Revolve Group Inc. (NYSE:RVLV) reported its financial results for the first quarter of 2024, revealing a slight dip in net sales but significant increases in gross margin and operational efficiency.
The company's net sales trajectory showed improvement in March and April with a return to year-over-year growth. Co-Founders and Co-CEOs Mike Karanikolas and Michael Mente highlighted the company's strategic focus on reducing return rates and enhancing customer experience, as well as expanding into new categories such as beauty, men's, and home.
The successful execution of the Revolve Festival and other marketing initiatives has also contributed to the company's strong brand engagement and customer growth.
Key Takeaways
- Net sales for Q1 2024 were $271 million, a 3% decrease year-over-year, while gross profit rose to $142 million.
- Gross margin expanded to 52.3%, reflecting the company's operational efficiency.
- Net income declined by 21% to $11 million compared to the previous year.
- Active customer base grew to 2.6 million, with an average order value increase of 4% to $299.
- Cash flow from operations was strong at $38 million, with cash and cash equivalents totaling $273 million.
- Revolve invested in AI technology to enhance customer service and expects gross margin to continue to increase.
- The company repurchased approximately 530,000 Class A common shares during the quarter.
Company Outlook
- Revolve expects gross margin for Q2 to be between 53.9% and 54.4%.
- The company plans ongoing investments in marketing, production, collaborations, and owned brands to drive growth.
- Strategic opportunities and common stock repurchases are on the agenda to enhance shareholder value.
Bearish Highlights
- Net income and net cash from operating activities both saw a 21% decrease.
- The company reported a decrease in net income per diluted share of 21% year-over-year.
- Inventory levels increased by 6% from the previous year.
Bullish Highlights
- The Revolve Festival and other activations generated significant press and social media impressions.
- Successful launches of owned brands and a new men's line, WAO, show promise.
- A new physical retail presence in Aspen and potential expansion into other regions indicate a strong move into brick-and-mortar.
Misses
- Net sales in April 2024 increased by a low single-digit percentage year-over-year.
- Adjusted EBITDA decreased by 12% compared to the previous year.
Q&A Highlights
- The company is focused on improving return rates and logistics.
- AI is expected to reduce costs and improve service and personalization across the business.
- Beauty category sales increased by 34%, while handbags, shoes, and accessories decreased by 10%.
- The company is optimistic about midyear balance for FWRD inventory and continued growth in customer engagement.
InvestingPro Insights
Revolve Group Inc. (RVLV) has shown resilience in its latest quarterly report, with an emphasis on operational efficiency and strategic brand expansion. To provide a deeper analysis, here are some insights based on real-time data from InvestingPro and exclusive InvestingPro Tips.
InvestingPro Data:
- The company currently holds a market capitalization of approximately $1.5 billion.
- Revolve's P/E ratio stands at 55.21, indicating a high earnings multiple which suggests that investors have high expectations of future growth.
- Despite a slight revenue decline of 2.97% in the last twelve months as of Q1 2024, the company's gross profit margin remains strong at 51.86%.
InvestingPro Tips:
- Revolve's stock price has experienced substantial growth, with a 35.06% return over the last three months and an impressive 55.97% return over the last six months.
- Analysts predict the company will be profitable this year, bolstering confidence in its financial outlook. Additionally, Revolve holds more cash than debt on its balance sheet, providing a solid foundation for future investments and operations.
For readers looking to delve deeper into Revolve's financial health and future prospects, there are additional InvestingPro Tips available at: https://www.investing.com/pro/RVLV. With the coupon code PRONEWS24, you can get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, unlocking valuable insights to inform your investment decisions. There are 11 InvestingPro Tips in total that cover various aspects of Revolve's financial performance and stock valuation.
Full transcript - Revolve Group (RVLV) Q1 2024:
Operator: Good afternoon. My name is Jael, and I will be your conference operator today. At this time, I would like to welcome everyone to the Revolve's First Quarter 2024 Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. 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 first quarter 2024 results. Before we begin, I would like to mention that we have posted a presentation containing Q1 financial highlights to our Investor Relations website located at investors.revolve.com. I would also like to remind you that this conference call will include forward-looking statements, including statements related to our future growth, our inventory balance, our key priorities and operating initiatives, industry trends, our marketing events, our partnerships, 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 will also reference certain non-GAAP financial information, including adjusted EBITDA and free cash flow. We use non-GAAP measures in some of our financial discussions, as we believe they provide valuable insights on our operational performance and underlying operating results. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP, and our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliations of non-GAAP measures to GAAP measures, as well as the definitions of each measure, their limitations and our rationale for using them, can be found in this afternoon’s press release and in our SEC filings. Joining me on the call today are our Co-Founders and Co-CEOs, Mike 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 had an encouraging first quarter on many levels, highlighted by meaningful gross margin expansion and year-over-year efficiency in our variable logistics costs that exceeded our guidance ranges. The great work by our operations team on the efficiency measures discussed on prior calls enabled us to achieve our first year-over-year decrease in selling and distribution costs as a percentage of net sales in three years. These gains helped us to achieve significant profitability and cash flow in the first quarter, despite a slight decline in net sales year-over-year and the expected increase in marketing spend due to the timing of our brand building investments in 2024. Importantly, our net sales trajectory has improved since our last update when net sales during the first eight weeks of the first quarter had declined by a mid-single digit percentage year-over-year. In fact, our net sales returned to positive year-over-year growth during March, and the momentum continued into April when our net sales growth remained positive to begin the second quarter. Most importantly, we achieved these solid