Okay. All right. I think we will get started. Welcome, everybody, to the Revolve presentation. I'm Mark Altschwager, Senior Research Analyst from Baird. Revolve is a fashion retail platform targeting millennial and Gen Z consumers. The business includes the Revolve segment, offering premium apparel, footwear, accessories, and beauty from third-party as well as owned brands. The Forward segment offers a curated assortment of luxury brands. I'm pleased to be joined by Jesse Timmermans, Chief Financial Officer. Welcome. Jesse, to start, it would be helpful if you could give a brief overview of Revolve for those in the room who may be newer to the story.
Yeah. Yeah. Great. Thanks for having us, Mark. Great to be here. Beautiful day in New York. Revolve, just quick background on Revolve. We've been around for over 20 years, founded by Mike and Michael, who are still our co-CEOs. In the office every day, grinding it out, still own just less than half of the company. Really important that it's a founder-led mindset, founder-led culture, very long-term oriented. Everything we do is really focused on the long term and capturing more and more market share. Like Mark said, we focus on the millennial and Gen Z consumer. Right now, we're just primarily female. We do have a small men's business that we're pretty excited about. A couple of other key differentiators, very focused on the data. Again, I said founded on the data. Data-driven merchandising, marketing, everything really ingrained in the business is data.
Very customer-first mindset. From day one, the home is a dressing room. Really important for her to be able to buy two or three dresses, knowing she's going to keep one for that event on the weekend. International great growth opportunity. Even in the domestic market, still very low penetration in our core demographic. Even though we're 20 years in, a long ways to go.
The company does have a long track record of market share gains in the apparel sector. In recent quarters, growth has re-accelerated, even in a more subdued macro backdrop. How would you frame the sustainability of passing the digit to low to the digit growth?
Yeah. Over the long term, we think it's very sustainable. Again, very low penetration in this core demographic. By our estimation, around 3% in the domestic market. And the international market is four times that size. A lot of opportunity to sustain that. Double digit is really the target, to sustain that over the long term. Now, short term is challenging. It's been very volatile. We closed 2024 out with 14% growth in Q4. We entered the year in January with, unfortunately, the Los Angeles wildfires, during which we paused social media marketing. Sales softened pretty meaningfully in January, picked back up in February and March, closer to where we were in Q4. April saw some softening again, right around Liberation Day. That said, trends did pick up in the back half of April.
They call it the last week and a half of April. They started to pick up. We saw that continue into May. We're excited about that. That said, it is a very uncertain environment out there. We're being cautious. Long-term growth opportunity is there.
That's great. You touched on the April, May. When you commented on April, you framed it towards lower price points. What do you think's driving that?
Yeah. We think it is in part macro and then in part category diversification. On the macro front, we did see demand soften. We also saw her shifting to more lower price point products, different categories. Also a shift from full price sales into markdown. Still very healthy full price sales, but we did see a shift. I think some of that is just her uncertainty in the market right now. A piece of that in Q1, though, was category diversification. This is one of our long-term growth drivers as well. Historically, she's come to us for the dress, for the occasion. That's primarily why she thinks of us. We think we should be there for really all aspects of her life and all aspects of her wallet, from beauty to men's, I mentioned.
Even in that core female apparel segment of premium basics, essentials, active wear, outerwear, we saw some great growth coming out of outerwear in Q4 and into Q1. There is also some shift with the AOV due to category shift.
Could we zoom in on the luxury segment for a moment? The company is investing in luxury in its Forward business, while others in the luxury space have been pulling back or even facing liquidity issues. Discuss the opportunities you see here, both in the near term and the longer term.
Yeah. Yeah. We see a lot of opportunity in luxury. It is challenged right now. That said, we do see opportunity for the reasons you mentioned. We're seeing others all the way from completely going out of business to moving through mergers and acquisitions to not paying bills, cutting really top-tier talent, all of which we see as an opportunity. One is on the customer front, acquiring new customers with businesses completely going out of business. There's more dollars up for grabs. On the brand front, just by the simple things of paying your bills on time, where we've been able to add a couple of brands that we've been after for a long time, really highly coveted brands. Then even within our existing brands, getting better allocations of product from those brands.
