Revolve Group , Inc. (NYSE: NYSE:RVLV) reported a year-over-year (YoY) decrease of 4% in net sales during its third-quarter earnings call, amounting to $258 million. The company's net income declined 73% YoY to $3 million, while adjusted EBITDA fell 46% YoY to $9 million. Despite these challenges, Revolve remains optimistic about its long-term growth prospects, with a focus on cost efficiencies, reducing return rates, and expanding owned brands.
Key takeaways from the call include:
- The company experienced a 5% decline in net sales in the US and a 1% decline in international markets.
- Revolve segment net sales decreased 2% YoY, while FWRD segment net sales dropped 14% YoY.
- The company reported a significant milestone in inventory rebalancing, with a steeper decline in inventory compared to net sales.
- Active customers surpassed 2.5 million, marking a 53% YoY increase in the third quarter.
- Revolve generated strong cash flows of $12 million from operations and $11 million in free cash flow.
- The company plans to leverage AI and machine learning to drive growth and efficiency.
Despite a challenging macro environment, Revolve expressed confidence in its ability to outperform benchmarks through its core competencies and long-term initiatives. The company highlighted its use of AI and machine learning in various areas of operations, including visual search for customers and personalized recommendations. Furthermore, Revolve is focusing on expanding its own brand mix and sees growth potential in the men's and beauty categories, with beauty net sales increasing by 44% YoY.
The company also discussed upcoming brand marketing activations, particularly in international regions, and its plans to leverage AI and disruptive marketing on platforms like TikTok. Revolve ended the quarter with $267 million in cash and cash equivalents, with no debt. The company also has a $100 million stock repurchase program, with $87 million remaining at the end of the quarter.
Despite increased return rates and lower average order value, Revolve is actively working to reduce shipping and logistics costs. The company expects gross margin to increase YoY in the fourth quarter and for the full year, and is focused on investing in initiatives to extend its competitive advantages and maximize shareholder value in the long term.
Revolve Group executives also discussed the importance of TikTok as a growing platform for driving platform discovery for new customers, expressing excitement about the early success of TikTok and its potential to become a massive platform. The company also highlighted the success of their direct selling efforts on Instagram and TikTok, and mentioned that Mexico is one of their top international markets, expected to contribute to overall revenue growth.
The executives confirmed that despite a weak environment, they plan to lean in on marketing spend in the fourth quarter to seize customer acquisition opportunities. They also expressed optimism about the company's hard work and the positive results they expect to see, particularly in gross margin and fulfillment.
InvestingPro Insights
Revolve Group (RVLV) has demonstrated a strong financial position, with InvestingPro Data indicating a market cap of $929.5M and a P/E ratio of 28.71 as of Q3 2023. Despite a decline in earnings per share, the company's revenue sits at a robust $1070.09M. However, it's worth noting that the revenue growth has slowed down, showing a decrease of 1.11% over the last twelve months as of Q3 2023.
InvestingPro Tips highlight that Revolve yields a high return on invested capital and holds more cash than debt on its balance sheet, signifying financial health. The company's stock price movements can be quite volatile, which is evident in the 39.35% decrease in the year-to-date price total return. Despite this, analysts predict profitability for the company this year, reinforcing the company's optimism about its long-term growth prospects.
To gain further insights into Revolve's financial landscape and access more than 12 additional tips, consider exploring InvestingPro's in-depth analysis tools.
Full transcript - RVLV Q3 2023:
Operator: Good afternoon. My name is Julianne and I will be your conference operator today. At this time, I would like to welcome everyone to Revolve third Quarter 2023 Earnings Conference Call.[Operator Instructions]. I would now like to turn the call over to Erik Randerson, Vice President of Investor Relations at Revolve. Thank you. Please go ahead.
Erik Randerson: Good afternoon everyone and thanks for joining us to discuss Revolve's third quarter 2023 results.Before we begin, I would like to mention that we have posted the presentation containing Q3 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 and profitability and ability to generate cash flow, macroeconomic industry trends, our competitive position, our business operations and marketing initiatives and investments, average spending per active customer category expansion, international expansion, our inventory balance and management and our outlook for net sales, gross margin, operating expenses, and effective tax rate.These statements are subject to various risks, uncertainties and assumptions that could cause our actual results to differ materially from these statements, 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, 2022, 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 to 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 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.I will begin with a recap of our third quarter results, followed by updates on some key operating priorities and multi-year growth initiatives, consistent with our focus on investing for the long term to maximize shareholder value. Net sales decreased 4% year-over-year to $258 million in the third quarter, a slight improvement from the 6% decline in the second quarter of 2023.We believe spending on discretionary products by our consumer demographic is being pressured by many factors, particularly in the US, including persistent inflation compounded by higher interest rates, reduced savings and significant uncertainty in the macroeconomic and geopolitical climate.Net sales in the US decreased 5% year-over-year and netsales in international markets decreased 1% year-over-year.The relative outperformance in international was driven by exceptional growth in Mexico that was offset by declining sales in Australia and China, two regions impacted by economic challenges and currency headwinds.By segment, Revolve net sales decreased 2% year-over-year, with going out styles like dresses detracting from growth against difficult comparisons.It's important to keep in mind that as previously shared, we have operated with new inventory buys down by a mid teens percentage year-over-year through the first three quarters of 2023.A highlight of the Revolve segment is our accelerated growth in Beauty net sales that validates our long term opportunity for category expansion.Michael will talk more about this exceptional execution of our beauty playbook in his remarks. FWRD net sales decreased 14% year-over-year, within a luxury sector that is recalibrating after two years of extraordinary growth coming out of COVID.Aspirational luxury consumers who were flushed with cash 18 months ago, just don't have the same capacity to spend in the current environment.As a relevant benchmark, Bank of America (NYSE:BAC) recently reported that its credit card data reflects 16% year-over-year decrease in luxury fashion spending by US consumers in the third quarter. As we entered the year, a top priority was rebalancing our inventory.We achieved this objective in the third quarter as the spreads between our year-over-year inventory and sales trends were favorable in the third quarter for the first time in more than two years. This very important milestone was driven by the Revolve segment, where the year-over-year decline in inventory was steeper than the year-over-year decline in net sales by several points. Shifting to the FWRD segment. While I'm thrilled with our successful effort to rebalance total company inventory, which has been beneficial to cash flows. The composition of our FWRD segment inventory is not yet optimal.As