results while continuing to invest in the foundations for long-term success. With that introduction, let me step back and provide a brief recap of the first quarter. Net sales were $271 million, a decrease of 3% year-over-year. Recall that in the first quarter of 2023 a much larger than normal percentage of our net sales were on markdown, as we worked aggressively to reduce our inventory position a year ago. By comparison, in the first quarter of 2024, our inventory health was in a much better place, so the net sales comparison in Q1 2024 reflects increased net sales at full price year-over-year that was more than offset by lower net sales on markdown year-over-year. Our gross margin expansion in the first quarter powerfully demonstrates the financial benefit of our much cleaner inventory position and higher mix of net sales at full price year-over-year. Driven by the performance of the REVOLVE segment, our consolidated gross margin increased 250 basis points year-over-year in the first quarter. The margin gains resulted in increased gross profit dollars year-over-year, despite the lower revenue. By segment, REVOLVE net sales decreased 1% year-over-year in the first quarter. FWRD net sales decreased 15% year-over-year, directionally consistent with external datapoints including reports that U.S. luxury spending in March declined 18% year-over-year, according to Citi credit card data, the lowest monthly rate in nearly three years. We view the luxury industry challenges as an exciting opportunity for Revolve 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. Net income for the first quarter was $11 million or $0.15 per diluted share, and adjusted EBITDA was $13 million. As expected, both profitability measures declined year-over-year, but benefited from gross margin expansion and operating expense efficiency outperforming our guidance ranges. Importantly, our business continues to generate meaningful cash flow. In the first quarter, we generated $38 million in operating cash flow, increasing our cash position by $28 million in just three months, even while we continued to enhance shareholder value through the repurchase of an additional $8 million in shares of our Class A common stock during the first quarter at what we believe were attractive prices. Beyond the numbers, I am excited by our team’s execution that has led to early progress on the strategic priorities outlined last quarter. Before turning it over to Michael, I will give you a brief recap of our progress on each initiative. First, I am extremely proud that we have delivered efficiencies in our logistics costs year-over-year. Selling and distribution expense as a percentage of net sales decreased 50 basis points year-over-year, despite continued pressures from a higher return rate in the first quarter of 2024. Considering the meaningful potential to drive efficiency if we can contain our return rate, we are extremely focused on initiatives designed to reduce our return rate and make returns more efficient. While not yet visible in our results, under the hood we see early signs of progress from these tests and initiatives that we intend to scale in the coming quarters. Some focus areas we are excited about include improved size guidance that primarily leverages technology partners and AR tools, testing of important new measures designed to prevent wardrobing, which refers to a customer wearing a purchased style out for an event and then returning it for a refund or exchange. And finally, effective last week, we have reduced our window for product returns to 30 days for returns and 60 days for exchanges, consistent with the return and exchange window we had successfully offered for many years prior to the pandemic. You may recall that in March of 2020, after the onset of the pandemic, we increased the window for returns and exchanges to 60 days and 90 days, respectively. Our analysis of the competitive landscape confirms that our hassle-free return policy remains among the most customer friendly in the industry, especially considering that most apparel retailers now charge customers a fee for online product returns. By comparison, we continue to encourage our customers to use the home as a dressing room with a no-hassle, free shipping and returns policy, which we have offered since our launch in 2003, making us one of the pioneers of free returns. Second, we further validated our opportunity to expand our share of wallet through continued expansion of emerging areas such as beauty, men’s, and home. Net sales in the beauty category increased 34% year-over-year in the first quarter, and our pipeline of coveted beauty brands we expect to onboard has never been stronger. Third, we continue to expand our international presence where we have remained focused on further elevating service levels to drive growth. Australia and the United Kingdom offer important proof points of our recent success. Our operational excellence and wide range of logistics partnerships drove shipping and cost efficiencies that enabled us to reduce the minimum purchase threshold for consumers in Australia and the UK to receive free international shipping. As with many of our service level breakthroughs, consumer response has been incredible. We had improved year-over-year growth in both Australia and the UK in the first quarter, which helped us to offset a very tough comparison in China. Based on this success, we have already begun to expand this proven model to additional international countries. Fourth, we remain committed to efficiently investing to expand our brand awareness, grow our customer base and strengthen our connection with the next-generation consumer. As Michael will expand upon, we reimagined the format of our Revolve Festival held last month to be even more intimate and exclusive this year, while maintaining the elevated brand positioning that is so unique to Revolve. The marketing team delivered an incredible Revolve Festival event that generated a greater impact on our key metrics within the one-day format in 2024 than we had achieved over an entire weekend for last year’s Revolve Festival event. And lastly, we continue to leverage AI and other technology to drive the business forward and even further elevate the customer experience: By leveraging AI and machine learning technology to better align product merchandising with customer preferences, we have driven notably higher conversion rates for our curated shops such as our festival shop where associated revenue increased more than 50% year-over-year in the period leading up to Revolve Festival. To wrap up, we are pleased with how the year has begun, encouraged by the return to year-over-year growth in March and April, and we are excited about our growth and efficiency initiatives that we believe improve our foundation for profitable growth over the long-term. I would like to congratulate our team on the wins this quarter. We have a lot of work ahead of us, but with your relentless drive and commitment, we are confident in our ability to compete and win together in 2024 and beyond. Now, over to Michael.
