All right. Well, good afternoon, everyone. Thanks for joining us. We're really excited to have Revolve here. I'm Edward Yruma, Piper Sandler's Disruptive Commerce and Apparel Analyst, and I run our consumer equity research practice here. I think one of the reasons we are so excited to have Revolve here is, you know, we're at a tech and consumer conference, and we think that Revolve uniquely sits at kind of that nexus of the two. I've covered apparel for a long time, and, you know, there's an art and science, but they tend to skew way more to the art. And I think what's so compelling about Revolve is it really does balance the art and science in the business. From the company, we're excited to have Jesse Timmermans, the CFO, and Erik Randerson from Investor Relations.
I guess we'll start with some Q&A.
Yeah.
On the recent conference call, you talked about cost efficiencies, particularly within shipping and logistics. Let's talk about the longer term dynamics of some of these initiatives, and then could you maybe contextualize how we should think about long-term cost savings?
Yeah. Yeah, and I guess first of all, Ed, thanks for having us. Always a pleasure to be here in Nashville with you. And, to your point, we were founded 20 years ago by Mike and Michael. Neither one of Mike and Michael were fashion guys. Mike is an engineer, Michael was a business analyst. So from day one, it was focused on data, very much engineering focused, and that combination of the art and science, like you said. So on the transactional cost, that's been a major pressure point for not just us, for everybody out there, but for us specifically, in combination with just inflationary factors and increase in shipping costs, fuel surcharge, you know, pick your cost that has increased over the last few years coming out of COVID.
But also our return rate has increased, and returns are impactful on the P&L in a negative way. So we're looking at a number of initiatives to kind of combat the cost in relation to returns and then also just kind of on a standalone basis. So I'll go through a few of them. We have, you know, literally, you know, I think 30+ individual unique initiatives against the transactional cost specifically that we're focused on internally, and of course, all different kind of sizes and scales from, you know, $20,000 here to a couple million dollars there.
So, number one I'll hit on is our East Coast distribution center, which we started about last year at this time, and really, you know, kind of in the last couple of months, up to full kind of full production in terms of taking returns in from the East Coast. Historically, we didn't have an East Coast distribution center, so the return had to come from New York back to L.A., get QA'd, and then maybe ship back all the way to New York. So, cutting back on the shipping and transit time back and forth for those returns. Really excited about that. Another one, similarly, is a returns injection center in the U.K., which we just launched.
So this is much smaller scale, but similar concept, where we're then not shipping the return all the way back to the U.S. just to refulfill it in the U.K. a couple of days later. Recently launched consolidated returns in Canada, so kind of bulking all the returns that are coming from Canada and then bulk shipping those across back to the U.S. A number of other things, kind of not related to returns, but on the outbound shipping, looking at, kind of line hauls, last mile delivery, alternative carriers in the U.S., and then also internationally, looking at our shipping providers internationally. And then, you know, just getting tighter and tighter. A lot of opportunity to, kind of get efficiencies of scale when we get back into growth.
We gained three points of leverage on that G&A line item alone over the last few years, kind of before we hit COVID. So expect something similar as we look ahead. Again, being around for 20 years, the platform is built very capital efficient, so a lot of scale efficiencies to come.
You mentioned returns in the broader context, and obviously, that's been a little bit of an investor, you know, question mark or area of focus. I guess maybe help us understand kind of what's happened with returns and then kind of what you're doing to combat maybe the most egregious returns.
Yeah. Yeah. Yeah, and maybe again, going back to the kind of the founding of Revolve, one of the core thesis was the home is the dressing room. So she needs to be able to buy a few dresses, try them on, and keep which one's right for her. So this has always been core to our, to our model. The premium price point helps alleviate some of those cost pressures when it comes to kind of the percent of sales and the efficiency of the model. That said, it has increased over time. If you look back to 2019 compared to now, our international regions weren't fully localized, meaning we were charging for shipping, we were charging for returns. Over the last few years, we've localized those regions, which of course increases the return rate, but also increases retention.
