybe kind of how does the all in economics, a bit luck and then I guess just to get maybe a little bit more further clarity on.

Michael Mente: That sale generated from Tik Tok Shop increased beautifully in the third quarter compared to the second quarter of 2023, even though we only made available a limited selection of products on Tik Tok Shop. A key contributor to assess is our proven ability to create compelling content for social channels and engage with influencers to drive awareness and impact combined with the conversion driven nature of the Tik Tok platform. Looking forward, we see an exciting opportunity to further leverage our experience in that Tik Tok platform and expand the range of revolved products and categories that will resonate with a large audience of Gen Z consumers and content creators on Tik Tok.

On getting Beforeward inventory numbers in line is that a multi quarter kind of goal or what are you didn't get it the next quarter or two thank you.

Yeah, Hi, it I'll I'll take the first willing to talk shop, our sensory stuff what we've seen thus far is that it's more of an incremental customer you know the nature of the verses fairly different from what we typically see within you know kind of our other channels, which is an exciting opportunity and.

Michael Mente: To capitalize on the exciting growth potential within this new channel, we recently launched a series of live streaming content videos intending to further engage the Tik Tok community with product insights, science tips and exclusive offerings. We also recently launched and dedicated Tik Tok beauty account with beauty specific content that will also have a beauty focused store within Tik Tok Shop. Beauty is a great category fit considering that Tik Tok has a snackle beauty community and that beauty is ideal for influencers to create compelling educational video content. For years, the viral nature of Tik Tok has a powerful catalyst for the beauty category and now with Tik Tok Shop, consumers can discover and purchase products in one place.

The thing I'd point out as a general still very new invasive, but it's got a awful lot in the coming months, we've already seen it be very dynamic within just gotta finish it wants to keep it operating so you know there's still a lot to play out here.

Yeah, and then and this is Jesse on the floor and inventory you know of course, a lot of this is dependent on what happens in the Macroenvironment looking ahead that we would say it's not three quarters, it's probably more like that two quarters scenario. So we're probably not quite there by year end, but as we get into the back half of the key one is our best best estimate at this point, but.

Michael Mente: Speaking of beauty, I'll wrap up the commentary on new categories where we continue to see a lot of growth potential. The men's and beauty categories achieve strong double-digit sales growth in the third quarter, further validating our opportunity for category expansion. Beauty was a stand-up performer so I'll focus my remarks here. Beauty net sales increased 44% year-to-year and expanded to 4% of net sales from 3% in the last year's third quarter, helping to offset the current softness in our payroll categories.

<unk> on the inventory perspective on forward.

Okay. Thank you.

And it actually want clarification right out on the incremental customer just from a definitional standpoint.

You should just be aware that we don't trust those as well.

Additional after the customers because they're coming in through a marketplace.

Michael Mente: Our team has done an incredible job executing, improving all aspects of the beauty business, and bringing on a panel of new beauty brands to help drive the 36-point improvement in our year-to-year growth rate compared to the second quarter of 2023. Most exciting is our momentum in attracting impact on new beauty brands, which is even stronger entering the fourth quarter. In October, we added a full range of products in one of the most coveted beauty brands, Laura Merciate, to both revolve and forward.

They are all tied to essentially.

Sort of single account within our system and we don't have those customer. So we do have names and shipping address as though.

So currently engaged with with those.

Gotcha.

Got it thank you.

Our next question.

And comes from all of our 10 from T. D. Cowan. Please go ahead. Your line is open.

Hi, Michael Knight to Jessie Uhm regarding the environment and what you're seeing with return rate it sounds incrementally worrisome given given that focus the.

Michael Mente: This is a huge win that we believe may help build momentum in attracting other top beauty brands. Also earlier this month, we extended our top-selling beauty brand and revolve Charlotte Tilbury to listen for it as well. And right away in the first week, Charlotte Tilbury became our top-selling beauty brand on forward. We expect several more impactful beauty brands to launch in the coming weeks, just in time for the holidays. Our goal is to become the preferred beauty destination for our customers.

The customer macros, maybe out of your control So would love you.

Thoughts on how that and are playing with the future of return rate and also as we look forward to average order value.

And then on the customer acquisition cough, it sounded like the marketing assistance he was encouraging.

Michael Mente: A big part of achieving this goal is having the right selection. We believe that as we continue to optimize our beauty assortment, our loyal customers will buy more and more beauty from us, because we have rendered just through our brand, curation, and best-in-class customer experience. We are off to a great start with the brand addition, as I mentioned, and a healthy partner of brands interested in partnering with us in 2024.

<unk>, what's driving that and what are your core classes going forward or a customer acquisition costs.

Thirdly related to the first question promotions just wanting your base case for the promotional environment because the whole industry is experiencing a lot of the cautionary comment to me. Thank you.

Michael Mente: In closing, while we continue to face challenges in the near-term, our team has energized by the opportunity to drive improved results across a wide range of longer-term initiatives that have leveraged the core competencies that have served us well in the past 20 years. I want to express a heartfelt thanks to our talented team for their incredible efforts and persistence, particularly in the last few years.

Yeah. So so you know you kind of start with with with the end of your question with regards to the promotional environment.

We are definitely seeing increased promotional activity, particularly within afford.

Jesse Timmermans: 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 third quarter results and then close with updates on recent trends in the business and commentary on our cost structures we look ahead. Starting with the third quarter results, net sales were $258 million, a year-of-year decrease of 4%, within an environment for consumer discretionary spending that remains quite challenging. Revolved sigma net sales decreased 2% and forward sigma net sales decreased 14% year-of-year in the third quarter.

Luxuries segments <unk>.

<unk> you know, we certainly see it as well we do things revolve has the ability to stay above the fray with regards to that but at the same time when consumers are feeling pressure.

Pressured you know.

Certainly does have an impact within the root of all we've seen that.

So you want to take <unk>.

Question.

And you know kind of projections.

Yeah, Yeah, and you'll be kind of separate from the return rate. We did see pressure on any of this quarter. As you can see you know maybe starting from the top with the segment breakdown forward is relatively flat. So it's more about a decrease in the area on the revolve side, but there was also an impact with this shift from.

Jesse Timmermans: By territory, domestic net sales decreased 5% and international net sales decreased 1% year-of-year. Active customers, which is a trailing 12-month measure, increased by 52,000 customers during the third quarter, are active customers across the 2.5 million customer milestone for the first time, an increase of 12% year-of-year. Our customers placed 2.1 million orders in the third quarter, an increase of 9% year-of-year. The increase in orders placed was offset by a decrease in average order value or AOV and the year-of-year increase in the return rate. AOV was $299, a decrease of 7% year-of-year, against an elevated AOV comparison of $320 in the third quarter of 2022.

I'm from foreign to resolving you know as you know foreign carriers <unk>, two and a half times that of.

<unk> did you see that shift me do see pressure on it will be <unk> within the revolves segment that was a D. C. Some about six per cent just shy of 6% that was largely due to both units per order and asp's and that was in part due to that mix in shift towards beauty that carries that lower S. P. So you know.

I think.

A lot of moving pieces, there and then on top of copying to a record high a O V. In the prior third quarter. Looking ahead, we would expect that to balance out I would say you know, we're not going to be up against such a significant comp and you know full price makes it is getting back to you I really healthy place.

Jesse Timmermans: It was the highest we have ever reported. Shifting the gross profit. Consolidated gross margin was 51.7%. Slightly below our guidance range. The decrease of 127 basis points year-of-year primarily reflects a lower mix of net sales at full price and a lower mix of own-brand net sales within our revolved segment compared to the third quarter of 2022. As you can see from our segment gross profit disclosures, the year of year comparison for segment gross margin is more favorable at Revolve than forward, which reflects the great progress we have made rebalancing the Revolve segment inventory.

Maybe on the marketing for since he was another piece of your question. There we did see efficiency <unk>. This corner, so that was really encouraging.