mentioned on previous calls, it will take longer to fully rebalance inventory FWRD considering the current challenges in the luxury industry as well as markdown restrictions from luxury brands that extend the time frame from rebalancing our FWRD inventory. Moving to key metrics. As a company passionate about serving our customers incredibly well, I'm excited and proud that we cross 2.5 million active customer threshold in the third quarter.Notably, active customers increased by 52,000 in the third quarter 53% higher than our growth in the second quarter of 2023.The improved results benefited from year-over-year growth in new customers and an efficient cost of acquisition that declines year-over-year.Most gratifying is that our net promoter and customer satisfaction scores were higher than in any prior third quarter for at least 5 years.Not surprisingly, average spending per active customer has decreased year-over-year in the current environment.Yet we hear loud and clear that our customers absolutely love Revolve. We view the lower average spending per active customer as the temporary dynamic that will normalize over time as the environment improves. Shifting to profitability. We are proud to be one of the only fashion ecommerce companies that generates consistent profitability and cash flow a meaningful competitive advantage that allows us to invest through business cycles.Net income was $3 million or $0.04 per diluted share a decline of 73% year-over-year that was negatively impacted by an accrual for a pending legal matter equivalent to $0.07 per diluted share.Adjusted EBITDA was $9 million a decline of 46% year-over-year, which reflects a lower gross margin and continued pressure on selling and distribution and fulfillment expenses primarily due to the higher return rate year-over-year, partially offset by increased marketing efficiency.Very important is our ability to continue to generate strong cash flows. Cash generated from operations and free cash flow were $12 million and $11 million in the third quarter, a year-over-year increase of 25% and 33% respectively.Our strong balance sheet enabled us to confidently invest our free cash flow into our $100 million stock repurchase program announced last quarter without sacrificing an investment in the business.We deployed $12.6 million to repurchase approximately 907,000 shares of Class-A common stock during the third quarter at an average cost of $13.87 per share. Since we view the current environment as a near-term headwind and remain confident in our longer term opportunity to drive growth and profitability, we view stock repurchases as an attractive and accretive use of our capital.Moreover, in a time when many fashion ecommerce peers have significantly reduced investment to limit their cash burn, our long term mindset strong balance sheet and consistent cash flow generation gives us the confidence to continue to prudently invest throughout the cycle. Our long term approach to investment decisions should allow us to emerge in an even stronger competitive position when the environment improves. With that in mind, I will now offer updates on our important growth and efficiency initiatives that we believe will further strengthen our foundation for profitable growth over the long term. We remain extremely committed to driving cost efficiencies within our global shipping and logistics operations. The successful launch I discussed last quarter of consolidated customer return shipments from Canada to the US and local re-fulfilment for certain product returns in the UK have reduced costs as intended, but were overshadowed in our financials by the higher return rate year-over-year.Building on our early success, in the coming months, we plan to extend our local re-fulfillment of certain product returns to Europe.We expect this initiative to reduce shipping costs and provide even faster service for our valued European customers.I'm also excited by our innovation in establishing alternative shipping arrangements in certain US regions that reduced our shipping costs in these regions even further improved shipping timelines, particularly on the weekends.It is early days, yet we see great potential for our many initiatives to drive efficiency and even further improve on our exceptional service levels.With the increase in return rate year-over-year being such a headwind on our financial results, I'm spending a great deal of time and focus with the team on initiatives designed to reduce the return rate and make returns more efficient.A recent survey on our product returns indicates that nearly 2/3rd of returns relate to size and fit, validating our opportunity to move the needle over time as we believe we can leverage technology to do a much better job communicating the fit and sizing before the purchase.Some early results are promising. The virtual try on and size comparison feature tool launched last quarter on FWRD for handbags and accessories has shown excellent results in reducing return rates for customers who engage with it.We are planning to meaningfully extend the tools availability have recently launched it on the Revolve site as an AB test.We have also recently launched product videos on the product detail page for several brands and very soon, we will launch product fit guides to test additional efforts to reduce the sizing uncertainty.If these efforts prove successful, the financial benefits should be compelling.Consider that for every one point decrease in our return rate, we would expect to realize cost savings of approximately 30 to 50 basis points in reduced selling and distribution and fulfillment costs.A reduced return rate would also drive higher net sales due to a lower percentage of orders being returned. We are also very focused on further expanding our capabilities and growth opportunities within owned brands.As shared on recent earnings calls, the softening consumer demand in recent quarters has led us to be more conservative in planning our own brand inventory bias.Since own brand require a deeper inventory commitment per style than our third party brands and the lower mix of owned brands year-over-year is a driver of the gross margin decline I mentioned since owned brands have a much higher gross margin.Nonetheless, we are excited by and continue to invest in the long term potential in owned brands, which offer huge potential for product differentiation and margin expansion.Consider that our Revolve segment gross margin of 55% reported today was in the same zone as the Revolve segment gross margin in the third quarter of 2019 even though the owned brand mix of the Revolve segment net sales in the third quarter of 2023 was roughly half of the owned brand mix in the third quarter of 2019.This comparison illustrates the opportunity to drive margin improvement from own brand expansion in the coming years if we can continue to raise the bar through our ongoing investments. Lastly, we continue to expand the use of AI and machine learning across several key areas of our operations to drive growth and efficiency.I am excited about our current application of AI technology that allows our customers to visually search for similar styles without any keywords.Currently in beta testing, the compelling user experience is especially relevant for driving discovery among the tens of thousands of styles on Revolve.We are also gearing up to launch the personalized recommendations landing page for returning customers, leveraging outstanding development work by our data science team to tap into our deep data insights.We believe the increasingly personalized site experience will provide a more engaging and rewarding shopping experience and based on prior efforts could lead to improved conversion rates.I am pleased with our team's execution on these important initiatives that our key building blocks for our continued long-term growth and profitability. In summary, while we face a multitude of challenges in the current environment, we will remain on offense.We continue to focus on our competitive advantages of technology innovation, operating efficiency, and brand building to guide us through these uncertain times we invest in the long-term opportunity ahead of us. Now over to Michael.
