Q4 2023 Revolve Group Inc Earnings Call

Participants

Erik Randerson; VP of IR; Revolve Group, Inc.

Michael Karanikolas; Co-Founder, Co-CEO & Chairman of the Board; Revolve Group, Inc.

Michael Mente; Co-Founder, Co-CEO & Director; Revolve Group, Inc.

Jesse Timmermans; CFO; Revolve Group, Inc.

Mark R. Altschwager; Analyst; Robert W. Baird & Co. Incorporated

Edward James Yruma; Analyst; Piper Sandler & Co.

Simeon Avram Siegel; Analyst; BMO Capital Markets Equity Research

Janine Marie Hoffman Stichter; Analyst; BTIG, LLC

Oliver Chen; Analyst; TD Cowen, Research Division

Ashley Anne Owens; Analyst; KeyBanc Capital Markets Inc.

Tom Nikic; Analyst; Wedbush Securities Inc.

RIck Patel; Analyst; Raymond James & Associates, Inc.

Anna Andreeva; Analyst; Needham & Company

Michael Binetti; Analyst; Evercore ISI

Jim Duffy; Analyst; Stifel, Nicolaus & Company, Incorporated

Presentation

Operator

No, no, no, no, no.
No.
Okay.
Or are in?
No, we will.
I mean, too No, in the mall for more.
No a lot.
Thanks.
No, no, yes.
Sure, Mitch, thanks.
Thanks.
Thanks.
Thanks.
No, good afternoon.
My name is Rob, and I'll be your conference operator today.
At this time, I would like to welcome everyone to the revolves Fourth Quarter and Full Year 2023 Results Conference Call.
All lines have been placed on mute to prevent any background noise.
After the speakers' remarks, there will be a question and answer session.
If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad.
If you would like to withdraw your question again, press the star one.
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 revolves Fourth Quarter and Full Year 2023 results.
Before we begin, I'd like to mention that we have posted a presentation containing Q4 and full year financial highlights to our Investor Relations website located at investors dot 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 for inventory balance, our key priorities for 2024, including related invest payments, product category expansion, cost saving measures, international expansion and technology enhancements, marketing events, our partnerships 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 and in this afternoon's press release as well as other risks and uncertainties are disclosed under the caption Risk Factors and elsewhere in our filings with the Securities and Exchange Commission, including without limitation, our quarterly report on Form 10 Q for the quarter ended September 30th, 2023, in our annual report on Form 10 K for the year ended December 31st, 2023.
We expect to file with the SEC on February 27th, 2020, for all of which can be found at our website at investors dot 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 will also reference certain non-GAAP financial information, including adjusted EBITDA and free cash flow.
We use non-GAAP measures and some of our financial discussions as we believe they provide valuable insights on our operating depletion of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to financial information we are prepared and presented in accordance with GAAP and 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 rationale for using them can be found in this afternoon's press release and in our SEC filings.
Joining me on the call today, our Co-Founders and Co-CEOs, Mike Karen acknowledgment, Michael maintain 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.