And you know it can be fair part of that was due to timing uhm. So we did shift some of the brand marketing activities out of Q3, and Q4 and into Q1. So you know there is a piece there but uhm. There was also efficiency on the performance marketing side, which are really encouraged about and then maybe I'll kick it back to Mike.

Jesse Timmermans: As Michael alluded to, while we have made progress with rebalancing forward, we still have some work to do to fully optimize the forward segment inventory. Moving on to operating expenses, the quick summary is that better than expected marketing efficiency in the third quarter was offset by our fulfillment expense and selling and distribution expense as a percentage of net sales coming in slightly higher than our outlook. Fulfillment costs were 3.6 percent of net sales.

Yeah, and then to just the first part of your question on the return rate you know, we do think the environment is playing a large role you know just.

See how consumer confidence is so low right now even lower than the Covid depths you.

You know, there's there's certainly a lot of disturbed indicators out there, but I think whether you look at the kind of luxury spending data from bank of America consumer confidence or other things and certainly we're working with our customers.

Jesse Timmermans: The increase of 56 basis points year of year was primarily due to a year of your increase in our return rate, a year of your decrease in AOV, increased rent expense, and other costs of operating our recently extended fulfillment network and higher wages for our fulfillment center staff. We expect to realize efficiencies on fulfillment expense as a percentage of sales in the coming years as we grow into and optimize our increased fulfillment center capacity.

Think she's not feeling in a good place and that's a section of the return rate. That's it we definitely recognize it as a very important cause pressure.

Laser focused on it and you know we're not happy with this you know our our business is not as solidly Russell right now as we want we're still in a more challenging times you know delivering something you know cash loan rooms, but just not at the level, we want and so.

Where where laser focused on that and we certainly hope to drugs.

Jesse Timmermans: Selling and distribution costs were 19 percent of net sales. The increase of 170 basis points year of year is primarily due to the higher return rate in lower AOV. We are aggressively pursuing initiatives both to reduce our shipping and logistics costs and to address the increasing return rate. Our marketing investment represented 15.4 percent of net sales, a decrease of 123 basis points year of year, reflecting reduction in brand marketing investment in events in the third quarter of this year as compared to last year, as well as year of year efficiency in performance marketing investment as a percentage of net sales.

Literally quarters.

Our next question comes from <unk>. Please go ahead your line is open.

Good afternoon. Thank you. So a lot of the headwinds you cite are more macro in nature, given the macro picture remains uncertain and challenging heading into 2024 do you think it's reasonable to expect top line growth in the first half of next year.

Or they're incremental levers you see for next year or two better offset the macro headwinds versus what you've experienced thus far in 2023, Okay and anything you can Sharon how you're thinking about that would be help though and then I have a follow up and gross margin.

Jesse Timmermans: The reduced brand marketing investment year of year is largely due to a shift in timing from the third quarter to the fourth quarter, with a very active calendar of brand building events in the fourth quarter of this year, setting into 2024. General and administrative costs were $35.2 million, including the $6.6 million dollar accrual for a pending legal matter. Excluding the legal accrual, our GNA cost came in slightly lower than our outlook for the third quarter.

Yeah, maybe I'll start and then if anybody else has anything that you know, we're not going to comment too much beyond what we've said in the script. You know he did comment that October is download single digits, but we are up against some you know slightly more difficult comes in November December. So we just want everybody to keep that in mind, you know to your <unk> macro is very uncertain.

There's a lot of good things happening internally, but that to your plan a lot of it is macro driven at this point. So you know we're gonna continue to stay nimble you know invest where we think there is meaningful return on the marketing and we'll get back to you inventory growth at least on the on the resolve side as we get into early next year.

Jesse Timmermans: Net or 4 cents per deluded share was impacted by the accrual for the pending legal matter, equivalent to $0.7 per deluded share. The 73 percent year of year decline in net income was also impacted by the net sale of decline, a year of year decrease in gross profit, and continued pressure on certain operating expenses. Adjusted EBITDA was $9 million, a decrease of 46 percent year of year. Moving to the balance sheet and cash flow statement, Ementoria, September 30, 2023 was $203 million, a decrease of 5 percent year of year, and down 1 percent sequentially from the second quarter of 2023.

So we're optimistic about that but not much more beyond that that we can say at this point given all the uncertainty.

Thank you and then Jesse can you help us better understand the factors that drove Q3 gross margin a bit below the guidance and then just given the better inventory physician D. C last risk burp or Q4 and zooming in on revolve I mean, the gross margins there have been a bit more stable the last couple of.

Jesse Timmermans: The year of year decline was 1 point steeper than our net sales decline, illustrating the progress we have made in rebalancing our inventory. Net cash provided by operating activities and free cash flow in the third quarter increased by a strong double digit percentage year of year. For the 9 months ended September 30, 2023, net cash provided by operating activities was $47 million, and free cash flow was $44 million. An increase of 37 percent and 44 percent year of year respect.

Quarters.

55% kind of the right level to be thinking about.

Okay.

Yeah, Yeah, maybe I'll start with the results, even though that was kind of a lesser impact this quarter. The the year over year decline. There is you know roughly split half and half between the full price to.

Mark down shift you know we were slightly lower on full price of this year this quarter than last year's third quarter again, nothing a really healthy place if you compare to pre covered but still a relative to last year. It is lower.

Jesse Timmermans: We put our cash flow to work towards the new $100 million dollar Stockree Purchase Program announced last quarter. We repurchased approximately $907,000 shares of Kasey Commons doc during the third quarter at an average cost of $13.87 per share. Approximately $87 million remained available under the repurchase program at quarter end. As of September 30, 2023, Cash and Cash equivalents were $267 million, an increase of $23 million. And we had no debt. Cash and Cash equivalents decreased by $2 million on a sequential basis versus the second quarter of 2023 as a result of our Stockree purchases.

<unk> balance is the other half of that you're on your decline were owned Brown mix was lower this year than it was last year a lot of opportunity there be given come into the prepared remarks, you know we are more cautious on that one band inventory and times when <unk> when we're pulling back in managing that inventory balance so.

We've all set it into your appointment you know more stable and kind of less risk there as we look into your T. Four on the foreign side. This is where you know you're on your significant decline in March and then also sequentially, which was you know, let's say maybe surprises uhm too aggressive.

Jesse Timmermans: Now, let me update you on some recent trends in the business since the third quarter ended and provide some direction on our cost structure. Starting from the top, the top line pressure we experienced in the third quarter has continued with net sales for the month of October 2023 down a low single digit percentage year of year. To assisting your modeling of our net sales in the fourth quarter of 2023, I want to highlight that our net sales comparisons are more difficult in the month of November and December on both a one year basis and on a multi year basis when compared to the October comparison.

We are working to inventory it is taking longer the macro pressures are adding to that and kind of extending that time frame. There and then add on the promotional environment. We did move more aggressively into that marked down inventory and the markdowns were more significant than they were in Q2 and last year. So.

I think we're probably at or near the trough on forward, but you know we probably have another another couple of quarters a challenge there.

Our next question comes from <unk> from Raymond James. Please go ahead. Your line is open.

Jesse Timmermans: Consistent with the third quarter results during October, year of year net sales comparisons in the revolve segment continue to outperform the forward segment. I would also like to highlight that our October net sales in the Middle East, which has been a growth driver for international, we're impacted by the war in Israel. Our hearts go out to everyone affected at home and abroad suffering tragic loss and hardship surrounding the recent events in the Middle East.

Thank you good afternoon guys.

You touched on it but I'm, hoping you can expand on how you're planning inventory for the spring of 24, it sounds like you're seeing signs of encouragement for the revolve Brandon and the beauty category, but just hoping for more color. There. If there's any other areas of the business that are worth calling out from an inventory planning perspective.

Jesse Timmermans: Shifting to gross margin, we expect gross margin in the fourth quarter of 2023 of between 51.7% and 52%. Implying a year of year increase in gross margin compared to the fourth quarter of 2022. Taking into account our third quarter performance, we have fine tuned our gross margin outlook for the full year 2023 to between 51.8% and 51.9%. Fulfillment. We expect fulfillment of the percentage of net sales to be around 3.6% for the fourth quarter of 2023, and now expect fulfillment to represent 3.5% of net sales for the full year 2023.