On the talent front, we've been able to acquire some great talent on the Forward side of the business from some of the other players that have been cutting back in the short term.
Every CFO's favorite topic, tariffs. Revolve, the company directly imports about 22% of its inventory, you outlined on the call, 16% from China. You sell many third-party brands that will have to deal with the tariffs as well. I think the 22 is the portion you're paying directly. On the recent call, you outlined tariff mitigation plans. Obviously, things have changed quite a bit since then. I think you guided with the 145. We've now moved to the 30% while negotiations occur. Can you talk about how that change will affect your mitigation strategies, as well as the confidence in the margin guidance you provided?
Yeah. Yeah. Maybe I'll start with the second part first. When we released, it was 145% for China imports, like you mentioned. That has since come down to 30%. I think we had a period of around, I don't know, 24 or 36 hours there last week where it was back to zero and went back to 30%. I think one point is that it is still very uncertain out there. It's been changing, if not weekly, daily. We need to be conscious of that. I think given where we're at with the 30%, it does give us more confidence in the range that we did provide. That range included dozens of different scenarios. This was one of those scenarios. It does provide us a little more confidence in the range.
It does not significantly impact our mitigation strategies and what we're doing to offset the tariffs. I think on the own brands directly, more immediate mitigation is cost-sharing with our brand partners, some selective price increases, working on logistics, all of which we'll continue to do. Longer term, there's diversification opportunity, moving the manufacturing out of China into other regions. We'll continue down that path. Even at 145%, we want to be really thoughtful when it comes to diversification because tariffs are only one factor in that decision. We need to think about fabric sourcing, labor, quality, port logistics, costs. We'll continue down that path, similar to the cadence when we were under a 145% tariff regime.
Switching gears to owned brands, can you talk about the role owned brands play in the growth strategy? The company has also hinted at some larger launches in the second half of this year and I think into 2026. What can you share with us on that front?
Yeah. We are super excited about owned brands for a number of reasons. One, it carries a much more premium margin than a third-party brand. Very accretive over the long run. Two, they are brands in and of themselves. They have their own aesthetic, their own brand name. From a customer perspective, they do not know that it is a Revolve owned brand. They are a similar price point to a third-party brand. Really important from a customer acquisition, product assortment, optimization through that lens. That is why we are excited about it. More recently, the underlying fundamental metrics of owned brands have been performing better than they ever have. This is the point we are waiting for before we have really leaned into expanding owned brands, which leads into your comment around the couple of owned brands we have planned for launch later this year into early 2026.
Maybe just to put some kind of guardrails around it, owned brands was about 18% of the Revolve segment business in 2024. We were at 36% back in 2019. It kind of shows the opportunity. We're not setting a specific percentage mix target. We just want to do what's right for the business and the product assortment.
Elsewhere, on category expansion opportunities, you've been known for a destination for dresses and event wear, but you are seeing faster growth in under-penetrated categories like men's and beauty and home. Can you discuss learnings from the recent investments in these categories and how you're thinking about the category expansion longer term?
Yeah. Absolutely. Another area we are super excited about is category expansion. Beauty is probably the best case study. It's been around a little bit longer than some of those other categories. Started in November of 2016, I believe, and has increased 4x or 5x over the last four or five years. Skews heavily towards new customers. We see those new customers coming back over time and purchasing at higher average order values. They can come in for beauty and then purchase additional higher average order value products or average selling price products over time. Really excited about that. It's about 4% of the business today. If you look at comparable department stores, they're in the low double-digit percentage. We think there's tremendous opportunity to continue to expand beauty.
Men's is another area, just a touch smaller than the beauty business today, but a lot of opportunity. If you look at the kind of consumer behavior out there, almost half of the men's purchases come from a female. We have a very engaged female audience. Something we think we can leverage through our marketing and merchandising. Home, much smaller, but we do see opportunity there leveraging our, again, merchandising capabilities, the platform, the engaged customer that we have. Back to just that core female customer, a lot of opportunity within those apparel categories of active, outerwear, swim, et cetera.
