Revolve Group, Inc. (RVLV) Q4 2023 Earnings Report, Transcript and Summary

Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Revolve's Fourth Quarter and Full Year 2023 Results Conference Call. [Operator Instructions] At this time, I'd like to turn the conference over to Erik Randerson, Vice President of Investor Relations at Revolve. Thank you. You may begin.

Good afternoon, everyone, and thanks for joining us to discuss Revolve's fourth quarter and full-year 2023 results. Before we begin, I'd like to mention that we have posted a presentation containing Q4 and full year financial highlights, to our Investor Relations website located at investors.revolve.com. I would also like to remind you that this conference call will include forward-looking statements, including statements related to our future growth, our inventory balance, our key priorities for 2024, including related investments, product category expansion, cost saving measures, international expansion and technology enhancements, our marketing events, our partnerships and our outlook for net sales, gross margin, operating expenses and effective tax rate. These statements are subject to various risks, uncertainties and assumptions that could cause our actual results to differ materially from these statements, including the risks mentioned in this afternoon's press release, as well as other risks and uncertainties disclosed under the caption Risk Factors and elsewhere in our filings with the Securities and Exchange Commission, including, without limitation, our quarterly report on Form 10-Q for the quarter ended September 30, 2023, and in our annual report on Form 10-K for the year ended December 31, 2023, which we expect to file with the SEC on February 27, 2024, all of which can be found on our website at investors.revolve.com. We undertake no obligation to revise or update any forward-looking statements or information except as required by law. During our call today, we'll also reference certain non-GAAP financial information, including adjusted EBITDA and free cash flow. We use non-GAAP measures in some of our financial discussions as we believe they provide valuable insights on our operational performance and underlying operating results. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP. And our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliations of non-GAAP measures to GAAP measures as well as the definitions of each measure, their limitations and our rationale for using them can be found in this afternoon's press release and in our SEC filings. Joining me on the call today are our Co-Founders and Co-CEOs, Mike Karanikolas and Michael Mente; as well as Jesse Timmermans, our CFO. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn it over to Mike.