Yeah, Yeah, maybe starting starting with revolved to your plan. We are further ahead on the inventory rebalancing and feel good about that inventory turns her up year on year. You know so we're at the point now where you know, let's start to see by the increase year on year as we get into Q1 of 24 on the foreign side.

<unk>, we've still got.

Another quarter or two rebalancing there so the kind of lean into inventory will be a couple of quarters lagging. So we're probably not you know not looking probably looking more at like mid year on the forward side and then on brands as a longer tail. It takes longer to kind of recalibrate and spend that upset you know.

Jesse Timmermans: Selling in distribution. We expect selling in distribution costs for the fourth quarter of 2023 to be approximately 19%, consistent with the third quarter result, and 18.7% of net sales for the full year 2023. The slight increase from our previous full year 2023 guidance primarily reflects a higher than expected return rate that has overshadowed early efficiency gains resulting from our shipping and logistics efficiency measures. Looking beyond the fourth quarter, in 2024, we believe we can begin to benefit from our concerted efforts to drive efficiency and our shipping and logistics operations globally.

Gives me as we approached the back half of next year seeing some some increases their.

That is a percentage of the overall mix no not factoring anything dramatic in for 2024 on the <unk> different from where we're at today.

And and maybe just a touch on duty as well because we are really excited about the beauty. The brands will be valid in Q3, a really healthy roster. Michael mentioned this on the prepared remarks really healthy healthy roster of brands coming on in queue for an into 2024, so I'm really excited about that that area.

Jesse Timmermans: Marketing. We expect our marketing investment in the fourth quarter of 2023 to represent between 17% and 17.2% of net sales. For the full year 2023, we have narrowed our expectation for marketing investment to represent between 16.2% to 16.3% of net sales, which has unchanged at the midpoint from our prior full year range. General and administrative. We expect DNA expensive approximately $29.6 million in the fourth quarter of 2023, and $121.5 million for the full year 2023.

Our next question comes from Cornell <unk> from you'll be asked. Please go ahead. Your line is open.

Hi, Thanks for taking my question.

<unk> an active times that number is still growing can you talk about red that you're.

Adding active times.

<unk> U S International let any demographic that you could you could give us and second on the efficiency on the marketing side is.

<unk> driven by a lower price.

On a <unk> basis out is that driven by better targeting automated maybe.

Jesse Timmermans: This increase in our full-year GNA Outlook is entirely due to the $6.6 million rule for a pending legal matter recorded in the third quarter. And lastly, we continue to expect our effective tax rate to be around 24% to 26% consistent with the last several quarters.

<unk>.

Thank you.

Yeah. He can on the first one in active customers.

By geography, it skews higher on a grocery respective international versus domestic uhm. So you you know roughly you know not in line that is similar similar dynamic to our overall sales <unk> international outpacing domestic within domestic you see.

Jesse Timmermans: To recap, we are laser focused on the large market opportunity ahead of us, leveraging our strong financial position and consistent with our focus on the long-term, we will continue to prudently invest in the multitude of initiatives that we believe can extend our competitive advantages that maximize shareholder value in the years ahead.

Mark down growth.

Outpacing the full price growth, but full price you know still very strong and you know call. It you know.

Unknown Executive: Now we'll open it up for your questions. If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, please press star one again.

Two thirds class almost three quarters of the new customers are coming from full price still so it really healthy our customer base.

And then revolved for it again, you know similar to the net sales dynamics were four legs out of revolve it similar on a new customer side.

Edward Yruma: Our first question comes from Edward Yruma from Piper Sandler. Please go ahead, your line is open. Hey, good afternoon guys, thanks for taking the question.

Unknown Executive: I guess first wanted to understand a little bit more about TikTok shops. Is it your sense that this is an incremental customer or is this a customer that would have maybe seen the media on Instagram and gone on this site? I'm trying to understand maybe kind of how does the all in economics of it look?

Yeah, and then in terms of the marketing efficiency.

It's a combination of things you you know we've been tweaking you know kind of a performance marketing budget over the past few quarters.

You run running.

Unknown Executive: And then I guess just to get maybe a little bit more further clarity on getting the forward inventory numbers in line, is that a multi quarter kind of goal or what do you get it the next quarter to thank you. Yeah, hi, I'll take the first one on TikTok shop. Our sense is of what we've seen as far as that it's more of an incremental customer. You know, the nature of the words is fairly different from what we typically see within, you know, kind of our other channels, which is an exciting opportunity.

Bruce chest and kind of adding to our ability to talk tomorrow is the marketing and it didn't really work kind of halfway to that future heard that process. So you know, it's a little bit of that and then it's a little bit of timing in terms of brand marketing activities, which are more longterm comes with having a doctor does this but you know overall.

You just wanted the bright spots.

Have strong enough to customer growth with with some more efficient.

Mhm.

Unknown Executive: And, you know, kind of the other thing I point out is the channel is still very new in nascent. It's going to evolve a lot in the coming months. We've already seen it be very dynamic within just kind of the initial months that we've been operating.

Our next question comes from Guineans Stichter from B T. I G. Please go ahead your line is open.

[noise] Hi, good afternoon, everyone go on to ask a bit more about return the.

Jesse Timmermans: So there's still a lot to play out here. Yeah, and then this is Jesse on the forward inventory. You know, of course, a lot of this is dependent on what happens in the macro environment looking ahead, but you know, we'd say it's not three quarters. It's probably more like that two quarters scenarios. We're probably not quite there by year end, but as we get into the back half of key ones are best best note at this point before read on the inventory perspective on forward.

The initiatives you'd have to improve certainty I think you talked about the initiative virtual Cheyenne videos private tech guys, but it seems like they're on the kind of earlier stages ever all out just trying to understand why am I can see them rolled out more broadly and then on that within Sally and distribution extended care targeting 18 point that my first time here and you've talked about getting.

The highest having teen arrange maybe even the lowest that in teens longer term just any structural changes that thinking based on what you're seeing on our train right now. Thank you.

Unknown Executive: Thank you. And Ed, actually, one clarification I'd add on the incremental customer, you know, just from a definitional standpoint, you should just be aware that we don't count those as additional active customers because they're coming in through a marketplace and they're all tied to essentially sort of single account within our system. And we don't have those customers. We do have names of shipping addresses, though. So in any ways, you know, certainly engage with those kinds of beyond shop.

Yeah, sometimes the return initiatives. They are in the earlier stages in terms of fraud or roll out it's gonna be a couple of things you know what we need to see.

And your social significance on the fact that we're trying to me and then to you know for a number of them is it depends on which one but a number of them require a lot of manpower to do well you know what I'm <unk>, that's well worth it you know compared to the cost savings, but you know it'll take time to kind of room that up once we get the full confirmation that these targeted efforts work you know and then we have to roll not work.

Unknown Executive: Thank you.

Broadly and make sure we have to have the right to to support.

Oliver Chen: Our next question comes from Oliver 10 from TD Cowan. Please go ahead, your line is open. Hi, Michael, Mike and Jesse, regarding the environment and what you're seeing with return rates, it sounds incrementally worrisome given that focus. The customer macro is maybe out of your control. So it would love your thoughts on how that's interplaying with the future of return rates and also as we look forward to average value. And then on the customer acquisition cost, it sounded like the marketing efficiency was encouraging.

And then in terms of someone in Dubuque distribution costs.

So.

Forecasts on those going forward.

Jesse.

Yeah, Yeah, and How'd you need yeah, we got hit on a number of fronts on that selling and distribution. This quarter at the return rate was a big factor in that year over year increase the visa lower you'll be also had a pretty significant impact there.

And you know those to you pressures, we had some really great cost savings initiatives that started to take place and really have an impact in Q3, but not enough to offset those two factors. So if you look on a cost per order basis, the customer order on selling and distribution was actually lower by <unk>.

