Great. Good afternoon, everyone, and welcome to Needham's nineteenth Tech, Media, and Consumer Conference. My name is Anna Andreeva. I am a senior analyst covering e-commerce and global brands, here for the firm. Next up, we are very excited to have the team from Revolve. From the company, we have Mike Karanikolas, co-founder and co-CEO. Welcome, Mike.
Thanks, Anna. Happy to be here.
Terrific. For those listening in who have a question, please feel free to either type it into your prompt and we will go over those, or conversely, just email me directly at aandreeva@needhamco.com, and we will go through those. So to kick this off, Mike, Revolve had a pretty nice quarter a week ago or so when you reported. Seeing nice inflection in the business, you saw positive trends in March, and that continued into April. Better gross margins for the business and really nice efficiencies within selling and distro, and that's where shipping and logistics costs get booked for the business. So maybe as you went through the quarter and on the quarter to date, talk about some of the positive surprises that you saw in the business.
Conversely, what came in maybe a little bit below expectations and, outside of just macro, more company specific?
Yeah. Thanks, Anna. Yeah, so we're really pleased with our results in the first quarter. We made progress on three critical fronts, as you mentioned. And, you know, we expected to make progress on those fronts, but at the same time, it was great to actually see it manifest itself, particularly, you know, some of them had been several quarters coming. You know, in terms of surprises, I think for us, the gross margin certainly surprised to the upside. We expected strong gross margin growth, but I think it was even higher than, you know, than we anticipated. Particularly on the Revolve side of the business, gross margin's extremely healthy, actually up around 200 basis points over 2019 when we had a much higher own brand penetration. So just really healthy inventory there, really great results by the team.
Selling and distribution, another one. You know, we were, you know, kind of expecting and hoping for, you know, driving those costs down, but, but obviously, you know, there's a lot of work that goes into that. And, you know, we've been putting in work for the past several quarters, seeing that come to fruition and actually driving improvements year-over-year. Fantastic to see. Order values surprised a bit to the upside also. You know, some of that's kind of gross margin and full price related. So yeah, I mean, so, you know, really healthy trends. And the other thing and, you know, kind of in the fourth, you know, kind of late fourth quarter, but especially like, you know, within the first quarter, we just really saw it come to fruition.
Our Aspen store, you know, kind of our first serious foray into physical retail, I'd say was also really positive surprise how well that store performed.
Okay. Okay, no, that, that makes sense. What about anything on the negative side of things, just again, outside of macro and aspirational consumer being difficult?
Yeah, no, nothing on the negative side. We're really pleased with the return to growth and, you know, obviously, we'd like to be growing at even faster rates, but first step is getting back into the positive territory like we did, and, you know, we're hopeful we can continue to drive that number up as the year goes on.
I think you mentioned some green shoots in the FWRD business. And the compares after 1Q at FWRD do get easier, so that's the good news. Can you talk about what you're seeing with the consumer there? And obviously, you're working through the inventory overhang. Inventories are starting to look much tighter, I think you said more in the back half of the year. Just how do we think about the trajectory of the business as we go through 2024?
Yeah. So we're happy with the trajectory of the FWRD business, showing really significant improvement as we exited the first quarter and the early second quarter. I would still say the aspirational consumer is quite challenged, you know, for luxury. You know, certainly there's pockets that are doing well, but I think we mentioned on our earnings call, Citibank released data that U.S. luxury consumer spend was down significantly. I think a lot of consumers are trading down in the current period, so that creates an overhang. But again, you know, Q1 is the toughest comp from a revenue standpoint for FWRD for the year. And again, as we exited it and through early Q2, we're seeing, you know, some nice signs of recovery in that business.
Hopefully, as we exit the year, inventory will be much healthier, gross margins will be up, and we'll be seeing some positive growth in that business.
Are you seeing the green shoots more in accessories and handbags and shoes? I think these categories have been pressured the most, or is it more in apparel or kind of across the board?
Yeah, I'm going to say it's kind of more on the apparel side of things.