Michael Mente: Thanks Mike and hello everyone. It has been a challenging few quarters contending with the macro environment and cycling through comparisons against the period of pentup consumer spending coming out of COVID.As a relevant benchmark, consumer sentiment in the US is currently 64, which is well below the consumer sentiment during the depths of COVID.Nonetheless, as CEOs of a grown company, Mike and I are not satisfied with our current results.Even within a current difficult macro environment, we expect to outperform the benchmark as we have for most of the 20 years since we founded Revolve.We have some work to do, our team is up to the challenge, and I feel great about our early progress on growth initiatives and strategies that we believe offer exciting potential for our future.Our long history operating the businesses taught us that periods of macro challenge can often present opportunity for market disruption.With our strong financial position, our fast paced and nimble operating structure, and our innovative entrepreneurial mindset, we believe we are well positioned to drive improved results. I will provide an update on what has me excited about our future. First, we have some impactful and innovative brand marketing activations in the works for the fourth quarter into early 2024 that I'm truly excited about.An important element of our brand building and our event planning strategy is sustainable, be relevant and fashion exciting.Our marketing plans for the fourth quarter and into early 2024 capture this strategy and our efforts to drive the greatest impact from our passionate community consumers, influencers and brands. One of our cornerstone brand building events in the fourth quarter will be in an international region where we see a great deal of opportunity for future growth in the years ahead.This follows on the heels of a highly successful activation in Mexico where our third quarter sales and customer growth were again truly exceptional, helped by further advances in service levels that drove another exceptional quarter of triple digit growth in new customers. As we exit the fourth quarter and extending into 2024, we have a number of activities planned featuring both the Revolve and FWRD that we are very excited about.We will share more details on these plans at later date. We are also leveraging our core competencies in disruptive marketing and technology innovations to drive results and lead a foundation for future growth.Mike talked about how we are leveraging AI for personalization and visual search on our website.Beyond this, it is important to understand that we are testing the use of AI broadly throughout the organization in an effort to drive growth and efficiency.In the coming weeks, we will also be experimenting with AI design images on our website and mobile app which is successful and proved to be a real game changer.We see many more applications for leveraging AI in the marketing realm building on the success of our innovative AI billboard campaign launched early this year. Finally on Friday, we will launch [Indiscernible] Revolve of from three emerging designers featuring new collections that were created entirely using AI Design.Produced by the three winners of the first ever AI fashion week, looks are incredible and will be exclusively available for sale on Revolve and as a company known for leading innovation on social channels, it is exciting to see our collaboration with TikTok Shop showing a great deal of promise in the early stages.Net sales generated from TikTok Shop increased meaningfully in the third quarter compared to the second quarter of 2023, even though we only made available a limited selection of products on TikTok Shop. A key contributor to assist is our proven ability to create compelling content for social channels and engage with influencers to drive awareness and impact combined with the conversion driven nature of the TikTok platform. Looking forward, we see an exciting opportunity to further leverage our experience in the TikTok platform and expand the range of Revolve products in category that will resonate with a large audience of Gen Z consumers and on content creators on TikTok. To capitalize on the exciting growth potential within this new channel, we recently launched a series of live streaming content videos intending to further engage the TikTok community with product insights, selling tips, and exclusive offerings.We also recently launched a dedicated TikTok Beauty account with beauty specific content that will also have a beauty focused store within TikTok Shop. Beauty is a great category fit considering that TikTok has a [Indiscernible] beauty community and that beauty is ideal for influencers to create compelling educational video content.For years, the viral nature of TikTok has been a powerful catalyst for the beauty category and now with TikTok Shop, consumers can discover and purchase products in one place. Speaking of beauty, I'll wrap up the commentary on our newer categories where we continue to see a lot of growth potential.The men's in beauty categories achieve strong double digit sales growth in the third quarter, further validating our opportunity for category expansion. Beauty was a standout performer, so I'll focus my remarks here. Beauty net sales increased 44% year-over-year and expanded to 4% of net sales from 3% in last year's third quarter. Helping to offset the current softness in our apparel categories.Our team has done an incredible job executing, improving all aspects of the Beauty business and bringing on a new Beauty brand to help drive the 36 point improvement in our year-over-year growth rate compared to the second quarter of 2023.Most exciting is our momentum in attracting impact from new beauty brands, which is even stronger entering the fourth quarter. In October, we added a full range of products on one of the most coveted beauty brands Laura Mercier to both Revolve and FWRD.This is a huge win that we believe may help build momentum tracking other top beauty brands. Also earlier this month, we extended our top selling beauty brand on Revolve, Charlotte Tilbury, to list on FWRD as well and right away in the first week, Charlotte Tilbury became our top selling beauty brand on FWRD. We expect several more impactful beauty brands to launch in the coming weeks just in time for the holidays. Our goal is to become the preferred beauty destination for our customers. The big part of achieving this goal is having the right selection.We believe that as we continue to optimize our beauty assortment, our loyal customers will buy more and more beauty from us because we have earned their trust through our brand, curation, and best in class customer experience.We are off to a great start with the brand additions I mentioned and a healthy pipeline of brands interested in partnering with us in 2024. In closing, while we continue to face challenges in the near term, our team is energized by the opportunity to drive improved results across a wide range of longer term initiatives that leverage the core competencies that have served us well in the past 20 years.I want to express the heartfelt thanks to our talented team for their incredible efforts and persistence, particularly in the last few years. Now I'll turn it over to Jesse for a discussion of the financials.