Hello, everyone, and thanks for joining us today. We ended a challenging year in 2023 with a solid fourth quarter, highlighted by a return to growth in the Revolve segment, a year-over-year increase in our consolidated gross margin and encouraging early progress in our efforts to drive efficiencies in our global logistics operations. I'll start by briefly discussing highlights for our fourth quarter results before shifting to the full-year 2023 and closing with our key priorities for 2024. Net sales were $258 million in the fourth quarter, a decrease of 1% year-over-year and a slight improvement from the 4% decline in the third quarter of 2023. U.S. net sales decreased 2% and were outpaced by international net sales increasing 7% year-over-year. Our international gains were highlighted by exceptional growth in Mexico and improved year-over-year growth in Europe and the UK, partially offset by declining sales in China and the Middle East. By segment, REVOLVE net sales increased 1% year-over-year in the fourth quarter, our first year-over-year increase in four quarters. FWRD net sales decreased 10% year-over-year, consistent with external reports from the luxury sector. As a relevant benchmark, Earnest Analytics reported that its credit card data reflects a 10% year-over-year decrease in luxury apparel spending by U.S. consumers during the holiday season. Now, moving below the revenue line. As a testament to our progress in rebalancing our inventory, our gross margin expanded to 52.0% in the fourth quarter, representing our first year-over-year increase in gross margin in six quarters. And with our inventory dynamics now in a very good place, in early 2024 we are back to year-over-year growth in receipts of new inventory for the REVOLVE Segment. Net income for the fourth quarter was $3.5 million, or $0.05 per diluted share, and adjusted EBITDA was $9 million. As expected, both profitability measures declined year-over-year. I will now shift to a review of our performance and accomplishments for the full-year 2023 before briefly touching on our key areas of focus for the coming year. From day one, Michael and I have approached the business with the customer at the center of everything we do. Even through a very challenging year, we continued to deliver an exceptional experience to our customer base of 2.5 million active customers, increasing our already exceptional customer satisfaction score by more than a full point year-over-year. Our active customers grew 9% year-over-year and we see a huge opportunity for further expansion, in the U.S and overseas. And, importantly, we drove a year-over-year decrease in our average cost to acquire customers in 2023. We believe the reduced CAC illustrates the strength of our brand and execution by our team in optimizing spend across channels and audiences within a competitive environment. Now, shifting to our top line results. Net sales in 2023 were $1.1 billion, a decline of 3% year-over-year, despite the healthy growth in active customers. Our customer demographic faced increased macro pressures in 2023, which we believe contributed to the normalization of spending levels from the significant apparel spending in 2021 and 2022 coming out of COVID lockdowns. The normalization of purchases by our customers in 2023 is also evident in a key net sales retention metric. Recall that once a year we disclose the revenue retention from our prior-year cohorts, defined as the revenue retention rate from the previous year for all existing customers who had purchased from us in a prior year. Since this retention metric has experienced significant variability in the past four years for obvious reasons, we believe it is important to look past the peaks and valleys. In 2023, active customers placed an average of 3.42 orders, which is 8% higher than in 2019. Also importantly, the average of our cohort net sales retention rates reported over the past four years is 92%, which is higher than our 89% net sales retention rate reported in 2019. Looking at the category performance. While the net sales of dresses, our largest category, was pressured in 2023 after increasing nearly 50% in 2022 and expanding at an even faster rate in 2021. I am excited by our progress in emerging categories. Our emerging areas of beauty, men’s and home collectively increased by more than 20% in 2023, further validating our opportunity to expand our share of wallet and helping to offset the 5% decline in net sales from dresses. We executed very well on a primary goal we set for 2023: to rebalance our inventory for growth and efficiency. Successful execution of this initiative helped to drive a meaningfully higher mix of net sales at full price in the second half of 2023 when compared to how we started the year. This sets us up well entering 2024. And we continue to operate profitably and generate significant cash flow. While we are not satisfied with our adjusted EBITDA margin in 2023, our profitable and cash generative business remains a key competitive advantage. In 2023, we generated $43 million in operating cash flow and $39 million in free cash flow, an increase of 85% and 114%, respectively. Our consistent cash flow generation gives us the capacity to invest throughout the cycle at a time when many peers have no choice but to significantly reduce investment. Our strong cash flow has further strengthened our balance sheet with $245 million in cash at year end 2023, even while investing $31 million in stock repurchases during the year to enhance shareholder value. Our cash position has increased by nearly 4x compared to the $65 million in cash on our balance sheet at year end 2019. Finally, we meaningfully advanced our technology and personalization capabilities during 2023, further elevating the customer experience. Leveraging AI, we significantly improved the recommendation of similar items using visual images, expanding conversion opportunities and further elevating our navigation for customers. Driving continuous improvement in personalization and site navigation is particularly important since we offer a broad assortment of more than 100,000 styles at any given time. I will wrap up with a discussion of our key priorities for 2024, which are aligned with our focus on maximizing value over the long term. First, we will continue to efficiently invest to expand our brand awareness, grow our customer base and strengthen the connection with the next generation consumer. Michael will talk about our brand building initiatives in his remarks. Second, we will continue to build on the successful expansion of our assortment into adjacent product categories. We have earned our customers’ trust through the strength of our brands, platform, product curation and our excellent customer experience. The impressive growth of our beauty and men’s businesses in 2023 validates our ability to tap into this customer loyalty and trust to drive adoption in emerging categories. Third, we remain extremely committed to driving cost efficiencies within our global shipping and logistics operations while maintaining a laser focus on our outstanding customer experience. In 2023, we successfully ramped our newer east coast fulfillment center that brings us closer to many of our customers, which we believe will enable us to realize further cost savings and elevate service levels through shorter shipping distances. Supported by a new AI technology application that strategically optimizes inventory rebalancing between our fulfillment centers to match consumer demand, among many other initiatives, I am confident that in 2024 we will begin to drive efficiencies in our logistics costs year-over-year. Fourth, we will further expand our international presence, where we see exciting opportunities to invest in our customer acquisition and in further elevating service levels to drive growth. We recently launched a new marketing communications channel in Mexico that has helped us to increase consumer engagement and drive even faster new customer growth in what is now our third largest market outside of the U.S. Finally, we will further enhance our technology stack and leverage AI and other technologies across the business to drive growth and efficiency. Michael and I are huge believers in the power of AI. Since day one, we have leveraged our own proprietary technology to run nearly all aspects of our business, delivering capital efficiency that is highlighted by our capital expenditures averaging only 0.6% of our net sales since 2016. We believe our data-driven mindset and culture of technology innovation positions us well to continue to expand the use of AI technology throughout the organization to drive results. To summarize, we have an unwavering focus on driving profitable growth and market share capture in the years ahead. Like many companies, we continue to face a host of challenges in the current environment and we have a lot of work to do. But in contrast to most fashion e-commerce peers, we have a profitable and cash generative business, proven financial discipline, and key competitive advantages that together enable us to confidently invest in the large opportunity ahead of us. I would like to thank our talented and passionate team for their incredible efforts, persistence and innovation that reinforces my confidence in our future. Now, over to Michael.

