All right. Ooh, mic'd up. My name's Dylan Carden. I'm the analyst here that covers Revolve. All you really need to get from me is the fact that you can find all our disclosures from a compliance standpoint on our website. I've got here the CFO of Revolve, Jesse Timmermans, and he's going to give you a little bit of a spiel. We'll do a breakout afterwards, which I'll tell you the room as soon as I figure it out.
Richardson, I think.
Richardson.
I think so. Thanks, Dylan, and thanks for the highly coveted early morning spot on the last day of the conference. I really appreciate that. Good turnout. Thanks for joining us here early this morning. I will get started with a quick background on Revolve, just in case some of you are new to the story. We started 20 years ago, founded by Mike and Michael, who are still our co-CEOs and co-founders, still in the office today, just grinding it out. They still own just less than 50% of the company. We have a very long-term focus, owner mindset. Our owners are investors, so we're really focused on the long term and really building this out. The thesis behind Revolve and some of the core differentiators are really the same today as they were 20 years ago. Founded by Mike and Michael, we're not fashion guys.
Relied on data and technology to make their decisions. Our systems are homegrown. Our ERP is homegrown. Warehouse management system, inventory management, technology, and data science is really ingrained into everything we do, from inventory to customer service to marketing to the back office. Really important, especially in today's day and age with the advent of AI. AI is not just a buzzword for us. We are leveraging it in really all aspects of the business and really moving fast. That data-driven culture from day one has really enabled us to embrace AI in this new day and age. That data and technology backbone supports a focus on the next-generation consumer. When upon founding, Mike and Michael saw that the department stores were big and stale, broad assortment, but no curation.
You have on the other side a small boutique across the country that does not have national or global distribution. Revolve's goal was to really combine those and have a broad selection, but very curated and really focused on this next-generation consumer. To have the online customer experience similar to in-person customer experience. From day one, the home was a dressing room. You have to be able to try on three dresses just for that one that you are going to keep for the Saturday event. Customer is at the center of everything we do. Merchandise assortment is really important. That merchandise and assortment feeds into our brand and our messaging. Our merchandise is supported by a really powerful brand marketing engine. Again, really focused on that next-generation consumer. We were early to social media and influencer marketing, really the pioneers there.
It went even before that. We were working with bloggers before they turned into influencers. Facebook turned into Instagram, turned into TikTok. Static post turned into video. It's really the theme is just being where the customer's at and really embracing her shopping behavior. Underlying all of that is a profitable and capital-efficient business model that we will get into. We operate in a large and growing TAM. There's an almost $700 billion market just in the U.S., 37% of which is online. If you look at either the number of customers we have or our revenue, we estimate that we're only 3% penetrated in that core market. That's just domestic. The international market, the global market, is 4x the size of that domestic market. Our international business today is only 20% of the overall business.
We believe that can be a much bigger piece of the business over time. We are operating in really favorable market dynamics. Purchasing power is shifting to that next-generation consumer. We are still, although at a slower rate, still shifting online. We are squarely centered right in the middle of these great kind of demographic shifts that are happening out there. We operate in that global market with two complementary—we say complementary segments because they are very complementary. We have Revolve that's 86% of the business versus Forward that's 14%. If you compare the two, Revolve is that premium, mostly focused on fashion apparel. About 30% of that assortment is dresses. Compared to Forward, that complements that assortment with primarily handbags and shoes.
We know that the girl that's buying a $200-$300 dress is also complementing that with a great pair of shoes, a very nice handbag. Then we have curation is probably the consistent theme across both of those. While Forward is higher-end and luxury, it's still very curated and still focused on this next-generation consumer. Very young luxury, not kind of the stale luxury of the past. We have a long-term track record of profitable growth. I mentioned this in the opening remarks. Consistent sales growth over time, despite some volatility with COVID and other macro cycles that we'll get into. A 17% CAGR and doing so profitably. A 73% increase in net income year- over- year last quarter and 60% increase in adjusted EBITDA. Again, consistently profitable.
Going back to kind of that founder-led mentality, that's really key for the success that we've had in managing through difficult cycles like we're in today. We've outperformed the competition and taken share over time. If you compare our 17% CAGR to the e-commerce of 13% or the premium department stores who are essentially flat to down since 2016, that's still where billions and billions of dollars are sitting, going through that physical department store door. It stands out among e-commerce peers, especially. Us and Zalando are the only ones that are gap profitable and positive free cash flow versus this long list of others. If we maybe step back now and double-click into what's driving that, number one is active customers. I mentioned only 3% penetrated. We have about 2.7 million active customers. That's a 15% CAGR over time.