Okay.
You know, the handbags and accessories, that's a lot of where the aspirational consumer's purchases go towards. And, you know, it's a combination of her indexing quite low right now, and then I think that consumer really overshooting in her purchasing behavior, you know, kind of in the post-COVID boom, where that consumer was feeling great and flush with cash, and-
Yeah
... you know, was making a lot of those reach up purchases.
Okay. All right, makes sense. The number of active customers and orders placed, those two KPIs, the growth did moderate a bit in the first quarter, but you're also lapping pretty much the peak of the markdown activity from last year, so that's curtailing some of that growth. How should we think about those two metrics as we go through 2024 and the markdown compares get more normalized?
... Yeah, so we expect active customer growth to continue to moderate through the rest of the year, but remain positive. And in terms of orders placed, you know, we'll have to see how that number plays out. But as you mentioned, first quarter was a very difficult compare on that metric with all the markdown merchandise. You know, at the end of the day, we, you know, we wanna drive healthy customers, healthy business, high margins, and continued revenue growth that we saw in March and April, and that's our primary focus.
Okay, okay, understood. Can we talk about the demo of the Revolve consumer and how that's changed over the years? We often get a question from investors: has that Revolve customer now aged out of the brand to an extent and moved on to other things out there? Just what, in your view, is that secret sauce that allows Revolve to stay relevant with that next gen type of a customer? And I guess, do you agree that the consumer has moved on as she's gotten older, out of the brand to an extent?
Yeah. No, you know, the data, you know, suggests to me that that's not the case. I'd say there's a couple things. You know, the key thing being, as we look at our retention cohorts-
Mm-hmm.
They can be quite healthy, you know, particularly if we kind of, like, normalize through the noise of the you know, kind of post-COVID boom. You know, looking at where we're at today, you know, still very healthy retention metrics.
Mm-hmm.
You know, so I think that's one key point, and I think if you look at, you know, how we're able to do it, it's... You know, the Revolve brand itself, I think it stands for things that are universally-
Mm-hmm
... appealing. You know, this aspirational lifestyle, fun, social, jet setting. And, yes, you know, kind of youthful, like, you know, sort of thinking and activity, but that's something that's universally appealing. And, you know, you just have to, kind of cater the message to each environment and channel. And, you know, we see that, right? So, you know, our content on Instagram sometimes will be a little bit different than, say, our content on TikTok-
Mm-hmm
... which is gonna skew towards a younger consumer. And so, you know, we think we have the ability to continue to bring in new generation consumers and then retain those consumers that grew up loving Revolve. You know, it's a huge market share opportunity out there for us.
Okay. No, that's, that's definitely fair. I love that you provide the disclosure by category in the business, and the latest disclosure did suggest that some of the key categories, like dresses, declined a little bit less sequentially. And, of course, beauty continues to work really well. Just as we think about the product opportunities for Revolve side of things, you're pretty well known for occasion wear and, right, like more casual, everyday needs of this customer has been something the management team has talked about.
Yeah.
Maybe talk about that. What percentage of the business is that currently, more of that casual assortment, and just how do you think about that going forward?
Yeah. We think it's a huge opportunity for us. As you mentioned, what consumers really think of us for is this, you know, kind of this merchandise that they wear when they're, you know, in the kind of best moments of their life and when they're on the social scene, when they're on vacation, when they're kind of out and about. But that same consumer, you know, also wants to look and feel great in the other moments of her life, and that's something from a marketing standpoint we haven't connected with her on as much, and also from a product assortment. You know, we've invested in our strengths historically, but we think there's a huge opportunity there.
You know, and it's a very low percentage of our business right now in terms of our share there. And so that's something we're making big investments on, both from a product assortment standpoint, you know, kind of product development with our own brands, and then from a marketing standpoint, working that more and more into the marketing strategy, you know, to get the consumer thinking about us for those categories. And that could be, you know, potentially equal to the share of revenue that we're doing in these more occasion pieces if we succeed at that over the long run.