Thanks, Mike, and hello everyone. As I reflect on 2023, I am proud of our team for overcoming a variety of headwinds to deliver profitability and significant cash flow that further strengthened our balance sheet. We continued to build our brands through innovative and impactful marketing strategies, in the U.S. and overseas. These marketing efforts helped us to increase our active customer base by 9% in 2023, while even further raising the bar on our already outstanding service levels. And customer trust in our brands and delight in our shopping experience helped us to successfully expand into emerging product categories, an exciting long-term opportunity. Most important is that we continue to invest and innovate throughout the company to strengthen our foundation for future growth, which we remain very confident in. I am excited to continue the momentum in these areas this year. Shifting to the industry landscape. Since our third quarter earnings call in November, there has been a lot happening in our space, particularly among luxury e-commerce peers. Two of the larger luxury ecommerce retailers were recently acquired in distressed buyouts and there is another large luxury e-commerce competitor listed as a discontinued operation by its parent company. And as reported by the Wall Street Journal, Business of Fashion and WWD, there have also been reports of luxury retailers not paying their brand partners on time. While these recent industry headlines may worry some investors, we are excited about the opportunity for us to benefit from industry turmoil. For instance, a major luxury brand group has already announced they will no longer sell their products through one of the e-commerce peers I referred to. As a profitable company with consistent cash flow generation and focused on creating value over the long term, we believe we are well positioned to emerge as an even stronger player. Our 20-year history has taught us that periods of market disruption can be a great time for us to invest when some others in the space are forced to retrench. With that as a backdrop, I will focus my remarks on our strategy to leverage our financial strength and position in the market to invest in our brand, acquire customers and gain market share over the long term. With the large market opportunity that we believe lies ahead of us, continuing to invest in our core domestic customer remains our number one priority. A highlight of our fourth quarter was the opening of our brand elevating REVOLVE and FWRD Pop Up shopping experience in Aspen, just in time for the holidays. Launched with a private event hosted by our FWRD Creative Director, Kendall Jenner, we have created something truly special in an aspirational town with a high concentration of wealth. Aspen is also a celebrity hotspot and a nightlife fashion playground where everyone dresses to impress. The REVOLVE and FWRD Pop Up was prominently featured in Vogue’s ranking of the top five designer popups to visit this winter, the only multi-brand retailer featured among iconic luxury brands like Louis Vuitton. And people are visiting and spending while they are there. Foot traffic for the first two months of operation has been impressive, highlighted by appearances from A-listers including Rihanna, Mariah Carey, Lori Harvey, Alessandra Ambrosio, Stella Maxwell, brand partner and snowboarder Shaun White, and featuring experiential events co-hosted by coveted brand partners including Miu Mui, Charlotte Tilbury, Jonathan Simkhai, Rhude, Eterne, and Nour Hammour. Also exciting is that the Pop Up is our first true integration of our highly complementary segments, REVOLVE and FWRD, under the same roof. In addition to the brand integration that is consistent with our growth strategy, consumer demand at the Pop Up is highlighting our opportunity to further expand into adjacent seasonal categories where our brands are not top-of-mind, such as outerwear, and across a broader range of price points, from beauty products at $25 to handbags of nearly $100,000. Most compelling is the customer engagement in our Aspen Pop Up. More than half of all customers at the pop up are entirely new customers to our brands, reinforcing our opportunity to grow our customer base. And our existing customers and fans have been thrilled to experience and interact with our brands in real life. Customers are spending significantly more per transaction in the Aspen pop-up than they typically do online, while returning products at a very small fraction of our typical return rate for products purchased online. So, we are very pleased with the learnings from the pop-up so far. If you are in Aspen in the coming weeks, please stop by and see us. As we look ahead, we have some very exciting plans for further investment in our brands in 2024, including a fresh take on our experiential marketing events that we are known for as well as some impactful partnerships in the works that we will be able to share more details on in the coming months. In addition to the large domestic opportunity, we continue to see a very large opportunity to further expand our share in international markets. In recent months, we have been incredibly active in elevating our brands with aspirational lifestyle events around the globe in key regions including Tokyo, Singapore and the Netherlands, creating brand heat and excitement on social media and press channels coinciding with a solid quarter for international net sales growth in Q4. One reason we chose to activate in Asia during the fourth quarter is that Asia has our largest social media following outside of the U.S. It’s a true testament to the strength of our brands globally, especially considering that we have not yet made significant investments in the region. Drilling into the details by country, China has our second largest social media following after the U.S., underscoring our opportunity for future growth in Asia. For our recent marketing events in Singapore and Tokyo, content creators were beyond excited to work with us in international markets, collectively delivering more content than we expected of them and contributing to the success of our largest-ever marketing event in Asia. Influencers enthusiastically traveled from China, Taiwan, India, Korea, Australia, Vietnam, Malaysia, Philippines, Europe, Canada and the U.S. to participate in our events. Their collective social following exceeds 100 million followers on Instagram on a combined basis. Of note, nearly half of the hundreds of millions of social media impressions generated by our Singapore marketing event were on native Chinese social media platforms including Douyin, Red, Weibo and WeChat. In fact, three of the top Chinese influencers generated 30 million views on Douyin alone. It has become a very important part of our international strategy to expand our presence and awareness on these Chinese social media and e-commerce platforms that have a very powerful influence on Asian consumers. I couldn’t be more pleased with how well our Singapore event delivered against this objective. I’ll close with a discussion of our investment in emerging product categories, an area where we see a great deal of opportunity to both acquire new customers and capture more share of our existing customers’ wallet. Beauty net sales increased 49% year-over-year in the fourth quarter, expanding to 5% of net sales from 3% in the fourth quarter of 2022. Even with such gains year-over-year, 5% of net sales remains well below the double-digit penetration for Beauty net sales that is typical among premium department stores. Contributing to our incredible beauty results was very effective merchandising with the addition of several high impact new beauty brands. Our beauty momentum has remained strong with recent launches of beauty brands including Tarte Cosmetics, Off-White Beauty and Dundas Beauty. I am also excited about our fast-growing Men’s business, supported by an increased marketing focus and merchandise assortment. Men’s has performed extremely well in some key international markets, contributing to our impressive growth in Mexico throughout 2023. While relatively small today, the scale of these areas of business are growing at an attractive rate. Beauty generated $42 million in net sales in 2023, up from just $11 million in 2019. We are targeting for the emerging offerings of Beauty, Men’s and Home to contribute more than $100 million in 2024 on a combined basis. And this expectation does not include contributions from our plan to expand into additional apparel categories this year to further solidify us as the destination for more aspects of our customers’ lives, supported by marketing initiatives to increasingly emphasize newer categories where we see opportunity. In closing, with the strength of our brand, our strong financial position, our fast paced and nimble operating structure, and our innovative, entrepreneurial mindset, we believe we are well positioned to take market share in the years ahead and build a larger and more powerful collection of brands than we have today. We remain incredibly excited about what lies ahead of us this year and for many years beyond. Now, I will turn it over to Jesse for a discussion of the financials.