Switching gears again, thinking about the balance sheet, really in great shape, plenty of cash, no debt. Company generates healthy free cash flow, I think $45 million in operating cash flow in Q1. This really differentiates the company from many peers in the fashion e-commerce space. Could you speak to the priorities for cash?
Yeah. Yeah. First of all, it's a great position to be in that you can ask that question. Number one is invest back in the business. Especially in times like this where you're going through a more challenging cycle, the ability for us, again, with Mike and Michael's long-term orientation, plus the strong balance sheet, allows us to continue to invest in marketing, artificial intelligence, the product category expansion, international expansion, and not pull back in the short term just to manage to a quarter or any given cycle. We think with the balance sheet, with the founder-led mindset, we can come out stronger through this cycle. In terms of priorities, number one is back into the business. Again, back to the low penetration. We think there's a lot of runway just in the core domestic market and then expand that to international.
It's all about investing back into the business. Again, marketing, AI team, acquiring some great talent on the Forward side of the business. We also think there's a great opportunity in physical retail that I'm sure we'll get to, which takes capital. We just hired a head of physical retail. A lot, again, just in that core business to invest in. M&A. We do think there is opportunity on the M&A front, especially during times like this. We see this as an opportunity. Again, with a strong balance sheet, we can take advantage of this opportunity. We have done, I would guess, smaller M&A in the past. We continue to look at things and experiment. Kind of the most recent was a small acquisition of IP from designer Dion Lee. A year ago, we purchased the IP of a French haute couture brand, Vauthier.
It's been about a year since we acquired that. Unfortunately, we decided to cease funding that operation. Trying to focus more on higher ROI projects, that project turned out to be pretty challenging. The designer left, kind of financially draining within that organization. Made that difficult decision. I think that's, again, core to Revolve is keep trying things, be disciplined, and move on when it's time to move on. The third one is buyback. We have a buyback plan in place, $100 million authorization, and have been very active there. I think with the strong balance sheet, we do not have to pick one of those three things. We can do all three of these things and stay disciplined.
Touched on international briefly. Can you give us a flavor of the trends that you're seeing on the international front, which markets are delivering the strongest results and where you're focusing your investments?
Yeah. Q1 was a great quarter for international. The last several quarters have been great for international. Where we saw particular strength was really across the board outside of a couple of regions. Strong double-digit growth outside of Canada was one good example. We saw Canadian customers essentially boycotting U.S. purchases there for a period of time. Canada was one of the more challenged regions in Q1. Mexico up against some tough comps. That was one of the more challenged. Outside of that, it was strong double-digit growth across the board. One area we're particularly excited about is Revolve within China. Historically, China has been more of a Forward story and more kind of brand names resonating with that Chinese consumer.
Over the last couple of quarters, Revolve has significantly outpaced and has been growing really nicely, thanks in large part due to a team that we put on the ground there, I think probably 18 months ago, and really working closely with the local Chinese marketplaces like Douyin, Xiaohongshu, Tmall, marketing in a way that speaks to the Chinese consumer and using merchandise in that marketing that speaks to that Chinese consumer. Really excited about the progress that we've been seeing there.
Thank you. On the marketing front, Revolve Festival is always a big event that you do each year. Can you talk about the takeaways from this year's event and zooming out just how your approach to Revolve Festival and other big events has been evolving?
Yeah. Another, I keep saying I'm excited and a lot of good stuff. And it's true. I think everything that we can control is going very well. It's just things out of our control that are a little more challenging right now. Another good example was Revolve Festival this past year. If you back up to Revolve Festival of last year, 2024, we had changed the format, cut it from two days to one day, cut millions of dollars out of the budget, delivered even higher press and social media impressions. The team was up against a really tough comp and challenge this year. They were challenged again to cut spend and increase the impressions, and they delivered. We executed Revolve Festival in April on a lower budget, delivered 40% more press impressions and 25% more social impressions.