Michael Mente: Thanks, Mike, and hello, everyone. I am excited by the progress we have made on our key priorities, especially the investments we are making in building our brands and continuing to strengthen our connection with the next-generation consumer. We are making the most of the opportunities at this important time to create brand heat and awareness as our core consumer gears up for an active lifestyle of events and travel in the months ahead. For the seventh year, we held Revolve Festival in Palm Springs on April 13th in a reimagined format that was better than ever. The more intimate venue for Revolve Festival this year was incredibly efficient, impactful, and buzzing with energy flowing from Y2K-themed performers including Ludacris, T Pain, Sean Paul, and the Ying Yang Twins. Many top A-listers in the desert chose to attend Revolve Festival, including actors, musicians, athletes, celebrities, and content creators such as Kendall Jenner, Rihanna, Teyana Taylor, A$AP Rocky, Billie Eilish, Megan Fox, Hailey and Justin Bieber, Zay Flowers, DeAndre Hopkins, Nina Dobrev, Lili Reinhart, Shaun White, Emma Roberts and Natalia Bryant. Most impressive is that we delivered our incredible Revolve Festival event while spending millions of dollars less than in recent years. And yet we delivered greater impact than before. In fact, press impressions from Revolve Festival in 2024 more than doubled year-over-year while social media impressions also increased year-over-year for the one-day event compared to last year’s REVOLVE Festival event that took place over an entire weekend. A key to our success is that our powerful Revolve brand consistently attracts a roster of top tier content creators, brand partners and A-listers who understand that our events give them a unique platform to further strengthen their own personal brands. Importantly, delivering meaningful efficiency in our Revolve Festival investment year-over-year has allowed us to significantly expand our marketing playbook in the second quarter. Just two weeks after Revolve Festival, we hosted a successful activation at the Stagecoach Festival, attended by A-listers including Post (NYSE:POST) Malone, Tyga and Charlie D’Amelio. We also have exciting activations in the upcoming weeks in Jamaica, St. Tropez and Sicily. All told, we are delivering a much broader range of activations in the second quarter in 2024 than in recent years, despite investing a lower percentage of net sales on our marketing investment year-over-year. We are also continuing to invest in marketing, production, and collaborations to drive success in our owned brands. While contributions from owned brands as a percentage of REVOLVE segment revenue remains below its longer term potential, we have had some notable recent success that further validate this long-term opportunity. We recently launched the first capsule of the L’Academie owned brand after Marianna Hewitt became its creative director. Initial sell-through was outstanding, exceeding our expectations, and strategically broadening our range of offerings. The new L’Academie brand aesthetic expands our assortment to serve a wider range of our customers’ lifestyles, including fashionable everyday essentials for the office. The collaboration with Marianna as creative director extends our long-standing and successful partnership with her over many years. Marianna is the Co-Founder of Summer Fridays, a top selling beauty brand on Revolve, and she is one of the top performers in our proprietary Revolve brand ambassador program. Another owned brand collection that has performed extremely well in recent months is HELSA, a collaboration with supermodel Elsa Hosk that we introduced in 2022. In March, we introduced HELSA’s eighth drop and it has been one of the most successful owned brand capsules in our history. Of note, HELSA features higher than typical price points and has uniquely performed exceptionally well on both REVOLVE and FWRD. In fact, HESLA was one of the most searched brands on the FWRD site in recent months. This is remarkable considering that FWRD offers some of the most iconic luxury brands in the world. Another recently launched owned brand that is exclusively available on REVOLVE and FWRD is our first ever owned brand within our men’s offering, WAO. We view expansion into men’s as a large and compelling opportunity for growth in the years to come. We were thrilled to see trendsetter Justin Bieber looking stylish sporting a WAO polo at our Revolve Festival afterparty last month. Now, let's shift gears to discuss physical retail. Performance of our REVOLVE and FWRD Pop Up shopping experience in Aspen during the first quarter was incredible, exceeding our initial financial goals. This exciting new channel for engaging with customers in real life has been a home run for brand building, acquiring new customers, and even further strengthening our relationships with brand partners who view our desirable Aspen presence as elevating to their brands. They are thrilled to partner with us and tap into an attractive consumer demographic with a proven appetite for premium, on trend fashion. The Aspen results and feedback have been so compelling that we have entered into a multiyear lease to operate our physical retail presence in Aspen. The economics alone are favorable, and even more importantly, we see this as a huge opportunity to expand and elevate our brands in this fashion playground for the rich and famous. The incredible success and learnings in Aspen have led us to explore other regions where a retail shopping experience may offer similar potential for compelling financial returns and further elevation of our brands. We are excited to continue to test and learn more about physical retail, taking a thoughtful and measured approach consistent with our founder led and investor first mindset. We will keep you apprised of our plans and progress on this exciting initiative moving forward. Now, I will close with an update on the dynamic competitive landscape within the luxury e-commerce sector. Challenges among certain of our luxury e-commerce competitors have further accelerated in recent months. The resulting disruption affecting luxury consumers and luxury brands creates a compelling opportunity for a profitable and cash generative company like Revolve to capitalize by investing in strategies to gain market share. We believe there is an opportunity to pursue the millions of effectively abandoned luxury customers that are up for grabs in the aftermath of the recent industry malaise. We are also renewing our efforts to expand our luxury brand relationships in the current environment. Beyond our financial strength that is a huge competitive advantage, luxury brands see FWRD as a highly attractive partner due to our strength in North America, our product curation, our distinct styling point of view that has attracted younger luxury customers, and our incredible brand marketing engine supported by FWRD Creative Director Kendall Jenner. Finally, while many competitors have no choice but to play defense in the current environment, we are aggressively investing in the future to drive revenue and efficiency, through the expansion in the use of AI. As just one example, in the first quarter we delivered promising tests of leveraging AI technology to intelligently route customer service inquiries that we believe could drive operating efficiency and even further raise the bar on our exceptional customer experience. Most compelling is that, in our testing, our internally developed AI technology solution has outperformed the commercially available AI solutions we had tested previously. We have also recently assembled a dedicated internal generative AI team that is building on our early successes in leveraging AI for imagery on our website and other digital channels, as well as to expand the use of AI across the business in pursuit of the large market opportunity ahead of us. To summarize, our powerful brands, connection with the consumer and our unwavering focus on the long-term, along with our strong financial profile, illustrated by the $38 million in cash flow from operations we generated in the first quarter, enables us to invest in a multitude of initiatives in pursuit of our long-term growth opportunity ahead of us. Now, I will turn it over to Jesse for a discussion of the financials.