Thanks, Michael, and hello everyone. I’ll start by recapping our fourth quarter results and then close with updates on recent trends in the business and commentary on our cost structure for 2024. Starting with the fourth quarter results. Net sales were $258 million, a year-over-year decrease of 1%, and a 3-point improvement from our comparison in the third quarter of 2023 as we continue to navigate a challenging environment for consumer discretionary spending, particularly in our luxury segment. REVOLVE segment net sales increased 1% and FWRD segment net sales decreased 10% year-over-year in the fourth quarter. By territory, domestic net sales decreased 2% and international net sales increased 7% year-over-year. Active Customers, which is a trailing 12-month measure, increased by 33,000 customers during the fourth quarter. This growth expanded our active customer count to 2.5 million, an increase of 9% year-over-year. Our customers placed 2.0 million orders in the fourth quarter, an increase of 3% year-over-year. The increase in orders placed was offset by a decrease in average order value, or AOV, of 1% year-over-year to $303, as well as a year-over-year increase in return rate. Shifting to gross profit. Consolidated gross margin was 52.0%, at the high end of our guidance range. The increase of 57 basis points year-over-year primarily reflects a higher mix of net sales at full price and an increased mix of net sales from the higher margin REVOLVE Segment, partially offset by a lower mix of Owned Brand net sales within our REVOLVE Segment compared to the fourth quarter of 2022. The gross profit comparison at the segment level is more favorable at REVOLVE than FWRD, underscoring our great progress in rebalancing the REVOLVE Segment inventory. Moving on to operating expenses. A high-level summary is that much better-than-expected efficiency in selling and distribution expenses in the fourth quarter was largely offset by our general and administrative expenses coming in higher than our outlook. Fulfillment costs were 3.5% of net sales, slightly better than our outlook, and higher year-over-year as expected. Selling and distribution costs were 17.8% of net sales, around 120 basis points more efficient than our fourth quarter outlook, and an increase of 24 basis points year-over-year. Our efforts to drive reductions in our global shipping and logistics costs are starting to become visible on our P&L, partially offset by a higher return rate year-over-year in the fourth quarter. Our marketing investment also came in more favorable than expected, representing 16.4% of net sales, an increase of 104 basis points year-over-year. The increase reflects a planned increase in brand marketing investment and a shift in the timing of events in the fourth quarter of 2023 as compared to the prior year, partially offset by year-over-year efficiency improvements in performance marketing as a percentage of net sales. General and administrative costs were $34.7 million, an increase of 21% year-over-year that included $2.8 million of non-routine import and export fees and an additional $600,000 in costs for the legal matter mentioned last quarter that has now been settled. Our tax rate was 28% in the fourth quarter, up from 24% in the prior year. Net income was $3.5 million, or $0.05 per diluted share. The 56% year-over-year decline in net income primarily reflects our increased marketing investment year-over-year and increased G&A expenses year-over-year. Adjusted EBITDA was $9 million, a decrease of 40% year-over-year. Moving on to the balance sheet and cash flow statement. For the full-year 2023, net cash provided by operating activities was $43 million and free cash flow was $39 million, an increase of 85% and 114% year-over-year, respectively. Contributing to the strong cash flow metrics were improved inventory dynamics, partially offset by lower net income. Inventory at December 31, 2023 was $204 million, a decrease of 5% year-over-year. The year-over-year decline was four points steeper than our net sales decline, demonstrating the important progress we have made in rebalancing our inventory. As of December 31, 2023, cash and cash equivalents were $245 million, an increase of $11 million, or 5% year-over-year, and we had no debt. Since the end of 2019, we have increased our cash balance by $180 million. Our strong financial position enabled us to continue to invest in the business while returning capital to stockholders through the repurchase of Class A common shares as part of our commitment to enhancing shareholder value. During the fourth quarter, we repurchased nearly 1.3 million Class A common