LTV has really driven, net sales in those regions that we've launched the localization. But even when you normalize for domestic, international, for full price markdown, product by product, we have seen an increase in the return rate that we think is largely due to macro factors, whether that's the macro pressure that she's experiencing. We do see an uptick in return rate when there's macro jolts, like the kind of the SVB kind of crisis and banking crisis in March, or whether it's, you know, the next kind of interest rate announcement or student loans, whatever it is, gives her pause and makes her second-guess her purchases. And she's more and more comfortable shopping online.
We see the return rate higher for our existing customers than our new customers, which is a proof point to say that once she engages with Revolve, once she's confident in the experience, she's more apt to purchase more and then also return more. Again, part of the thesis, we want her to be able to return to try on that dress, but we need to work on the cost on the back end, which we talked about. And then are there ways we can reduce that return rate? And we want to do that in win-win ways. We don't want to make it harder for her to return.
So we know that we can reduce return rate overnight if we pull the shipping label out of the box, if we start charging for returns, or if we cut down on the period in which she's able to return. But we want her to be able to return and try on things. So it's looking for those ways. Can we make that initial purchase better, more educated, more informed for her? And that's through personalization, through size and fit recommendations, potentially video content to not just show her small, medium, large, but how it fits and flows and, and looks on her. A lot of similar to the cost initiatives that we have going on internally, there's a return rate task force and at least a couple dozen individual initiatives against return rate.
Again, looking for those win-win ways to make the experience better and reduce the return rate.
Is there a way to size what's been kind of macro returns versus what you think are just, you know, using this as your closet and you know, shopping?
Yeah, yeah. Right now, it is largely macro, in that we can see, you know, more kind of near term over the past year. The kind of using the home as the closet is a kind of a slower build over time. And we do have, you know, bad actors, that we watch and focus on and, you know, put measures in place to reduce the return rate for those specific customers. But even that we do in win-win ways. It's not cutting them off or just charging them. It's reaching out to them and asking them, like: "We know you don't want to return this much. We don't want you to return this much. What can we do to make it easier for you and better for you?
You guys were. I think one of the central differentiating characteristics of your business was your use of influencers, but the way we've observed it, your use of influencers is just so much more comprehensive, they're so much more analytical than so many of your peers. But we'd love to understand kind of where we go from here. You know, can you talk a little bit about this, you know, you guys had this, you know, beautiful imagery with your influencers going spectacular places. Is there a desire to have a more kind of approachable view, I guess, from the influencer side, a more practical view, a relatable view? And then just kind of bringing it back to the model, since that's what we all focus on, like, when does marketing get closer to that kind of mid-teens level-
Mm-hmm
P ercentage of sales?
Yeah, maybe I'll work backwards from that. We had guided to around 16%-16.5% of net sales being marketing this year, and we expect it to be that way, at least in the kind of near- to midterm. Mostly due to the fact that we think we're still very underpenetrated in the domestic market and then especially internationally. We think we're about 3% penetrated domestically, and the international market is 10x that. So a lot of room to grow, where we don't want to take the foot off the pedal yet. A lot of customers to acquire, a lot of share to take. So it'll be a while before we get into kind of into the mid- to lower teens. But... and the influencer landscape is very dynamic.
It's always changing. Rewind five years ago, kind of back into that pre-COVID era, it was all about Instagram and static posts, and to your point, kind of revolve around the world and those amazing images of, you know, the Amalfi Coast and wherever the influencers are traveling. At the end of the day, the influencer is a brand in itself, in herself, in building content. We provide great content, which is combined with great products, so still a very desirable place to be, from an influencer perspective and her building her brand. That has evolved, and I think in part, in large part, due to the way the customer is engaging with brands. Video really wasn't a thing, you know, five years ago. Now, not just with TikTok, but within Instagram, with Reels and Stories, it's all about that video.
To your point, that comes with more kind of more realism, more authenticity. You know, these influencers, that kind of newer, kind of Gen Z influencers, are living their life through this video content, and being very real with the product and the reviews and how they're rating companies and their experience. So, it's definitely a shifting environment, and we've really leaned into that video content. TikTok is performing well, video content is performing well. Static posts are down, offsetting that. Beauty is a great example that works really well on video and some of that newer content, especially via TikTok and in the TikTok Shop.