I would imagine, right, the profitability could be greater in some of those casual categories, too, because the markdown risk potentially is not as significant?
Yeah, yeah, absolutely. Like, you know, less markdown risk, and of course, I think we do a great job managing markdowns with those higher risk categories, but less markdown risk. And also, you know, selling and distribution costs should be lower as well because it's a little bit more predictable-
Mm-hmm
... you know, for the consumer in terms of knowing what they're gonna get.
Hopefully less returns as well.
Yeah, exactly.
Okay. Okay, no, that sounds great. Can you update us where you are with the own brand penetration? I know that penetration has not grown in the last couple of years, but you've called out some brands, like Helsa especially, which is doing well for both brands-
Mm-hmm
... and pretty unique, as a higher priced brand for the business as well. I guess, what are you waiting for, in terms of maybe macro or any inside of the company's signals, to begin to invest in own brands a little bit more?
Yeah. So it's really been a combination of things. You know, macro, as you mentioned, has been quite volatile, and there's bigger inventory commitments on that side of the business. And, you know, we've been trying to optimize certain aspects of the business to make sure that as we grow it beyond the current 20% mark, it's, it's synergistic in all the ways that we're looking for. 'Cause, you know, I'd call out... or, I mean, as I did earlier, we actually had a higher gross margin in the first quarter of this year on the Revolve side of the business than we did in 2019, when the own brand share was nearly double. But, you know, own brand, you know, has significantly higher starting margins than, than third party. So it's a big opportunity.
We just wanna make sure we go about it in the right way. You know, so combination of really optimizing, you know, internal processes, you know, quality, you know, putting a big emphasis on that. And then crafting brands in a way that we think is gonna work better with consumers going forward. Helsa being a perfect example of that, and we're, you know, we're working on rolling out additional brands that we can think can be of comparable impact. And I think once we start to see that, we'll start to see the own brand share grow in a very healthy way, with really nice, you know, unit depths and volumes and economics.
Will the own brand start growing again in the back half, or is it more of a 2025 story?
I mean, I would say hopefully we start to see signs of the growth in-
Okay
... in the back half. You know, but it would be, you know, in terms of making a bigger impact, a 2025 story.
Okay. Okay, that makes sense. On marketing, on the first quarter call, you guys talked about more efficient Revolve Festival event. You did it one day versus weekend, historically. Just curious, can you elaborate on what else you did differently and just some of the learnings from this event?
Yeah, definitely. You know, well, I mean, I think it's a classic case of sometimes less is more, you know, which was absolutely great to see. We invested significantly less. We, you know, we got more. And, you know, part of it was just strategy-wise, because with marketing, you always need to change things up to stay interesting. You know, so you can't just do the exact same thing over and over again. And so, you know, for us, taking away some budget gives us more budget to do other things that we think are interesting to the consumer. So we're at Stagecoach in a bigger way this year. We have other... a number of other activities lined up. We're at F1. You know, we had the Aspen store, which was really, you know, kind of, marketing-oriented in early Q1.
So that was a lot of it. And for many years, part of how we were, you know, trying to add additional interest to Revolve Festival is make it bigger and bolder than the year before. At a certain point, you start to reach diminishing returns with that, where just-
Sure
... cost and logistics and complexity and, and also kind of the level of influencer, you know, that you invite, you start to get diminishing returns on. So-
Mm-hmm
... you know, after we kind of reached, we thought, the point of diminishing returns from that approach, we decided to make things interesting in a different way, make it a bit more exclusive this year.
Mm-hmm.
A little bit simpler, get more bang for our buck, and put some marketing ammo in other places.
Makes sense. What type of in-person events are you thinking about going forward? You guys have been, to your point, pretty creative with those.
Yeah. So I mean, you know, as I mentioned, like Stagecoach in a bigger way, we did this year. You know, we did an activity, an activation in F1. And we have a number of other events coming up in the next 3-4 months. I can't remember the events off the top of my head. But yeah, there's several exciting activations coming up.