This is up 6% in Q1. We've been kind of hovering around a 5% growth that ticked up in Q1. Active customers are really important. We'll get into the dynamics of our existing customer in a second. Net sales at full price is really important. She comes to us for what's new and exciting, not for the discount. It's not a value play. She's coming to us for the great merchandise and being part of that Revolve ecosystem. Consistently, on average, around 80%. Even before COVID, it was 79%. We've been averaging around 80% post-COVID. 79% was already good, and we've improved that since COVID. Kind of driving that is that data-driven merchandising. Buying very shallow on that initial buy, reading the data even before the sales, reading impressions on the product, and then reordering into what's working.
Over half of our purchases, our inventory purchases, are reorder, which have a higher full-price sell-through and higher margin as a result. Average order value, premium average order value. This is really important and gives us a lot of leverage on the P&L and gives us the ability to absorb that high return rate, giving the customer the ability to purchase and return and really try on the product and offer fast and free shipping and all the great customer experience that she expects from us. That customer loyalty that I mentioned several times has driven incredible loyalty and strong customer dynamics and LTV over time. Number one, free shipping, free returns, really core to the story from day one, still today. I think we were one of the first, if not the first, to offer free shipping and free returns online.
Our customer service experience continues to get better and better, and we continue to drive up our customer satisfaction score. In most recent quarters, the last two quarters, we have been at modern-day records. Really great to see that and not taking our foot off the pedal in terms of just providing a great customer experience. That results in, again, really high full-price sell-through. If we go to the customer dynamics, just over 50%, 54% of our active customer base is an existing customer. They purchase more frequently and at higher average order values over time. After they get in, they are really sticky. We have a first-order drop-off from first order to second order, but from second to third, fourth, fifth, they are very sticky. You can see 54% of the active customers are existing. They place 80% of the orders and represent 81% of the net sales.
That's driven by both, like I mentioned, an increase in the frequency. Their orders per year go up, and their average order value goes up over time. Net sales per active customer, $424 in 2024. That continues to increase again as a result of this purchase frequency and higher average order value. If we get into a couple more recent drivers of our success, first is AI, AI and other technologies. From day one, we are data-driven, data-driven merchandising, technology focus, ingrained in the culture, systems homegrown. This has really enabled us. I think that data-driven technology culture mindset is very underappreciated and undervalued. Having that center within the company and people that are really focused on that enables us to embrace things like AI. A few examples of our AI developments. In the center of the page here, site search.
Historically, our on-site search was driven by a third party, probably the best in the search business. Our data science and BI team took that upon themselves to develop our own internal AI algorithm for our internal search. This not only outperformed the third party, driving significant revenue gains, but also we do not have to pay the third party several hundred thousand dollars a year for the use of that technology. A lot of AI initiatives on the site itself, from the edits on the site, personalization for the customer, size and fit, product recommendations. We just launched a virtual styling tool on the site that we are testing. We are testing video. A lot of great things happening on the site in terms of merchandising, assortment, and that customer experience. Also driving a reduction in returns. We are leveraging AI to drive a reduction in returns.
Again, reducing returns in the right way. Not making it harder on the customer to do the returns, but making that first purchase more educated and making it actually easier for her. A lot going on in the back office. We do think AI can touch all aspects of the business. Just a couple on the back office and operational front, intelligently routing customer service inquiries to the most appropriate agent. That is driving that really high customer satisfaction score. Also translating voice calls into text so we can better mine the data behind those customer inquiries and, again, serve the customer better. Also intelligently placing inventory around the world from our distribution center in L.A. , Pennsylvania, U.K. , so that the inventory is placed appropriately. For example, a customer in Europe purchases an item. We ship it from L.A. to that customer in Europe.
They return the item. Our algorithms determine the probability of that item reselling within Europe or the likelihood of it selling back in the U.S., if it's likely to sell and not shipping back to the U.S. just to ship it to another customer back in Europe. Just one example of the inventory algorithms behind the scenes and a lot of other things we're working on on the AI front, but a lot of opportunity as we look ahead into the future. Kind of wrapping up maybe with this first section, the consistent growth, consistent profitability, consistent cash flow generation has led to a very strong balance sheet. We broke the $300 million mark this past quarter, no debt. Really important in times like this and cycles like this. We've managed through several difficult cycles.
Having $300 million on the balance sheet allows us to continue to invest, which is really important. We see this cycle as an opportunity. If you think about our capital allocation priorities, number one is invest back into the business. 3% penetration in this core market. We have a long ways to go. We are going to continue to market, continue to acquire customers, invest in AI, invest in great talent, and continue to take market share at the same time where others are forced to pull back given their less than optimal financial profiles. Number two, thoughtfully evaluate M&A opportunities. We think, again, during this cycle, there is a great opportunity to acquire other creative platforms and brands that we can tuck into the Revolve platform and leverage everything that we are good at: the technology-driven, data-driven merchandising, the powerful marketing, the operational platform that we have.