Maybe another example is our ambassador program that we didn't have kind of in that pre-COVID era, but now this is a kind of a homegrown affiliate program where we're engaging with a much broader set of influencers. Maybe this was a kind of a high-frequency customer of the past that has turned into an influencer. And again, giving that real product review, and we can read exactly what product is working, what influencer is working through that data feedback loop, so...
You touched a little bit about the differences between the Millennial, who I feel like we've been talking about forever, and maybe Gen Z, who, you know, are your customers that are kind of up and coming. I guess, what other differences do you see? Is there a difference in the assortment, the product you're bringing? And how do you-- You know, how are you focusing on these younger consumers?
Yeah. No, it's a good question. And I think maybe one is staying on the Millennial customer for now, and that customer is aging differently than maybe the customer of the past. She is carrying some of that kind of that aesthetic that, that she kind of wore when she was 25 into her 30s and 40s. So she's aging differently, she's dressing differently than maybe her mom or kind of the generations of past. So number one is staying focused on that consumer and making sure we don't lose her. She's very, very loyal to us. Her frequency increases over time, her AOV increases over time. That said, we need to tap into this new generation as well. And about a third of our social following is Gen Z, even though that skews lower on the purchase.
So we know she's out there, we know she's engaged, we know she wants to purchase from Revolve. Some of the product works on both Millennial and Gen Z, maybe it's just styled differently. And then there's new product that is more specific to Gen Z. So from a styling perspective, slightly different, from a product perspective, different, and then we talked about the marketing and how you engage with them is also different. But again, being careful that we maintain our existing customer plus tap into that new customer demographic. And you can do that now with AI moving so fast. We've always had personalization on the site, different search technology, but that becomes even more important so that you can serve the right product to the right customer at the right time.
You mentioned, beauty in the context of, I think, TikTok shops. Would love to understand kind of the opportunity around beauty and maybe other category extensions, kind of what gives you the confidence you can execute in areas outside of your core wheelhouse. And then I don't know if you had followed it very closely, but obviously, Farfetch had kind of entered beauty, exited beauty. You know, any lessons that you've learned?
Yeah
From their experience?
Yeah. Yeah, it's hard to comment, kind of, kind of how they, you know, deployed their, their strategy. We feel very confident in, in beauty on Revolve. Specifically, and I'll talk about men's and some of the other, other categories as well. Beauty has been a great new customer acquisition tool. Not only that, it's a great add-on item for the existing Revolve customer. We found that new customer that comes from beauty then graduates up, purchases higher price point items over time. We hired a new beauty leader, a beauty director, who comes from the industry. And it's all about, in the near term, getting the right brands and the right assortment on Revolve. And we have her trust.
And we found that, you know, again, we can serve her... y ou know, if it's the right product at the right time, she trusts us, and she'll come to us time and time again. There's a good example, The Five Minute Journal, was a product that one of the buyers brought in. Really hard product to create content around, you know, versus a dress and, you know, an amazing backdrop. But again, because the customer trusts us, she really leaned into that product. We sold out right away, had to reorder, almost immediately. So just, you know, good examples of where she trusts us, and we can add on product. Beauty is a massive market. A lot of kind of emerging brands that we can tap into. And then men's. Men's very underpenetrated. Both beauty and men's are about the same size for us right now.
A large portion of the purchases for the male out there are done by the female. We have a very, again, engaged, captive audience with our female customers, so being able to cross-market the men's apparel to her. And then maybe more kind of close to home is just the other categories, like active, some of the workwear or colder weather. You know, ski has done really good for us the last couple of years. So again, I think, you know, looking for more ways to tap into her wallet and create, you know, the place for everything, not just for the dress and kind of Coachella Festival.
You know, you announced recently that you're making a push into China, which is interesting because you're zigging when everyone else is zagging and talking about how they're exiting China or de-emphasizing it. So I'd love to just get your take on the country. Like, why, why you view this as a wide space? And then as you introduce your brands to China, what, what has to happen from an influencer or marketing perspective to get that, that brand awareness that you have here?
