💙 🔷 Not impressed by Big Tech in Q3? Explore these Blue Chip Bargains insteadExplore for free

Earnings call: Revolve Group sees robust growth and strategic acquisitions

EditorNatashya Angelica
Published 2024-08-07, 07:02 a/m
© Reuters.
RVLV
-

Revolve Group Inc. (NYSE:RVLV) reported a strong performance in the second quarter of 2024, as net sales increased by 3% year-over-year (YoY) to $282 million. The company's net income saw a significant rise, more than doubling YoY to $15 million.

Adjusted EBITDA also soared, with a 97% increase YoY to $20 million. These financial gains came alongside strategic moves to expand the company's market share and long-term growth, including an 80% stake acquisition in luxury brand Alexandre Vauthier and partnerships with luxury e-commerce retailer Matches Fashion and Nike (NYSE:NKE).

Key Takeaways

  • Net sales grew by 3% YoY to $282 million, with net income more than doubling to $15 million.
  • Adjusted EBITDA increased by 97% YoY to $20 million.
  • Strategic acquisition of an 80% stake in luxury brand Alexandre Vauthier.
  • Expanded international presence, particularly in China, and strong marketing results despite reduced spending.
  • Active customer growth reaccelerated, tripling compared to the first quarter.
  • Strong balance sheet with $245 million in cash and cash equivalents and no debt.
  • Positive net sales growth expected to continue into the third quarter.

Company Outlook

  • Revolve anticipates ongoing positive net sales growth in the third quarter, with gross margin expected to be between 52.3% and 52.5%.
  • Fulfillment costs are projected to be about 3.4% of net sales, selling and distribution costs around 18.3%, and marketing investment between 15.3% and 15.5%.
  • General and administrative expenses are expected to increase due to the acquisition and key investments, with an effective tax rate of 24% to 26% for the third quarter and 25% to 26% for the full year.

Bearish Highlights

  • A decrease in cash and cash equivalents from the previous year due to stock repurchases exceeding $40 million.
  • General and administrative expenses are anticipated to rise due to investments and recent acquisition.

Bullish Highlights

  • Strong international growth, especially in Mexico and China.
  • Significant increase in active customers and efficient logistics leading to cost savings.
  • Positive impact from changes in return policy without consumer pushback.

Misses

  • No specific details provided on inventory categories or the July trend in spending.

Q&A Highlights

  • No specific target for expanding owned brands, but internal metrics per style are improving.
  • Year-over-year inventory increase expected for the third quarter, with a positive outlook on inventory health.
  • Management expressed confidence in the company's progress and future opportunities.

Revolve Group's second-quarter performance demonstrated a solid trajectory for growth, with a particular focus on expanding its luxury brand portfolio and international market presence. The company's financial health remains robust, with a strong balance sheet and strategic investments aimed at long-term success.

With the upcoming relaunch of Alexandre Vauthier and continued innovation in AI and marketing strategies, Revolve Group is positioning itself to capitalize on future growth opportunities.

InvestingPro Insights

Revolve Group Inc. (RVLV) has demonstrated a robust financial performance in Q2 2024, highlighted by a notable increase in net income and a strong surge in adjusted EBITDA. Delving deeper into the company's financial health and market performance with real-time data from InvestingPro, we can observe additional insights that may influence investor perception and decision-making.

InvestingPro Data points out that Revolve holds a market capitalization of $1.24 billion, with a Price to Earnings (P/E) ratio of 51.95, indicating a premium market valuation as of Q2 2024. The company's revenue for the last twelve months stands at $1.068 billion, with a gross profit margin of 52.54%, aligning closely with the gross margin expectations set by the company for the third quarter.

An InvestingPro Tip highlights that Revolve's stock price has experienced significant volatility, with a 9.2% decrease over the last week, yet it has achieved a strong return over the last month with a 14.24% increase. This volatility reflects the market's reactive nature to both the company's performance and broader economic factors.

Despite the stock's recent price movements, Revolve's balance sheet strength is underscored by the fact that it holds more cash than debt, as noted in another InvestingPro Tip. This positions the company well to navigate market fluctuations and invest in strategic growth initiatives.

InvestingPro also offers additional tips for Revolve Group, which can be accessed for further detailed analysis and investment consideration. Currently, there are 10 more InvestingPro Tips available for Revolve Group, which can provide investors with a more comprehensive understanding of the company's financial nuances and market potential.

These insights and data points serve to enrich the overall perspective on Revolve Group's current standing and future outlook, offering valuable context for investors monitoring the company's trajectory.

Full transcript - Revolve Group LLC (RVLV) Q2 2024:

Operator: Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to Revolve's Second Quarter 2024 Results Conference Call. [Operator Instructions] At this time, I'd like to turn the conference over to Erik Randerson, Vice President of Investor Relations at Revolve. Thank you. You may begin.

Erik Randerson: Good afternoon, everyone, and thanks for joining us to discuss Revolve's second quarter 2024 results. Before we begin, I'd like to mention that we have posted a presentation containing Q2 financial highlights to our Investor Relations website located at investors.revolve.com. I would also like to remind you that this conference call will include forward-looking statements, including statements related to our future growth, our inventory balance, our key priorities and operating initiatives, industry trends, our marketing events and impact, our partnerships and strategic acquisitions, our physical retail stores, and our outlook for net sales, gross margin, operating expenses and effective tax rate. These statements are subject to various risks, uncertainties and assumptions that could cause our actual results to differ materially from these statements, including the risks mentioned in this afternoon's press release as well as other risks and uncertainties disclosed under the caption Risk Factors and elsewhere in our filings with the Securities and Exchange Commission, including, without limitation, our annual report on Form 10-K for the year ended December 31, 2023 and our subsequent quarterly reports on Form 10-Q, all of which can be found on our website at investors.revolve.com. We undertake no obligation to revise or update any forward-looking statements or information except as required by law. During our call today, we'll also reference certain non-GAAP financial information, including adjusted EBITDA and free cash flow. We use non-GAAP measures in some of our financial discussions as we believe they provide valuable insights on our operational performance and underlying operating results. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP, and our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliations of non-GAAP measures to the most directly comparable GAAP measures as well as the definitions of each measure, their limitations and the rationale for using them can be found in this afternoon's press release and in our SEC filings. Joining me on the call today are our Co-Founders and Co-CEOs, Mike Karanikolas and Michael Mente; as well as Jesse Timmermans, our CFO. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn it over to Mike.