Michael Karanikolas

Hello, everyone, and thanks for joining us today.
We ended the challenging year in 2023 with a solid fourth quarter, highlighted by a return to growth in the REVOLVE segment year over year increase in our consolidated gross margin.
Some encouraging early progress in our efforts to drive efficiencies in our global logistics operations.
I'll start by briefly discussing highlights to our fourth-quarter results shifting to the full year 2023, in closing with our key priorities for 2024.
Net sales were 258 million in the fourth quarter, a decrease of 1% year over year in a slight improvement from the 4% decline in the third quarter of 2023.
Us net sales decreased 2% and were LPs by international net sales increasing 7% year over year for international games were highlighted by exceptional growth in Mexico and improved year over year growth in Europe in the UK, partially offset by declining sales in China in the Middle East.
By segment revolve net sales increased 1% year over year in the fourth quarter.
Our first year-over-year increase in the four quarters forward.
Net sales decreased 10% year over year, consistent with external reports from the luxury sector as a relevant benchmark or just analytics reported that its credit card data reflects a 10% year over year decrease in luxury apparel spending by US consumers during the holiday season.
Now moving below the revenue line, a testament to our progress in rebalancing our inventory.
Our gross margin expanded to 52% in the fourth quarter, representing our first year-over-year increase in gross margin in six quarters.
And with our inventory dynamics now at a very good place in early 2024, we are back to year-over-year growth in receipts of new inventory for the REVOLVE segment.
Net income for the fourth quarter was $3.5 million, or $0.05 per diluted share, and adjusted EBITDA was 9 million.
As expected, both profitability measures declines every year.
I will now shift to a review of our performance and accomplishments for the full year 2023.
Before briefly touching on our key areas of focus for the coming year from day one micron, I have approached the business with the customer at the center of everything we do.
Even through a very challenging year, we continued to deliver an exceptional experience to our customer base of 2.5 million active customers increasing are already exceptional customer satisfaction scores by more than a full point year over year.
Our active customers grew 9% year over year, and we see a huge opportunity for further expansion in the US and overseas.
And importantly, we drove a year-over-year decrease in our average cost to acquire customers in 2023.
We believe the reduced cash illustrates the strength of our brand and execution by our team and optimizing spend across channels and audiences within a competitive environment.
Now shifting to our top line results.
Net sales in 2023 were 1.1 billion, a decline of 3% year over year.
Despite the healthy growth in active customers, our customer demographic faced increased macro pressures in 2023, which we believe contributed to the normalization of spending levels from the significant apparel spending in 2021 and 2022 coming out of the COVID lockdowns to normalization of purchases by our customers in 2023 is also evident in a key net sales retention metric.
Recall that once a year, we disclosed the revenue retention from our prior year cohorts, defined as the revenue retention rate from the previous year for our existing customers who had purchased from us in a prior year.
Since this retention metric has experienced significant variability in the past four years.
For obvious reasons, we believe it's important to look past the peaks and valleys.
In 2023, active customers placed an average of 3.42 orders, which is 8% higher than in 2019.
Also importantly, the average of our cohort net sales retention rates reported over the past four years as 92%, which is higher than our 89% net sales retention rate reported in 2018.
Looking at the category performance, while the net sales of dresses, our largest category was pressured in 2023 after increasing nearly 50% in 2022 and expanding at an even faster rate in 2021.
I'm excited by our progress in emerging categories.
Our emerging areas of beauty, men's and home collectively increased by more than 20% in 2023, further validating our opportunity to expand our share of wallet in helping to offset the 5% decline in net sales from dresses.
We executed very well on our primary goal we set for 2023 to rebalance our inventory for growth in it efficiency.
Successful execution of this initiative helped drive a meaningfully higher mix of net sales at full price in the second half of 2023 when compared to how we started the year.
This sets us up well entering 2024, and we continue to operate profitably and generate significant cash flow.
While we are not satisfied with our adjusted EBITDA margin in 2023 are profitable and cash-generative business remains a key competitive advantage.
In 2023, we generated 43 million in operating cash flow and 39 million in free cash flow, an increase of 85% and 114%, respectively.
Consistent cash flow generation gives us the capacity to invest throughout the cycle at a time when many peers have no choice, but to significantly reduce investment.
Our strong cash flow has further strengthened our balance sheet with 245 million in cash at year end 2023, even while investing 31 million in stock repurchases during the year to enhance shareholder value, our cash position has increased by nearly four times compared to the 65 million cash on our balance sheet at year-end 2019.
Finally, we meaningfully advanced our technology and personalization capabilities during 2023, further elevating the customer experience.
Leveraging a I we significantly improved the recommendation of similar items using visual images, expanding conversion opportunities and further elevating our navigation for customers driving continuous improvement and personalization and site navigation is particularly important since we offer a broad assortment of more than 100,000 styles at any given time.
I will wrap up with a discussion of our key priorities for 2024, which are aligned with our focus on maximizing value over the long term.
First, we will continue to efficiently invest to expand our brand awareness, grow our customer base and strengthen the connection with the next-generation consumer.
Michael will talk about our brand building initiatives in his remarks.
Second, we will continue to build on the successful expansion of our assortment into adjacent product categories of our brand extra customer experience.
The impressive growth of our beauty men's businesses in 2023 validates our ability to tap into this customer loyalty and trust to drive adoption in emerging categories.
Third, we remain extremely committed to driving cost efficiencies within our global shipping and logistics operations while maintaining a laser focus on our outstanding customer experience.
In 2023, we successfully ramped our newer East Coast fulfillment center that brings us closer to many of our customers, which we believe will enable us to realize further cost savings in elevate service levels through shorter shipping distances, supported by new AI technology application that strategically optimizes inventory rebalancing between our fulfillment centers to mass consumer demand.
Among many other initiatives.
I'm confident in 2024, we will begin to drive efficiencies in our logistics costs year over year.
Fourth, we will further expand our international presence where we see exciting opportunities to invest in our customer acquisition and and further elevating service levels to drive growth.
We recently launched a new marketing communications channel in Mexico that has helped us to increase consumer engagement and drive even faster new customer growth.
And what is now our third-largest market outside the US.
Finally, we will further enhance our technology stack and leverage AI and other technologies across the business to drive growth and efficiency.
Michael and I are huge believers in the power of AI.
Since day one, we have leveraged our own proprietary technology to run nearly all aspects of our business, delivering capital efficiency that is highlighted by our capital expenditures, averaging only 0.6% of our net sales in 2016.
We believe our data-driven mindset and culture of technology innovation positions us well to continue to expand the use of AI technology throughout the organization to drive results.
To summarize, we have an unwavering focus on driving profitable growth and market share capture in the years ahead.
Like many companies, we continue to face a host of challenges in the current environment, and we have a lot of work to do.
But in contrast to most fashion e-commerce peers, we have a profitable and cash-generative business, proven financial discipline and key competitive advantages that together enable us to confidently invest in the large opportunity ahead of us.
I would like to thank our talented and passionate team for their incredible efforts, persistence and innovation that reinforces my confidence in our future.
Now over to Michael.