The environment was just really, I do not know what the right word is, was buzzing. Great influencers, great celebrities, great performances. Everybody had a great time. Just kind of the vibe at the festival was really positive. The team continues to deliver, continues to look for efficiencies. We have some exciting things coming up this summer. We have the couple of brand launches that we talked about later this year into early 2026 that will have brand marketing dollars associated with them. The opening of our store in L. A. at the Grove will have some marketing investment behind that. Some really good stuff is coming up in the back half of the year into 2026.
Can you talk about the influencer side of the marketing strategy and what's changing there?
Yeah. I think it's, so we have a network of, call it 7,000+ influencers. There's constant kind of cycling in and out of influencers. I think more recently, over the last couple of years, a shift from static post to video and influencers that work well in video, whether that's on TikTok or Instagram Stories or doing more work with YouTube. The Ambassador Program, our internally developed Ambassador Program, which if you're not familiar with it, it's similar to a third-party affiliate program. It's just internally developed and working with influencers that we know. We get a read on the product that's selling. They get payment in cash or clothing credit. We get all of the data and feed it back into the system. That's been a really good expansion to the influencer program over the last couple of years.
You've brought up the stores a couple of times. I know you want to talk about it, so why don't we go there next? You are starting to make some larger investments in stores. I think $8 million-$9 million planned to build out the new store for LA later this year. I guess, one, what should investors know about your physical retail strategy in the medium term? What are the ROI guardrails you have in place as you begin to invest in these spaces?
Yeah. Yeah. We are very excited about the physical retail opportunity. That said, back to being disciplined, we are going to really test these two locations before we really commit to physical retail. Right now, we have a store in Aspen, just over 3,000 sq ft. That's been around about a year. Started as a pop-up temporary location, delivered some great results. We turned that into a permanent physical location. Similar story with the Grove. Great opportunity at probably the best space within the Grove to do a temporary holiday pop-up that we did this past holiday season. That went well. We are extending that into a more permanent location. With these two destinations, we'll have two really great data points, a lot of similarities and a lot of differences. Aspen being a destination, lower traffic, higher conversion. Grove, major metropolitan market, higher traffic, lower conversion.
Both will have Revolve and Forward under one roof. Both have multiple floors. These are two really good test cases to determine if and how fast we roll out physical. The CapEx at the Grove is higher than it will be going forward. A couple of unique things about the Grove location. One, it's two full floors and a big external facade that takes more CapEx than a typical store would. If you compare it to Aspen, Aspen was nowhere near the $8 million-$9 million we're forecasting for the Grove. Also, two floors, and it was a former Apple-turned-Fisker space. It was nowhere near optimized for a merchandise kind of retail destination and really an experiential destination that we want it to be. A lot of work going into making it a really great location. Also, our first store in a major metropolitan market.
We want to go and put our best foot forward and really make it an experience. There are some upfront costs that we can leverage into future stores in terms of design and architecture. $8 million-$9 million is high. Would not expect that for stores going forward.
Focusing on margins for a moment, there's been a lot of attention to the return rates, and you're starting to really do a nice job bending the curve, moving return rates lower. I think 300 basis point year-over-year improvement in the March quarter. What has been working there, and how should we think about the margin implications as you continue down that path?
Yeah. Yeah. A lot of good work going into reducing the return rate. And important that we are reducing it in customer-friendly ways. So it's not making it harder for the customer to return. It's really benefiting us both. Last year, this is going to sound like it's not a benefit for the customer, but it's still a very great return policy. We cut the return policy from 60 days to 30 days. That's just going back to our pre-COVID return policy and still a much better experience than pretty much anybody out there. Also started to crack down on our high, high return rate customers, and these are the very highest of the high return rate customers. Small population of customers, but with significant dollar amount of returns. Again, in a very customer-friendly way, started charging them $8 for outbound shipping and $8 for their return shipping.
Of course, we did lose some customers. Most of them did stick around and change their behavior and started batching things, batching products into return boxes to save on that $8 shipping and turn that cohort from negative contribution to positive contribution margin. Really great success there. Other things, putting more controls around wardrobing where somebody buys the product, wears it to an event, takes pictures with it, and then returns it. The more exciting kind of longer-term initiatives are all centered around the website, the experience, size, and fit. Product recommendations, curation on the site, size and fit recommendations to get better and better using both third parties and our internal measurements to provide her the best recommendation on size. Better ability to filter and sort recommendations and reviews on specific products.