Mike Karanikolas: Hello, everyone, and thanks for joining us today. We delivered a strong second quarter, highlighted by a return to top line growth, net income more than doubling year-over-year, and nearly 350 basis point increase in our adjusted EBITDA margin year-over-year. Contributing to the significant growth in profitability was meaningfully better-than-expected marketing efficiency as well as increased logistics efficiencies that also outperformed our guidance, helped by improving trends in our return rate as many of our return-rate initiatives began to take hold late in the second quarter. Most importantly, we achieved these strong results while continuing to invest in initiatives to drive profitable growth and market share gains over the long term. With that introduction, let me step back and provide a brief recap of the second quarter. Net sales were $282 million, an increase of 3% year-over-year that was driven by improved year-over-year trends in both segments relative to our comparisons in the first quarter of 2024. Net sales in the REVOLVE segment increased 4% year-over-year, our best performance in 6 quarters. This was partially offset by a 4% decline in FWRD segment net sales, an improvement of 10 points from FWRD's year-over-year comparison in the first quarter of 2024. While we continue to see headwinds in a dynamic luxury environment where FWRD competes, as one of the financially strongest operators of a multi-brand luxury e-commerce platform, we are actively pursuing opportunities to capitalize on the current environment by investing in strategies to gain market share. Along these lines, Michael will talk about our acquisition of a majority interest in the revered luxury brand and longtime brand partner of FWRD, Alexandre Vauthier. Net income for the second quarter was $15 million or $0.21 per diluted share, an increase of 111% year-over-year. Adjusted EBITDA was $20 million, an increase of 97% year-over-year, driven by a nearly 350 basis point expansion of our adjusted EBITDA margin. Beyond the numbers, I'm excited by our team's execution that has led to continued great progress on the strategic priorities we have outlined on prior calls. I will discuss some of the key highlights since our update last quarter. First, I am pleased to report that we delivered even greater efficiencies in our logistics costs year-over-year than last quarter, contributing to our exceptional growth and profitability in the second quarter. Expressed as a percentage of net sales, selling and distribution expense decreased approximately 70 basis points year-over-year, and fulfillment expense decreased 15 basis points year-over-year. It was our first year-over-year decrease in fulfillment costs as a percentage of net sales in 2.5 years. I would like to acknowledge great execution by our operations team for driving these efficiencies in the U.S. and international markets. Shifting to the outlook for driving future efficiency gains. I'm thrilled to report that we are beginning to see early tangible benefits from the initiatives outlined on recent calls designed to reduce our return rates. As a proof point, our return rate declined year-over-year in the second quarter, representing the first year-over-year decline for any quarter in more than 3 years. The financial benefits of potentially reducing our return rate in the future are compelling, considering that for every 1-point decrease in our return rate, we'd expect to realize cost savings of approximately 30 to 50 basis points in reduced selling and distribution and fulfillment costs. Importantly, many of our efforts to reduce the return rate further elevate the customer experience, including by providing improved size guidance and leveraging technology and data for more personalized merchandising of products less likely to be returned. Second, we delivered strong results in expanding our international presence in the second quarter as net sales from international markets increased 13% year-over-year. Net sales increased across nearly all major regions, including China, where outstanding growth during the important 618 shopping festival in China led Revolve to be recognized as the second largest seller of fashion merchandise on Tmall Global. The 618 Festival is the second biggest event of the year in China for driving online sales, trailing only Singles Day in November. I'm also excited that we have recently launched a branded retail presence on the Douyin and RED e-commerce marketplaces that serve more than 750 million monthly active users on a combined basis. These incredibly popular platforms serve a young Gen Z demographic that skews female, a highly relevant audience for our fashion, beauty and lifestyle offerings. Third, we remain committed to efficiently investing to expand our brand awareness, growing our customer base and further strengthening our connection with the next-generation consumer. Our team delivered outstanding results in the second quarter across brand and performance marketing channels, leveraging the strength of our brands. For instance, the second quarter was our most efficient quarter for performance marketing investments in nearly 4 years based on our performance marketing investment calculated as a percentage of net sales. Michael will talk about important wins and brand marketing efficiency measures that are also a key contributor to the increased marketing efficiency reflected in our updated 2024 guidance for marketing investments. And lastly, we continue to leverage AI technology to drive growth and efficiency while further elevating the customer experience. A perfect example is our recent development and successful launch into production of an internally developed AI search algorithm on our FWRD site. For years, consumers have searched for products on our sites through a third-party search platform. With the emergence of AI and as part of our data-driven mindset, I challenged our team to develop and test our own AI search capabilities and test it against the incumbent retail search platform developed by a very large third-party technology company. It is incredibly impressive that our internal team of data scientists developed a solution that outperforms the third-party search technology, driving higher revenue per search and at a much lower operating cost. With this success, our internally developed AI search algorithm is now live on FWRD, and we are currently A/B testing the algorithm on our Revolve site with promising early results. To wrap up, we still have work to do, yet I feel great about the important progress we have made in the first half of the year. We began the third quarter of 2024 with solidly positive year-over-year growth in net sales for the month of July 2024, and there is momentum building across key growth and efficiency initiatives that we believe may further improve our foundation for profitable growth in the years to come. Now over to Michael.