Michael Mente

Thanks, Mike, and hello.
Everyone has an effect on 2023.
I am proud of a tool for overcoming a variety of headwind or profitability, has significant cash collect further strengthened our balance sheet.
We continue to build our brand through innovative and impactful marketing strategies in the US and overseas.
These marketing efforts helped us to increase our active customer base by 9% in 2023, while even further raising the bar already had outstanding service levels and customer Chuck and our brand and delighting our shopping experience helped us successfully expand into emerging product categories.
Setting long-term opportunity.
Most importantly, is that we continue to invest and innovate throughout the Company to strengthen our foundation for future growth, which we remain very confident, and I'm excited to continue the momentum in these areas this year.
Shifting to the industry landscape.
Since at third quarter earnings call in November, that has been a lot happening in our space, particularly in light of luxury cars less peers.
two of the larger luxury e-commerce retailers were recently acquired and just buy out, there was another large luxury e-commerce competitor listed as a discontinued operation by its parent company as reported by the Wall Street Journal business, the fashion and WWD. to have also been reports of luxury retailers not paying the bank partners on time.
While these recent industry headlines, there were some investors, we are excited about the opportunity for us to benefit from industry turmoil.
For instance, a major luxury brand group has already announced.
They will no longer sell their products in one of the e-commerce players are referred to as a profitable company with consistent cash flow generation and focus on creating value over the long term, we believe we have well positioned to emerge as an even stronger player.
A 20-year history has taught us that periods of market disruption can be a great time for us to invest some others in this Basin of Western retrench, but that has a batch.
I will focus my remarks on our strategy to leverage our financial strength position in the market to invest in our brand, acquire customers and gain market share over the long term, what the large market opportunity we believe lies ahead of us.
Continuing to invest in our core domestic customer remains our number-one priority.
Ahead of our fourth quarter was opening of our band, elevating REVOLVE and FORWARD pop-up shop experience in Aspen, just-in-time for the holidays launch with a private event hosted by a four autoclaves vector Kendall Jenner.
We have to create something truly special, an aspirational tell with a high concentration of wealth and as also a celebrity hotspot and Knight less fashion.
Tigo were Evolent, Jesse, to address REVOLVE and FORWARD pop-up was prominently featured evokes ranking of the top five designer pop-up statistics, which are the only multi-brand retailers featured among iconic luxury brands like move a ton and people are visiting and spending.
A lot of data traffic for the first two months of operation has been impressive highway appearances and a this is including Liana, right, carry Roy Harvey, Alexandre D’Ambrosio, stellar Maxwell brand partner, Ensco border sunlight and featuring experiential events co-hosted by coveted brand partners, including you show it until dairy Jonathan's Inkai route a turn and normalize.
Also exciting is that the pop-up as our first to integration and are highly complementary segments, REVOLVE and FORWARD under the same roof.
In addition to the brand integration that is consistent with our first strategy, consumer demand at the top of its highlighting opportunity to further expand into adjacent seasonal categories where our brands that have a line such as auto M across a broader range of price bundles of G. products at $25 to handbags of nearly $100,000 most compelling, this customer engagement, interest and open up more than half of all customers at a pop-up are entirely new customers to our brands, reinforcing our opportunity to grow our customer base and our existing customers and fans have been guilty experience and interact with our brands to realize customers are spending significantly.
More per transaction is asking up and they typically do online while they're turning positive very small fraction of our typical the churn rate for products purchased online.
So we are very pleased with the learnings from the published so far.
If you're in Aspen becoming lease, please stop by and see us as we look ahead.
We have some very exciting place for further investment in our brands in 2024.
We're putting a fresh take on our expansion, Michael events that we are Nova as loss in the past or partnerships in the works that we will be able to share more details on in the coming months.
In addition to the large domestic opportunity, we continue to see a very large opportunity to further expand our share in international markets.
In recent months, we have been incredibly active and elevating our brand with aspirational lifestyle events around the globe, the key regions, including Tokyo, Singapore and the Netherlands, creating then he and the excitement on social media and press channels, coinciding with a solid quarter for international net sales growth in Q4.
one reason we chose to activate in Asia during the fourth quarter is that Asia has our largest social media.
Following outside of the U.S.
It's a true testament to the strength of our brands globally, especially considering that we have not yet made significant investments in that region.
Journeys that details by country.
China had a second largest social media following up with the U.S. on this growing opportunity for future growth in Asia.
So our recent marketing events in Singapore and Tokyo content creators would be unexpected to work with us.
International markets collectively deliver more content than we expected of them and contributing to large success of our largest ever marketing events in Asia, influencers, enthusiastically telephone, China, Taiwan, India, Korea and Australia, Vietnam, Malaysia, Philippines, Europe, Canada and the U.S. to participate.
Non-defense collect the social following exceeds 100 million followers on Instagram on a combined basis.
Of note, nearly half of the one hundreds of millions of social media impressions generated by Singapore market, but one native Chinese social media platforms, including 1 billion of our top Chinese influencers, generated 30 million views on billion alone.
It has become a very important part of our international strategy to expand our presence and awareness, omnichannel, social media and commerce platforms to have a very powerful influence and Asian consumers.
I couldn't be more pleased with how well as Singapore event delivered against this objective.
I'll close with a discussion of our investment in emerging product categories, an area where we see a great deal of opportunity to both acquire new customers and capture more share of our existing customers' wallet.
Beauty net sales increased 49% year over year in the fourth quarter expanded to 5% of net sales from 3% in the fourth quarter of 2022.
Even with such gains year over year, a 5% of net sales remains well below double digit penetration for Beauty net sells at a typical among premium department does contributing to our incredible beauty results were very effective merchandising with the addition of several high-impact new beauty events.
Our beauty momentum has remained strong with recent launches of beauty brands and cool type cosmetics, offline beauty.
And then this beauty, I'm also excited about our fast-growing men's business, supported by an increased marketing focus and merchandise assortment of men's has performed extremely well in some key international markets, contributing to our impressive growth in Mexico throughout 2023.
While relatively small to date, the scale of these areas of business are growing at an attractive rate.
Beauty generated 42 million in net sales in 2023, up from just 11 million in 2019.
We are targeting for the emerging often is our beauty, men's and home to contribute more than $100 billion in 2020 for a combined basis.
And this expectation does not include contributions from our plans to expand into additional apparel categories this year to further solidify us as a destination for more aspects of our customers' lives, supported by marketing initiatives to increasingly emphasizing categories.
We see opportunity in closing with the strength of our brand by strong financial position, our fast pace and nimble operating structure and our innovative entrepreneurial mindset believe we are well positioned to take market share in the years ahead and build a larger and more powerful collection of brands that we have today.
We remain incredibly excited about what lies ahead of us this year and for many years beyond.
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 fourth quarter results and then close with an update on recent trends in the business and commentary on our cost structure for 2024.