shares at an average price of $13.94. Approximately $69 million remained on our $100 million stock repurchase program at year end. Now, let me update you on some recent trends in the business since the fourth quarter ended and provide some direction on our cost structure to help in your modeling of the business for 2024. Starting from the top. The top-line pressure we experienced in the fourth quarter has continued, with net sales through the first eight weeks of 2024 decreasing by a mid-single digit percentage year-over-year. To provide context for our net sales trending for the 8-week period through February 25, remember that in early 2023, we had a much larger assortment of markdown inventory than we do today. Notably, our net sales at full price have increased slightly year-over-year through the first eight weeks of 2024, while our markdown sales have decreased as our inventory today is substantially healthier. With much healthier inventory entering the year, the proportion of our net sales at full price and our gross margin are also much healthier in early 2024 as compared to the same period in 2023. To assist in your modeling of net sales for the full first quarter of 2024, I also want to highlight that our net sales comparison for the upcoming month of March is easier than the year-over-year comparison we faced through the first eight weeks of 2024, consistent with our commentary on our fourth quarter 2022 earnings conference call last February. Consistent with recent performance, net sales comparisons in the REVOLVE segment continued to outperform the FWRD segment year-over-year in early 2024. Lastly, I would like to point out the difficult comparison we face in international markets in the first quarter, as our international net sales increased 16% year-over-year in the first quarter of 2023. Shifting to gross margin. We expect gross margin in the first quarter of 2024 of between 51.4% and 51.9%, implying a nearly two-point increase in gross margin year-over-over compared to the first quarter of 2023. For the full-year 2024, we expect gross margin of between 52.5% and 53.0%, an increase of about 90 basis points year-over-year at the midpoint. Fulfillment: We expect fulfillment as a percentage of net sales of approximately 3.5% for the first quarter of 2024. For the full-year 2024, we expect fulfillment costs of between 3.3% and 3.5% of net sales, approximately flat year-over-year, at the midpoint of the range. Selling and Distribution: We expect selling and distribution costs for the first quarter of 2024 to be approximately 18.1%, which implies our first year-over-year decrease in selling and distribution expense as a percentage of net sales in three years. For the full-year 2024, we expect selling and distribution costs of between 17.8% and 18.0%, an expected decrease of roughly 50 basis points year-over-year at the midpoint of the range, as we continue to realize the efficiency efforts we invested in during 2023. Marketing: We have an active calendar of brand building events in the first quarter, including two impactful events held in Las Vegas around the Super Bowl and dozens of events in Aspen at the REVOLVE and FWRD Pop Up. As a result, we expect marketing in the first quarter of 2024 to be approximately 16.0% of net sales. For the full-year 2024, we expect our marketing investment to represent between 16.0% and 16.2% of net sales, consistent with our marketing investment of 16.1% of net sales in 2023. In terms of sequencing, in 2024, we expect marketing as a percentage of net sales to be more linear than in recent years, particularly in the second quarter. General and Administrative: We expect G&A expense of approximately $33 million in the first quarter of 2024 and between $130 million and $133 million for the full-year 2024. This implies a 4% year-over-year increase in G&A costs for the full-year 2024, at the midpoint of the guidance range, as we continue to invest in longer term growth initiatives. We expect G&A expense in dollar terms to be fairly steady throughout the year. And lastly, we continue to expect our effective tax rate to be around 24% to 26%, both in the first quarter and in the full-year 2024. To recap, we closed out a challenging year with a solid fourth quarter, highlighted by a return to gross margin expansion year-over-year that we expect will continue in 2024. We also expect to drive efficiencies in our largest operating expense category, selling and distribution costs. And finally, we expect to continue to leverage our financial strength and invest in the attractive long-term opportunity ahead of us. Now, we’ll open it for your questions.