Michael Mente: Thanks, Mike, and hello, everyone. I'm excited by the great progress we have made on our key priorities, especially the meaningful increased efficiency of our marketing investments year-over-year as we invest to build our brands and further strengthen our connection with the next-generation consumer. Our newly reimagined REVOLVE Festival in April set the tone for the second quarter by exceeding our expectations and generating a much greater impact on our key metrics within the 1-day format in 2024 than we had achieved over the entire weekend for last year's event. But we didn't stop there. We had an incredibly active and efficient second quarter for brand building, hosting a passel of events at Stagecoach Festival, the Formula One Grand Prix in Miami, the Met Gala in New York and at our retail store in Aspen, as well as in international locations, such as Mexico, Jamaica, St. Tropez and Sicily. Particularly exciting was a REVOLVE and FWRD Met Gala active party with rap brand fashionista Cardi B that generated nearly 3 billion press impressions in top publications, including Vogue, Elle, W Magazine, The New York Times, MSN, E! News and People. At the center of all the press attention was Cardi B's incredible dress at the afterparty that was custom-designed for her by our own brand team. Rave reviews in the press and on social media included Page 6 of the New York Post (NYSE:POST) calling Cardi B's dress, a red-hot atelier REVOLVE number. Most exciting, in Cosmopolitan's ranking of the best Met Gala afterparty looks, Cardi B and our REVOLVE atelier dress ranked #1, at the very top of the list. Most impressive is that we were much more active in the second quarter of 2024 and delivered significantly increased marketing impact while spending millions of dollars less year-over-year. In fact, for the second quarter, year-over-year growth in our press and social media impressions accelerated meaningfully, even though we spent $7.5 million less in brand marketing than in the second quarter of 2023. Our impactful marketing efforts in the second quarter also helped to drive a reacceleration of active customer growth. Trailing 12-month active customers' increase by 26,000 during the second quarter was a tripled increase in active customers in the first quarter of 2024. Let's shift gears and talk about our recent acquisition of Alexandre Vauthier announced in June. We view the luxury industry challenges as an exciting opportunity to go on offense and invest in market share capture, supported by our consistent profitability and cash flow generation that sets us apart in fashion e-commerce. So we have had our eye out for opportunities, and we took on an exciting transaction late in the second quarter with the acquisition of an 80% ownership stake in Alexandre Vauthier, an iconic luxury fashion idol that we have sold them for, for many years. Alexandre himself retains the other 20% ownership of the business and is equally excited to expand the partnership with the Revolve Group. Our team pursued a complex transaction in the depths of French bankruptcy courts, locking a compelling opportunity to acquire the Alexandre Vauthier business for a commitment to invest EUR 6 million over the next 3 years. I will share just a few reasons why the entire Alexandre Vauthier team are so excited about the combination. Alexandre Vauthier is 1 of only 15 haute couture brands in the world, with recognition that is incredibly important to luxury customers. To provide some context, the term haute couture is legally protected and can only be used by brands approved by the Federation of Haute Couture and Fashion, including Chanel, Christian Dior, Givenchy and Alexandre Vauthier. We expect REVOLVE and FWRD to benefit from the association with the revered luxury brand while giving us a direct line into the French fashion ecosystem to approximately 30 Alexandre Vauthier employees that are based in Paris. The brand marking impact that Revolve can deliver is an ideal complement to the Alexandre Vauthier brand that has just an incredible range of A-listers on red carpets, including Kendall Jenner, Rihanna, Beyonce, Taylor Swift, Selena Gomez, Katy Perry and Brigitte Macron, the First Lady of France. In close partnership with Alexandre, we intend to relaunch the Vauthier brand with a reimagined new collection in the fall, followed by a fashion show during Paris Couture Week in January 2025. Also compelling are the expected synergies from our e-commerce experience, data-driven merchandise experience and operational excellence to help grow the Alexandre Vauthier direct-to-consumer business, which has historically been very small. Our creative teams are already working hard in designing a new Alexandre Vauthier e-commerce site. With the Vauthier brand coming off a period of underinvestment, in the near term, we will understand what we need to invest ahead of the financial benefits we expect to realize in future years. In summary, there is a whole lot of work to do, yet we see a ton of opportunity to grow the brand on our platform through wholesale and other distribution channels in the years to come. We have also increased our organic investment in our luxury business. Capitalizing on the availability of outstanding talent, we have made a variety of strategic investments at FWRD that we believe can advance our pursuit of the vast number of effectively abandoned luxury customers that are up for grabs with all the recent industry disruption. As a case in point, 2 weeks ago, luxury e-commerce retailer Matches Fashion was shut down entirely, a business that in 2022 reportedly generated $460 million in revenue. Also important, the recent industry malaise has reinforced to brands that FWRD is an attractive partner due to our product curation, distinct styling point of view and incredible brand marketing engine that has attracted young luxury customers. I am pleased to share that Nike has recently committed to sell their full range of products on FWRD for the first time, building on Nike's success and long-standing partnership signed with Revolve. Now I will conclude with an update on our evaluation of the physical retail opportunity. I am excited to share that our key performance metrics, such as traffic, sales and customer engagement on our first permanent retail store in Aspen, continues to be encouraging. Summer has been a great selling season, further illustrating our potential of this new market opportunity. Our view, our early momentum in physical retail is impressive considering that we are still learning a great deal in the early stages of our retail journey. Mike and I have always believed that when a part of the business is performing as strongly as Aspen has so far, we want to invest into that opportunity in a much bigger way. Exploring retail expansion is especially fitting considering that most apparel sales still happen in physical stores. At the same time, we recognize that physical retail is a new and adjacent market opportunity for us that we haven't fully mastered. We have built an incredible brand that we believe can translate to physical retail. But before we move to quickly and to truly assess the long-term core potential, we need to first validate we can replicate the success in Aspen in other locations. To guide us through the next phase of our journey in testing physical retail beyond Aspen, we have engaged one of the most accomplished retail advisory firms in the market. Our partner has played a key role in retail expansion of some of the world's most respected consumer brands, including Apple (NASDAQ:AAPL), lululemon (NASDAQ:LULU), Abercrombie & Fitch and Restoration Hardware (NYSE:RH). Their deep industry experience will help us navigate critical decisions on evaluation of potential markets, retail site selection, negotiation, architecture and store design. We are very excited to further explore and test launch of opportunity in physical retail. We should have an update on what comes next at our third quarter conference call in early November. To summarize, it feels great to see our team's hard work on growth and efficiency initiatives deliver results on the top and bottom line. With our powerful brands we have invested for more than 20 years, operational excellence and strong financial position, especially compared to our fashion e-commerce peers, we believe we are well positioned to pursue profitable growth and market share gains. Now I'll turn it over to Jesse for a discussion of the financials.