Jesse Timmermans: Thanks, Michael, and hello everyone. I am pleased with our execution in the first quarter, highlighted by outperforming our guidance for gross margin expansion and selling and distribution cost efficiency, our largest operating expense line item. I’ll start by recapping our first quarter results and then close with updates on recent trends in the business and our outlook for gross margin and cost structure. Starting with the first quarter results. Net sales were $271 million, a year-over-year decrease of 3%, as growth in net sales at full price was more than offset by a decrease in net sales on markdown year-over-year. REVOLVE segment net sales decreased 1% and FWRD segment net sales decreased 15% year-over-year within a luxury sector that remains challenged. By territory, domestic net sales and international net sales each decreased 3% year-over-year. Active customers, which is a trailing 12-month measure, grew to 2.6 million, an increase of 5% year-over-year. Average order value, or AOV, increased 4% year-over-year to $299, benefitting from the higher mix of net sales at full price. The higher AOV was more than offset by a 2% decrease in total orders placed to 2.2 million, and a year-over-year increase in our return rate. Shifting to gross profit. Gross profit increased 2% year-over-year to $142 million, despite the decline in net sales. Consolidated gross margin was 52.3%, an increase of 250 basis points year-over-year and exceeding the high end of our guidance range, driven by our REVOLVE segment. The increased gross margin primarily reflects a higher mix of net sales at full price and lower inventory valuation adjustments year-over-year. Moving on to operating expenses. Fulfillment costs were 3.5% of net sales, consistent with our outlook, and an increase of 23 basis points year-over-year. Selling and distribution costs were 17.9% of net sales, a decrease of 50 basis points year-over-year that marks the first time in three years that selling and distribution costs have decreased as a percentage of net sales year-over-year. Great execution in reducing logistics costs enabled us to outperform our guidance for selling and distribution cost efficiency, despite the higher return rate year-over-year. Our marketing investment also came in more favorable than expected in the first quarter, representing 15.3% of net sales. The increase of 158 basis points year-over-year is primarily due to a shift in the timing of our brand marketing investments this year with a very active first quarter. General and administrative costs were $33 million, consistent with our outlook. Around 40% of the year-over-year increase in G&A expense in the first quarter of 2024 reflects increased variable compensation expense in 2024 and increased stock-based-compensation expense year-over-year. Our tax rate was 26% in the first quarter, up slightly from 25% in the prior year and within our expected range. Net income was $11 million, or $0.15 per diluted share, a decrease of 21% year-over-year. Net income in the first quarters of 2024 and 2023 each included an insurance recovery within other income. For the first quarter of 2024, the insurance recovery was $2.8 million, or $2.1 million, net of tax, equivalent to $0.03 per diluted share. Adjusted EBITDA was $13 million, a decrease of 12% year-over-year. Moving on to the balance sheet and cash flow statement. Net cash provided by operating activities was $38 million and free cash flow was $37 million, further strengthening our balance sheet and supporting our commitment to enhance shareholder value through capital allocation. These cash flow metrics decreased 21% and 23%, respectively versus the first quarter of 2023, when our cash flow benefited meaningfully from favorable working capital movements including a large reduction in inventory during the prior year period. Inventory at March 31, 2024 was $202 million, a decrease of 1% on a sequential basis compared to December 31, 2023, and an increase of 6% year-over-year. We continue to view our inventory position in the REVOLVE segment as very clean, consistent with our gross margin expansion year-over-year and we have made continued progress in rebalancing FWRD inventory. As of March 31, 2024, cash and cash equivalents were $273 million, an increase of $28 million, or 11%, from December 31, 2023, and we had no debt. The decrease in cash and cash equivalents year-over-year compared to March 31, 2023 reflects strong cash flow from operations that was more than offset by our stock repurchases in the last three quarters. Our strong financial position enabled us to continue to invest in the business while repurchasing Class A common shares as part of our commitment to enhance shareholder value. During the first quarter, we repurchased approximately 530,000 Class A common shares at an average price of $15.17. Approximately $61 million remained under our $100 million stock repurchase program as of March 31, 2024. Now, let me update you on some recent trends in the business since the first quarter ended and provide some direction on our cost structure to help in your modeling of the business for the second quarter and full year 2024. Starting from the top. The return to positive year-over-year net sales growth in March has continued into the second quarter with net sales in April 2024 increasing by a low single digit percentage year-over-year. Consistent with recent performance, during the month of April, net sales comparisons in the REVOLVE segment continued to outperform the FWRD segment year-over-year. Shifting to gross margin. We expect gross margin in the second quarter of 2024 of between 53.9% and 54.4%, which implies a slight increase 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 53.0%. Fulfillment. We expect fulfillment as a percentage of net sales of approximately 3.4% for the second quarter of 2024, consistent with the fulfillment efficiency ratio in the second 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 18.0% for the second quarter of 2024, which implies a year-over-year improvement of approximately 60 