Okay. All right, great. We'll be looking forward to those. Revolve has been such a leader from the early days of influencer marketing, and now with the other platforms out there, whether it's TikTok or some of the international platforms as well. Can you talk about... you've mentioned, obviously, some of the events, but what has done the best for the brand to continue to stay in touch with that next gen consumer?
Yeah, I mean, I think it's all about being, you know, where that consumer is at, understanding where she's at, and understanding how she likes to consume content, what type of content she likes to consume. And so, you know, certainly in kind of the current age, it's no secret, right, what the dominant platforms are, and TikTok being huge, particularly for Gen Z. So, you know, we've built a great share on TikTok itself to where, you know, it's generally comparable, the amount of marketing activity exposure we're doing within TikTok.
Yeah
... versus Instagram. So making sure that we're investing marketing dollars towards that Gen Z consumer. And then, you know, again, kind of knowing some of the nuances of the types of TikTok content that might resonate more with the TikTok and Gen Z consumer versus the millennial consumer that's a little bit more next on Instagram. And then the other thing is, you know, we've been putting more, you know, marketing dollars kind of outside of brand marketing towards-
Mm-hmm
... channels like Pinterest, which is starting to show some nice-
Sure
... you know, revenue growth for us. TikTok paid advertising itself, we're starting to get some decent traction on, which is great to see. And then kind of newer areas for us that I think are pretty big opportunities, like podcasting, is something that we historically have not done a lot of marketing activity on, that we're starting to ramp up activity in.
Oh, interesting. Okay. The one thing we really love seeing is the pop-up store in Aspen, the success with that, and you extended the lease after successful holiday in 1Q. Can you talk about the new-to-Revolve brand consumer that you acquired through this, and how is she different, if she is? And any metrics that you can share, whether it's transaction size, just on new customer acquisition, return rates, and frequency?
Yeah, definitely. So yeah, we're really excited by a number of metrics with the Aspen store. You know, particularly, I'd say that maybe the two most exciting ones are sort of the sales and revenue we're seeing per square foot, particularly, you know, in relation to rent costs. And then the other one would be the portion of customers that are new to our brand, where the majority of shoppers there are have been new customers. So those are both tremendously exciting. You know, at the same time, Aspen's a very seasonal market, and we certainly have an idea of what we think the seasonality is.
But, you know, we haven't wanted to share specific metrics around, like, sales per square foot and things of that nature until we have a broader sample of time to really understand where that's gonna settle at. So that was tremendously exciting. Aspen is a bit of a unique market. So, you know, certainly much higher AOVs in that market. How much of that is physical store related? How much of it is just the market itself? You know, that's, you know, I think more difficult to say at this point, but again, very compelling metrics there. Return rates, of course, significantly lower, you know, I mean, return rates at that store are in the single digits.
You know, we think, you know, with physical stores, at the end of the day, it's 60% of the market out there. You know, this store shows that our brand can resonate well in physical. It shows that we have a huge untapped market, not just in terms of that physical opportunity itself, being 60% of the market, but just customers we haven't reached out to, seeing how the majority of those customers are new in that store. So, it's just really been exciting from a number of fronts. And then, even on the return side, and Aspen is less the ideal market for this, because it's a bit of a destination market. But, you know, we do have a high return rate. The home is the dressing room.
We want customers to purchase items that they're interested in, you know, try them on, see what works for them. But that does result in a lot of returns. But, you know, that can be a great traffic driver for us with physical stores as well, where we both save on the logistics costs, processing those items, and then get a potential incremental sale from bringing that customer into the store. So there's certainly a lot to like. It's early, but we like what we see.
Great advertising for the brands, as well.
Yeah, yeah. Yeah, agreed.
Curious, why did you decide, with Aspen and not something closer to your home base, L.A.? And, how do you think about the site selection going forward?