Jesse Timmermans: Thanks, Michael, and hello, everyone. I am very pleased with our second quarter, both from a financial standpoint and even more so by the progress made by the team on our operational initiatives that gives me increased confidence in our financial outlook moving forward. I will start by recapping our second quarter results and then close with updates on recent trends in the business and our outlook for gross margin and cost structure for the balance of the year. Starting with the second quarter results. Net sales were $282 million, a year-over-year increase of 3%. The REVOLVE segment net sales increased 4%, and FWRD segment net sales decreased 4% year-over-year. In terms of geography, both territories returned to year-over-year growth in the second quarter. Domestic net sales increased 1% year-over-year, and international net sales increased 13% year-over-year. Active customers, which is a trailing 12-month measure, grew to 2.6 million, an increase of 5% year-over-year. Total orders placed were $2.3 million, flat with the prior year. Average order value, or AOV, increased 2% year-over-year to $306, benefiting from the higher mix of net sales at full price year-over-year. Another contributor to the improved year-over-year net sales growth was that our return rate decreased year-over-year in the second quarter, as the many initiatives designed to reduce our return rate in customer-friendly ways have begun to deliver visible results. Consolidated gross margin was 54%, an increase of 7 basis points year-over-year, driven by a year-over-year increase in our higher-margin REVOLVE segment. Let's move on to operating expenses, which was a true highlight that drove our meaningful operating leverage in the second quarter. Of note, we delivered better-than-expected operating expense efficiency across each of the 4 line items that we guide to each quarter. Fulfillment costs were 3.3% of net sales, around 10 basis points more favorable than our guidance, and a decrease of 15 basis points year-over-year. Selling and distribution costs were 17.9% of net sales, also better than expected by approximately 10 basis points and lower by 73 basis points year-over-year. This year-over-year decrease reflects the continued great work by our teams to drive efficiency in our logistics costs while also benefiting from the slight decrease in our return rate year-over-year. The biggest source of outperformance in the second quarter versus our guidance was marketing, which came in at 15.2% of net sales, significantly below our guidance of 17% of net sales. This represents a 360 basis point decrease year-over-year compared to our marketing investment of 18.8% of net sales in the second quarter of 2023. General and administrative costs were $33.5 million, around $500,000 lower than our outlook, which reflects a year-over-year increase that continued to outpace our net sales growth as we continue to invest in initiatives that support our long-term growth opportunities. Our tax rate was 26% in the second quarter, up slightly from 25% in the prior year and within our expected range. The increased net sales and gross profit year-over-year, the meaningfully improved marketing efficiency and the outstanding progress driving efficiencies in our logistics costs helped us drive impressive growth on the bottom line. Net income was $15 million or $0.21 per diluted share, an increase of 111% year-over-year. Adjusted EBITDA was $20 million, an increase of 97% year-over-year. Moving on to the balance sheet and cash flow statements. Net cash used by operating activities was $25 million, and free cash flow was negative $27 million in the second quarter, primarily due to unfavorable working capital movements that more than offset the increased net income. For the 6-month year-to-date period in 2024, we generated positive operating and free cash flow, although lower year-over-year, primarily reflecting an increase in inventory investments to support a return to top line growth compared to a declining inventory balance in the first half of 2023 when we were very focused on rebalancing our inventory position. Inventory at June 30, 2024 was $234 million, an increase of 14% year-over-year. As of June 30, 2024, our balance sheet remained in a very strong position, with cash and cash equivalents of $245 million and no debt. The decrease in cash and cash equivalents year-over-year compared to June 30, 2023 primarily reflects positive cash flow from operations that was more than offset by our stock repurchases, exceeding $40 million in the last 4 quarters. Our strong financial position enabled us to execute on our capital allocation strategy in an effort to enhance shareholder value through: one, investing in the business to support the long-term growth opportunity ahead of us; two, opportunistically pursuing strategic M&A and partnerships; and three, returning capital through our stock repurchase program, where we repurchased approximately 119,000 Class A common shares at an average price of $15.83 during the quarter. Approximately $60 million remained under our $100 million stock repurchase program as of June 30, 2024. Now let me update you on some recent trends in the business since the second quarter ended and provide some direction on our cost structure to help in your modeling of the business for the third quarter and full year 2024. Starting from the top. Our return to positive year-over-year net sales growth has continued into the third quarter, with net sales in July 2024 increasing by a mid-single-digit percentage year-over-year, a sequential improvement compared to the year-over-year trends we reported for the second quarter of 2024. Shifting to gross margin. We expect gross margin in the third quarter of 2024 of between 52.3% and 52.5%, which implies an increase of approximately 70 basis points year-over-year at the midpoint of the range. For the full year 2024, we continue to expect gross margin to be between 52.5% and 53%. Fulfillment. We expect fulfillment as a percentage of net sales of approximately 3.4% for the third quarter of 2024, a decrease of approximately 20 basis points from the fulfillment efficiency ratio in the third quarter of 2023. For the full year 2024, we continue to expect fulfillment costs of between 3.3% and 3.5% of net sales. Selling and distribution. We expect selling and distribution costs as a percentage of net sales of approximately 18.3% for the third quarter of 2024, which implies a year-over-year improvement of approximately 70 basis points. For the full year 2024, we continue to expect selling and distribution costs to improve to a range of between 17.8% and 18% of net sales. I also want to note that our outlook for fulfillment costs and selling and distribution costs continues to assume a return rate that is flat year-over-year for the full year 2024, consistent with our expectation at the beginning of the year. We are optimistic that our great progress in the second quarter of 2024 in reducing the return rate year-over-year will continue, and the team is working hard to achieve it. However, since the improved return rate happened late in the second quarter, as encouraged as we are, I am not yet comfortable factoring in a lower return rate into our financial outlook until we can prove it out for a longer period. Marketing. We believe our strategies to drive impactful marketing campaigns at an increased level of efficiency will continue. We expect our marketing investment in the third quarter of 2024 to be approximately 15.2% of net sales, a decrease of approximately 20 basis points year-over-year. For the full year 2024, we now expect our marketing investment to represent between 15.3% and 15.5% of net sales, which is a decrease of 70 basis points from our prior full year 2024 guidance range for marketing investments. General and administrative. Offsetting some of the increased marketing efficiencies is our expectation for higher G&A costs than our prior full year guidance. We expect G&A expense of approximately $35.5 million in the third quarter. For modeling purposes, remember that our G&A expense in the third quarter of 2023 a year ago included a nonroutine accrual of $6.6 million for a then pending legal matter that we do not expect to reoccur this year. For the full year 2024, we now expect G&A expense of between $135 million to $138 million, which at the midpoint is an increase of $3.5 million from the high end of our prior G&A guidance range that we guided to on last quarter's earnings call. The majority of the G&A increase from our prior outlook is related to the Alexandre Vauthier acquisition completed late in the second quarter, including around 30 employees based in Paris and our investment to relaunch the Alexandre Vauthier brand and D2C website in the coming months. The remainder of the increase in our G&A outlook for the full year 2024 relates to increased investment in certain key areas where we see timely opportunities to invest today to even further increase our competitive position and drive future results, such as the forward investments that Michael discussed, and continued investment in AI technology, where we have already delivered meaningful growth and efficiency gains throughout the company. And lastly, we expect our effective tax rate to be around 24% to 26% in the third quarter and 25% to 26% for the full year 2024. To recap, I am very encouraged by our second quarter results, highlighted by the return to top line growth, operating discipline that drove a more than doubling of net income year-over-year, and driving the first year-over-year decrease in our return rate in more than 3 years. Now we'll open it up for your questions.