Three is return of capital through our share buyback program. We have a $100 million share buyback program authorized. We still have ample room to purchase there. We are quiet on that front in the last couple of quarters. We were back in the market in Q2, and that's been a really great return of capital. I guess I covered this. Now we'll go to the more recent quarter, this past Q1. Unfortunately, a really strong quarter was kind of masked and covered by all of the attention around tariffs. If I start with the positive and the really strong quarter that we had, top line was up double-digit 10%. That's off of a 14% positive Q4. A couple of quarters of really strong growth and back into the double digits, which was our goal. On top of that, again, profitable growth.
a 57% increase year- over- year in income from operations, 45% adjusted EBITDA, return rate, significant reduction in return rate. This is the third quarter we have had pretty meaningful reduction in return rate. That is important if you go back up to the income from operations and adjusted EBITDA. For every point of return rate reduction, there is a 30-50 basis point benefit in our variable cost line items of selling and distribution and fulfillment. This has been a really important profitability driver in the last few quarters. Strong free cash flow, $45 million up 18%, again, going back to the $300 million cash balance. Own brands, we are really excited about. We will get to this in a minute with our growth opportunities. Own brands was higher year- over- year, the mix of own brands on a Revolve segment for the first time in 10 quarters.
Own brands carry a significantly higher gross margin than a third party. So again, a really important profitability driver over the long term. Now, all that good was covered by all of the attention around tariffs, which is definitely a challenge, but we also see as an opportunity. And maybe to rewind, still very uncertain out there. At the time we released earnings, it was right at the point when China was at 145%. The rest of the world was at 10%. So a lot of scenarios going into our modeling around gross margin guidance in particular. And there's still a lot of uncertainty out there. Even though we're down to 30% for China today, there was a time of 24-36 hours last week that we thought it was zero. Europe could be going up to 50% here in a couple of weeks.
I think the theme is very uncertain. The movement from 145% down to 30% does not change our mitigation strategies, our diversification objectives on own brands. 30% is still high. We think it is more manageable, of course, and gives us more confidence in our gross margin range. Again, very uncertain out there, both in terms of timing and level of tariffs. If we step back a little bit, I have mentioned the cycles and difficult cycles a couple of times, having the strong balance sheet, the ability to manage through those cycles. We have done it before and we have come out stronger. I think that is important. Again, Mike and Michael owning just less than half of the company, very long-term focus, seeing challenges as opportunities. There have been two in our history. The first was the global financial crisis back in 2008, 2009, and then most recently COVID.
COVID was a really interesting case study, and you all lived through that. Our brand is really focused on going out, dresses, living your best life, travel, parties, etc. We were geared up for our peak season in Q2 of 2020 when COVID hit and everybody was, of course, locked down. We had to quickly pivot from dresses, from going out, from our big marketing activities that we had planned to more stay-at-home, both apparel, attire, beauty, etc. We were able to do that, really pivoting on a dime. Dresses were down 26%. That is our biggest category. With the pivot, we were able to manage the year to down only 3% with really significant profitability gains during that year. Just an example, during a very challenging time, we were able to not just manage through it, but come out stronger.
We think the same is true for this most recent cycle. On top of that, a lot of challenges in the luxury market. You see the examples here from Farfetch to MatchesFashion, Saks and Neiman having challenges. While at the same time, Forward is growing and we are investing in Forward. That's again, reminder, our luxury platform, over a $600 average order value. We're acquiring great talent. We're leveraging AI. We're cross-marketing Revolve customers to that Forward platform. Physical retail has enabled us to really double down on that cross-marketing with Revolve and Forward under the same roof. Although the luxury market is challenged right now, we see it as a great opportunity to continue to take share and really complement that Revolve assortment again with the Forward higher price point, handbags, shoes, accessories, etc. Okay, now on to the future and our growth opportunities.
I mentioned this already, but we do believe there is just a long runway of growth opportunity just in our core customers. If you just look in the U.S., 3% penetrated, whether you look at that 18- 44 year old female in the U.S. or our revenue as a percentage of the TAM. If you do not believe either of those, you can compare our active customer base to some of the other players out there where there is still, again, billions of dollars of share to be taken from even just the premium department stores alone. That is number one. Invest back into the business, continue to market, continue to acquire customers, have great merchandise, have a great customer experience. Number two, and these are not necessarily in order after this first kind of focus on the core, but we see a great opportunity to expand categories.