Oliver Chen: What's driving that and what are you forecasting going forward for customer acquisition cost. Thirdly, related to the first question promotion, just wanting your base case for the promotion environment, because the whole industry is experiencing a lot of the cautionary comments you made. Thank you.

4% year on year. So some good early games, they're just not enough to offset the pressures of you saw this quarter.

The only factor that into our guidance four Q4, and taking a cautious dancer, but as we look ahead into 2024, we are optimistic and you know we're in the early stages of those efficiency and <unk> initiatives.

Unknown Executive: Yeah, so, you know, I'll maybe kind of start with with the end of your question. With regards to the promotional environment, you know, we're definitely seeing increased promotional activity, particularly within, you know, for, you know, in the luxury segments, you know, for Revolve, you know, we certainly see it as well. You know, we do think Revolve has the ability to stay above the prey with regards to that, but at the same time when consumers are feeling pressured.

We are optimistic I think it's probably you know from the time he talked last quarter. It's the timeline has probably extended given some of the increased pressures that we've seen in return rate you know kind of at those elevated levels also want a sequential basis, we saw fuel pick up again. So it was kind of up 10% sequentially from just last quarter were still lower on a year over year basis.

Unknown Executive: You know, it certainly does have an impact within Revolve and we've seen that. I guess you want to take the AOV question and the marketing kind of projections. Yeah, yeah, on AOV kind of separate from the return rate. We just see pressure on AOV this quarter as you can see. You know, maybe starting from the top with the segment breakdown. Forward was relatively flat, so it's more about decrease in the AOV on the revolve side, but there was also an impact with this shift from from forward to revolve and, you know, as you know, forward carries AOV that's two and a half times that of that of revolve.

You know some of those things just work in our favor.

This quarter, but feel optimistic Mitchell longterm on that that line item.

Our next question comes from Alice Alice Chouse from Bank of America. Please go ahead. Your line is open.

Hi, Thanks for taking my question, where do you see beauty shake out as a percentage of sales longer term, how quickly or you're expanding that business signing up new brands and what's the crossover for customers that purchase apparel versus beauty now how much lower as beauty a L V y.

And what our long term Martin implications. If you know you have a higher percentage of theory longer term just just more details on beauty that'd be helpful. Since it seems to be the one kind of category a bright spot.

Unknown Executive: So when we do see that shift, we do see pressure on AOV. Then within the revolve segment, that was a piece of about 6% just shy of 6%. That was largely due to both units per order and ASPs. And that was in part, you know, due to that mix in shift towards beauty that carries that lower ASP. So, you know, I think, you know, a lot of moving pieces there and then on top of comping to a record high AOV in the prior third quarter.

Yeah, there's there's other bright spots, but definitely beauty is really really shining.

Longterm Wise you know, we look at kind of historic competitors, you know whether it be you know previous generation kinda like legacy players like the department stores I got a notice from her name is and things like that and we tried to like you know call at 15% you know some some listen competitors, receiving the Ohio, it closer to 20, but ultimately and I'm at church today, we think the business should be something in that zone. So we have a long way to go.

Unknown Executive: Looking ahead, we'd expect that to, you know, balance out, I would say, you know, we're not going to be up against such a significant comp and, you know, full price mixes, getting back to a really healthy place. And then maybe on the marketing efficiency was another piece of your question there. We did see efficiency on the cactus quarter, so that was really encouraging. And, you know, to be fair, a part of that was due to timing.

Of course over the longterm, we anticipate kind of a corvette club Hello. This is to continue to grow. So we think that you know if my daughter's perspective, you know that 15% to 20% will hopefully just get larger and larger over time. So moving targets got quite excited about that you know of course, it's super obvious that our customers are buying clothes to go out of course, there where he makes good beauty so.

Unknown Executive: So we did shift some of the brand marketing activities out of Q3 into Q4 and into Q1. So, you know, there is a piece there, but there was also efficiency on the performance marketing side, which really encouraged the maybe I'll kick it back to Mike.

So of course that natural state there long-term wise, we'll look at the economics just to tell you. The best person to talk about that puts it takes me a lot of opportunity there.

Mike Karanikolas: Yeah, and then to just the first part of your question on the return rate, you know, we do think the environment is playing a large role, you know, just kind of seen how consumer confidence is so low right now, even lower than COVID depths. You know, there's certainly a lot of disparate indicators out there, but I think whether you look at the kind of luxury spending data from make America consumer confidence or other things and certainly we're working with our customers.

Yeah, Yeah, sure and maybe just to corroborate kind of something Michael mentioned, 15%, you know plus or minus of our new customers came from BT. So it shows the potential of that mix, increasing over time and and some of that overlap that we do experience and then those beauty customers do come back and purchase at higher a O B's over time, you know similar to our overall customer.

At a greater kind of increased it'll be basis, so opportunity to continue to upsell across all those b b customers.

Mike Karanikolas: You know, I think she's not feeling in a good place and that's affecting the return rate. That said, we definitely recognize it's a very important cost pressure. We're laser focused on it and, you know, we're not happy that, you know, our business is not as solidly profitable right now as we want. You know, we're still in more challenging times, you know, delivering some, you know, cash loan earnings, but just not at the level we want. And so, you know, we, we're laser focused on that and, you know, we certainly hope to try to, you know, in the coming quarters.

From kind of an economic standpoint, so gross margin is lower on those beauty products that you know other things to keep in mind does he work down through the contribution margin. The return rate is significantly lower so we're talking you know kind of mid single digit return rate versus you know our overall return rate is much higher than that.

So you know we think it's a very healthy customers very healthy kind of a product category to have an balance out the the the mixer.

Mark Altschwager: Our next question comes from Mark Altzweger from Baird. Please go ahead. Your line is open. Good afternoon. Thank you. So a lot of the headwinds you cite are more macro in nature, given the macro picture remains uncertain and challenging heading into 2024.

Our next question.

<unk> comes from actually Owens from Keybanc capital markets. Please go ahead. Your line is open.

Great. Thanks for taking my question does that'd be curious to hear comments on the inventory mixed with and for it kind of as it stands today are there any category that you feel are closer to being right size and then inversely any of that you are having a harder time clearing for you that are creating submit those rebalancing legs. Thanks.

Unknown Executive: Do you think it's reasonable to expect top line growth in the first half of next year? Now, are there incremental levers you see for next year to better offset the macro headwinds versus what you've experienced thus far in 2023? Is it anything you can share on how you're thinking about that would be helpful?

Yeah. So.

Is that all we certainly have too much inventory. It is concentrated in brands that have more markdown restrictions. This is kind of prevent us from going through a normal kind of markdown kids on the website itself.

Unknown Executive: And then I have a follow up on gross mark. Yeah, maybe I'll start and anybody else has anything to add. You know, we're not going to comment too much beyond what we've said in the script. You know, we did comment that October is down those single digits, but we are up against some, you know, slightly more difficult comps in November and December. So we just want everybody to keep that in mind.

And then from a category standpoint.

It is concentrated in categories tend to hold their value well you know things like handbags.

Unknown Executive: And, you know, to your point, macro is very uncertain. There's a lot of good things happening internally, you know, but to your point, a lot of it is macro driven at this point. So, you know, we're going to continue to stay nimble, you know, invest where we think there's meaningful return in the marketing and, you know, we'll get back to inventory growth, at least on the, on the revolve side as we get into early next year. So we're optimistic about that.

Handbags.

Jews accessories loaded with products. So we feel good from that standpoint, but it's certainly been a challenging situation in a.

A bit frustrating that.

You know the the inventory stools and fully rebalanced.

Jesse earlier comments were hopefully we'll.

We'll start to see that true.

Jesse Timmermans: But, you know, not much more beyond that that we can say at this point given only uncertainty. Thank you. And then Jesse, can you help us better understand the factors that drove Q3 gross margin a bit below the guidance. And then given the better inventory position, do you see less risk for Q4 and zooming in on revolve? I mean, the gross margins there have been a bit more stable the last couple of quarters.