Operator: [Operator Instructions] Your first question today comes from the line of Rick Patel with Raymond James.

Rick Patel: Congrats on the great progress. I was hoping to get some additional color on second quarter results by month. And also, any additional color you can add to quarter-to-date trends as you think about the REVOLVE platform versus FWRD? And I'm curious if the KPIs that drove the second quarter results are the same ones that you're seeing drive a modest acceleration through July.

Jesse Timmermans: Yes. Thanks, Rick, and thanks for joining. This is Jesse. On the intra-quarter trends for Q2, if you remember last quarter, we said we were up in the low single-digit range through April, and we closed that plus 3. So I think, relatively consistent throughout the quarter with maybe a slight improvement as we progressed through the quarter, and then that continued into July. And then if you look at July, I'd say largely the same trend in July as you saw in Q2 with REVOLVE and international outperforming the domestic and FWRD businesses. But overall, really healthy and good progress, again, as we move through the quarter and then into July, and similar KPIs as well.

Rick Patel: Great. And on the return rate, it sounds like you're not baking in the progress that you saw late in the second quarter for the rest of the year. Does this reflect conservatism until you see a little bit more traction? Or is there something about maybe the seasonality of the business where returns usually tick up around holiday or certain other peak periods that would give you pause in incorporating that into updated guidance?

Jesse Timmermans: Yes. I think I wouldn't necessarily say that it bakes in conservatism. I think it trended well, but in the back half of the quarter, so we don't want to get too excited yet. There's great progress, but we want to see a little more traction before we bake that in. And I think we talked about the year-over-year decrease in return rate, but I think even more importantly is there is seasonality with return rate from Q1 to Q2. Q2 is certainly our highest return rate quarter of the year. And we saw Q1 to Q2 being flat. So just another data point to support that return rate in the second quarter.

Operator: Your next question comes from the line of Michael Binetti with Evercore.

Jesalyn Wong: This is Jesalyn Wong on behalf of Michael Binetti. Just a little bit on the marketing costs. We lowered the full year guidance even though second quarter came in lower. And I know we alluded to higher efficiencies in the marketing. Should we be seeing this coming on efficiencies kind of flow through in the out-years? And then the other question would be on the active customers trend. How should we think about that heading into the second half of the year?

Jesse Timmermans: Yes. This is Jesse again. On the marketing, yes, we had a great quarter in terms of efficiency, and it's both on the brand marketing side, as Michael mentioned, investing $7.5 million less in REVOLVE Festival than we did last year and getting even better results. So that was the big driver in Q2, and we're continuing to see that efficiency on the brand marketing side in the back half of Q2 and into the back half of the year. But also important to note is that we did see efficiency on the performance marketing side as well. So that's what we baked into our guidance. If you look into the out-years, we'll continue to be opportunistic when it comes to marketing and kind of read the landscape. So not commenting too much more beyond that, but really happy with the efficiency this quarter. And then on active customers, it's great to see that active customer number holding at plus 5% and an incremental increase in the active customer count. As we have communicated on prior calls, we expected that growth rate to come down and approximate the net sales growth rate over time as we lap some of those higher customer growth periods of last year. So I think we'll continue to expect to see similar as we go into the back half of the year, but not a significant increase to that growth rate until we lap out of that Q1 2023 heavy markdown period that we were in that drove a lot of new customers. And I think on that customer point, also important to note that the growth came from full-price customers, which are very healthy customers, partially offset by lower-markdown customers, again, as we comp that Q1 2023 period.