Jesse Timmermans: Thanks Michael and hello, everyone. I'll start by recapping our third quarter results and then close with updates on recent trends in the business and commentary on our cost structure as we look ahead.Starting with the third quarter results. Net sales were $258 million a year-over-year decrease of 4%, within an environment for consumer discretionary spending that remains quite challenging.Revolve segment net sales decreased 2% and forward segment net sales decreased to 14% year-over-year in third quarter. By territory, domestic net sales decreased 5% and international net sales decreased 1% year-over-year. Active customers, which is a trailing 12-month measure, increased by 52,000 customers during the third quarter. Our active customers crossed the 2.5 million customer milestone for the first time, an increase of 12% year-over-year.Our customers placed 2.1 million orders in the third quarter, an increase of 9% year-over-year. The increase in orders placed was offset by a decrease in average order value, or AOV, and the year-over-year increase in the return rate.AOV was $299, a decrease of 7% year-over-year against an elevated AOV comparison of $320 in the third quarter of 2022. It was the highest we have ever reported. Shifting to gross profit. Consolidated gross margin was 51.7%, slightly below our guidance range.The decrease of 127 basis points year-over-year primarily reflects a lower mix of net sales at full price and a lower mix of own brand net sales within our Revolve segment compared to the third quarter of 2022.As you can see from our segment gross profit disclosures, the year-over-year comparison for segment gross margin is more favorable at Revolve than FWRD, which reflects the great progress we have made rebalancing the Revolve segment inventory.As Mike alluded to, while we have made progress with rebalancing FWRD, we still have some work to do to fully optimize the FWRD segment inventory. Moving on to operating expenses.The quick summary is that better than expected marketing efficiency in the third quarter was offset by our fulfillment expense in selling and distribution expense as a percentage of net sales can be slightly higher than our outlook.Fulfillment costs were 3.6% of net sales.The increase of 56 basis points year-over-year was primarily due to a year-over-year increase in our return rate, a year-over-year decrease in AOV, increased rent expense, and other costs of operating our recently expanded fulfillment network and higher wages for our fulfillment center staff. We expect to realize efficiencies on fulfilment expenses, percentage of sales in the coming years as we grow into and optimize our increased fulfillment center capacity. Selling and distribution costs were 19% of net sales. The increase of 170 basis points year-over-year is primarily due to the higher return rate and lower AOV.We are aggressively pursuing initiatives both to reduce our shipping and logistics costs and to address the increasing return rate. Our marketing investment represented 15.4% of net sales, a decrease of 123 basis points year-over-year.Reflecting a reduction in brand marketing investment and events in the third quarter of this year as compared to last year, as well as year-over-year efficiency and performance investment as a percentage of net sales. The reduced brand marketing investment year-over-year is largely due to a shift in timing from the third quarter to fourth quarterwith a very active calendar of brand building events in the fourth quarter of this year, heading into 2024. General and administrative costs were $35.2 million, including the $6.6 million accrual for a pending legal matter. Excluding the legal accrual, Our G&A cost came in slightly lower than our outlook for the third quarter. Net income of $3 million or $0.04 per diluted share was impacted by the accrual for the pending legal matter, equivalent to $0.07 per diluted share.The 73% year-over-year decline in net income was also impacted by the net sales decline, a year-over-year decrease in gross profit, and continued pressure on certain operating expenses. Adjusted EBITDA was $9 million, a decrease of 46% year-over-year. Moving to the balance sheet and cash flow statement. Inventory at September 30, 2023 was $203 million, a decrease of 5% year-over-year and down 1% sequentially from the second quarter of 2023.The year-over-year decline was one point steeper than our net sales decline, illustrating the progress we have made in rebalancing our inventory. Net cash provided by operating activities and free cash flow in the third quarter increased by a strong double digit percentage year-over-year.For the nine months ended September 30, 2023, net cash provided by operating activities was $47 million and free cash flow was $44 million, an increase of 37% and 44% year-over-year, respectively.We put our cash flow to work towards the new $100 million stock repurchase program announced last quarter.We repurchased approximately 907,000 shares Class A common stock during the third quarter at an average cost of $13.87 per share. Approximately $87 million remains available, under the repurchase program at quarter end.As of September 30, 2023, cash and cash equivalents were $267 million, an increase of $23 million or 9%year-over-year, and we had no debt.Cash and cash equivalents decreased by $2 million on a sequential basis versus the second quarter of 2023 as a result of our stock repurchases. Now let me update you on some recent trends in the business since the quarter ended and provide some direction on our cost structure. Starting from the top, the top line pressure we experienced in the third quarter has continued with net sales for the month of October 2023, down a low single digit percentage year-over-year.To assist in your modeling of our net sales in the fourth quarter of 2020 I want to highlight that our net sales comparisons are more difficult in the month of November and December on both a one-year basis and on a multi-year basis, when compared to the October comparison. Consistent with the third quarter results, during October, year-over-year net sales, comparisons in the Revolve segment continued to outperform the FWRD segment.I would also like to highlight that our October net sales in the Middle East, which has been a growth driver for international were impacted by the war in Israel. Our hearts go out to everyone affected at home and abroad, suffering tragic loss and hardship surrounding the recent events in the Middle East. Shifting to gross margin. We expect gross margin in the fourth quarter of 2023 of between 51.7% and 52%,implying a year-over-year increase in gross margin compared to the fourth quarter of 2022. Taking into account out third quarter performance, we have fine-tuned our gross margin outlook for the full year 2023 to between 51.8% and 51.9%. Fulfillment,we expect fulfillment as a percentage of net sales to be around 3.6% for the fourth quarter of 2023, and now expect fulfillment to represent 3.5% of net sales for the full year 2023. Selling and distribution, we expect selling and distribution costs for the fourth quarter of 2023 to be approximately 19%, consistent with the third quarter result. And 18.7% of net sales for the full year 2023.The slight increase from our previous full year 2023 guidance primarily reflects a higher than expected return rate that has overshadowed early efficiency gains resulting from our shipping and logistics efficiency measures. Looking beyond the fourth quarter, in 2024, we believe we can begin to benefit from our concerted efforts to drive efficiency in our shipping and logistics operations globally. Marketing,we expect our marketing investment in the fourth quarter of 2023 to represent between 17% and 17.2% of net sales. For the full year 2023, we have narrowed our expectation for marketing investments to represent between 16.2% to 16.3% of net sales, which is unchanged at the midpoint from our prior full year range. General and administrative, we expect G&A expense of approximately $29.6 million in the fourth quarter of 2023 and $121.5 million for the full year 2023.This increase in our full year G&A outlook is entirely due to the $6.6 million accrual for a pending legal matter recorded in the third quarter. And lastly, we continue to expect our effective tax rate to be around 24% to 26%, consistent with the last several quarters. To recap, we are focused on the large market opportunity ahead of us, leveraging our strong financial position, and consistent with our focus on the long term, we will continue to prudently invest in a multitude of initiatives that we believe can extend our competitive advantages that maximize shareholder value in the years ahead. Now we'll open it up for your questions.
Operator: [Operator Instructions]. Our first question comes from Edward Yruma from Piper Sandler. Please go ahead. Your line is open.
Edward Yruma: Hey, good afternoon guys. Thanks for taking the question.I guess, first, I wanted to understand a little bit more about TikTok Shops. Is it your sense that this is an incremental customer or is this customer that would have maybe, seen the, media on Instagram and then go on to the site.I'm just trying to understand maybe kind of how does the all in economics of it look?And then I guess just to get maybe a little bit more further clarity on getting the FWRD inventory numbers in line. Is that a multi quarter kind of goal or did you get at the next quarter or two?