Our next question comes from Dylan Carden from William Blair. Please go ahead. Your line is open.

Thank you.

I know, you're not gonna give us hard numbers, but can you at least sort of.

Somehow give us a sense of dynamics on toward the return number is it is it sort of increasing steadily order.

Something that's stabilizing just at a higher rate I'm, just trying to <unk>.

Jesse Timmermans: You know, it's 55% kind of the right level to be thinking about. Thank you. Yeah, yeah, maybe I'll start with the revolve, even though that was kind of a lesser impact this quarter. The year we are decline there is, you know, roughly split half and half between the full price to mark down shift. You know, we were slightly lower on full price this year, this quarter than last year's third quarter. Again, that's in a really healthy place, if you compare it to pre-COVID, but still relative to last year it is lower.

Get my handwriting.

Yeah, I'm sure there's a lot of moving parts every quarter and we certainly break it down a number of different ways. So I couldn't give you a conclusive answer on that but I see it directly as we interpret the data <unk>.

There was continued pressure in Q3 and it didn't.

Yeah.

He didn't look like a stabilization in Q3, you know now whether it was continued increasing kind of quarter over quarter rise is it's hard to say because there's too many moving parts quarter by quarter. It comes with a mixture of some other dynamics, but we haven't seen clear signs of stabilization.

Jesse Timmermans: And then owned brands is the other half of that year on your decline where owned brand mix was lower this year than was last year. A lot of opportunity there, but given the comments and the prepared remarks, you know, we are more cautious on that owned brand inventory in times when we're when we're pulling back and managing that inventory balance.

Okay, and it's something.

Caught in passing in the prepared remarks is there a dynamic and the model now where if your sales come in higher than you expect.

Jesse Timmermans: So that's all that we've all said in pure point, you know, more stable and kind of less risk there as we look into Q4 on the forward side. This is where, you know, year on year significant decline in margin and also sequentially, which was, you know, with the new surprises to aggressive, but, you know, we are working through the inventory. It is taking longer the macro pressures are adding to that and kind of extending the time for in there.

Earning to actually come in lower because they come with higher returns dynamic there was a play in this quarter did I misunderstand that.

No not necessarily I think that you know a lot depending on the mix and.

<unk> of course, but I would say yeah not directly a result of net sales coming in.

Jesse Timmermans: And then out on the promotional environment, we did move more aggressively into that mark down inventory in the mark downs were more significant than they were in Q2 and last year. So, you know, I think we're probably at or near the trough on forward, but, you know, we probably have another, another couple quarters of challenge there.

And in general.

Those are good for everything including Green. So obviously it depends on the dynamics were marketing expenditures higher where gross margins lower return retired, but but all things being equal.

<unk> is a good thing.

Okay, Great Ultimate.

Our next question comes from Simian seek all from BMO capital markets. Please go ahead. Your line is open.

Rick Patel: Our next question comes from Rick Patel from Raymond James. Please go ahead. Your line is open. Thank you. Good afternoon, guys. You, you touched on it, but I'm hoping you can expand on how you're planning inventory for the spring of 24. Sounds like you're seeing signs of encouragement for the revolve brand and the beauty category, but just hoping for more color there. And if there's any other areas of the business that are worth calling out from an inventory planning perspective.

Thanks, Hey, guys. Good afternoon, and I appreciate you, making your comments regarding Israel.

That's on top and the two and a half million how are you thinking about the active customer trajectory for the short and longer term opportunity from here are you seeing any meaningful spending pattern differences in the new customers first the existing and then just have any existing active customers breakdown between domestic and international thanks.

Rick Patel: Yeah, yeah, maybe starting starting with revolve to your point. We are further ahead on the inventory rebalancing and feel good about that inventory turns right up year on year. You know, so we're at the point now where, you know, we'll start to see by the increase year on year as we get into key one of 24 on the forward side. You know, as I mentioned, we've still got another quarter to rebalancing there.

Yeah, Yeah, let's see so you know I think new customers you know continue to grow on the new customer friend holding up on the active customer front that growth is compressing as we as we work through these quarters of the year on your girls for active customers is getting to be a little bit lighter in queue. For then it is in queue.

Three and over time, you know those two will get back to you can I call. It the old days after recycle out of all these comps where the net sales in the act of customer growth or plus or minus in the same zone.

Rick Patel: So the kind of lean in the inventory will be a couple quarters lagging, so we're probably not, you know, not looking, probably looking more at like mid year on the forward side. And then own brands is a longer tail. It takes longer to kind of recalibrate and spin that up. So, you know, I think as we approach the back half of next year seeing some some increases there. But as a percentage of the overall mix, you know, not factoring anything dramatic in for 2024 on the own brand mix, so different from what we're at today, and maybe just a touch on beauty as well, because we are really excited about the beauty. The brands that we've added in Q3 are really healthy roster. Michael mentioned this on the prepared remarks, really healthy roster of brands coming on in Q4 and into 2024.

And what we're seeing from the new customers you know nothing significant that that Pops out for my particular cohort of new customers. You know all cohorts are behaving relatively the same.

You do see differences in you know and we're shifting between full price and mark down in the <unk>.

The customer is new to us so we'll see how that plays out over the longterm, but as mentioned those customers are coming back at higher average order value. So you were optimistic about that.

And then I'd say you know no significant difference between the kinda retention patterns between domestic and international a lot of that is dependent on the localization efforts that we've made over the past several years. So that retention dynamic is much stronger given the free shipping for your return and the customer.

Unknown Executive: So I'm really excited about that.

Kunal Madhooker: Our next question comes from Kunal Madhooker from UBS. Please go ahead, your line is open. Hi, thanks for taking the question.

<unk> that we've optimized over the last few years.

Unknown Executive: One on active clients, that number still growing, can you talk about where that you're you're adding active clients, whether it is US international and any demographic that you could you could give us. And second on the efficiency on the marketing side, is that driven by lower price on a per ad basis, or is that driven by better targeting or better, you know, maybe channel mix. Thank you. Yeah, he can all on the first one an active customers by geography is skewed higher on a growth perspective, international versus domestic.

Okay, and then just how many of the customers are international and then if I can within a O V. Did you are could you know what aspie was versus units per order.

And I think that's an LTM number how would they will be or ISP for this quarter versus the prior year period. Thank you.

Yeah, Yeah, So I guess not breaking out you know specifically the international versus domestic active customers that roughly in the same zone as the as the domestic but keep in mind that four or sorry International ski is a little bit heavier forward. So it would be a little bit lighter on our customer versus revenue basis.

Unknown Executive: So, you know, roughly, you know, not in line, but similar similar dynamic to our overall sales growth, where you see international outpacing domestic within domestic, you see, you know, mark down growth outpacing the full price growth. But full price, you know, still very strong and, you know, call it, you know, Q3 plus almost three quarters of the new customers are coming from full price still. So a really healthy customer base. And then revolve forward again, you know, similar to the net sales dynamics where forward leg that have revolved similar on the new customer side.

On any O V.

N a S. T vs. Yukio there was a decrease in both of those both E. S. P. N U P. O U P. O was the biggest impact this corner on a year over year basis, and some of that was due to the shift in mixed towards beauty and specifically that take talk shop. There are a lot of single item orders, so that skewed the <unk>.

On top of that keeps me and last year, we had a really phenomenal yukio quarter.

So there's a little bit of a dynamic there in in a S. P. And this is all on the results that I can forward is plus or minus in the same zone on it'll be so F. T. On revolved was also down year on year and much of that was due to the shift in next to be any kind of strict D. D. L. E. S. T 's were up a healthy number outside of that duty.