Yeah, definitely. So Aspen was decided from a marketing perspective. The main actual focus of the Aspen pop-up was as a marketing activation. But as we've been thinking more and more about physical over the years, we made sure we went into it with the dual purpose of monitor the metrics-
Mm-hmm
...start having early discussions with the landlord, so that if we do see things click, we can turn it into a permanent location. But that, that was actually kind of more option value as we went in. It was not the primary focus, it was a secondary focus. And then, when we saw the metrics we were seeing and how things were working really well-
Mm-hmm
... that's what told us, "Hey, shift this into a permanent store." And it's really great because, again, the metrics seem really good at this point in terms of what that, you know, means in kind of a standalone basis. It's a great ongoing marketing activity for us in terms of having that premium location and destination to be able to hold marketing events going forward. So that's where that came from. And then, in terms of what we're thinking of for additional stores, there's broadly kind of two classes of locations that we're looking at at this point. One would be additional destination-type locations, whether it be like a Hamptons or a St. Barts or something of that nature, you know, similar to Aspen.
And then, the other would be, you know, just kind of these premier locations in the U.S. that are gonna resonate with our consumer, where we have a lot of our consumer there, whether it's like a Soho in New York, whether it's, you know, a nice location in Los Angeles, whether it's a Miami, you know. So those are the candidates for what our next store, where our next store may be.
Okay. Okay, no, that, that sounds great. Have you been more surprised to the upside by Revolve or FWRD side of things at the store level, or would you say both?
Yeah, I think both have checked quite well. You know, FWRD, in particular, out of the Aspen location, you know, has been, you know, quite strong. And again, you know, that could be location specific. And I think it's interesting as we think about how to optimize physical retail. We're certainly not optimized at this point, you know, given that this was originally a marketing activation that just happened to do really well from a, you know, kind of physical store metric standpoint.
I think what's a bit unique about our business and our opportunity is we do have such a wide assortment in the two brands that are very synergistic with one another, where, depending on the location, I think we can play with the assortments and the mix between the two brands a bit more than other physical retailers might, you know, to properly optimize towards whatever particular market we're in.
Okay. All right, sounds great. Switching gears to returns, that's always a hot topic. On Revolve, I know you've been doing a lot of work for some time now, and you've said you are seeing green shoots there, but return rates overall still edged higher.
Mm-hmm
... in 1Q and, and the fourth quarter as well. Can you talk about out of, the initiatives that you have discussed, maybe stack up the ones that you think are most meaningful in terms of, starting to move that return rate, to the downside in a kind of a, let's call it, a near to medium term?
Yeah, definitely. And maybe before I directly answer that, I'll just provide some context to how we're thinking about return rates. You know, so one is we look at the numbers in the fourth quarter and the first quarter, we're extremely encouraged. You know, particularly when we look at return rates on merchandise in the first quarter that didn't have any kind of markdown or promotion associated with it, those return rates were nearly flat year-over-year. You know, a very slight tick-up, but and showing meaningful improvement in terms of this trajectory versus where we'd been in previous quarters. So that was fantastic to see. And, you know, we had... You know, we have several things that we've put in place, you know, that have already been showing success.
Some AR tools on subsegments of our product mix, an expansion of a fit predictor tool that we've had on some parts of our site for a number of years. And then, a number of things that we've been testing, which I can certainly get into. But you know, just the other comments I would provide also is, for us, it's not so much the absolute number of the return rate. At the end of the day, we're looking to optimize customer experience, and we're looking to optimize selling and distribution costs as a percentage of sales. And not all return rates are made equal. You can have different AOVs, right? And we saw, you know, great results on AOV in the first quarter.
Mm-hmm.
You know, you can have different. I mean, I guess this relates to AOVs, but it's a very different economic profile if you have a customer who returns 85% of the items in as much as small orders, versus if she does one or two bigger orders.
Sure.