Again, historically, she's looked to us for going out, for dresses, for that special occasion. You rewind 10 years ago, it was a compliment when you ran into a Revolve customer on the street and she says, "I go to Revolve for all of my occasions." Now it's almost not a criticism, but constructive feedback where we want her to say she comes to Revolve for everything, for her workwear, activewear, outerwear, dresses, going out. We think we have that opportunity. Even beyond that core female customer, we see an opportunity in men's. Men's is a very small piece of the business right now, but we've made great gains there and it's growing in excess of the overall business. We don't see another really great men's multi-brand platform out there. We think there's a huge opportunity.
Up to half of the purchases out there for a male come from a female. We have a very engaged female audience and a great new leader on the men's business that's really curating that assortment from kind of the more fashion forward that we've historically carried to using that as a halo and then complementing that with the core basic stuff that the guy would wear Monday through Friday. Beauty is another great example and a great case study. We kicked off beauty back in 2016. Over the past six years, it's increased 5x. Still only 4% of the business. If you compare that to premium department stores that are in the double digits, we think that's our target and we think we can get there in terms of beauty mix as a percentage of the total business.
First step, both on men's and beauty, is really getting the assortment right and getting that merchandise right. Then we can really start to market and get the experience right for both of those customers. These are really important in both capturing additional TAM, capturing more share of her wallet, and then also increasing that customer lifetime value. Her purchase frequency increases over time already. Increasing that even more by going after more aspects of her life and getting her to come back to us for the beauty, for the basics, for the premium essentials. Just a couple of quick stats on this. The combination of men's, beauty, and home grew significantly greater than the overall business in Q1 and launched our foundations, basics, premium essentials this past January, have received great feedback from both brands and customers.
As a result of that focus on these other categories, we did see fashion apparel increase 14% as compared to the 10% overall business and 4% for dresses. We are seeing some of that category mix start to happen. That impacts AOV in a negative way. Our AOV did come down, but also a lower return rate on these other categories. If you compare our overall return rate of, call it in the mid 50% range, beauty has a low single-digit return rate. Over time, this has a natural benefit for reducing the return rate. International, another huge growth opportunity. I mentioned the international market previously. If you look at the global mix of sales, it is 78%. Our mix is 20% on the business. Huge opportunity internationally. Every region, every market is different, has its own opportunities and challenges, but the theme is really consistent.
Our growth strategy is, number one, get the customer experience on par with that domestic customer. That means free shipping, free returns, all-inclusive pricing, payment types, payment methods that match with that local customer. Great example of that is in Canada. It's probably been a couple of years now. Previously, rewind five years ago, that customer in Canada would have to pay all of their duties, taxes, the HST, GST, PST separately. That was not included in the price. Sticker shock when you get to the checkout. If that customer returns the product, he or she is not refunded those taxes, they would have to go to the Canadian government to recover those taxes. We layered in all-inclusive pricing. When the return is returned, we refund the full amount. We, Revolve, go to the Canadian government and recover those taxes. Very seamless customer experience.
That resulted in Canada sales increasing triple digit for the following several quarters. Return rate, of course, increases because it's much easier for her, but gross sales and net sales increased far greater. That's basically get the customer service experience right. Then we can start to merchandise and market better and more specifically for those markets. Great example is in the recent quarters, China. We hired a leader in China about 18 months ago. She comes from the live streaming sector and really good at understanding that Chinese customer, how she interacts both on the merchandising and marketing front and leveraging channels that work in that market. For example, Douyin, Red, Tmall, and using marketing methods that again resonate with that customer and choosing the right merchandise that resonates with that customer. What we've seen in China over the last couple of quarters is Revolve outperforming Forward.
Historically, China has been more of a Forward business, more about the brand name. More recently, Revolve has taken over and has performed really well, which is really important. Again, goes back to the merchandise and marketing. A lot of the Revolve brands are not known to that customer. A lot of the Revolve brands are not known to even a U.S. customer. They are emerging brands. Really important that the Revolve brand is resonating with that Chinese customer. Huge opportunity internationally and continue to make progress there. Then own brands. I mentioned earlier, own brands have a significantly higher gross margin than that of a third party. From a pure profitability perspective, massive opportunity on own brands. It was about 18% of the business in 2024. It was 36% back in 2019.
I use that just as a reference point to say that own brands could be a much larger piece of the business. We are expanding very thoughtfully. We want to make sure the assortment's right, the brands are right, and the underlying economics of the own brand product is working. That was our goal coming out of COVID, to really get those fundamental metrics right. They are performing better today than they ever have, which gives us confidence in our own brand expansion. We have a couple of brands launching later this year into early next year that we're really excited about. The opportunity lies in a few different areas. One, new brands. Health is one of our most recent.