Unknown Executive: Yeah, and then in terms of the marketing efficiency, you know, it's a combination of things, you know, we've been tweaking, you know, kind of the performance marketing budgets over the past few quarters, you know, run running, you know, kind of various tests and kind of adding to our ability to optimize the marketing. And I think it really we're kind of happy to that future or that process. So, you know, it's a little bit of that and then it's a little bit of timing in terms of brand market activities, which are more long-term outcomes of having impact with business. But, you know, overall, we, you know, everything is one of the bright spots of the quarter that we're able to have strong active customer growth with some more efficient marketing.

Category, so largely due to mix on both of those factors.

Our next question comes from Jim Daffy from Stifel. Please go ahead. Your line is open.

Hi, This is Peter Mcgoldrick on for Jim. Thanks for taking my question I wanted to ask on social marketing you offered some valuable insight on customer engagement through tictoc driving the playbook for our customers and beauty could you provide some sense of how important this channel is to driving platform discovery for new customers.

Emerges overall, perhaps size it against the magnitude of static posts on Instagram.

Danine Stickard: And next question comes from Danine Stickard from BTIG. Please go ahead. Your line is open. Hi. Good afternoon, everyone. I want to ask a bit more about returns and some of the initiatives you have to improve fit certainty. I think you talked about a few initiatives. Virtual try-on videos, product-spectives, but it seems like they're all in the kind of earlier stages of rollout. So, I just want to understand when we could see them rolled out more broadly.

Yeah overall longterm checking that take talk is you have a great platform with and of course, it's going platform screen will provide schooling opportunity.

Danine Stickard: And then on that, within selling and distribution expense, I think you're targeting 18.7% this year. And you've talked about getting to kind of the high 17 range, maybe even the low 17s longer term. Just any structural changes that thinking based on what you're seeing on return rates now. Thank you. Yeah, so just the return initiative. They are in the earlier stages. And in terms of broader rollout, it's got a couple things.

You know being you know a little bit more mature as you know of course very very important person. They were still very focused on but of course staying on top of you know where the puck is moving you know pay attention take dragon developments down a success. There is you know very very very quite encouraging you know as Mike mentioned on some of your questions and such that it is very dynamic and very early so we're quite excited with the early success you know it.

The early success and direct selling has succeeded mature success and is that gonna direct selling and being in the early early as the one that picked I guess is right. You know it can be massive you know very very massive bed at this point, it's up very early by the Super encouraging.

Danine Stickard: You know, one we need to see. Here's the significance on the impact that we're trying to make. And then two, you know, for a number of them. It depends on kind of which one, but a number of them require a lot of manpower to do well. You know, manpower that's that's well worth it, you know, compared to the cost savings, but you know, it'll take time to kind of ramp that up once we get sort of the full confirmation that these targeted efforts worked.

Thanks, and then I just had one follow up on Mexico. This market continues to show strong customer traction can you size. This business as an overall mix of international and offer some some sort of guide as to how big this could be or contribute to revenue looking ahead.

Danine Stickard: You know, then we have to roll out more broadly and make sure we have the right team to support. And then in terms of some distribution costs, you know, in kind of forecasts on those going forward, I turn it off with Jesse. Yeah, yeah, hi, Janine. Yeah, we got hit on a number of fronts on that selling and distribution in this quarter. The return rate was a big factor and that year of year increased the visa.

Yeah. So it's really I mean, one of our more important international markets. It's in our top five countries now in terms of size in so.

You know it was certainly a meaningful portion of the mix, but at the same time you know we we do sell worldwide. So you know it's not like it but it has some you know dominant share, but you know it's.

It's starting to get to a size, where it's a credit growth rates of it does have a meaningful impact on the overall growth of the international business.

Danine Stickard: Lower AOV also had a pretty significant impact there. And you know, those two pressures, we had some really great cost savings initiatives that started to take place and really have an impact in Q3, but not enough to offset those two factors. So if you look on a cost per order basis, the cost per order on selling and distribution was actually lower by, you know, 4% year on year. So some good early gains there, just not enough to offset the pressures that we saw this quarter.

You know, we're we're hopeful we can continue our efforts there and it'll you'll drive more and more so total growth is that market gets gets larger and larger.

Danine Stickard: So we factor that into our guidance for Q4 and taking a cautious stance there. But as we look ahead into 2024, we are optimistic. And you know, we're in the early stages of those efficiency and cost savings initiatives. So, you know, we are optimistic.

Okay.

Our next question comes from Koranda Roth and can I. Please go ahead. Your line is open.

Hey, guys just wanted to see if we get back up real quickly to the October trend that you mentioned the download single digits.

It just doesn't sound like a big deceleration despite all the concerns and the headwinds that your consumers facing so anything you can unpack too for us as to why that is holding up despite some of the aircraft incremental had when she's pacing and then just Jessie may be any monthly comp dynamics to call out for the fourth quarter as we think about bottling top line growth.

Jesse Timmermans: I think it's probably, you know, from the time you talk last quarter, the timeline has probably extended given some of the increased pressures that we've seen and return rate, you know, kind of at those elevated levels. Also on a sequential basis, we saw fuel pickup again. So it's kind of up 10% in sequence from just last quarter. We're still lower on year of year basis, but you know, some of those things just work in our favor. This quarter, but feel optimistic over the mid to long term on that that line item.

Yeah, I would agree that you know of course, we're not happy with you know I I think I've got a quarterback and you're looking at the Big picture you know it could be a lot worse I think it really kind of highlights the competitive landscape, where us being in you know a premium player. We're competing against you know the legacy players of decades ago, and we continue to do that quite well, especially in times of challenge.

And now we see you know <unk> you know you know very intense competition luxuries own you know with conglomerate. There's also see at the kind of mass market is dealing with the rise of seeing against you know the incumbents, we see how dare take over that business, but in the middle premium zone. We you know we are unique and we don't face any direct modest competitors. So I think that.

Alice Chow: Our next question comes from Alice, Alice Chow from Bank of America. Please go ahead. Your line is open. Hi. Thanks for taking my question. Where do you see beauty shake out as a percentage of sales longer term? You know, how quickly are you expanding that business, signing up new brands? What's the crossover for customers that purchase a parallel versus beauty now? How much lower is beauty AOV? What and what are long term margin implications? You know, you have a higher percentage of beauty longer term.

The long multi decades kind of us competing against Agassi players continues to you know be you know a longterm trend that you know ultimately drive continued success.

And then Jesse maybe on the.

Michael Mente: Just just more details on beauty would be helpful since it seems to be the one kind of category of bright spot. Yeah, this is the right spot, but definitely beauty is really really shining. Long term wise, you know, we look at kind of historic competitors, you know, whether it be in a previous generation, kind of like legacy players like the department stores, I got like an artist from her name is and things like that.

Oh, the monthly cost call ask that because that'd.

That'd be great. Yeah, Yeah, nothing you know significantly incremental mentioned on the call and that November and December are slightly tougher both on one year and a multiyear I'm trying to get 2019 basis. So we just wanted to call that out uhm. So you can factor that into the fourth quarter.

Michael Mente: And we try and like, you know, call it 15% you know some some some competitors receiving, you know, higher closer to 20. But ultimately in a mature state, we think the business should be something in that zone, so we have a long way to go. Of course, over the long term, we anticipate kind of a core bit our core parallel business to continue to grow. So we think that, you know, for dollars perspective, you know, you know, that 15 to 20% will hopefully get larger larger over time. So, you know, moving target. So quite excited about that. You know, of course, it's super obvious that customers are buying closer, go out. Of course, they're wearing make them beauty.

But yeah, nothing <unk> nothing more outside of that.

Okay got it and then just I was a little surprised to see you guys leaning into the marketing spend in the fourth quarter commentary despite somewhat of a week environment. So are we seeing an opportunity to play offense to for customer acquisition as our brand has been going on in the fourth quarter, just maybe help us understand sort of the incremental Molina in there.

Yeah, I would say, it's a longtime office at times like this you know, we always see that competition and kneeled appetite.