[Operator Instructions] Your first question comes from the line of Mark Altschwager from Baird.

Maybe to start out, I was hoping you could elaborate a bit more on the quarter to date and the positive full price selling trends you're seeing. I guess just any reads from the festival season early on here, anything you're going to be doing differently this spring from a marketing perspective that we could watch for? I know you called out the easier comparison, but just wondering any other dynamics beyond that, which you think could drive a sustained positive inflection in the growth rate as we move through spring. And then I had a follow-up on margin.

Yes. So we feel really good about the trends we're seeing early in the quarter with regards to full price sales. And I think it's a reflection of all the work we've done on the inventory side, REVOLVE in particular, looks quite healthy. FRWD, we still have some work to do, but really promising trends on that side. As we move through the spring, that's always one of our core seasons. And it's still a bit early. We haven't kind of hit that season full on yet, but we're certainly optimistic we'll see some better trends on the sales side as we move through the course three months of March and then April and May.

And then the selling and distribution, nice progress there, I think, 100 basis points, over 100 basis points better than your plan in the fourth quarter. And I think you're looking to sustain at or below the 18% for the year. What are the implicit assumptions you're making there for the trajectory of return rates? And just as we unpack that, I mean, are you able to quantify some of the efficiency savings you're seeing from some of those more controllable initiatives?

Yes. Thanks, Mark. We probably won't quantify specifically those initiatives. We put a lot of good work into those in 2023. So it's great to finally see those coming through in the P&L. But maybe for some of the other assumptions that do impact that line item. AOV, we're assuming is flat to slightly positive for the year. And in return rate, we are modeling in a flat return rate. So we're optimistic that we can make gains there, and we've got a lot of good things in the works, but we're not modeling that in at this point. And then I think keep in mind also that Q1 typically has a slightly lower AOV and that's why you see the, in part where you see the Q1 guidance of 18.1%, a little bit higher than that 18% or kind of that 17% to 18% for the full year.

Your next question comes from the line of Anna Andreeva from Needham.

Great. Congrats, guys. Nice results. We had two questions. I wanted to follow-up on the G&A expenses. You mentioned the accrual that you saw in the fourth quarter. But can you talk about what's driving what looks like double-digit growth in 1Q and also for the year? And also secondly, looking at category performance, great to see beauty and men's working well. The fashion apparel and dresses continue to decline. So can you talk about what are you doing specifically to improve trends there? Are there fashion trends that you see in apparel as '24 unfolds that REVOLVE could capitalize on?