Starting with the fourth quarter results, net sales were 258 million a year over year decrease of 1% and a three point improvement from our comparison in the third quarter of 2023, as we continue to navigate a challenging environment for consumer discretionary spending, particularly in our luxury segment, REVOLVE segment net sales increased 1% and FORWARD segment net sales decreased 10% year over year in the fourth quarter and by territory, domestic net sales decreased 2%, and international net sales increased 7% year over year.
Active customers, which is a trailing 12-month measure, increased by 33,000 customers during the fourth quarter, this growth expanded our active customer count to 2.5 million, an increase of 9% year over year.
Our customers like 2 million orders in the fourth quarter, an increase of 3% year over year.
The increase in orders placed was offset by a decrease in average order value or AOV of 1% year-over-year to 303, as well as the year-over-year increase in return rate.
Shifting to gross profit.
Consolidated gross margin was 52% at the high end of our guidance range.
The increase of 57 basis points year over year, primarily reflecting a higher mix of net sales at full price and an increased mix of net sales from the higher margin REVOLVE segment, partially offset by a lower mix of owned brand net sales within our REVOLVE segment compared to the fourth quarter of 2022.
The gross profit comparison at the segment level is more favorable that revolve than forward underscoring our great progress in rebalancing the REVOLVE segment inventory.
Moving on to operating expenses at a high-level summary is that much better than expected efficiency and selling and distribution expenses in the fourth quarter was largely offset by our general and administrative expenses coming in higher than our outlook.
And fulfillment costs were 3.5% of net sales, slightly better than our outlook and higher year over year.
As expected, selling industry Fusion costs were 17.8% of net sales, around 120 basis points, more efficient than our Q4 outlook and an increase of 24 basis points year over year.
Our efforts to drive reductions in our global shipping and logistics costs are starting to become visible on our P & L, partially offset by a higher return rate year over year.
In the fourth quarter.
Our marketing investment also came in more favorable than expected, representing 16.4% of net sales, an increase of 104 basis points year over year.
The increase reflects the planned increase in brand marketing investment and a shift in the timing of events in the fourth quarter of 2023 as compared to the prior year, partially offset by year-over-year efficiency improvements in performance marketing as a percentage of net sales, general and administrative costs were 34.7 million, an increase of 21% year over year.
That included 2.8 million of nonroutine important export fees and an additional $600,000 in costs for the legal matter mentioned last quarter, it has now been settled.
Our tax rate was 28% in the fourth quarter, up from 24% in the prior year.
Net income was 3.5 million, or $0.05 per diluted share to 56% year over year.
Decline in net income primarily reflects our increased marketing investment year over year and increased G&A expenses year over year.
Adjusted EBITDA was 9 million, a decrease of 40% year over year.
Moving onto the balance sheet and cash flow statement.
For the full year 2023, net cash provided by operating activities was 43 million and free cash flow was $39 million, an increase of 85% and 114% year-over-year, respectively.
Contributing to the strong cash flow metrics were improved inventory dynamics, partially offset by lower net income inventory at December 31st, 2023, with 204 million, a decrease of 5% year-over-year.
The year-over-year decline was four point steeper than our net sales decline, demonstrating the important progress we have made and rebalancing our inventory.
As of December 31st, 2023, cash and cash equivalents were 245 million, an increase of $11 million or 5% year over year, and we had no debt since the end of 2019.
We have increased our cash balance by 180 million.
Our strong financial position enabled us to continue to invest in the business while returning capital to stockholders through the repurchase of Class A. common shares.
As part of our commitment to enhancing shareholder value.
During the fourth quarter, we repurchased nearly 1.3 million Class A. common shares at an average price of $13.94.
Approximately $9 million remained on our $100 million stock repurchase program at year end.
Now let me update you on some recent trends in the business since the fourth quarter ended and provide some direction on our cost structure to help in your modeling of the business for 2024.
Starting from the top, the top line pressure we experienced in the fourth quarter has continued with net sales through the first eight weeks of 2024, decreasing by a mid-single-digit percentage year over year to provide context for our net sales trending for the eight week period through February 25th.
Now remember that in early 2023, we had a much larger assortment of markdown inventory than we do retain.
Notably, our net sales that will price have increased slightly year over year through the first eight weeks of 2020 for our markdown sales have decreased as our Inc.
I'm sorry, today is substantially healthier with much healthier inventory entering the year.
The proportion of our net sales at full price and our gross margin are also much healthier in early 2024 as compared to the same period in 2023.
Thinking and modeling and net sales for the full first quarter of 2024.
I also want to highlight that our net sales comparison for the upcoming month of March is easier than a year over year comparison.
We think through the first eight weeks of 2020 for 2010 earnings conference call last February.
Consistent with recent performance.
Net sales comparisons in the REVOLVE segment continued to outperform the FORWARD segment year over year in early 2020 form.
Lastly, I would like to point out the difficult comparison we faced in international markets in the first quarter as our international net sales increased 16% year over year in the first quarter of 2023.
Shifting to gross margin, we expect gross margin in the first quarter of 2024 of between 51.4% and 51.9%, implying a nearly two point increase in gross margin year over year compared to the first quarter of 2023.
For the full year 2024, we expect gross margin of between 52.5% and 53%, an increase of about 90 basis points year over year.
At the midpoint fulfillment, we expect fulfillment as a percentage of net sales of approximately 3.5% for the first quarter of 2024.
For the full year 2024, we expect fulfillment costs of between 3.3% and 3.5% of net sales, approximately flat year-over-year at the midpoint of the range selling and distribution.
We expect selling and distribution costs for the first quarter of 2024 to be approximately 18.1%, which implies are first, the year-over-year decrease in selling and distribution expense as a percentage of net sales in three years.
For the full year 2024, we expect selling and distribution costs of between 17.8% and 18% and expect a decrease of roughly 50 basis points year over year at the midpoint of the range has continued to realize the efficiency efforts we invest in during 2023.
Marketing have an active calendar brand-building events in the first quarter, including two impactful events held in Las Vegas around the Super Bowl and dozens of events announcement at the REVOLVE and FORWARD pop-up.
As a result, we expect to marketing in the first quarter of 2024 to be approximately 16% of net sales.
For the full year 2024.
We expect our marketing investments represent between 16% and 16.2% of net sales, consistent with our marketing investment of 15.1% of net sales in 2023.
In terms of sequencing in 2024, we expect marketing as a percentage of net sales to be more linear than in recent years, particularly in the second quarter, general and administrative.
We expect G&A expense of approximately 33 million in the first quarter of 2024 and between 130 and 133 million for the full year 2020 for this implies a 4% year over year increase in G&A costs for the full year 2024 and at the midpoint of the guidance range, we continue to invest in longer-term growth initiatives.
We expect G&A expense in dollar terms to be fairly steady throughout the year.
And lastly, we continue to expect our effective tax rate to be around 24% to 26%, both in the first quarter and in the full year 2024.
To recap, we called out a challenging year with a solid fourth quarter, highlighted by a return to growth margin expansion year over year that we expect will continue in 2024.
We also expect to begin selling and distribution costs.
And finally, we expect to continue to leverage our financial strength and invest in the attractive long-term opportunity ahead of us.
Now now we'll open it up for your questions.
At this time, I would like to remind everyone in order to ask a question, press star then the number one on your telephone keypad.
I'll pause for just a moment to compile the Q&A roster.