Michael Mente: Yeah. Hi, Ed. I'll take the first one on TikTok Shop. Our sense is what we've seen thus far is that it's more of an incremental customer. The nature of the [Indiscernible] is fairly different from what we typically see within, kind of our other channels, which is an exciting opportunity and the other thing I pointed out is the channel is still very new and nascent. It's gonna evolve a lot in the coming months.We've already seen it be very dynamic within just kind of the initial months that we've been operating. So you know, there's still a lot to play out here.
Edward Yruma: Yeah. This is for Jesse on the foreign inventory, of course, a lot of this is dependent on what happens in the macro environment looking ahead,but, we'd say it's not three quarters,it's probably more like that two quarter scenario.So we're probably not quite there by year end, but, as we get into the back half of, Q1 is our best, best estimate at this point before we read off on the inventory perspective on forward? Thank you.
Michael Mente: And Ed, actually, one clarification I'd add on the incremental customer, you know, just from a definitional standpoint, you should just be aware that we don't count those as additional active customers because they're coming in through a marketplace, and they're all tied to essentially, sort of single account within our system, and we don't have those customer emails.We do have names and shipping addresses, though, and plenty of ways to certainly engage with those beyond TikTok Shop.
Edward Yruma: Got it. Thank you.
Operator: Our next question comes from Oliver Chen from TD (TSX:TD) Cowen. Please go ahead.Your line is open.
Oliver Chen: Hi, Michael, Mike and Jesse. Regarding the environment and what you're seeing with return rates, it sounds incrementally worrisome given that focus. The customer or macros may be out of your control.So we'd love your thoughts on how that's interplaying with the future of return rates and also, as we look forward, to average order value and then on the customer acquisition cost, it sounded like the marketing efficiency was encouraging.What’s driving that? And what are you forecasting going forward for a customer acquisition cost? Thirdly, related to the first question, promotions, just one wanting your base case for the promotional environment because the whole industry is experiencing a lot of the cautionary comments you made.Thank you.
Michael Mente: Yeah. So I'll maybe kind of start with the end of your question, with regards to the promotional environment, you know, we're definitely seeing increased promotional activity, particularly within, FWRD in in the luxury segment. For Revolve, we certainly see it as well. We do think Revolve has the ability to stay above the fray with regards to that, but at the same time, when consumers are feeling pressured, you know, it certainly does have an impact within the Revolve, and we've seen that.Jesse, you want to take, the EOB question and the marketing kind of projections.
Jesse Timmermans: Yeah. On AOV, kind of separate from the return rate. We did see pressure on AOV this quarter, as you can see. Maybe starting from the top with the segment breakdown. FWRD was relatively flat, so it's more about, decrease in the AOV on the Revolve side, but there was also an impact with the shift from FWRD to Revolve and as you know, FWRD carries AOV that's two and a half times that of Revolve. So we do see that shift, we do see pressure on AOV. Then within the Revolve segment that was a decrease of about 6% just shy of 6% and that was largely due to both units per order and ASPs and that would in party, due to that mix in shift towards Beauty that carries that lower ASP.So you know, I think, a lot of moving pieces there and then on top of comping to a record high AOV in the prior third quarter. Looking ahead, we'd expect that to balance out, I would say. We're not gonna be up against such a significant comp and full price mixes getting back to a really healthy place and then maybe on the marketing efficiency was another piece of your question there.We did see efficiency on the tax this quarter, so that was really encouraging and to be fair part of that was due to timing. So we did shift some of the brand marketing activities out of Q3 into Q4 and into Q1.So, you know, there is a piece there but there was also efficiency on the performance marketing side, which we're really encouraged about and then maybe I'll kick it back to Mike.
Michael Mente: Yeahand then to address the first part of your question on the return rate, you know, we do think the environment is playing a large role just kind of seeing how consumer confidence is so low right now, even lower than the COVID depths. There is certainly a lot of disparate indicators out there, but I think whether at, kind of luxury spending data from Bank of America, consumer confidence, or other things and, certainly, we're working with our customers. I think she's not feeling in a good place, and that's affecting the return rate. That said, we definitely recognize it's a very important cost pressure.We are laser focused on it and, we are not happy that our business is not as solidly profitable right now as we want it. We are still in more challenging times, delivering cash flow and earnings, but just not at the level we want and so we are laser focused on that and we certainly hope to drive some good improvement there in coming quarters.
Operator: Our next question comes from Mark Altschwager from Baird. Please go ahead. Your line is open.
Mark Altschwager: Hi. Good afternoon. Thank you. So a lot of the headwinds you cite are more macro in nature. Given the macro picture remains uncertain and challenging heading into 2024.Do you think it's reasonable to expect top line growth in the first half of next year? Are there incremental levers you see for next year to better offset the macro headwinds versus what you've experienced thus far in in 2023? If there anything you can share on how you're thinking about that, would be helpful. And then, I have a follow-up on gross margin.
Jesse Timmermans: Yeah. Maybe I'll start, and then, if anybody else has anything to add. We are not going to comment too much beyond what we've said in the script. We did comment that October is down low single digits, but we are up against some, slightly more difficult comps in November, December.So we just want everybody to keep that in mind. To your point, macro is very uncertain. There's a lot of good things happening internally, but to your point, a lot of it is macro driven at this point.So, we are going to continue to stay nimble, you know, invest where we think there's meaningful return in the marketing and you know, we'll get back to inventory growth, at least on the Revolve side as we get into early next year.So we're optimistic about that, but not much more beyond that that we can say at this point given all the uncertainty.
Mark Altschwager: Thank you.And then, Jesse, can you help us better understand the factors that drove Q3 gross margin a bit below the guidance. And then just given the better inventory position, do you see less risk for Q4 and zooming in on Revolvethe gross margins there have been a bit more stable the last couple of quarters. It's 55% kind of the right level to be thinking about.Thank you.
Jesse Timmermans: Yeah. Maybe I'll start with the Revolve, even though that was, kind of a lesser impact this quarter. The year-over-year decline there is roughly split half-an-half between the full priced to markdown shift. We were slightly lower on full price this year, this quarter, than last year's third quarter. Again, that's in a really healthy place, if you compare it to pre-COVID, but still relative to last year, it is lower and then owned brands is the other half of that, year-on-year decline where owned brand mix was lower this year than it was last year.Lot of opportunity there, but given the, comments in the prepared remarks, we are more cautious on that own brand inventory in times when we're pulling back in, managing that inventory balance.So that's on the Revolve side and to your point, more stable and kind of less risk there as we look into Q4.On the DWRD side, this is where, year-on-year significant decline in margin and also sequentially, which was, would say maybe surprises, too aggressive, but we are working through the inventory.It is taking longer. The macro pressures are adding to that and kind of extending the time frame there.And then add on the promotional environment, we did move more aggressively into that markdown inventory and the markdowns were more significant than they were in Q2 and last year.So, I think we are probably at or near the trough on FWRD, but we probably have another couple quarters of challenge.