Yes, sure. Thanks, Anna. And I'll take that first one on G&A and then pass it over to Mike and Michael for the second part of that question. Yes. We did have some non-routine items in the quarter. If you pull those out, it was closer to in line with the guidance that we gave. But to your point, that does mean that Q1 is higher than Q4 on G&A. So a couple of things to keep in mind there. One, we make our merit adjustments, our salary increases in January of every year and two-thirds of that line item is people. So there is a sequential increase there. And then also, we do have incentive bonuses, incentive compensation in G&A. And given the results of this past year, bonuses were not accrued to the full amount, obviously. And then in the full year for 2024, we're starting off in January with the expectation that we meet our targets. So there's a difference in the accruals for the incentive compensation.

Your next question comes from the line of Edward Yruma from Piper Sandler.

Just trying to understand a little bit more on the gross margin expansion both for the quarter and for the year. Is it just driven by lower markdowns? Or at this point, are you now assuming that mix, either more dresses or private label as a positive gross margin driver for the balance year.

Yes. Thanks, Ed. So it's largely the former an increase in that full price sales mix for the year. We did close out 2023 for the full year at 79%, which is in line with 2019. So very healthy. But if you remember in the first part of the year, especially the first half of the year, we are very suboptimal in terms of full price mix. So that's the largest driver there. And then we continue to make inroads just in kind of the third-party margins in general. We're not factoring in an increase in owned brand mix for 2024. So that's not part of it. And then forward Revolve mix always has an impact. And based on the results today, as we commented, we're seeing REVOLVE outpace FWRD, which -- and REVOLVE carries a higher margin than that FWRD segment.

Your next question comes from the line of Michael Binetti from Evercore ISI.

A couple for me. I guess on the -- in the U.S., you talked a lot in the -- well, you talked about in the prepared remarks about international. How are you thinking about plans to grow the U.S. in 2024? Just curious your thought there on how to get back to positive. And then on the pop-up store, you guys have been fairly dogmatic about sticking to e-commerce only. And certainly, there's a lot of advantages to staying there -- your core channel, you have a lot of compounded excellence there. But when you see the turnout that you spoke of at these pop-up stores, the sales metrics, the new customer connections may be a way to extend the efforts you've made to make points of shipment and points of product returns closer to the consumer. It seems like there could be some inches that you could scratch. Is there like a potential for this business to have a small fleet of high-impact stores or key cities strategy on stores at some point?

Yes, definitely. So as we think about -- just taking the first part of your question, as we think about growth for 2024, for us, it's just about continuing to invest in the things that make sense, continue to invest on the brand side, make sure we nail the merchandising mix and the position with the consumer. And I think with a much healthier inventory position, particularly on the REVOLVE side, we're well positioned to do that. Certainly, it's been a bit frustrating the past 18 months, not seeing the growth we're accustomed to. But the market opportunity remains huge. We have very low penetration in our target customer base. Also, just kind of touch on -- the store thing as it relates to the growth opportunity, the fact that over half of the customers we saw at the pop-up store were new customers, again, I think, validates that opportunity to a lot more share to take, all the category expansion we're doing. So we think that the potential is quite huge. And obviously, we need to execute well to make sure we're seizing it at the appropriate pace, and we're hopeful that things will start to turn as we progress through the year. And then as we think about physical stores, we have always felt like REVOLVE has an incredibly strong brand. And we also feel like physical stores aren't going anywhere. We'll have to see where the ultimate balance of physical versus digital ends up. But physical in our view will always be an important channel. And so yes, I think that is an exciting opportunity for us. We're not going to go after it just to chase share. If we go after it, we're going to make sure we're doing it in the right way, in a profitable way. I think as you mentioned, there's a lot of upside opportunities with it, particularly for our business, which has such a high return rate. That can be a great traffic driver and help reduce return costs and increase sales from those customers coming in. And then the Aspen store results. And certainly Aspen is a unique location. We've had a lot of marketing activities supporting it. So it's a bit early to extrapolate too much from it. But certainly, at the surface level, the numbers are quite compelling that we see there. So that's certainly an interesting data point for us and has us thinking more and more of what the potential opportunity there is. And as a result of the traction that we're seeing, we do anticipate testing out the Aspen location a bit longer than we originally anticipated or as originally anticipated, just as a pure pop-up event we think it's interesting to consider the potential further than that.

Your next question comes from the line of Kunal Madhukar from UBS.