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 18.0% of net sales. Marketing. We have an extremely active calendar of brand building events in the second quarter, including Revolve Festival, our recent activation at Stagecoach Festival, and the many international events Michael mentioned. Importantly, we expect the increased efficiency of our impactful Revolve Festival investment in 2024 and our operating discipline to help us achieve marketing efficiency year-over-year in the second quarter. We expect marketing in the second quarter of 2024 to be approximately 17.0% of net sales, a decrease of approximately 180 basis points year-over-year. For the full year 2024, we continue to expect our marketing investment to represent between 16% and 16.2% of net sales. General and administrative. We expect G&A expense of approximately $34 million in the second quarter. For the full year 2024, we continue to expect G&A expense of between $130 million to $133 million, most likely towards the high end of the range as we continue to invest in the business through a multitude of initiatives to drive long-term value creation. We expect quarterly G&A expense in dollar terms to be relatively consistent throughout 2024. Note that this expectation is a change from the variability in quarterly G&A expense during 2022 and 2023 when we had non-routine accruals for two separate legal matters that we do not expect to incur this year. And lastly, we continue to expect our effective tax rate to be around 24% to 26%, both in the second quarter and in the full year 2024. To recap, we had a productive first quarter with solid profitability and strong cash flow that further strengthened our balance sheet. Our strong financial profile gives us the financial flexibility to invest in the business, pursue strategic opportunities and repurchase common stock to enhance long-term shareholder value. Now, we’ll open it up for your questions.
Operator: [Operator Instructions] Your first question comes from the line of Michael Binetti of Evercore. Your line is open.
Michael Binetti: Hey, guys. Thanks for taking our question here. I just want to see if you could walk us through the March versus April a little bit. Jesse, is April accelerating from March? And I think you gave a little bit of color. I'm curious on the cadence. I'm trying to remember a year ago if you gave us the cadence of how much percent of sales in first quarter versus second quarter was on markdown. I'm just trying to think about how much that comparison changes as you get into the second quarter considering full price sales are positive now as an encouraging update. And then, I'm curious what would cause the selling in -- you seem to have some line of sight on selling and distribution improvements accelerating in the second half after decelerating a little bit in the second quarter. Maybe just a little bit to help us on the visibility you have there.
Jesse Timmermans: Yeah. Thanks, Michael. Maybe starting with the March and April trends. I wouldn't say it was an acceleration, deceleration. March closed in positive territory. April positive low single digit. So, on the surface of slight acceleration. April did have slightly easier comps. So, there's a lot of puts and takes there and Easter timing shift that I would say just nice to have positive growth in two consecutive months. So, looking forward to the balance of the year. On markdown, Q1 last year was, a low point. We were on significant markdown working through inventory. So, there was a significant increase in the full price ratio from Q1 to Q2. Also part of that is just the typical seasonality where we see Q2 at a higher full price mix. So, we do expect increase in full price mix as we go from this Q1 into Q2 of this year. And you can see that in the margin guidance as well, not as significant as we saw last year, given the inventory shifts that we were doing, but still an increase there and optimistic on again that growth in full price, not only sales, but also customers. And then repeat your selling distribution one again.
Michael Binetti: It sounds like it's so you have it going from -- it was like -- it was high 17s in the first quarter to 18% in the second quarter and then, I guess 17% to 18% for the year. So, I would just suggest that it starts to improve in the second half as a percent of sales in 2Q a little bit. It sounded like you were pretty happy with what you're seeing there. Maybe just a little bit of help and what you're seeing that should continue to compound on the gains you've seen so far.
Jesse Timmermans: Yeah. Great. Yeah, really pleased with what we've seen there. And after talking about it for several quarters now, really good to see that come through in the numbers. And a 60 basis point decrease year-over-year in Q2. There is some seasonality there as well with the higher full price return rate tends to tick up a little bit higher in Q2 just seasonally. So, there is an impact on that line item in that Q2 period. And then to your point, then it gets better in the back half of the year just due to seasonality. And then as these initiatives continue to layer on, we're optimistic about the trend there getting to that full year guidance that we outlined.
Michael Binetti: Okay. Thanks a lot. Congrats guys.
Jesse Timmermans: Thanks.
Operator: Your next question comes from one of Oliver Chen of TD (TSX:TD) Cowen. Your line is open.
Oliver Chen: Hi, Mike, Mike and Jesse. Regarding what you're seeing now and the revenue guidance, are you going to continue to see a negative transaction growth? How do you see that evolving along with average order values? And as we also look to model the active customer growth, would love your color on the back half. Also, as we think about categories, are there any call outs for better versus worse performing categories that would be helpful as well. And then you gave us a lot of color on return rates. How were return rates relative to your expectations? I know it's been a bit of a bumpy line item in terms of the bifurcated consumer and a consumer that's -- somewhat under pressure. Thanks a lot.