Jesse Timmermans: So, of course, that natural fits there on term wise, when we look at the economics, you know, just to tell you the best person to talk about the puts and takes a longer opportunity there. Yeah, yeah, sure. And maybe just to corroborate kind of something Michael mentioned 15% you know, plus or minus of our new customers came from beauty. So it shows the potential of that mix increasing over time and some of that overlap that we do experience.

A lot of.

Your intuition I think is is quite common and I think that's kind of you know how a lot of people vote situations, but I think <unk> is that going to be optimistic when people are conservative, especially when the core business withdrawn when especially when we have lunch at mindset. So we can see opportunities coming up and we will continue to the vet.

Jesse Timmermans: And then those beauty customers do come back and purchase that higher AOVs over time, you know, similar to our overall customer, but at a greater kind of increased AOV basis. So, you know, opportunity to continue the upsell across all those beauty customers. From a kind of an economic standpoint, so gross margin is lower on those beauty products, but you know other things to keep in mind as you work down through the contribution margin, the return rate is significantly lower.

We have time for one more question and it will come from Tom Nick from Wedbush Securities. Please go ahead. Your line is open.

Hey, guys. Thank thanks for squeeze me in.

Jesse I think obviously your you know your margins have come under pressure to the last couple of years.

Is there any way, we should or could think about what is recoverable and <unk> may be a structural relatives too I guess margins that we were seeing a coupla years ago.

Jesse Timmermans: So we're talking, you know, kind of mid single digit return rate versus, you know, our overall return rate is much higher than that. So, you know, we think it's a very healthy customer, it's a very healthy kind of a product category to have and balance out the mix there.

Yeah, Great question time.

I think a large portion of it is recoverable I think if you start at the gross margin level. You know we are coming off of an inventory rebalancing period, we're still being pressured by forward Yeah, There's something that Mike mentioned in his prepared remarks that you think is important in that you know my roughly in the same zone on gross margin for revolve now as we were.

Unknown Executive: Our next question comes from Ashley Owens from Keybank Capital Markets. Please go ahead, your line is open. Great, thanks for taking the question. This will be curious to hear comments on the inventory mix within Ford kind of as it stands today. Are there any categories that you feel are closer to being right sized and then inversely any that you're having a harder time clearing through that are creating some of those rebalancing lags? Thanks.

Three Q of 2019, despite the fact that one brand is half the mix that it was back then so I think that shows one the great success, we've made on both.

One brand and third party gross margin Standalone and then second the opportunity. We have looking ahead as we increase that one brand of Mick So that's number one and I would say largely recoverable and not just recover over the you know getting in excess of where we were in a pre pre COVID-19 level.

Unknown Executive: Yeah, so, you know, it's a whole we certainly have too much inventory. It is concentrated in brands that have more markdown restrictions that kind of prevent us from going through a normal kind of markdown cadence on the website itself. You know, and then from a category standpoint, it is concentrated in categories that tend to hold their value well, you know, things like handbags, shoes, accessories, logo products. So we feel good from that standpoint, but you know, it's certainly been a challenging situation and a bit frustrating that, you know, the inventory still isn't fully rebalanced, but, you know, the Jesse's earlier comments were hopeful in the coming quarter as well start to see that turn.

Uhm fulfillment you know we're at a point now where we're getting pressured by again the return rate. The a O V also capacity, where we extended our fulfillment footprint last year around this time, we haven't fully optimized fully grown into that so there is opportunity. There. So that is you know maybe not 100 per cent, but largely recovered.

Of all selling your distribution is tougher given the return rate pressure that we've experienced the increase in rates over the past several years feel in particular, so you know we do think there was a lot of opportunity there and we have a lot of initiative that play internally, we're already starting to see the savings there.

Dylan Cardin: Our next question comes from Dylan Cardin from William Blair. Please go ahead, your line is open. Thank you. I know you're not going to give a hard numbers, but can you at least sort of somehow give us sense of the dynamics on sort of the return number? Is it is it sort of increasing steadily in order that's something that's stabilizing just to the higher rate? Let's try to get my hand down.

You know that is I would say recoverable, but not to the extent of those other two.

If we can't get return rate you know right, Sir which you know I think there's a lot of opportunity. There uhm marketing is a number we can Paul you know I've been called out of recoverable are unrecoverable, that's kind of an opportunity you know and.

And I love her we can pull on an G&A is very.

Very recoverable and has a lot of leverage as we look ahead and get back into growth territory and and get some <unk>. There. So and if you look at that line item you know a couple of points over the last three years do you think that's achievable over the next few years as well.

Dylan Cardin: Yeah, I mean, there's a lot of moving parts every quarter and we certainly break it down a number of different ways. So I couldn't give you a conclusive answer on that, but I say directionally as we interpret the data, there was continued pressure in Q3 and it didn't, you know, you know, it didn't look like a stabilization in Q3. Now, whether it was continued increasing kind of quarter quarter rise is hard to say because there's too many moving parts quarter by quarter terms of mixed shifts and other dynamics, but, you know, we haven't seen clear signs of stabilization. Okay, and it's something caught in passing on the prepare march.

If that makes Jesse best of luck or severe.

Thanks.

This concludes today's Q&A assertion I would like to turn a call back over to management for closing remarks.

Hey, guys. Thanks for joining a spare another quarter excited who you'll continue stay focused in our team is working on a lot of exciting things is that is that they now so excited to share the positively setting results of the hard work that the foundation that we're living now thanks guys.

This concludes today's conference call. Thank you for your participation you may not disconnect.

Unknown Executive: Is there a dynamic in the model now where if your sales come in higher than you expect your earnings actually come in lower because they come with higher returns that dynamic, it was a play in this quarter, did I misunderstand that? No, not necessarily, I think, you know, a lot depending on the mix and, you know, AOVs of course, but I would say, yeah, not directly a result of net sales coming in.

Please wait the conference will begin shortly.

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Unknown Executive: I mean, in general, higher net sales are good for everything in clean range. Now, obviously, it depends on the dynamics, we're marketing expenditures higher, we're gross margins, though, and we're return rates higher, but, but all things be equal. More net sales is a good thing.

Simeon Siegel: Our next question comes from Simeon Siegel from BMO Capital Market. Please go ahead and line up. Thanks. Hey, guys. Good afternoon and I appreciate you making your comments regarding Israel.

Unknown Executive: So, perhaps on topping the two and a half million, how are you thinking about the active customer trajectory for the short and longer term opportunity from here? Are you seeing any meaningful spending pattern differences in the new customers first existing and then just have the existing act of customers break down between domestic and international? Thanks. Yeah, yeah, let's see. So, you know, I think new customers, you know, continue to grow on the new customer front and holding up on the active customer front.

Unknown Executive: That growth is, you know, compressing as we as we work through these quarters. So, the year on your growth for active customers is, you know, going to be a little bit lighter in Q4 than it is in Q3. And over time, you know, those two will get back to kind of call it the old days after we cycle out of all these counts, where the net sales and the active customer growth are plus or minus in the same zone.

Unknown Executive: And what we're seeing from the new customers, you know, nothing, you know, significant that that popped out from a particular cohort of new customers, you know, all cohorts are, you know, behaving relatively the same. You do see differences in, you know, and we're shifting between full price and markdown and, you know, the beauty customer is new to us. So, you know, we'll see how that plays out a bit long term, but as mentioned, those customers are coming back at higher average order values.

Unknown Executive: So, you were optimistic about that. And then I'd say, you know, no significant difference between the kind of retention patterns between domestic and international. A lot of that is dependent on the localization efforts that we've made over the past several years, so that retention dynamic is much stronger, given the free shipping, free returns and the customer experience that we've optimized a bit last few years.

Unknown Executive: Okay, and then just how many of the customers are international and then if I can within AOV, did you or could you know what ASP was versus units for order? And I think that's an LTM number. How is AOV or ASP for this quarter versus the prior periods? Thank you. Yeah, yeah, so I guess not breaking out, you know, specifically the international versus domestic active customers, but, you know, it's roughly in the same zone as the domestic, but keep in mind that forward or sorry international skis a little bit heavier forward.