Yeah, yeah. China's been a great market for us thus far. A huge market, as you know. We have over a million social followers in China. Those social channels are different in than in the U.S. The influencers are different. It works differently than even some of the other international regions. So kind of why now? We did hire a China leader, boots on the ground in China, who has experience in live streaming operationally, kind of, you know, knows the players in China, which we think will be very helpful. And number one, the product has to work. Historically, the product, you know, I'd say, was more divergent in China than in the U.S., and that's starting to converge, and we're seeing much more engagement on our core Revolve products than we have in the past.
So does it seem like the right time, given the product fit, and the opportunity looking ahead, the kind of shift into video that I mentioned, the live streaming, and just the sheer size of the market. But, you know, in true Revolve fashion, it's a very kind of rational investment. We're very capital efficient, so you won't see a big, you know, kind of a big blip on the P&L or the balance sheet in relation to the specific China investment.
Speaking to that discipline, you know, one of the most impressive parts about the business long term has been the cash flow generation you have. I know in the second quarter call, you announced that you would initiate a share repo program. Would love to understand kind of thoughts around use of cash. I know we were in a meeting earlier, someone asked about M&A. I'd love to hear your, your vantage point on that. And then if it is M&A, what do you think you bring to the table that's differentiated from other buyers?
Yeah, yeah. Yeah, again, back to, you know, your point. Capital efficient, strong balance sheet, you know, sitting on over $250 million of cash that continues to build. And, you know, whether it's the investment in China, the investment in men's, fulfillment centers, very capital efficient. So the number one place we look to reinvest is into the business, and we think we're doing that. You know, keeping the pedal down on marketing, investing in AI, investing in the return rate, investing in, you know, cost efficiencies, fulfillment centers, fulfillment footprint, but still generating cash, free cash flow on top of that. So the second place we would look is M&A, and with the $100 million stock buyback, it doesn't take M&A off the table.
Still, enough dry powder to execute on M&A if we choose. So the things we look for, I think, you know, number one, and this is kind of probably most likely, the least likely, but, you know, are there smaller brands that we can acquire, tuck in to build on our own brand platform, whether that's from a kind of a manufacturing capability, aesthetic, brand perspective, that we—that would accelerate own brands? There's also a kind of TAM expanders, so that could be... men's is a great example. You know, is there a multi-brand retailer out there that we could, that we could tag on, and accelerate the men's expansion? But we are very disciplined, so we look at a lot of things. Haven't executed on anything, obviously, yet, but continue to look and think there is opportunity out there over time, to accelerate.
You know, one area that we've seen incremental pressure, you know, we took a more kind of cautious view on the luxury consumer at the start of the year. It seems like it's kind of continuing to see softness. Would love to kind of get your vantage point on that. Kind of longer term, right? So forgetting that it's a little soft right now. How do you take somebody that's a Revolve customer today and bring them to FWRD over time? You know, your approach to the space, kind of what you've learned, and how important you think that kind of luxury piece of the business will be for you long term.
Yeah. Yeah, it has been volatile, and the comps have been crazy and really pressured right now. As you said, and as everyone has heard. But we think over the long term, this Revolve customer that is willing to spend $200 on a dress, we know she is complementing that with a multi-thousand-dollar handbag, with a great pair of shoes over time, so why not FWRD? We also think there's space in the market for that young luxury customer, that kind of West Coast, more curated, more kind of emerging brand feel, similar to Revolve, but at a more elevated, elevated aesthetic. I think Elsa is a great example. That's an own brand that we launched with Elsa Hosk, that's carried on both Revolve and FWRD. Very strong point of view and works on both sides.
So that's, you know, one way is more kind of cross-pollination between the sides. Another way is the cross-marketing, so having FWRD more prominent on the Revolve site, so that we can address that Revolve customer that may be splurging on a handbag periodically. The FWRD pop-up, we just had a two-month pop-up in LA, specific to FWRD , so it was a great way to showcase the brands. The FWRD Renew program is really exciting for us. That's where she can exchange a pre-owned FWRD handbag and kind of buy another handbag using her credit, or we're acquiring third-party pre-authenticated handbags that are, again, great new customer acquisition tools. So I think long term, there is still opportunity in that luxury, still opportunity to tap into that Revolve customer.