Jesse Timmermans: Yeah. Thanks, Oliver. Okay. Starting with the orders and number of transactions there. I guess important to note that Q1 of last year with a significant markdown quarter for us so that had an elevated number of orders relative to the sales. So, we did comp that this quarter. We expect to see that converge more or less with the net sales as we get to a more normalized place. Really happy with the AOV trend being up 4%. And that's with beauty. Being up 34% this quarter. So, peeling out beauty, AOV was actually increased much higher than that 4% overall. And we'd expect to continue to see kind of in that zone in the kind of low single digit increase in AOV as the year progresses. Active customers up 5% this quarter. The growth rate has come down as we've communicated over the last few quarters and we've continued to expect that growth rate to come down until we lap out of that really robust customer growth quarter that we had in Q1 of last year again going back to that that heavy markdown quarter that we had where drove a lot of customers lower AOV, higher orders. So until we go to that period, it's going to be a tougher comp on that trailing 12-month active customer number. On categories, I mentioned beauty. That was the that was really the star up 34%. On the flip side handbag shoes accessories were down 10%. And handbag shoes accessories skews more towards the FWRD segment and you could see with FWRD being down relative to that REVOLVE being down 1%, those are probably the two big ones to call out on the categories. And then return rate, I would say it's in line with our expectations. On the surface, it increased probably more than expected, but when you peel that back and look at just a normalized full price return rate, it was, call it, flattish. So, kind of, I wouldn't say pleased yet. But kind of in line with expectations and excited to see how these return rate initiatives play out over the course of the year.
Oliver Chen: Okay. Thanks, Jesse. One quick follow up on artificial intelligence. You're a lot of great color and you've been pioneers of test read and react as well as using data driven dashboards. But as we think about AI and modeling, where do you see the financial impact in terms of merchandise margins or speed or inventory terms or more logical functions just would love some high level thoughts on how that may manifest in value creation. Thanks.
Michael Mente: Yeah. I think there can really be an impact all across the board to contest nearly every aspect of the business. And I think in a couple of different ways like certainly cost reductions in different areas, but I think when you get cost reductions you have the opportunity to choose to invest some or all those cost reductions into better service or better personalization. So we've talked to in the past about how the imagery side of the business, there's a lot of opportunity to reduce costs, but then again potentially reinvest it back into forbearance for things that are suited to what each individual user wants to see. And so, we're in the early stages, but we're continuing to make progress and get better and better with our efforts in terms of the quality of what we're able to turn out, how quickly we're able to turn it out, it will kind of cost. So, we feel great about the progress there. We mentioned on the call about some progress on helping route customer, kind of inquiries which is a smaller portion, but it just highlights how there's so many different things that can touch. Merchandise margins as you mentioned, we already think we do a fantastic job managing those, but no doubt AI can unlock further gains on that side of the business, should our efforts continue to yield fruit. So, yeah, really excited. I think pretty much every aspect of the business has the potential to invest and we feel great about our investments. As we noted while we do keep up with and test the latest and greatest external technology, we also have a really strong internal team that helps us as well, which often produces better results than those external, kind of efforts and also provides, kind of cost savings for us, right? So, we're not at the mercy of whatever price some external vendor wants to charge.
Operator: Your next question comes from line of Jay Sole of UBS. Your line is open.
Jay Sole: Great. Thank you so much. Mike, you talked about investments in increasing brand awareness, obviously a lot of marketing. Just talk about where you see the brand awareness today. Where you think you can get over a year or three-year period and how that brand awareness is going to turn into active customers. Thank you.
Michael Mente: I think that you're looking at the overall market here just anecdotally, we see stronger indexes of course, like the major cities and kind of like the New York and LA. If you look at the global opportunity, we do this as a global opportunity. We're very, very early scratching the surface. Historically, almost all of our marketing efforts have been a little market and we still have a long way to go there. But also look out elsewhere where we're just barely starting that journey very soon.
Jay Sole: Thanks. And maybe if I can add one about logistics, obviously talked about improved size guidance and preventing wardrobe and things like that. If you have like a big picture sort of goal as to where you want the return rate to go. I mean, talked a little bit about it on the other questions, but if you could just elaborate on that sort of bigger picture where you think you can get it to that be helpful. Thank you.
Mike Karanikolas: Yeah. There isn't a specific number we're looking to drive it to. Instead, there's kind of directional parameters in terms of what we're trying to accomplish. So, we always want the home to be the dressing room. We understand no matter how much we improve the technology and the communication of information to the consumer. There'll be a substantial number of returns, but we would like to get it meaningfully lower than where it's at today in the right ways that are new or beneficial to customer experience. And so, we're already starting to see some success with something for working on. We're really hopeful about a lot of things that we have in the works. And so, we'll see where that takes us up. But this is going to be a multiyear journey with hopefully some big impact in the current year along the way.
Jay Sole: Got it. Okay. Thank you so much.
Operator: Your next question comes from a line of Mark Altschwager of Baird. Your line is open.
Mark Altschwager: Thank you. Good afternoon. First, was hoping to get a bit more color on the REVOLVE versus FWRD trend that you're seeing so far in the second quarter. That positive inflection is that happening across both segments. And then, international, that have been outperforming the U.S. and recent quarters, think Q1 looked like it was more in line. Is there any surprises there and maybe just speak to any trends you're seeing by region you'd like to call out?
Jesse Timmermans: Yeah. Hey, Mark. Number one on the REVOLVE versus FWRD trend in April. I think as we mentioned, it's largely consistent with how we exit to the quarter REVOLVE positive, FWRD not yet, but good traction on the REVOLVE segment. And some of that goes back to the point we made in the prepared remarks around just luxury being so challenged aspirational consumer, and still working through the inventory while making progress on the FWRD side. And then domestic versus international, yeah, on the surface both down 3%, but keep in mind that international last year had a much more difficult comp. International last year in Q1 was plus 16 versus domestic minus 5. So, kind of normalizing for that, good international results and really solid growth really across the board outside of China, which was negative.