Question and Answer Session

Mark R. Altschwager

Our first question comes from the line of Mark Altschwager from Baird.
Your line is open.
Good afternoon.
Thanks for taking my question.
Maybe just start out was hoping you could elaborate a bit more on the quarter to date and the positive full-price selling trends you're seeing, I guess, just any reads from the festival season early on here.
Anything you're going to be doing differently this spring from a marketing perspective that we think we can watch for?

Edward James Yruma

I know you called out the easier comparison, but just wondering any other dynamics behind that or do you think could drive a sustained positive inflection in the growth rate as we move through Spring Bank's?
And then I had a follow-up on margin.
Yes.

Simeon Avram Siegel

So we feel really good about the trends we're seeing early in the quarter versus a full price sales.
And I think it's a reflection of all the work we've done on the inventory side.

Janine Marie Hoffman Stichter

That revolve in particular looks quite healthy for resolve, some work to do, but really promising trends on that side.
As we move through the spring of and that's all is one of our core seasons.
I mean, it's still a bit early.
We haven't kind of shift that season full-on yet, but we're certainly optimistic.
We'll see some better trends on the sales side as we move through the course three months of March and April and May.
Thank you.
The selling and distribution made nice progress there.
I think 100 basis points over 100 basis points better than your plan in the fourth quarter.
And I think you're looking to sustain at or below the 18% for the year.
What are the implicit assumptions you're making there for the trajectory of return rates?

Oliver Chen

And just as we unpack that, I mean, are you able to quantify some of the efficiency savings you're seeing from some of those more controllable initiatives?
Thank you.
Yes.
Thanks, Mark.
We probably won't quantify specifically those initiatives.
We put a lot of good work into the 2023.
So it's great to finally see those coming through in the P&L.
But maybe for some of the other assumptions that do impact that line item AOV, whereas a year and then return rate, we are modeling and have flat return rate.
So we're optimistic that we can make gains that we've got a lot of good things in the works that we're not modeling that in at this point.
And then I think keep in mind also that Q1 typically has a slightly lower AOV.
And that's why you see the in part why you see the Q1 guidance of 18.1%, a little bit higher than that, that 18% and 17, 18% for the full year.
Your next question comes from the line of Anna Andreeva from Needham.
Your line is open.

Ashley Anne Owens

Great.
Thanks so much, and congrats guys on nice results.
We had two questions.
I wanted to follow up on that G&A expenses.
Are you mentioned the accrual that you saw in the fourth quarter, but can you talk about what's driving what looks like a double digit growth in 1Q and also for the year?
And also secondly, looking at category performance, great to see beauty and men's are working well, the fashion apparel and dresses continue to decline.
So can you talk about what are you doing specifically to improve trends there?
Other fashion trends that you see in apparel as 24 unfolds that revolve we could capitalize on.
Thanks so much.
Yes.
Thanks, Anna.
And I'll take that first one on G&A and and pass it over to Mike and Michael for the for the second part of that question.

Tom Nikic

Yes, we did have some non-routine items in the quarter.
If you pull those out, it was closer to in line with the guidance that we gave it to your point.
That does mean that Q1 is higher than Q4 on G&A.
So a couple of things that have been minor, but when we make our our merit adjustments, our salary increases in January of every year and two thirds of that line item is people.
So there is a sequential increase there.
And then also we do have incentive bonuses, incentive compensation in G&A.
And given the results of this past year, bonuses were not accrued to the full amount, obviously.
And then in the full year for 2024, we're starting off in January with the expectation that we meet our target.
So there's a there's a difference, India, the accruals for incentive compensation.
Your next question comes from the line of Edward Yruma from Piper Sandler.
Your line is open.

RIck Patel

Hey, good afternoon and thanks for taking the question.
Just trying to understand a little bit more on the gross margin expansion, both for the quarter and for the year.
Is it just driven by lower markdowns or at this point, are you now assuming that Mick, either more addresses our private label is a positive gross margin driver for the balance of the year?
Thank you.
Yes, I think that so it's largely the former an increase in that full price sales mix for the year, we did close out 2023 for the full year at 79%, which is in line with 2019.
So very healthy.
But if you remember in the first part of the year, especially the first half of the year, we are very soon optimal in terms of full price mix.
So so that's the largest driver there.
And then we continue to make inroads just in Canada and the a third party margins in general, we're not factoring in an increase in own brand mix for 2024.
So so that's not part of it.
And in forward revolving accelerated hasn't it impact.
And based on the results today, as we commented, we're seeing revolve outpace forward, which revolve carries a higher margin than that for IT segment.
Great.
Thank you.