She finds a couple pieces she likes, and then she returns the ones that she doesn't like. That can work out for us very well economically, versus the, the former situation can't. So our, our focus is around optimizing customer experience and moving consumers to behavior that works great for them and is economical for us. And so in terms of the various things that we're working on, you know, I maybe want to get away from sort of stacking them up, but I'll, I'll tell you some of the ones that, you know, are, are more interesting to us. You know, first, you know, first thing I'll mention, just 'cause it's very public, you know, we mentioned it, we, we did shift the return policy-
Mm-hmm
... starting May first, just to be consistent with the pre-COVID return policy. That's something that may have an impact on return rates. We'll have to see. You know, we did some analysis on the FWRD versus Revolve businesses because FWRD did not shift its return policy during COVID, but Revolve did. Now, they're different businesses. There's a bunch of factors that need to be normalized for, but it seemed to indicate that there could be some upside there, so we'll see how that plays out. So that's one thing. Another thing we mentioned on the call is wardrobing. And trying to put in measures to prevent or significantly reduce that. We have some data points that suggest that could be a big opportunity. Again, we'll have to see how that plays out.
Then the third, you know, set of things that I'm pretty excited about is just a number of, you know, kind of various activities and issues we have with regards to better communicating to customers how a product is gonna work for them, and there's all sorts of elements to that, right? It's, it's not, it's not just picking your size, it's how the product is gonna fit them. It's them understanding aspects of, you know, the nature of the, of the fabric and material and, and, and, and kind of other aspects of the garment that they're getting. And in general, we've seen that when we do that well, it has positive results on both conversion rate and lower end return rate. So, you know, a whole host of things we're working on there, different ways of communicating product fit information, you know, various technologies.
You know, we're also experimenting with videos, you know, kind of call it, video fit models that are a little bit more accessible to the average person in terms of their proportions versus, you know, the-
Everyday type of-
Yeah, yeah
... versus.
Yeah, yeah, and trying to provide content there for consumers. And, you know, we don't have enough data yet to say any statistical significance, but the, you know, the leading... and I'm sure it'll have to be refined, but the initial data we have suggests there's opportunity there. These things can work when done well. So, you know, just, yeah, a number of investments across the board, and we think over time it should mean good things for the consumer experience and good things for our return rate.
Okay. Okay, and the store is, of course, helping with that as well. Remind me, I think you didn't guide for any improvement in the return rate for the year. Is that correct?
Yeah, that's correct. And you know, we're kind of leaving it open where things will shake out.
Mm-hmm. Got it.
We keep investors up on the latest trends we see, everything we're working on, and, you know, we'll see how the numbers play out.
Okay. All right, sounds good. You mentioned AOV increased in the first quarter. I think it's the first time in over a year for the business, and less discounting is obviously a part of that. Can you talk about what are you seeing units versus ASP, and should we expect those positive trends in AOV to continue as we go through 2024?
Yeah. So it's primarily driven by ASP versus units. And so, you know, we do expect positive trends to continue throughout the year.
Mm-hmm.
you know, that said, the sort of markdown versus full price comps will normalize a bit as we flow throughout the year, and so the level of increase might moderate a bit as the year increases, or the year continues.
Okay. Okay, makes sense. Switching gears to margins. You've made a lot of progress recalibrating that inventory position and improving cash flows at the same time. Can you remind us how do you feel about inventories by brand? I know it's very good at-
Yeah
... at Revolve. Just remind us on the FWRD side of things, and specifically, which categories are you still long in?
Yeah. So yeah, we feel better about things at FWRD than, you know, say, a few quarters ago or a year ago. You know, we're starting to get to where we need to be, but, you know, as a whole, you know, the FWRD position is not where we want it to be. We're hoping as we get closer to mid-year and kind of exiting mid-year, that we start to see an inflection point on the inventories there, and then as we exit the year, hopefully some really nice improvements on the gross margin side of the FWRD business.
And then in terms of categories, you know, I mean, there's excess merchandise still in most categories, I'd say, but it does index more towards, you know, handbags and accessories and things of that nature, which, you know, I think the good news is, those are a bit easier categories to liquidate if, you know-
Yeah
... if margins, if need be. So, so yeah, that, that, that's, that's the current state of FWRD.