Mark Altschwager: Thank you. And I wanted to follow up on marketing. It sounds like you're pleased with the results you're seeing with the evolving strategy. What are the key learning so far and implications for the business moving forward as you look to engage with new and younger customers and maybe qualitative or I'm sort of quantitatively. It doesn't seem like you're looking for much efficiency in the back half of the year. Can you just walk us through what's different in the back half versus how you're approaching Q2 where you seem to be guiding to fairly material efficiency. Thank you.
Mike Karanikolas: Yeah. I think the one thing that we really noticed thing which is really encouraging is that, we are confident that our customer knows us in certain zones where it's very strong and dress is very strong and warm weather, very strong in vacation. But she's also eager and anxious to hear from us in other places. So as we invest in our energy and marketing dollars in other places, we see a great connection with the customer and great efficiency and a message being received very well, which kind of leads directly to the back half of the spending, which I think you can get into a little more detail.
Jesse Timmermans: Yeah. To your point, Mark, lower in the back half of the year relative to the first half of the year. Again, Q1 we saw that hundred and call it 60 basis point increase Q2 for our guidance down 180 basis point. So then in the back half of the year call it roughly consistent with 2023. But keep in mind, we're always opportunistic and there's always timing shifts with the brand marketing activation. So, quarter to quarter, there could be some volatility. But if you look on a kind of 2H basis call it roughly in line to get to that full year in the 16 to 16.2 versus 16.1 last year.
Operator: Your next question comes from line of Anna Andreeva of Needham. Your line is open.
Anna Andreeva: Great. Thanks so much. Thanks for taking our question and great to see positive trends in the business. Two quick ones from us. On inventories, I think you said REVOLVE inventories are pretty clean. Can you just talk about your comfort level at FWRD? And at which point do you think inventories there will be closer with the sales trend. And then secondly, on return rate. You mentioned green shoots a couple of times. So should we expect improvement in return rates in the back half as some of these initiatives scale up. And I think in the past you've said that each percentage change in return rate is equal to about 20 basis points on selling and distro on the annual basis. Just curious if that's still the right math. Thanks so much.
Jesse Timmermans: Yeah. Thanks, Anna. On inventory, feel really good about the REVOLVE inventory. And that that shows in the full price mix and the really solid margin. Quick note on that margin, it's two points higher on REVOLVE than it was in 2019 with, call it half the own brand mix. I think that just goes to show the real strength and REVOLVE inventory and full price margin, FWRD, we are making good progress. We still have some work to do. I'd say we'll -- I think targeting midyear before we feel kind of balance there not to say that sales and inventory will exactly match, but we'll feel good about the balance. And also important to note that that inventory of plus six. Most of that increases coming from that clean REVOLVE segment as we're leaning in there forward was just slightly positive year-over-year. So overall feel good. REVOLVE strong, still some work to do on FWRD. On return rate, we are optimistic about all the work going into that and the changes we've made some green shoots. We're not baking in any of those improvements into the guidance or into our modeling. We're still modeling that kind of flat to last year and then hope for better than that, but not counting on it yet. And did you have one third one? Yeah. The math selling a distribution.
Anna Andreeva: Yeah. 1%.
Jesse Timmermans: Yeah. It's a little north of that. It's kind of in the 30 to 50. If you include both fulfillment and selling and distribution combined. So on those two line items.
Anna Andreeva: Okay, great. Very helpful. Thank you, guys.
Operator: Your next question comes from the line of Janine Stichter of BTIG. Your line is open.
Janine Stichter: Hi, good afternoon. Thanks for taking my question. So I wanted to ask about FWRD. Understanding, we're going through some challenges right now in the luxury or the aspirational luxury market, but how do you think about taking advantage of some of that dislocation that you mentioned with some of the other online e-commerce players and just leveraging your strong balance sheet here to take advantage of that.
Michael Mente: Yeah. I think there's a couple different ways. Certainly, with all the disruption in businesses in turmoil, we're on the lookout for strong people from those companies. We're on the lookout for opportunities to potentially take market share and revenue share. And then in some cases, we're looking at some of those asset opportunities themselves. So, there's really a lot of opportunities. I think offset, obviously by the short term, weakness that's continuing in terms of that aspirational luxury consumer. And so, we'll have to see how it all plays out. Again, things are tough, but we think over the long-term that kind of disruption and the damaged brands that come out of that that are likely losing sniff and share, leaves an opportunity for others to take advantage of. So, we're hopeful that we can start to take advantage of that in a bigger way and hopeful that we can exit the year with some momentum there.
Janine Stichter: Great. And then just on physical retail, it sounds like the few experiences that you've launched this year have gone really well. Is any update to how you're thinking about potential further physical retail pop up?
Mike Karanikolas: Yeah. The International is like an early eye opening, really encouraging, sales strong, obviously, the property very strong obviously return rates many skills compared to online. New customer acquisition was incredible. So we thought that wow, this is like a huge, huge lane for us. We've, of course, been focused on the online market for the past two decades, but looking at, the ultimate potential where the business can be, we really see opportunity with physical retail. We do recognize that it is an adjacent business, but it is a different business and our early wins are very, very encouraging. So we're definitely putting a lot of -- at this point, I would say more and more energy and focus, but not dollars toward just yet. We're really trying to build the muscle really trying to get smarter, but ultimately over the long-term, we think it's a massive opportunity for us.