Operator: Our next question comes from Rick Patel from Raymond James.Please go ahead. Your line is open.
Rick Patel: Thank you. Good afternoon guys. You touched on it, but I'm hoping you can expand on how you're planning inventory for the spring of 2024.Sounds like you're seeing signs of encouragement for the Revolve brand and the Beauty category, but just hoping for more color there and if there's any other areas of the business that are worth calling out, from an inventory planning perspective?
Jesse Timmermans: Yeah. Maybe starting with Revolve to your point. We are further ahead on the inventory rebalancing and feel good about that inventory turns are up year-on-year. So we're at the point now where, we'll start to see buys increase year-on-year as we get into Q1 2024.On the FWRD side, as I mentioned, we've still got another quarter to rebalancing there. So the, kind of lean into inventory will be a couple of quarters lagging. So we'reprobably looking more at, like, year, on the FWRD side.And then owned brands is a longer tail,it takes longer to recalibrate and spin that up. So, I think as we as we approach the back half of next year, seeing some increases there, but as a percentage of the overall mix, not factoring anything dramatic in for 2024 on the own ground mix, different from where we're at today and maybe just to touch on Beauty as well because we are really excited about the Beauty.The brands that we've added in Q3 are really healthy roster and Michael mentioned this on the prepared remarks. Really healthy roster of brands coming on in Q4 and into, 2024.So really excited about that that area.
Operator: Our next question comes from KunalMadhukar from UBS. Please go ahead. Your line is open.
KunalMadhukar: Hi, thanks for taking the question.One on active clients, that number, is still growing. Can you talk about where, that you're adding active clients, whether it is US, International, and any demographic that you could give us and second, on the efficiency on the marketing side, is that driven by lower price, on a per ad basis, or is that driven by better targeting or better, maybe channel mix? Thank you.
Jesse Timmermans: Yeah. Hey, Kunal. On the first one on active customers, by geography, it skewed higher on a growth perspective, international versus domestic.So, roughly, not in line, but a similar dynamic to our overall sales growth where you see, international outpacing domestic.Within domestic, you see, markdown growth outpacing the full price growth but full price, still very strong and call it 2/3rd plus almost three quarters of the new customers are coming from full price bill.So a really healthy, customer base and then Revolve FWRD again, similar to the net sales dynamics where forward leg that of Revolve it's similar on the new customer side.
Mike Karanikolas: Yeah and then in terms of the marketing efficiency, it's a combination of things. We've been tweaking the performance marketing budgets over the past few quarters, runningvarious tests and kind of adding to our ability to optimize marketing and I'd say, we're kind of halfway to that future, or that process.So, it's a little bit of that, and then it's a little bit of timing in terms of brand marketing activity, which are more long term in terms of how they impact the business, but, overall that is one of the bright spots of the quarter that we're able to have strong active customer growth with some more efficient marketing.
Operator: Our next question comes from Janine Stichter at BTIG. Please go ahead. Your line is open.
Janine Stichter: Hi. Good afternoon everyone. I wanted to ask a bit more about returns and some of the initiatives you have to improve the certainty.I think you talked about a few initiatives, virtual try on, videos, product fit guides, but it seems like they're all in the kind of earlier stages of roll out.So I just wanted to understand when we could see them rolled out more broad and then on that within selling and distribution expense, I think you're targeting 18.7% this year and you've talked about getting to kind of the high 17 range, maybe even the low 17 longer term. Any structural changes that thinking based on what you're seeing on return rates now. Thank you.
Michael Mente: Yeah. So in terms of the return initiative, they are in the earlier stages and in terms of broader roll out, there is going to be a couple of things. One, we need to see there's this significance on the impact that we're trying to make and then two, for a number of them, and it depends on kind of which one, but a number of them we require a lot of manpower to do well. Manpower that's well worth it, compared to the cost savings, butit'll take time kind of wrap that up once we get sort of the full confirmation that these target efforts worked, you know, then we have to roll it out more broadly and make sure we have the right team to support. In terms of selling and distribution costs, in kind of forecast on those going forward. I'd turn it over to Jesse.
Jesse Timmermans: Yeah. Hi, Denise. We got hit on a number of fronts on that selling and distribution quarter. The return rate was a big factor, in that year-over-year increase that we saw. Lower AOV also had a pretty significant impact there. Those two pressures.We had some really great cost savings initiatives that started to take place and really have an impact in Q3, but not enough to offset those two factors.So if you look on a cost per order basis, the cost per order on selling and distribution was actually lower by 4% year-on-year. So some good early gains there, just not enough to offset thepressures that we saw this quarter. So we factored that into our guidance for Q4 and taking a cautious stance there, but as we look ahead into 2024, we are optimistic and, we are in the early stages of those efficiency and cost savings initiative. So, we are optimistic.I think it's probably, from the time we talked last quarter, the timeline has probably extended given some of the increased pressures that we've seen in return rate, kind of at those elevated levels.Also on a sequential basis, we saw a fuel tick up again. So it was kind of up 10% sequentially from just last quarter. We're still lower on a year-over-year basis, but, you know, some of those things just work in our favor this quarter, but we feel optimistic over the mid to long term on that that line item.
Operator: Our next question comes from Alice Choy from Bank of America. Please go ahead. Your line is open.
Q – Alice Choy: Hi. Thanks for taking my question.Where do you see beauty shake out as a percentage of sales longer term? How quickly are you expanding that business, signing up new brands, what's the crossover for customers that purchase apparel versus Beauty Now?How much lower is Beauty AOV what and what are long term margin implications if, you have a higher percentage of Beauty longer term.Just more details on Beauty would be helpful since it seems to be the one kind of category bright spot.