Operator: Your next question comes from the line of Dylan Carden with William Blair.

Dylan Carden: Just curious, any update on beauty, men's attachment rates or sort of how the business has been trending? And any help you can give on, I know it's early days, sort of timing of the retail strategy? I guess you just engaged the consultants, but is that, in your mind, something like a 2025 rollout? Or anything there would be helpful as well.

Jesse Timmermans: Yes, I'll start with the beauty and men's. Seeing great progress on both of those areas of the business, as we commented, a 25% growth on beauty, men's growing nicely as well. We're also seeing really great growth in the home product category, very small, but still really healthy growth there. So good progress. The team continues to execute, add new and exciting brands, especially on the beauty front. And then timing of retail, I think we mentioned on the prepared remarks, we have engaged the consultants. We are actively, I guess, pursuing, investigating, learning. But we want to caution that we are moving very, very pragmatically, learning as we go, and we'll have an update in our next quarterly call.

Dylan Carden: And I know you're probably not going to answer this one, but the brand strategy is sort of acquiring the acquisition that you made. I know you're being opportunistic, but is that something that if you kind of see those opportunities arose, you wouldn't balk at because maybe form some sort of stable of brands there?

Michael Mente: Yes. [Indiscernible] in the marketplace has really provided some unique opportunities here. We think that forever in our zone to our customer, strong design talent, unique design talent and brands that are aligning with that kind of our overall kind of brand ethos is important. So we're excited to come across this. And if we're able to come across other opportunities with similar-type profile and metrics, we wouldn't hesitate to pursue more.

Operator: Your next question comes from the line of Mark Altschwager with Baird.

Mark Altschwager: I also wanted to follow up on the marketing. Significant upside to your plan there, significant change to the guide for the year. So I just want to better understand where you're seeing the efficiencies, what has changed in the landscape relative to a few months ago. I know you said you're pleased with REVOLVE Festival, but I guess the spend there was known at the time that you guided. And just any change to the underlying expectation on the top line that informs that guide for the year?

Michael Mente: Yes. I'll speak in particular to the brand marketing side where we saw great gains here, where a significant reduction in spend but actual outperformance compared to last year. And we really challenged the team to continue to evolve and to continue to get better. The landscape outside what we do on the brand side is a broad universe, but also it's -- a level below is a very diverse portfolio. So we've reallocated to certain zones and certain strategies that have been super, super effective and challenged the team to really do more with less. And they've proven they're extremely positive that they can do so. So we will continue to push that. But this will enable us to do at the appropriate time is really experiment with different tools, different strategies in the future. So there's a lot in the future that you'll see from us that is different and experimental and hopefully, very, very exciting and effective. And that will be coming at any time. We'll seek to drive greater efficiency, reduce spend, but continue performance by our internal metrics.

Mike Karanikolas: Yes. And certainly, on the digital or performance marketing side, we challenged the team to do more with less, and they delivered. That said, I'd say it's very landscape-dependent. And so sometime we'll see periods where we're able to get some nice efficiencies. There are also periods where the environment is a little bit more challenging. So I think it's difficult to say whether it's a trend that continues through the back half of the year, but we're very pleased with the results on the performance marketing side that we've seen thus far.

Mark Altschwager: And then, Jesse, on gross margin, historically, we've seen a bigger sequential uptick in REVOLVE segment Q2 versus Q1. That looks a bit more muted this year. Maybe unpack some of the puts and takes there and just any implications as we think about the back half of the year.

Jesse Timmermans: Yes. No significant implications as we look at the back half of the year. I think this year, different from years past. And of course, the last few years have been very abnormal with COVID, coming out of COVID, inventory correction, et cetera. But if you go back in time, there has been more of a seasonal impact there, but also a much different kind of skew on the full price markdown mix that was more consistent this Q1, Q2 than it has been in the past.

Operator: Your next question comes from the line of Oliver Chen with TD (TSX:TD) Cowen.

Oliver Chen: As we look forward to Q4, the comparison toughens a little bit. What are some major catalysts for Q4 in terms of the potential to maintain that comp or improve? And any catalysts we should think about for back-to-school and holiday? Also, would love your view on the customer behavior. As you know, the macroeconomics, we've been seeing bifurcation and inflation pressure, but your growth continues to be really nice. So would love your thoughts on how the macros and the health of your customer is interplaying with what you're seeing.

Mike Karanikolas: Yes. So we feel really good about the trends we saw in the second quarter continued into Q3. And we know others out there have commented on some weakening of the customer and some macro pressures. Thankfully, it's not something we're seeing in our own data. How much that speaks to the macro environment versus us just executing well and gaining strength in the market, I think is too early to say. But we feel great about our own trends that we're seeing there. As we look at the back half of the year, I'll leave it to Jesse to go into any comp discussion, but we're focused on making our business the best it can be. We feel good about the trends, and we're hopeful that bodes well for H2.

Jesse Timmermans: Yes. Yes, nothing significant to add on the comps. You mentioned the comps do get slightly tougher. Holiday season, as you know, isn't as big for us as it is for others in terms of seasonality. So I know there's that tough shorter holiday season. But while it may have some impact, we don't expect a significant impact there. Back-to-school is a great season as well, but again, not over-indexing for us like it does others. So I would say nothing specific to call out. And then I think just all of the initiatives that the team has been working on through last year and into the first half of this year that continue to really take effect and you could see visibly in the results this quarter will continue to build.