Unknown Executive: So it would be a little bit lighter on a customer versus revenue basis. On AOV and ASP versus UPO, there was a decrease in both of those both ASP and UPO. UPO was the biggest impact is quarter on a year-rear basis. And some of that was due to the shift in mix towards beauty and specifically that TikTok shop, there are a lot of single item orders, so that skewed the UPO lower.

Unknown Executive: On top of that Q3 of last year, we had a really phenomenal UPO quarter. So there's a little bit of dynamic there in an ASP, and this is all on the revolts side, because forward is plus or minus in the same zone on AOV. So ASP on revolve was also down year on year. And much of that was due to the shift in mix to beauty, so you kind of strip beauty out ASPs were up a healthy number outside of that beauty category. So, you know, largely due to mix on both of those factors.

Peter Mcgoldrick: Our next question comes from Jim Duffy from Steeple. Please go ahead, your line is open. Hi, this is Peter McGoldrick on for Jim, thanks for taking a question. I wanted to ask on social marketing, you offered some valuable insight on customer engagement through TikTok, driving the playbook for customers and beauty. Can you provide some sense of how important this channel is to driving platform discovery for new customers overall, perhaps size it against the magnitude of static posts on Instagram?

Unknown Executive: Now overall, we've been talking about the long-term trend being that TikTok is doing the growing platform with, and of course with the growing platforms through, you know, provides growing opportunity, you know, Instagram, you know, being, you know, a little bit more mature is, you know, of course, very, very important for us. And then we're still very focused on, of course, staying on top of, you know, where the puck is moving, you know, pay attention to TikTok. I'm the development center. And the success there is, you know, very, very, very, quite encouraging, you know, as Mike mentioned on some earlier questions and such that it is, you know, very dynamic and very early.

Unknown Executive: So we're quite excited with the early success, you know, the early success in direct selling has succeeded mature success in Instagram direct selling and being in the early, early zone that, you know, if TikTok gets this right, you know, it could be massive, you know, very, very massive, but at this point, it's very early but super and hard.

Unknown Executive: Thanks. And then I just had a one follow up on Mexico. This market continues to show strong customer traction. Can you size this business as an overall mix of international and offer some sort of guide as to how big this could be or contribute to revenue looking ahead? Yeah, so it's really, I mean, one of our more important international markets, it's in our top five countries now in terms of size. And so, you know, it's certainly a meaningful portion of the mix, but at the same time, you know, we do sell worldwide.

Unknown Executive: So, you know, it's not like if it has some, you know, dominant share. But, you know, it's starting to get to a size where at the current growth rates, it does have a meaningful impact on the overall growth of international business. You know, we're hopeful we can continue our efforts there and it'll, you know, drive more and more total growth as that market gets larger and larger.

Unknown Executive: Thank you.

Matt Caranda: Our next question comes from Matt Caranda from Roth MKM. Please go ahead. Your line is open.

Unknown Executive: Hey guys, just want to see if we could back up real quickly to the October trend that you mentioned the download single digits. It just doesn't sound like a big disseleration despite all the concerns and the head ones that you're consumers facing. So anything you can unpack to for us as to why that's holding up despite some of the incremental incremental head when she's facing.

Unknown Executive: And then just Jesse, maybe any monthly comp dynamics to call out for the fourth quarter as we think about modeling top line growth. Yeah, you know, I would agree that, you know, of course, we're not happy with, you know, a negative growth quarter, but you're looking at the big picture. You know, it could be a lot worse. I think it really did kind of how I see competitive landscape where us being in, you know, a premium player.

Unknown Executive: We're competing against, you know, the legacy players of decades ago and we continue to do that quite well, you know, especially in times of challenge. You know, we see, you know, stiff, you know, you know, very intense competition in the luxury zone, you know, with the conglomerates and we also see at the kind of mass market zone with the rise of she and against, you know, the incumbents, we see how they're taking over that business.

Unknown Executive: But in, you know, the middle premium zone, we, you know, we are unique and we don't face any direct market competitors. So I think that the long multi decades trend of us competing against legacy players continues to, you know, be, you know, a long term trend. And that, you know, ultimately would drive continues success.

Jesse Timmermans: And then, Jesse, maybe on the... Oh, the monthly call-up, yeah, because that'd be great. Yeah, yeah, nothing, you know, significantly incremental to what we mentioned on the call in that. November and December are slightly tougher, both on a one-year and multi-year, comparing to 2019 basis, so we just wanted to call that out, so you could factor them into the full quarter. But yeah, nothing out, nothing more outside of that.

Unknown Executive: Okay, got it.

Unknown Executive: And then just, I was a little surprised to see you guys leaning into the marketing spend in the fourth quarter commentary, despite somewhat of a weak environment. So, are we seeing an opportunity to play offense to, for customer acquisition, is there brand spend going on in the fourth quarter, just maybe help us understand sort of the incremental lean in there? Yeah, I would say it's a long-term offense, you know, and in times like this, you know, we always see that, you know, competition and the appetite, you know, a lot of, you know, as your intuition, I think, is quite common, and I think that's kind of, you know, how a lot of people approach a situation, but I think it's kind of the same with people as adding the opportunistic when people are conservative, especially when the core business is strong, especially when we have a long-term mindset. So, we do see opportunities coming up and we'll continue to invest.

Tom Nikic: We have time for one more question, and it will come from Tom Nickyx from Lead Bush Securities. Please go ahead, your line is open. Hey guys, thanks for squeezing me in. Jesse, you know, I think obviously, you know, your margins have come under pressure the last couple of years. Is there any way we should or could think about what is recoverable and what may be structural relative to, you know, I guess margins that we were seeing a couple of years ago?

Tom Nikic: Yeah, great question, Tom. You know, I think a large portion of it is recoverable. I think if you start at the growth margin level, you know, we are coming off of an inventory re-balancing period. We're still being pressured by forward. You know, something that Mike mentioned in his prepared remarks that I think is important in that, you know, we're roughly in the same zone on growth margin for re-volve now as we were in 3Q of 2019.

Tom Nikic: Despite the fact that owned brands is half the mix that it was back then. So, I think that shows one, the great success we've made on both owned brands and third party growth margin stand alone. And then second, the opportunity we have looking ahead as we increase that owned brand mix. So, that's number one, and I would say largely recoverable and not just recoverable, but, you know, getting an excess of where we were in a pre-COVID level.

Tom Nikic: We'll film it. You know, we're at a point now where we're getting pressured by, again, the return raised the AOV, also capacity where we extended our fulfillment footprint, you know, last year around this time, we haven't fully optimized, fully grown into that. So, there is opportunity there. So, that is, you know, maybe not 100%, but largely recoverable. Selling a distribution is tougher given the return rate pressure that we've experienced, the increase in rates over the past several years, fuel in particular.

Tom Nikic: So, you know, we do think there is a lot of opportunity there. And we have a lot of initiatives that play internally. We're already starting to see the savings there. But, you know, that is, I would say, recoverable, but not to the extent of those other two. If we can't get return rates, you know, rates are, which, you know, we think there's a lot of opportunity there. Marketing is a lever we can pull.

Tom Nikic: You know, if I've been called out a recoverable or unrecoverable, that's kind of an opportunity. You know, and a lever we can pull, and then GNA is very recoverable, and has a lot of leverage as we look ahead and get back into growth territory and get some scale leverage there. So, and if you look at that line, you know, a couple points over the last three years, we think that's achievable over the next few years as well. [inaudible] Thanks, Jesse. Best of luck to us here. Thanks. Thank you.

Unknown Executive: This concludes today's Q&A session. I would like to turn the call back over to management for closing remarks. Hey, guys, thanks for joining us for another quarter. I'm excited to continue to stay focused. Our team is working on a lot of exciting things as they know. So excited to share the positive exciting results of the hard work and the foundation that we're laying out. Thanks, guys.

Unknown Executive: This concludes today's conference call. Thank you for your participation. You may now disconnect. Please wait.

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