Michael Mente: Yeah. There's other bright spot, but definitely Beauty is really, really shining.Long term wise, you know, we look at kind of historic competitors, you know, whether it be, you know, previous generation, kind of like legacy players, like the department stores, like, a noise from our Neiman's and things like that and we triangulate, you know, call it 15%, some competitors receiving, higher or closer to 20%, but, ultimately, in a mature state, we think the business should be something in that zone. So we have a long way to go. Of course, over the long term, we anticipate kind of our core apparel business to continue to grow.So we think that, you know, from a dollar's perspective, you know, you know, that 15% to 20% will hopefully just get larger and larger over time.So, moving target there. So quite excited about that. You know, of course, it's super obvious that our customers are buying clothes to go out. Of course, they're wearing makeup and Beauty.So, of course, that natural fit there. Long term wise, when we look at the economics, just to tell you the best first in terms of talking about the puts and takes and the long term opportunity there.
Jesse Timmermans: Yeah sure and maybe just to corroborate, kind of something Michael mentioned, 15% plus or minus of our new customers came from Beauty. So it shows the potential of that mix increasing over time and some of that overlap that we do experience and then those Beauty customers do come back and purchase that higher AOVs over time, similar to our overall customer, but at a greater kind of increased AOV basis.So, opportunity to continue to sell across all those Beauty customers.From a kind of an economic standpoint, so gross margin is lower on those beauty products, but other things to keep in mind as we work down through the contribution margin, the return rate is significantly lower.So we're talking, kind of mid-single digit return rate versus our overall return rate is much higher than that. So, you know, we think it's a very healthy product category to have and balance out the mix there.
Operator: Our next question comes from Ashley Owens from KeyBanc Capital Markets. Please go ahead.Your line is open.
Ashley Owens: Great. Thanks for taking the question. Just would be curious to hear comments on the inventory mix within FWRD as it stands today. Are there any categories that you feel are close to being right sized? And then, inversely, any that you're having a harder time clearing through that are creating some of those rebalancing lags. Thanks.
Mike Karanikolas: Yeah. So, you as a whole, we certainly have too much inventory.It is concentrated in brands that have more markdown restrictions that kind of prevent us from going, you know, through a normal kind of markdown cadence on the website itself and then from a category standpoint, it is concentrated in categories that tend to hold their value well, things like handbags, shoes, accessories, logoed products.So we feel good from that standpoint. But, it's certainly been a challenging situation and a bit frustrating that the inventory still isn't fully rebalanced but to Jesse's earlier comments were hopeful in the coming quarter as well start to see that churn.
Operator: Our next question comes from Dylan Carden from William Blair. Please go ahead. Your line is open.
Dylan Carden: Thank you. I know you're not going to give a hard numbers, but can you at least sort of somehow give us a sense of the dynamics on sort of the return number?Is it is it sort of increasing steadily quarter? Is it something that's stabilizing just at a higher rate, just trying to get my hands around?
Mike Karanikolas: Yeah. I'm sure there's a lot of moving parts every quarter, and we certainly break it down a number of different ways.So I couldn't give you a conclusive answer on that, but I'd say directionally as we interpret the data, there was continued pressure in Q3, and it didn't look like a stabilization in Q3. Now whether it was continued increasing kind of quarter-over-quarter rise is hard to say because there's too many moving parts quarter by quarter in terms of mix shifts and other dynamics, but you know, we haven't seen clear signs of stabilization.
Dylan Carden: Okay. And it's something caught in passing in the prepared remarks. Is there a dynamic in the model now where if your sales come in higher than you expect, your earnings actually come in lower because they come with higher returns? Is there a dynamic that was at play in this quarter that I misunderstand?
Jesse Timmermans: No. I don't think not necessarily.I think that a lot depending on the mix and, AOVs of course, but I would say,yeah. Not directly a result of net sales coming in.
Mike Karanikolas: I mean, in general, having net sales are good for everything including [Indiscernible]. Now, obviously, it depends on the dynamic, where marketing expenditures higher, where gross margins low and where return rates higher, but all things being equal.More net sales is a good thing.
Dylan Carden: Okay. Great. That's all for me. Thanks.
Operator: Our next question comes from Simeon Siegel from BMO (TSX:BMO) Capital Markets. Please go ahead. Your line is open.
Simeon Siegel: Thanks. Hey, guys good afternoon, and I appreciate you making your comments regarding Israel. So congrats on topping the 2.5 million. How are you thinking about the active customer's trajectory for the short and longer term opportunity from here?Are you seeing any meaningful spending pattern differences in the new customers versus the existing and then just how do the existing active customers break down between Domestic and International?
Jesse Timmermans: Yeah. Let's see. So I think new customers, continue to grow on the new customer front and holding up on the active customer front.That growth iscompressing as we as we work through these quarters. So the year-on-year growth for active customers is, you know, going to be a little bit lighter in Q4 than it is in Q3 and over time, those two will get back to kind of call it the old days after we cycle out of all these comps where the net sales and the active customer growth are plus or minus in the same zone and what we're seeing from the new customers, nothing significant that that popped out from a particular cohort of new customers, all cohorts are behaving relatively the same.You do see differences in and we're shifting between the full price and markdown and the Beauty customer is new to us so we'll see how that plays out over the long term, but as mentioned, those customers are coming back at higher average order value. So optimistic about that and then I would say no significant difference between the retention patterns between domestic and international.A lot of that is, dependence on the localization effort we've made over the past several years so that retention dynamic is much stronger given the free shipping, free returns and the customer experience, that we've optimized over the last few years.
Simeon Siegel: Okay.And then just how many of the customers are international? And then if come with an AOV, did you, or could you know what ASP was versus units per order? And I think that's an LTM number. How was AOV or ASP for this quarter versus the prior year period?
Jesse Timmermans: Yeah. Yeah. So I guess not breaking out, specifically the international versus domestic active customers but it's roughly in the same zone as the domestic, but keep in mind that for international SKU is a little bit heavier forward. So it would be a little bit lighter on a customer versus, revenue basis. On AOV, and ASP versus, UPO, there was a decrease in both of those, both ASP and UPO. UPO was the biggest impact of quarter on a year-over-year basis and some of that was due to the shift in mix towards Beauty and specifically that TikTok Shop, there were lot of single item orders, so that skewed the UPO lower. On top of that, Q3 of last year, we had a really phenomenal UPO quarter.So there's a little bit of a dynamic there and this is all on the Revolve side because forward is plus or minus in the same zone on AOV. So ASP on Revolve was also down year on year and much of that was due to the shift and mix to Beauty. So you kind of stripped Beauty out ASPs were up, a healthy number outside of that duty category. So, largely due to mix on both of those.
Operator: Our next question comes from Jim Duffy from Stifel. Please go ahead. Your line is open.