Oliver Chen: Okay. Lastly, you've done a really good job like optimizing customer lifetime value with new brands that you've added, own brands with an older customer as well. What are your thoughts on your private label capabilities now? And which parts of your assortment do you feel like you have the most opportunity for further improvement?

Michael Mente: Yes. I think definitely, there's been a lot of work there. I think the broadening of the assortment over the past several years, the refinement is really -- that's also, as Mike mentioned, one of the many things that's continued to drive performance in a challenging environment, and we expect this to continue to drive growth in the future. Specific to owned brands, we've seen kind of the arc of expansion and contraction. And now we're in a phase of kind of a trough in ultimately, what we believe will be steady expansion over the near term and long term. I think this is -- part of it is the expansion outside of kind of our historic strength of dresses, which still remains very, very strong. Expansion to other categories are supposed to be seeing in the near term in terms of like kind of what we would view as more core essentials foundation product, which also can be stylized and be very cool, fashionable, but also very premium as well, the things that we know our customer is buying and shopping, but sometimes not always picking up us as the first place to go. So we'll be seeing -- putting energy in that space. We think there's also effort and energy and we can see in kind of the younger consumer as well. I mean that's an area that's yet to really be fully, fully nurtured. So we see a broadened roadmap to really enhance that owned brand experience over the last cycle of the customer as well as kind in all aspects of the closet, things that -- a lot of room to go on that zone.

Operator: Your next question comes from the line of Matt Koranda with ROTH Capital.

Matt Koranda: Just can you put a finer point, Jesse, for us on the progression of third quarter last year? Remind us, I think you said comps get tougher, but I'm not sure if you were talking about fourth quarter or you were talking about the progression of the third quarter, so maybe August and September, if you could do that.

Jesse Timmermans: Yes. Yes, sure. Yes, I was more referencing the fourth quarter that gets a little tougher that Oliver was referencing. If we look at the third quarter last year, if you recall, we commented that July was down mid-single digits. We closed the quarter at minus 4%. So it's plus or minus in the zone where we're roughly even comps through the quarter.

Matt Koranda: Okay. Got you. And then just one on -- since a lot of others have been asked and answered, I was curious on the inventory balance. It looks up quite a bit more than sales year-over-year. So just wondering maybe if you could speak to the assortment and what we're positioning for. It sounds -- you guys sound pretty upbeat like we're going to see additional growth. And obviously, July was good. But it seems like they were preparing for some future growth. But maybe just if you could speak to the assortment, how we feel about it, health of inventory, that would be great.

Mike Karanikolas: Yes. So on the REVOLVE side, we feel very good about the health of the inventory. It is turning a tick slower than we would like to see, but we feel like the health is good. And the areas we're a little bit overinvested in are areas of lower markdown risk. Some room for optimization, but we think it's within the zone of a healthy turn that we're able to manage well. And it's something we have our eye on, but we feel good about the mix and the path going forward with the inventory.

Jesse Timmermans: Yes. And maybe just to add to that, Matt, the increase that we're seeing is primarily on the REVOLVE side, which, as you know, is much, much more in favor for us, easier to control and the assortment's great, like Mike said. FWRD, a few quarters ago and for the past several quarters, we've been commenting that we feel like around midyear, we'd be more back in check on the FWRD side. We've made great progress there. The differential on the inventory sales growth for FWRD is much tighter. And so I think essentially, they're on FWRD.

Operator: Your next question comes from the line of Jay Sole with UBS.

Jay Sole: I'm wondering if you can elaborate a little bit on your comments you made about AI, about the internal search engine and also in the comments about elevating the customer experience that you mentioned in the press release. If you could talk a little bit about that, kind of where you see the company's ability to really use AI to improve the business going, that would be helpful.

Mike Karanikolas: Yes. So yes, we're really proud of the results with the internal search. And where it really excels, I think, is in things that traditional search struggled with, right? So it's less about finding specific attributes, although it's great at that, and more about understanding general aesthetics and broader concepts that traditional search struggles with. So -- and it wasn't just a small win too. It was a very resounding versus a very respected platform from the third-party company. So we're really pleased with those results. They look good on REVOLVE thus far also. And I think more broadly speaking, this sort of technology really opens up doors in terms of innovating in the customer experience, right, where it can be good at search, but the types of things it's good at lend themselves to much more broadly than search, just new ways of customers exploring and navigating the website and new sorts of features we can put together, some of which we have in kind of smaller portions of our customers, some initial tests and those types of things. But I think over the coming years, you're going to see that really evolve a lot. And our goal is to be at the forefront of that.

Operator: Your next question comes from the line of Jim Duffy with Stifel.

Peter McGoldrick: This is Peter McGoldrick on for Jim. Jesse, can you break out the increase in G&A dollars in guidance between the Vauthier business and other investment areas? As we think about normalized G&A run rate going forward, is there any component that's a onetime cost related to the relaunch that should not recur? And then related to that, how should we be thinking about the contribution to the top line from the Vauthier brand?

Jesse Timmermans: Yes. Sure. So if you look at the back half of the year and that increase of $3.5 million, call it, I'd say about half is -- a little more than half is from Vauthier specifically. And then a meaningful portion of that remainder is due to the investments that we mentioned, still making investments in AI, making some really good investments on the FWRD side of the business. If you peel back the, call it, nonroutine and investment areas, G&A is in the kind of mid-single-digit-plus zone, so closer to in line with the sales growth. In terms of contribution from Vauthier on the top line, not until later this year, early next year, until we see some good movement there. As we mentioned, this is kind of restart, rebuild, build the website and launch the first collections there later this year into early next year.

Peter McGoldrick: Excellent. And then on international regions, you pointed to encouraging signs out of China. I was wondering if you break out contribution from other regions? Is anything standing out on a dollar contribution or growth rate basis? And how has international progressed quarter-to-date relative to the mid-single-digit growth overall?