Janine Stichter: Great. Thanks so much.
Operator: Your next question comes from line of Simeon Siegel of BMO (TSX:BMO) Capital Markets. Your line is open.
Simeon Siegel: Thanks. Hey, guys. Good afternoon. Hope you're all doing well. Just to follow up briefly on the quarter date again. So just with the positive inflection and that sales function of just now having lapsed through the prior year markdown selling or do you see improvement in full price selling as well? Sorry if I missed that. And then, I know that trailing 12 months dynamic is something we always like it trips up on, but could you elaborate on your thoughts on the gap between the ongoing customer growth versus the order count and revenue trajectory. Just trying to think like, are you seeing fewer orders per customer? And if so, any thought as to why and when that should more closely converge? Thanks guys.
Jesse Timmermans: Yeah. Sure. On the full price dynamic, in addition to the shift in full price sales, we are seeing an increase just like for like in in full price sales offset, of course, by just the significantly lower markdown sales. And that continued into April, not to the extent of Q1, but still healthy and the majority of the customers are full price, even in those heavy markdown periods. So optimistic there and those are really strong customers for us, which leads into your customer question. Again, Q1 of last year was a really heavy customer ad quarter with the heavy markdowns. So until we lap out of that, the active customers will be challenged. Orders per customer are down year-on-year, kind of from those peaks that we saw in '21 and '22 and then also just again, the heavy order activity in Q1 of last year, but still higher than 2019. So we're seeing overall just good healthy active customer behavior is just working through these volatile comps.
Simeon Siegel: Okay. So just any for when the active customer growth will more closely align with order growth or revenue growth, whichever way we want to look at it.
Jesse Timmermans: Yeah. I think it's really kind of Q4 this year Q1 of next year.
Simeon Siegel: Perfect. Thanks guys. Best luck for the rest of the year.
Jesse Timmermans: Yeah. Thanks.
Operator: Your next question comes from a line of Rick Patel of Raymond James. Your line is open.
Rick Patel: Hey, good afternoon and great progress, guys. Can you provide color on what percent of your returns happen outside of that 30-day window right now and what that looked like before the policy changed during COVID. I know your assumptions are for this to not be that much of a needle mover this year, but just curious where you see this mix settling.
Michael Mente: Yeah. It's a fairly significant portion of the returns that occur outside 30 days. It's a minority, but it's a substantial portion in it and that portion has increased over time. So, love to see what kind of impact the return policy has. We're certainly hopeful there could be some level of impact, but I think it's one of those things where you know you certainly can't do with any confidence whether there'll be a positive impact or not until you roll it out. So we'll have to see what kind of impact it has on the overall return rate.
Rick Patel: And it sounds like you're making good progress on own brands. I know national brands have been more of a focus over the last couple of years, but just curious how we should think about a potential acceleration for own brands and whether that's something that could be a needle mover this year.
Mike Karanikolas: Yes. As the business has been stable as over the past year or so, or I'll call it 18 months, as we have taken down own brand style delivery, we're starting to be a little bit more opportunistic. We haven't really planned for the acceleration at this point. We think now we're not really, really healthy position to really start to think about expansion once again. The inventory has been cleaned up, the new brands are performing extremely well. So I think we're hopefully at a near a tipping point for us to advance that saturation.
Rick Patel: Thanks very much.
Operator: Our last question comes from the line of Janet Joseph [ph] of JJK Research Associates. You line is open.
Unidentified Analyst: Hi, everybody and congrats on the progress. I just wanted to ask about FWRD. You're saying that the handbag and accessories business continues to be weak. So, I was wondering if you could discuss any strategies in place. Two, I mean, in terms of assortment architecture where you think that these comp climbs can moderate and if there's a possibility that they could flatten out or even turn positive as the year goes along. And I was wondering about opening price points there. We're seeing some of the luxury brands tweaked down their opening price points. And I was just wondering how you're thinking about your assortments in terms of categories and about your pricing. Thank you.
Mike Karanikolas: Yeah, definitely. Yeah. So handbags, as we noted have been particularly challenged. I think you're spot on that a lot of the price increases that the luxury brands put in over the past couple years have put a crimp on demand. And so is consumers continue to adjust to the new normal and hopefully is luxury brands start to rationalize price in kind of more accessible way. We're still in hopeful. We'll start to see that turn and then obviously comps are a big deal also. So even without those changes, just hopeful is comps get a bit easier. Then we'll start to see some better momentum in the FWRD business as we exit the back after the year, especially with all that disruption and opportunity and revenue share loss from those disrupted brands.
Unidentified Analyst: Okay. Anything on assortments and how do you think they should be better positioned? Yeah. From the assortment perspective, we're really thinking, a little bit more expansion. I think it's not really just a lot of the course, they categories per se, but kind of end use and functionality ends up being meaningfully different. So I think that's really where our focus is really tapping into the other aspects of lifestyle, but beyond the aspects of our lifestyle where she loves this already.
Operator: That's all the time we have for questions today. I'll turn the call back over to management for closing remarks.
End of Q&A:
Mike Karanikolas: I want to thank everyone for joining us today. Thank you to the Revolve team for all the great progress we made through this quarter. We feel great about the trends, particularly exiting the quarter progress made on margin and sales. And we're excited to hopefully continue the building momentum throughout the rest of the year. So, thank you.
Operator: This concludes today's conference call. You may now disconnect.
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