Peter McGoldrick: Hi. This is Peter McGoldrick on for Jim. Thanks for taking our question. I wanted to ask on social marketing, you offered some valuable insight on customer engagement through TikTok, driving the playbook for customers and Beauty.Could you provide some sense of how important this channel is to driving platform discovery for new customers overall? Perhaps size it against the magnitude of, static posts on Instagram.
Michael Mente: Yeah overall, we see the long term trending that TikTok is the growing platform with and, of course, with the growing platforms, provides growing opportunity, Instagram being a little bit more mature isof course is very, very important for us and something we're still very focused on, but of course, staying on top of where the puck is moving, pay attention to TikTok and developments there and the success there is very quite encouraging, you know, as Mike mentioned on some earlier questions and such that it is, very dynamic and very early.So we're, quite excited with the early success. It had the early success in direct selling has succeeded, mature success in Instagram direct selling, and being in the early zone that, if TikTok is right it could be a very massive, but at this point, it's, very early, but super encouraging.
Peter McGoldrick: Thanks and then I just had a one follow-up on Mexico.This market continues to show strong customer traction. Can you size this business as overall mix of international and offer some sort of guide as to how big this could, be or contribute to revenue, looking ahead.
Jesse Timmermans: Yeah. So it's certainly, I mean, one of our more important international markets, it's our top 5 countries now, I mean, in in terms size and soit's certainly a meaningful portion of the mix but at the same time, we do sell worldwide.So, it's not like, it has some dominant share but it's starting to get to a size where at the current growth rates, it does have a meaningful impact on the overall growth of the international business, what we're hopeful, we can continue our efforts there. And it'll, you know, drive more and more to total growth as that market gets larger and larger.
Operator: Our next question comes from Matt Koranda from Roth MKM. Please go ahead. Your line is open.
Matt Koranda: Hey, guys. Just want to see if we could back up, real quickly to the October trend that you mentioned, the down low single digits.It just doesn't sound like a big deceleration despite all the concerns and the headwinds that your consumer is facing.So anything you can unpack for us as to why that's holding up despite some of the incremental headwinds facing.And then just, Jesse, maybe any monthly comp dynamics to call out, the fourth quarter as we think about modeling top line growth.
Michael Mente: Yeah. I would agree thatof course, we're not happy with a negative growth quarter, but you're looking at the big picture, could be a lot worse.I think it really kind of highlights the competitive landscape where us being in a premium player, we're competing against you know, the legacy players of decades ago, and we continue to do that quite well, especially in times of challenge.You know, we see, very intense competition in luxury zone with the conglomerates, and we also see at the kind of mass market zone with the [Indiscernible] against, the incumbents we see at home.They're taking over that business but inthe middle premium zone, we are unique and we don't face any direct model competitors.So I think that the long multi-decades trend of us competing against legacy players continues to be you know a long term trend that ultimately drive continued success.
Matt Koranda: And then, Jesse, maybe on the monthly comp call out that'd be great.
Jesse Timmermans: Yeah. Nothing, significantly incremental to what you mentioned on the call in that November and December are slightly tougher, both on a one year and a multiyearcompering to the 2019 basis.So we just wanted to call that out. So you could factor them into the full quarter, butnothing out nothing more outside of that.
Matt Koranda: Okay. Got it. And then just I was a little surprised to see you guys leaning in the marketing spend in the fourth quarter commentary despite somewhat of a weak environment.So are we seeing an opportunity to play offense for customer acquisition? Is there brand spend going on in the fourth quarter? Just maybe help us understand sort of the incremental, lean in there.
Michael Mente: Yeah.I would say it's a long term offense, you know, in in times like this we really see thatcompetition and, the appetite, it's like a lot ofyour intuition, I think is quite common and I think that's kind ofhow a lot of people approach the situation, but I think it's when people are zagging, being opportunistic when people are conservative, especially when the core business is strong and especially when we have a long termmindset.So we do see opportunities, coming up and we'll continue to invest.
Operator: We have time for one more question, and it will come from Tom Nikic from Wedbush Securities. Please go ahead. Your line is open.
Tom Nikic: Hey guys thanks for squeezing me in. Jesse, I think, obviously your margins have come under pressure the last couple of years.Is there any way we should or could think about what is recoverable and what may be, structural, relative to I guess, margins that we're seeing a couple of years ago?
Jesse Timmermans: Yeah. Great question Tom. Yeah, I think a large portion of it is recoverable. I think if you start at the gross margin level, we are coming off of an inventory rebalancing period. We're still being pressured by forward. Something that Mike mentioned in his prepared remarks that I think is important in that, we're roughly in the same zone on gross margin for Revolve now as we were in 3Q of 2019, despite the fact that owned brands is half the mix that it was back then.So I think that shows;one, the great success we've made on both own brand and third party gross margin standalone and then second, the opportunity we have looking ahead is we increase that own brand mix.So that's number one. And I would say largely recoverable and not just recoverable, but, getting in excess of where we were in a pre-COVID levels.Fulfillment, we are at a point now where we're getting pressured by, again, the return rate, the AOV, also capacity, where we expanded our fulfillment footprint, last year around this time we haven't fully optimized, fully grown into that. So there is opportunity there.So that is maybe not 100%, but largely recoverable. Selling and distribution is tougher, given the return rate pressure that we have experienced, the increase in rates over the past several years, fuel in particular.So, we do think there is a lot of opportunity there, and we have a lot of initiatives that play internally. We're already starting to see the savings there, but that is, I would say, recoverable, but not to the extent of those other two.If we can't get return rate, right to which we think there's a lot of opportunity there. Marketing is a lever we can pull. If I've been called out a recoverable or unrecoverable, that's, kind of an opportunity and a lever we can pull and then G&A is very recoverable, and has a lot of leverage as we look ahead and get back into growth territory and get some, get some scale leverage there.So and if you look at that line item, a couple points over the last three years, we think that is achievable over the next few years as well.
Tom Nikic: Understood. Thanks, Jesse. Best of luck for the rest of the year.
Jesse Timmermans: Thank you.
Operator: This concludes today's Q and A session. I would like to turn the call back over to management for closing remarks.
Mike Karanikolas: Hey, guys. Thanks for joining us for another quarter. We will continue to stay focused, our team is working on a lot of exciting things as they are now so excited to share the positive exciting results of the hard work and the foundation that we're letting you know.Thanks, guys.
Operator: This concludes today's conference call. Thank you for your participation.
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