Easier being seasonless, right? That's, that's what you mean.
Yeah, seasonless and in a liquidation scenario, you can get a higher margin for it typically than-
Okay
... ready-to-wear is a little bit tougher. It takes a bit more specific buyer on ready-to-wear.
Okay. Okay, that's fair. Gross margins came in really nicely in 1Q, beating the high end of the guide. And you guided for a more modest year-over-year expansion in the second quarter, just given a tougher compare. Can you remind us how we should think about the puts and takes on a gross margin side of things? I mean, we talked about the inventories and of course, the back half with FWRD becoming more in line-
Mm-hmm
... that would be a benefit for the business.
... Yeah, so there are a couple of factors going on. You know, one, you know, we had started to make progress on our inventory, you know, last year, sort of as we exited Q1 and through early Q2, for the Revolve side of the business. And so, you know, Revolve inventory got into a much healthier place in the back half of the year, so there's just sort of less room to beat versus last year in terms of-
Sure
being full optimization.
Mm-hmm.
Another factor is that Q1, just in general, like if there is, you know, kind of a situation with over inventories and markdown pressure, Q1 is often where it's gonna be particularly ugly, and we saw that last year with Q1. So again, just kind of more room to beat on that side. As you mentioned, we do expect Gross Margin to improve, so hopefully we see some lift there. But, you know, we just want to make sure we're appropriately, you know, conservative with the outlook for the back half of the year, knowing that there's always a number of uncertainties in terms of how things play out and you know, and, you know, whether things unfold as we hope.
Okay. This takes me to the next point. So on G&A, you are making investments and the year you guided likely at the high end.
Mm-hmm
... of the range you had previously talked about. Just maybe remind us, what kind of investments are you making? I'm sure AI is a big part of that, and, and we'll talk about that, too. But what would you need to see in the environment, to pause some of the spending?
Yeah. I mean, at the end of the day, for the most part, we look at investments individually. At the end of the day, are we getting a good ROI on the investments or not? You know, and frankly, given our strong cash position there, there's no need to be cautious in that sense. But of course, we want to be prudent with every investment that we're making. So in terms of the increased G&A, you know, certainly over time, we want to drive that down significantly as a percentage of sales.
You know, we're still quite healthy to where we were at the time we IPO'd in terms of having made gains on G&A, but we want to, you know, gain multiple hundreds of basis points in G&A leverage over the coming, you know, coming years and, you know, I'd say, you know, sort of shorter term versus longer term. But while making the investments that make sense. So, you know, kind of breaking it down specifically, part of that G&A increase does just relate to incentive compensation. Last year was not a good year for the company compared to where we want it to be, and so that had an impact. So it's a bit of normalization on incentive compensation, assuming we hit targets this year that we've set for ourselves. So that's part of it.
Another part of it is investments into important areas of the business. You know, you mentioned AI, and-
Mm-hmm
... you know, we're making a ton of investments there. And, you know, at the end of the day, it's gonna be transformational for pretty much every business, so we want to make sure we're ahead of the curve, not behind the curve there, in terms of our understanding and ability to apply and deploy that to our business. You know, also, we've been making investments into, you know, important drivers of key profitability metrics, right? So, you know, getting the selling and distribution costs down, as an example, return rate investments, things like that. These are important long-term investments. We want to make sure we don't skimp there.
Mm-hmm.
Also, been investing in the organization in general to support better globalization of the organization, which over the long term should provide cost leverage, but in the short term-
Mm-hmm
... you know, are kind of more additive in nature. So yeah, yeah, you know, key areas, we feel good about those investments, and we feel good about our ability to drive G&A down over the mid to long term.
Okay, and that's from, I think, 12-ish, currently as a percentage of sales, right?
Yeah.