Mike Karanikolas: Yes. So Q2 was a really strong quarter for international, both in terms of the absolute result and also just broadly speaking across regions. We saw nearly every region in the green internationally in Q2. And the standout regions continue to be some of the standout regions of past quarters. So Mexico, in particular, we continue to see really strong growth in. But we're really encouraged by regions like you noted in China, that we saw growth in China despite there being some headwinds there. We feel like we've made some good solid progress in China. As you know, a couple of quarters ago, we mentioned we were making a little bit more investments into that region. Obviously, there's a huge opportunity there. And so we started to see some impacts of those investments this quarter, and we're hopeful we'll see more of that in the quarters to come.

Operator: Your next question comes from Sean Dunlop with Morningstar.

Sean Dunlop: I had one on the return rate initiatives. It looks like we shortened the return window on these AI fraud detection to sort of avoid wardrobing. Good to see the progress there. I guess I'm curious, has there been any discernible pushback from consumers? Have they reacted to that at all? I guess with us seeing a little bit less than one order per quarter on average, is that something we would have seen in period or something that we're sort of keeping an eye out in future quarters?

Mike Karanikolas: Yes. Great question. So through our own customer service channels, we haven't seen really any kind of pushback against the return policy change. And it's still a very generous, arguably industry-leading or certainly amongst the industry leaders in terms of the generousness of the return policy. So the return window was shortened to 30 days for cash credit, but actually 60 days for store credit. So consumers still have quite a long time to return items, and we're very friendly with customers if there's any kind of issue or exception. So we think it's been a very positive change. As we look at our own data, there's a whole host of things we've been working on with regards to returns. We think some of the impact in the second quarter may have been from that policy change, but we think a lot of the impact was through a number of these other areas that we've been working on, some of which started to exact earlier in the quarter, some of which are still in the early phases as we fine tune them and get them right. So we'll have to see how the year progresses, but we're hopeful, over time, we can continue to make a big impact there.

Sean Dunlop: Got it. That's helpful. And then just one more for me on repurchases. Looks like just $1.9 million there during the quarter. And I guess I'm just curious what plays into that capital return philosophy. With just a little bit less than $60 million remaining on the authorization, it seems like at current prices, that might be a pretty good investment.

Jesse Timmermans: Yes, yes. No, we think over the course of the last 4 quarters, it's been a great investment. And like you said, we still have $60 million there available. So we'll continue to be active. No comment on kind of when and how and at what price we buy, but I'm happy with the progress thus far.

Operator: Your next question comes from the line of Ashley Owens with KeyBanc.

Ashley Owens: Just a quick one for me, maybe on FWRD, but also a little about the inventory progress there. Just any color on how return rates are looking? And then any insight on the gross margins there? Are we at the point of inflection yet? Or when should we start to expect to see that shift?

Jesse Timmermans: Yes. No specific comment on return rate specific to FWRD, I think just commenting on that overall. And to highlight, the return policy change that Michael was mentioning was made on REVOLVE only. We never shifted the FWRD return policy during COVID like we did on REVOLVE. So not an impact there on FWRD. In terms of margin, as I mentioned, we made great progress on the inventory balance. Markdown margin is still lower than where we want it to be, and that is showing up in the overall gross margin for FWRD with the goal of getting that back into the 40s over the kind of near to midterm.

Operator: Your next question comes from the line of Ethan Saghi with BTIG.

Ethan Saghi: You got Ethan Saghi on for Janine. I just want to ask one quick one on owned brands. I was just wondering, as you guys are looking to start expanding that penetration again, if you have a target in mind of where you'd like that to get? And if so, what the time line would be to get there?

Michael Mente: No, we don't have a particular target when it comes to owned brand. I think the ultimate goal is just to get product -- get the best product in front of our consumer. I think for the portion of owned brand, we have to be that great. We see our -- even though our penetration is down from our peak, our per style metrics, our internal per style metrics are better than ever. So feeling incredibly great about that, so we comment about outstanding. But there is no long-term target. There is no -- there are modest improvement on the near term with how it can be for the near term. But also, we think that if we continue to do our job for years, I think there's no reason why we can't get to the penetration numbers of the times past. But of course, we think that this is far into the future.

Operator: Your next question comes from the line of Janet Kloppenburg with JJK Research.

Janet Kloppenburg: Congratulations on [indiscernible]. I just had two quick questions, just getting back to the inventory. I think you said it was isolated to REVOLVE. Is that new categories or deeper investment in private label? Maybe help us understand the direction of inventory as we think about the end of the third quarter. And just lastly, as you think about July and your solid trends, any discernible change in spending on dress up versus casual or denim or anything like that, that you think you're well positioned for?

Jesse Timmermans: Yes. Sure, Janet. Thanks for the questions. On inventory, we expect to be kind of year-over-year increase in the same zone as we are in Q3 as we are today. No specific kind of categories or third-party versus owned brand dynamics to call out. But we feel good about the health of the inventory there. And again, being on REVOLVE, much more versatile, kind of in our control than on the FWRD side, so very manageable. And then no comments on any more specifics around the July trend, I think other than to say what we already said with REVOLVE and international continue to outpace the domestic and FWRD side of the business.

Operator: That's all the time we have for questions today. I will turn the call back to management for closing remarks.

Michael Mente: Thank you, guys, for joining us on this quarterly earnings call. We're really proud of the results and the progress that we've made. Really, that has been broad based across a number of functions, the entire team performing at a very high level, but with a lot of work that's done. That foundation has been laid over many, many quarters before. We're excited for our continued progress ahead, knowing that this is a great product, but also knowing that there is a lot more coming to make a lot more opportunities indeed in front of us and beyond. We're quite prepared and excited for any turbulence ahead as we have been in times past, and looking forward to the dynamic landscape and looking forward to another quarterly -- another call with you guys very soon.

Operator: This concludes today's conference call. You may now disconnect.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.