Right now, there's only a 5% overlap between the two brands, so, much more opportunity. And especially as that millennial customer ages, her income increases, she's still investing in her wardrobe and that kind of, again, emerging discovery, kind of newness that FWRD and Revolve offer.
You know, one of the things that you mentioned during your discussion on capital deployment, I think you mentioned very briefly, like, new tech capabilities, Gen AI. Would love to understand, maybe it was in one of the meetings I've had with you. Would love to understand how you think this is applicable to your business. You know, what are things that this will help unlock for the consumer, help give them a better shopping experience?
Yeah. Yeah, we think, AI is real. It's not just a buzzword. We are working, fast and furious on it. We have, again, another internal, kind of dedicated task force on AI. And, and maybe backing up, we've used Machine Learning/AI for years, so this is not new, new to us. The newness is how broadly it impacts the business and how fast it's moving in the recent, you know, most recent six to 12 months. So I think maybe, first and foremost, it's about that website experience, the personalization, the stores, the search, and how, how she's searching, whether that's through visual search or more kind of ChatGPT type phrasing, of the search. We did an editorial campaign that was AI-generated leading up to Festival.
We actually took the imagery from that AI billboard campaign and developed physical product from that AI imagery. So that's another area that we're excited about, is using AI in the own brand design process. So just kind of the speed of iteration, the speed we can get designs into production is exciting. And then there is... you know, on return rate, we talked about whether that's kind of the size and the fit recommendations, the video, the product detail pages, the copy. Many areas there that we think AI can benefit. And then even in the back office, you know, longer term, whether that's, you know, in accounting or legal, but really impacting all aspects of the business.
I'm not too proud to admit that I typed in-- When I took my eleven-year-old to her first concert, Taylor Swift, this summer: "What does dad wear to Taylor Swift?
Yeah.
You know, there's really lots of applicability for this.
Yeah.
Would love to hear a little bit more about private brands. I know that you've got a great private brands business. It's kind of grown, shrunk.
Mm-hmm.
Now, what's the right kind of level set for, or how do you think about managing that within the business? And then, like, as you think longer term, you know, kind of where do you sit on that?
Yeah. Yeah. Back in 2019, we were at about 36% of the business. Right now we're, you know, call it ±20%. In times when we're trying to rebalance inventory, it makes more sense to pull back on the own brands, given the depth that we have to produce at, and keeping the product assortment right on the site for her. So it has been, you know, kind of a volatile couple of years. We still think there is room to get back up to that, you know, 30+% , but in the right ways, and making sure the assortment is right for her. I mentioned Elsa Hosk, and the Elsa collection was a great example of a recent launch that was carried on both Revolve and FWRD.
There's also ways we've been working with the ambassadors to curate an assortment around the top ambassadors that we have. So a long way to go on own brands. Really excited about it. There's also kind of gaps, you know, call it gaps in the assortment, potentially, where we're trying to expand into some of these other adjacent categories that we can build into via own brands.
I think we're down to our last minute, so I'd love to ask just, you know, as good consumer analysts would ask, you know, where's the consumer today?
Uh.
State of the consumer. Obviously, student loans is something that people are talking about a lot, maybe how you think it could impact the business, and, you know, what should we see for holiday?
Yeah. Yeah, it's, it's, it's tough. I think, you know, the headline is: The consumer is strong. But again, you know, similar to the Walmart discussion last night, when you peel back the layers, discretionary is definitely impacted. And if the consumer, if I pick a number, maybe is a 7 or 8, that discretionary apparel is lower, it's probably a 5. So I think we've got. You know, we need to cycle through this. She's definitely pressured. Student loans adds just one more thing that pressures her, and especially with our younger consumer, that has a meaningful impact on her. I think there is. You know, we have to prove this out over the next couple of quarters, but I think there is a potential that student loan payback is already impacting her purchasing psychology.
So how much will come when it actually takes place? Not sure yet. I think some of it's already baked in. But, you know, I think, having a strong balance sheet, long-term minded, you know, we can invest through these cycles and come out stronger.
Great. Well, with that, we look forward to hearing the updates from you. Same time, same place next year.
All right. Sounds good.
Thank you.
Thanks, Ed.