Anna Andreeva

Your next question comes from the line of Michael Binetti from Evercore ISI.
Your line is open.
Hey, guys, congrats on nice Cortex on a couple from me.
I'm also, I guess on the in the US, you talked a lot in the in the on we talked about in the US in the prepared remarks about the international on how are you thinking about plans to grow the U.S. in 2024?
Just curious your thoughts there on how to get back to positive.
And then on the pop-up stores, you guys have been fairly dogmatic about into e-commerce only.
And certainly there's a lot of advantages sustain area of your core channel.
We have a lot of compounded excellence.
They're both.
We see that turn out that you spoke of at least pop-up stores, the sales metrics and new customer can sections maybe a way to extend the efforts you've made can make points of shipment endpoints of product returns closer to the consumer.
It seems like there could be some niches that you could scratch.
Is there is there like a potential for this business?
Have a small fleet of high-impact stores are key cities strategy on stores at some point?
Yes, definitely.
So as we think about just taking the first part of your questions, we think about growth for 2024 for us, it's just about continuing to invest in the things that makes sense, continue to invest on the brand side, make sure we nail the merchandising mix in that position with the consumer.
And I think with a much healthier inventory position purely on the revolver side, we're well put positioned to do that.
Certainly it's been a bit frustrating the past 18 months, not seeing the growth we're accustomed to, but the market opportunity remains huge.
We are very low penetration in our target customer base.
Also just kind of touch on the store thing as it relates to the growth opportunity, the fact that over half of the customers we saw at the pop-up store were new customers.
Again, I think validates that are actually a lot more share to take all the category expansion we're doing.

Michael Binetti

So we think that the potential is quite huge.
And obviously, we need to execute well to make sure we're using it at the appropriate pace, and we're hopeful that things will start to turn as we progress through the year.
And then as we think about physical stores, we have always felt like revolve as an incredibly strong brands.
And we also feel like physical stores aren't going anywhere will have to see where the ultimate balance of physical versus digital ends up.
But physical, in our view will always be an important channel.
And so yes, I think that is an exciting.
The opportunity for us.
We're not going to go after it just to chase share.
If we go after it, we're going to make sure we're doing in the right way in a profitable way.
I think as you mentioned, there's a lot of upside opportunities with appropriate for our business, which has such a high return rate that can be a great traffic driver and help produce return costs and increase our sales from those customers coming in in the the Aspen store is also an annual.
Certainly, Aspen has a unique location.
We've had a lot of marketing activities supporting new.
So it's a bit early to extrapolate too much from it, but certainly at the surface level, but the numbers are quite compelling that we see there.
So that's certainly an interesting data point for us.
It has us thinking more and more of what the potential opportunity there is in the US is a result of the traction that we're seeing.
We do anticipate testing out the Aspen location a bit longer than we originally anticipated, where as originally anticipated, just as a pure pop-up events, we think it's interesting to consider the potential further than that.
Okay.
Thanks.
I'll talk more about it.
Thanks a lot, guys.
Congrats again.
Your next question comes from the line of Kunal Madhukar from UBS.
Your line is open.

Hi, thanks a lot of this is Jason on for crude oil from UBS.
A couple of questions.
The first one is Macy's said this morning that closing about what that the stores nationwide and was curious how you guys are digesting business at a high level, like as more physical retailers pulled back, how much cobalt benefit from it and have a follow-up.
Yes, you know, we've always said that one of the biggest sources of market share gain out there is a lot of these legacy retailers, particularly as it kind of the mutant higher end.
And certainly Macy's does have stores like that.
And they're Bloomingdale's bid business and some are in Macy's stores.
And I think it's reflective of the broader department store business.
There's been huge, the chair for years.
So for us, I think this is just kind of another data point into ongoing multiyear trend that should we execute well should be very good things for us.
Got it.
Thank you.
On the second quick one, I can you help us understand sort of the how the inventory levels and gross margin in terms of man and beauties of can you help us understand sort of the typical AOV profile for those two categories?
Yes.
So in the first one on the inventory and margin trends, yes, I think you can see in the guidance that we gave with the Q1 being 51.4 to 51.9 and then the full year being 52.5 to 53.
We do see sequential improvement throughout the year.
There's also seasonality there.
So Q1 is typically lower than, say a Q2 has a higher ratio of full price.
And then inventory.
I think in total, we're excited to be back into a moderate growth mode there with bookings being positive year on year after year after year of correction in 2023.
But it is the tale of two cities there with revolve, as we've commented in, much better shape than forward.
So we still have some work to do on forward, but but revolve starting off the year very well.
And then you had mentioned and I think beauty with both those men with ED and typically they're Mad Men gap.
Yes.