That's the level you're talking about. Okay, all right. Now, you mentioned AI. We're already at the end of this chat, and cannot speak about AI. Can you talk about what are you most excited about with this opportunity? I remember on the call, you talked about opportunity with AI in merchandising, specifically, as well as customer service inquiries, to kind of raise the bar even further on the customer service. I know customer service is a big part of the loyalty, right, opportunity.
Yeah
... at the company.
Yeah, definitely. So I think what I'm most excited about are what I view as the more transformational opportunities. At the end of the day, AI is gonna touch every aspect of the business, the more mundane ones and the more exciting ones, but I'll kind of start with the more exciting ones. I think just the way consumers shop and interact with websites is gonna change significantly.
Mm-hmm.
AI's ability to discover and uncover products and predict products that consumers might want is just in a completely different ballpark than traditional search technologies. Traditional search technologies excel in certain areas. I think AI search in particular is fascinating because it's able to understand better these subjective aspects of clothing and style that, you know, have always been that secret sauce for fashion creatives and things like that, and AI is actually quite good at that. I think that enables AI search to be not just search, where people are looking for something specific, but really to just be a completely different way in which people interact with discover clothing.
You know, whether it's AI chatbots, which, you know, have gotten some hype or whatnot, but, you know, I think are just one kind of interesting early prototype of the types of things you can do there.
Mm-hmm.
You know, what I envision is the way consumers kind of browse and discover styles will be very AI-driven in the future, in terms of how they're able to jump around from one concept to the next, and you know, versus less sitting in a window and typing in specific things.
Mm-hmm.
So yeah, quite exciting there. Also, very excited by opportunities in terms of the visual presentation of products to consumers.
Mm-hmm.
You know, it's across the board. It's... You know, I think it's gonna quickly get to a place where we can generate really high-quality editorials for cheaper than existing processes-
Yeah
... with a lot of, a lot more permutations and personalization to people's personal tastes.
Mm-hmm.
Within catalog photos, being able to account for size and show people what products look like on themselves. So yeah, incredible opportunities there. You know, where we're currently using it? Well, we do currently use it on some editorial imagery. It's currently a low percentage, you know, maybe like 1% of our editorial imagery. Able to produce some really high-quality stuff. I wouldn't say we're fully productionized at this point to where it can be 50% of the mix, but again, it's just rapidly advancing. Other areas of the business, you know, we've used it for a long time on various algorithms internally in the business, some of which we've talked about in the past.
We use it to visually, you know, kind of categorize and classify products to allow consumers to use visual navigation to drill down on products. But again, very rudimentary versus where it ultimately could be. We recently upgraded our warehouse rebalancing algorithms to use AI to more efficiently figure out how to redistribute the inventory, was a recent win we talked about on the call. You know, you mentioned the customer service. So, you know, we're actually able to use internally developed AI to route customer service emails. So we had a prototype that showed promise, and it's just being productionized right now, and it actually outperformed, you know, commercially available solutions. So, which at the end of the day, you know, we always go with whatever the best...
You know, we use external solutions, we use internal, and we don't have any preference. You know, the best, you know, the best software wins. But, you know, I always take a personal pride and satisfaction. You know, it's awesome when I see, hey, our teams are able to outperform those external-
Yeah
- solutions. And then finally, you know, I mentioned AI search. We have, and it's still very early stages, AI search that our internal team has developed that is outperforming on some key metrics versus, existing search solutions that we have that are from very reputable, external providers. Showing on some key metrics like, like product click rate in terms of going from the search-
Mm-hmm
to drilling down into products, 99.9% significance in terms of increasing, you know... And, and again, it, it's so early stage.
Yeah.
So it's one of those things where, you know, everyone's excited by, by the promise. Things are getting really close and, you know, once you reach that inflection point, where instead of being close to is good or a little bit better, it's way better, you know, I think you're just gonna see dramatic changes across the board. So, very exciting for us.
Okay, this is a perfect, kind of an area to end this on. Thank you so much, Mike. Thank you to everyone who listened in. This has been really great and educational, and thanks for coming to the conference.
Great. Thank you, Anna.
Absolutely.