Working more with video and testing video because especially for a dress, it's not just small, medium, large. It's how it's cut, fit, flows, fabric, and a number of other variables. And a lot of other things. Still have a very dedicated return rate task force that continues to work hard on this. Then longer-term, outside of the things that we're doing specific to the return rate, opportunity again back to category diversification where dresses have the highest return rate. Other categories have a lower return rate. More at the extreme is beauty with a low single-digit return rate. As we expand those categories, that'll have a natural benefit to return rate. Physical retail, if, when, and how fast we roll out physical retail, that has a benefit. The return rate in store is significantly lower than online.
There is a case that we end up in a better kind of lower return rate situation in the future than we were at even pre-COVID.
Aside from the return rates, what are the key drivers to margin expansion from here?
Yeah. Yeah. I think number one is the product margin or merchandise margin. So continuing to generate a high full-price mix. That came down a little bit in Q1, but still higher than we were in the pre-COVID era. Also feeding that is Forward. Forward's been suboptimal for the last several quarters as we work through some of the longer kind of longer tail, older inventory. Getting Forward back up into the 40s. Own brands has a significant impact on our gross merchandise margin with premium margin to that of a third party. Those are the gross margin drivers. If you start to work down through the P&L, return rate has a significant impact on our variable and distribution costs.
For every point of return rate up or down, it moves the combination of selling and distribution and fulfillment by 30-50 basis points. Significant impact on those line items. Marketing continue to drive efficiencies there. That's also opportunistic and more kind of more volatile on a quarter-to-quarter basis, especially on the brand marketing front. Not an area that we want to pull back on given the massive amount of customers and revenue out there still to acquire. That's not a leverage point for us. Finally is on the G&A, the more fixed component. The foundation's built. The team is there. Over the next couple of years, we should be able to get a couple of points of leverage out of the G&A line item, similar to the cadence that we saw from, call it 2018 up into kind of 2020.
Thank you. Earlier, you talked about how the strength of the balance sheet and cash flow is enabling you to continue to make investments. Wanted to talk about AI in your strategy there. How are investments impacting customer engagement, conversion, overall sales growth, and just any examples you can provide?
Yeah. Yeah. Again, another area that we're very excited about and a number of different examples. And it's not just a buzzword for us. It is real, and it's having an impact on the business. Again, going back to the founding, founded by Mike and Michael, founded on data and technology. The systems are homegrown. We have the culture, which I think is really important and underappreciated, that having the culture and the mindset to really leverage technology and drive technology in the business is a real key differentiator. In terms of AI, we do think it can touch all aspects of the business. Some of the things we're seeing maybe starting on the site front, we developed our own internal search algorithm on the site. Historically, we had leveraged a third party, probably the best in the search industry, but decided to do it on our own.
Saving not only hundreds of thousands of dollars by not paying that third party, but it drove better results, estimated in the kind of seven-digit revenue benefit from just that internal search. The fact that we own it and we own the algorithm, we can continue to modify and improve that algorithm. A lot of work leveraging AI going into site personalization, product recommendations, curation. We're also leveraging it on return rate. This example kind of combines and benefits both performance marketing and return rate in that we are suppressing ads to high return rate customers. Not serving ads to the high return rate customers, which means return rate comes down, and not using those marketing dollars to go to those high return rate customers. Being more efficient on performance marketing.
In the kind of back office, using AI and machine learning to intelligently place inventory around the world from our LA distribution center to our Pennsylvania distribution center to U.K. return center. Our algorithms can determine the likelihood of a product selling in any one of those regions. If we're taking in a return from the U.K. or Europe, not shipping it all the way back to the U.S., just for it to sell back in Europe. Significant savings on logistics. A lot on the customer service front. Intelligently routing customer inquiries to the most appropriate agent, translating voice calls into text so we can better mine that data and drive behavior from our customer experience agents and a number of other areas.
Excellent. I think we covered a lot of ground, and we're almost out of time, so let's leave it there. Please, everybody join me in thanking Jesse for a great presentation.
Thank you.