Jim Duffy

Yeah, Phil, beauties of the I guess, the most different, but significantly at a much lower return rate.
So those are the biggest differences between the beauty and kind of the core business.
So when you get down to a contribution margin level, that puts and takes there relatively balanced out.
And then I would say men is closer to the women's business, a lower return rate on them and then a slightly different product mix on men's.
When you think about that versus a women's that a third addresses plus or minus and then meant being more kind of shoes and apparel portion.
Your next question comes from the line of Jim Duffy from Stifel.
Your line is open.
So thank you.
Appreciate you guys taking my question.
I wanted to focus on return rates for a moment.
It's encouraging to see some sequential improvement in returns.
I'm curious, is that seasonality or some of the specific initiatives that you guys have started to put in place?
Are you beginning to see some benefits from those?
Yes.
Thanks, Jim.
Yes, it was good to see that sequential decrease that said and don't get too excited about it because there is some seasonality factor there.
If you go back to pre-COVID times, there's typically about a point sequential decline between 3Q and 4Q.
We did see a larger sequential decrease than that this quarter, but there's also a lot of other mix components and things going on there.
But I think it was good to see just don't want to get too far ahead of ourself.
And we are to the second part of your question there.
We are still very optimistic on a lot of the initiatives we have going into that, that return rate initiative, but not not factoring that into the model yet for 2024.
So our next question comes from the line of Rick Patel from Raymond James.
Your line is open.
Thank you.
Good afternoon, everyone.
You talk about the health of the consumer.
I'm curious if there any changes to the way people behave in the fourth quarter relative to earlier in the year as we think about things like trade down sensitivity to price points and so on and what your underlying assumptions are for how this evolves as you go through 24?
Yes.
So the fourth quarter, we saw some, I call it mildly improving trends on the revolver side.
I mean, we've talked about in the past all revolve, you know, it's kind of a full-price and off-price ratios are a bit more a function of its own inventory mix than what's going on in the broader market problem.
But I but I would say, you know, kind of mildly better in the fourth quarter, but I wouldn't say kind of a, you know, anything that shows us a clear inflection point forward continues to be challenged.
And you mentioned earlier on the call off some of the luxury sector data.
And I think particularly multi-brands, e-commerce apparel continues to be challenged in the luxury segment.
So we haven't seen the inflection points we'd like there.
We feel confident towards positioning in confident and its ability to grow over the long term.
But progress has been a little bit slower there than we'd hoped for.
Our next question comes from the line of Simeon Siegel from BMO Capital Markets.
Your line is open.
Thanks.
Hey, guys.
Good afternoon to all doing well.
Maybe to follow-up on that a little bit.
So any way to break apart your active customer performance between REVOLVE and FORWARD and maybe to the comments about the luxury market dislocation and just how are you thinking about what the time line should look like for you to see the turn in that business and maybe both speak to the revenues, which I think you are, but then also the gross margin.
Thank you.
Yes.
So on active customers, breaking that out between REVOLVE and FORWARD, you know, it is not exactly but largely tracks to the revenue performance that we're seeing.
We're seeing more and more activity on the revolver side, more positive activity on the revolver side and then more pressure on the forward side.
And then also kind of reflective of the revenue mix between domestic and international, more positive activity on international.
And then from then on the domestic side.
So you can kind of generally align sales and the new customer growth there, which then impacts active customers.
We do expect the active customer growth number to come down.
I think that's an important to note, given that last Q1 and Q1 of 2023, we had a record number of new customers.
Now a lot of that growth came from markdown customers, given our mix and the inventory repositioning they're going through at that time.
So really good healthy customer base.
The customer activity is healthier than the pre-COVID levels, but there are some near-term dynamics that we're working through there.
And then the second part of your question, just for I think I don't know, micro micro, you had made the comment that this can be guided the market dislocation amongst the LAP online luxury peers.
So just how are you thinking about what the time line or different expectations that you'd expect to see to be able to see that turn?
And I think that generally speaks to the revenues, but it would also just helpful to hear your perspective on on the gross margin.
Yes, certainly hopeful we'll start to see some inflections in the back half of the year.
And we still have some inventory to work through, but we believe some dislocation in the online luxury world should should provide meaningful opportunities for us.
And we're getting closer to see the kind of inventory turns.
We one of the forward side of the business.
So hopefully, we see those margins improve in the U.S. sales trends, improve it a significant way come at the back half of the year.
Your next question comes from the line of Janine Stichter from VTIG.
Your line is open.
Thanks for taking my question.
And I understand you're not planning on brand penetration to grow this year, at least based on how you're buying inventory, but wondering if you could speak to them the African Union added to retool the Avon brand, and that's going to be filling the gap in the assortment.
And we know it's an area that I see that launch.
It gives us a bit more casual Morguard fundamentally easily seen on the unbranded with abated.
It is challenging income.
Yes, on a high level, it's kind of the categories are kind of broad categories, addresses the bottom here that set us up.
It's one lens that rebate dollars and share information.
But also internally, we view and Huston kind of segmentation even more important.
So we'll see a diversification away from the categories where diversification zone outside of our historic strength going out, close, warm weather into areas of the wardrobe areas of the closet, another, the flows that departments so that we are I'm just top of mind.
So that was a strong result in to kind of more a little bit of more sophisticated, a little bit more chic, little bit of a casual or potentially a little bit more modern workplace as well.
Was it will help the customers who is going strong for us has also been a lot more casual.
So they know the customers' lives and will continue to see more and more diversification, knowing that, you know, the customer loves us and customers trust us.
And ultimately, there's just so much more of a change to connect with their on different levels of which needs turning.
Can you just remind us how much higher margin the Avon brand diversity of product assortment?
Yes, we haven't specifically quantified that other than to say it is meaningfully higher than the third party.
Let me just leave it there, but but it is an important long-term gross margin drivers, especially on the revolver side and then some opportunity longer term on forward as well.
Flat.
Your next question comes from the line of Oliver Chan from TD Cowen.
Your line is open.
I made a lot of progress in rightsizing inventories.
How should we think about the modeling of the inventory relative to sales growth going forward?
And those distinctions also, as you think about categories, what where are you outperforming our had opportunities for for chasing if there were some in terms of outperforming versus underperforming categories?
And then finally, you've been very creative and proactive with artificial intelligence.
Would love your thoughts on how material this may be.
It can definitely apply the supply chain and fraud detection, but it can also apply that in a very creative aspects.
How would you hope to file for what might actually be needle moving as you as you engage in that 10 innovation?
Thanks.
Yes, I'll take the first couple of they're all of it and then pass it over.
And so on the inventory modeling with this quarter, we closed with inventory down five on net sales down one.
So and improve the gap there from what you've been seeing earlier in the year.
We do expect that overall gap to close in the sales growth, inventory growth, too, roughly aligned.