Has been a great brand, really unique in that it's a higher price point for our own brands and carried across both Revolve and Forward and has performed extremely well. Additional opportunities like this where we partner with a personality and create a great brand. Additional categories, another opportunity. We launched our first men's kind of unisex brand, WAO, a few quarters ago. Additional opportunity in other categories. It could be men's. Again, back to basics, premium essentials, activewear. A lot of opportunity to complement and supplement the assortment with our own brands. Then brand expansion within our existing brands. We have over 20 of our own brands. The customer wouldn't know that these are our own brands necessarily. They're not private label. They're not priced at a discount to third parties. They're priced on par with third parties for comparable products.
They have a brand and a life and an aesthetic of their own. A lot of opportunity to expand the products within each of those brands. Finally, prudent expansion into physical retail. We do see a huge opportunity in physical retail. Of course, historically, we have been 100% online until about a year ago when we opened our Aspen store. We have experimented with pop-ups over time. Aspen started as a pop-up just to experiment. Those pop-ups are usually focused on brand marketing activations and really customer engagement. We decided to really test physical retail with that Aspen pop-up and make it more of a true store. It performed well, so we extended that lease. This past holiday season, we opened a pop-up at The Grove in L.A. , had the opportunity for really, we think the best actual spot within The Grove to test a holiday pop-up there.
Again, performed really well, so we extended the lease and made that, or are in the process of making that a permanent location that should open this fall. Some of the things we like about physical retail and what we experienced in both Aspen and The Grove, one, it over-indexed on new customers. Great new customer acquisition tool. This was really both great and surprising at The Grove in L.A. L.A. is our hometown. We thought everybody in our core demographic knew what Revolve was in L.A. , but we saw incredible new customer growth and a halo effect. Very small because it was a short time period, but a halo effect in the greater L.A. area. Also, anecdotal examples where we had team members run into customers that we thought were core Revolve girls and were talking on the street and asking each other, "Revolve, what is that?
I think I've heard of it. Is that a fashion brand? Just kind of showed the opportunity out there. Again, back to that 3% penetration. Return rate, a small fraction of what it is online. With the expansion of physical retail, a natural way to get the return rate down. Own brands I just mentioned, own brands performed at a higher rate than that of online. Both in terms of mix of sales and then sales to the inventory positioned in the store. We see a great opportunity to assort own brands into the stores and drive even greater margin expansion. We get the question a lot, why now? I think a few reasons. One, behavior changed coming out of COVID. People are looking for experiences. Two, we have the scale in the brand.
We have a very powerful brand and we think this is a great opportunity and time to really use that brand to acquire new customers and be out there. These will be different than a stale department store. They will be experiential, likely have events in store and make it a really great experience for that customer. That said, again, back to my opening, prudent expansion. We are being very disciplined on our expansion. We'll have Aspen and the Grove. We'll read the data there. If we get these stores and we're confident we will get these two stores performing to our very high standards, then we'll talk about expansion, but we're not rolling out a 10-20-30 store expansion plan out of the gate. We need to build this muscle. We are, again, historically online, so we acknowledge we've got to build this muscle.
We just hired a head of retail. Putting our best foot forward, but again, reading and testing as we go. With 50 seconds left, that is my close.
Can anyone not make the breakout that has a burning budget? All right. We got 45 seconds. I mean, on important topic, you kind of touched on it, just how you're feeling about weighing tariffs in the current environment and kind of what you've embedded. You don't guide top line, but sort of weighing where you are in the volatility that you've seen as far as sort of the outlook.
Yeah, nothing. The question, just in case, is kind of how we're weighing tariffs and the uncertainty and how we're feeling about kind of our guidance range, I think is the gist of the question. I would say nothing has changed. It's still very uncertain out there.
Maybe just to back up, the guidance range at the low end assumed the elevated tariffs, so call it 145% in China, and our best estimation of mitigation efforts. The high end assumed, and this was not any one scenario. There were dozens of scenarios in that range. The high end assumed some level of reduced tariffs and mitigation that would offset the vast majority. I think with the recent reduction to 30%, it just gives us more confidence in the range, but does not significantly change our mitigation strategies or the range.
Heard it here first.
All right.
The breakout is in Richardson, which I have about 75% confidence is the one that overlooks the atrium. All right. Thank you. Thank you, everyone. Nice job. Oh, thanks.
This presentation has now finished. Please check back shortly for the.