And again, just as a reminder, revolve in much better shape.
So that positive gap to call it on revolver is much healthier versus forward, where we still have work to do the year.
But having having going into the year with healthy full-price, healthy margin and back into kind of inventory booking flash receipts growth mode, we're pretty excited about.
And then outperformance versus underperformance, dresses down 5%, apparel down 8% and then offset by really strong growth in handbags, shoes and accessories of plus seven.
And then on kind of be a highlight with beauty at plus 28%.
So that continues to really outperform.
But I would say no significant misses on you're missing demand or or or the or the opposite.
I feel like we're in pretty good step as we enter the year outside of Florida.
Yes.
And on the artificial intelligence side, it really has the aspect to touch every year is the business.
So certainly yearly authority had an impact on the things that we do.
I think more broadly, most aspects of general operations.
You can see some sort of benefit there.
In terms of the website experience, there's a ton of opportunities in terms of personalization and new ways of product discovery in search and Internet browsing, the Web site that we're actively working on, both with third parties and also with our own internal team, which is tremendous on the buying and planning side, it to assist us with those buying and planning decisions, which leaves us so faster to supply chain, but was a little bit more interesting ones in the warehouse rebalancing.
And then to your point on kind of the most creative aspects rage, there's a ton of potential within the imagery.
And certainly, there's a lot, as I think many examples out there.
We've all seen the Artwear Gener eight I can do with inventory, getting it to the point where it's production-wise, just something that we're working on in bioproduction.
I mean, you can do it the cost effective way in a repeatable way that some in our teams are actively working on.
And I have confidence that that is something that's going to occur sooner rather than later across the industry.
And we certainly hope to be a leader there in that kind of enables you to do many more things that you could prior, right, where you can really customize the experience in the inventory to the individual user in terms of what does it look like?
Because we would hope to be able to kind of customize things and generate a lot more options than we could without the help of artificial intelligence.
Thank you.
Last follow up on performance marketing.
It's been a little more rational, but fairly volatile.
What are you assuming for your customer acquisition cost and anything you're seeing with keywords and also in light of dislocation were all speaking to?
Thank you.
Yes.
So performance looking into something that we've always contemplate quarter by quarter with the obviously trying to keep things in a certain range in terms of our overall spend as a percentage of sales and then the various internal targets we have in terms of acquisition costs.
So I'd say overall, we've seen what I'll call them work the challenging environment the past couple of quarters despite the improvement in market inefficiency that that what you saw some, you know.
So hopefully, we start to see things turn there.
But for now, I can say it's a little bit more challenging environment to be able to deploy to spend that we'd like if the efficiencies that we'd like to see.
As you know, that's always been kind of the case across the years.
Where do you have some periods where it's a little bit tougher than some periods where opportunity opens up.
Your next question comes from the line of Ashley Owens from KeyBanc Capital Markets.
Your line is open.
Thanks so much.
So just turning quickly on fulfillment and would appreciate some color on the shaping of that, I think 2024.
And then just how you're thinking about at return rate number and I suspect deeming regulations to that and then have a follow-up.
Yes, on fulfillment, and we expect to see some slight efficiencies as we progress through the year.
So Q1, you know, we are guiding towards 3.5 and then for the full year at 3.3 0.3 to 3.5.
So there's always some quarter to quarter fluctuation there.
But I would say over over the course of the year, some some slight efficiencies.
And then reiterate, we are, you know, at this point modeling and you know, no kind of benefit or detriment on return rate when bundling in a flattish return rate for this hearing and considering that no fluctuations across the year.
But that said, optimistic on the things we have in works, but not quite there yet where we can model it in.
Okay, great.
And then just quickly to I saw that a of the four legs to it that and then Canada inventory continues to right page here.
Where do you see this number is normalizing?
Yes.
No, that was great.
And just kind of on that and a slight increase in the forward AOV.
And maybe as a reminder as well, different from revolver, where a heavy portion of the mix is dresses forward is largely handbags, shoes, accessories, and you can see the overall growth in handbags, shoes and accessories and some of our disclosures there.
So we're seeing seeing good growth in those higher price point categories.
And then maybe just on the AOV point as well, slightly down minus 1% year over year on the revolver AOV, which led to the 1% decline overall NAV.
And that is also a mix component there with beauty growing phenomenally over the course of this year.
That does take the ticker AOV. down.
If you remove beauty from both years than AOV does increased slightly on revolve as well.
Your final question comes from the line of Tom Nikic from Wedbush Securities.
Your line is open.
Hi, guys.
Thanks for all immune here.
On the I guess you want to ask about the margin structure billables itself.
And it looks like this year, you should see.
Yes.
Terry, you mentioned to remain in both the gross margin and the OpEx to sales ratio.
I'm assuming you'd like to kind of build back towards some of that some of the higher margin levels that you had before I pass back to, you know, high single digit range.
We were pre-COVID.
Yes, we are going to walk, you know, down down the road a couple of years.
Like what line items do you think would be able to help you bridge the gap between that, like, you know, 3% to 4% margin, you're kind of implying for this year relative to the eight or so that you were doing pre-COVID?
Yes, yes.
No, that's good question, Tom.
Thanks, Hugh.
And I think in the near term, you can yes, we obviously gave the guidance around that.
So you expect to see some gross margin improvement and then starting to realize the efficiencies in that selling and distribution line.
And that's kind of plays out over the longer term to if you kind of extend that we do, I expect further gross margin expansion, especially as we get forward, that's going to take a good part of this year to get forward, right?
So once that happens, we get improved margin on the Ford business.
And then over the long term, we talked about owned brands still a lot of opportunity on own-brand as we get into 2025 and beyond.
So those are a couple of that gross margin drivers where we expect to get back closer into that mid 50s zone versus the call it 52.5% to 53%.
We're in today and some moderate efficiency gains and fulfillment, not a huge lever there.
And then selling and distribution feel that we've made great gains in the past quarter.
It's looking good early on for the year and starting to realize some of the work that we put into that line item in 2023.
So that's another meaningful line item marketing.
We want to keep the pedal down there.
Back to Mike's comments on just the large opportunity that we have, that's not one that we intend to pull back on.
And then finally, G&A over the long term.
And you can kind of see we've done for a few years prior to COVID and gaining multiple points of efficiency on that selling and distribution line item.
But that takes obviously getting back into growth mode, which we're optimistic about.
It still too much uncertainty out there to call and have, you know, timing and magnitude.
That's all the time we have for questions today.
I will turn the call back to management for closing remarks.
Thanks for joining us for this in 2023 year in review, we're a bit of a challenging environment, but we're very excited about the progress that we've made behind the scenes, most part of the team and the whole hard work data products we have in upcoming quarters, and we'll be excited to show we have in the quarters ahead.
Thank you.
This concludes today's conference call.
You may now disconnect.
To me in the quarters ahead.
Thank you.
This concludes today's.