This is Jason on for Kunal from UBS. I have a couple of questions. The first one is Macy said this morning, they're closing about 150 stores nationwide. And what's curious how you guys are digesting this news? At a high level, like as more physical retailers pull back, how much could REVOLVE benefit from it? And I have a follow-up.

Yes. We've always said that one of the biggest sources of market share gain out there is a lot of these legacy retailers, particularly kind of the mid and higher end and certainly Macy's does have stores like that. And the Bloomingdale's business and some higher end Macy's stores. I think it's reflective of the broader department store business that has been seeing share for years. And so for us, I think this is just kind of another data point in an ongoing multiyear trend that should we execute well, it should mean very good things for us.

Got it. The second one is a quick one. Can you help us understand sort of the -- how the inventory levels and gross margin would trend for the rest of this year? And in terms of men and beauty, can you help us understand sort of the typical AOV profile for those two categories?

Yes. So on the first one, the inventory and margin trends. I think you can see in the guidance that we gave with the Q1 being 51.4% to 51.9% and then the full year being 52.5% to 53%, we do see sequential improvement throughout the year. There's also seasonality there. So Q1 is typically lower than, say, Q2 that has a higher ratio of full price. And then inventory, I think in total, we're excited to be back into moderate growth mode there with bookings being positive year-on-year after a year of correction in 2023. But it is the tale of two cities there with REVOLVE as we've commented in much better shape than the FWRD. So we still have some work to do on FWRD, but revolve starting off the year very well. And then you had Men's and I think Beauty, was it both those Men’s and Beauty?

Kind of the styles there? Men’s and Beauty. Yes.

So beauty is the, I guess, the most different with significantly lower AOV, but with that comes a much lower return rate. So those are the biggest differences between Beauty and kind of the core business. So when you get down to a contribution margin level that puts and takes there relatively balanced out. And then I would say Men's is closer to the women's business, a lower return rate on Men's. And then a slightly different product mix on men's when you think about that versus a women's that's one-third dresses, plus or minus, and then men's being more kind of shoes and the apparel portion.

Your next question comes from the line of Jim Duffy from Stifel.

I wanted to focus on return rates for a moment, encouraging to see some sequential improvement in returns. I'm curious, is that seasonality or some of the specific initiatives that you guys have started to put in place? Are you beginning to see some benefits from those?

Yes. Thanks, Jim. Yes, it was good to see that sequential decrease. That said, don't get too excited about it because there is some seasonality factor there. If you go back to pre-COVID times, there's typically about a point sequential decline between 3Q and 4Q. We did see a larger sequential decrease than that this quarter, but there's also a lot of other mixed components and things going on there. But I think it was good to see. I just don't want to get too far ahead of ourselves. And we are -- to the second part of your question there, we are still very optimistic on a lot of the initiatives we have going into that return rate initiative, but not factoring that into the model yet for 2024.

Your next question comes from the line of Rick Patel from Raymond James.

Can you talk about the health of the consumer. I'm curious if there are any changes to the way people behave in the fourth quarter relative to earlier in the year as we think about things like trade down, sensitivity to price points and so on and what your underlying assumptions are for how this evolves as you go through '24?

So in the fourth quarter, we saw some, I'd call it, mildly improving trends on the REVOLVE side. And we've talked about in the past how REVOLVE kind of the full price off price ratios are a bit more a function of its own inventory mix and what's going on in the broader market. But I would say kind of mildly better in the fourth quarter, but I wouldn't say kind of anything that shows us a clear inflection point. FWRD continues to be challenged and mentioned earlier on the call, some of luxury sector data, and I think particularly multi-brand e-commerce apparel continues to be challenged in the luxury segment. So we haven't seen the inflection points we'd like there. We feel confident in FWRD’s positioning and confident in its ability to grow over the long term, but the progress has been a little bit slower there than we'd hoped for.

Your next question comes from the line of Simeon Siegel from BMO Capital Markets.

Maybe to follow-up on that a little bit. So any way to break apart your active customer performance between REVOLVE and FWRD and maybe the comments about the luxury market dislocation. Just how are you thinking about what the time line should look like for you to see the turn in that business? And maybe both speak to the revenues, which I think you were, but then also the gross margin.

Yes. So on active customers, breaking that out between REVOLVE and FWRD, not exactly, but largely tracks to the revenue performance that we're seeing, where we're seeing more activity on the REVOLVE side, more positive activity on the REVOLVE side and then more pressure on the FWRD side. And then also kind of reflective of the revenue mix between domestic and international, more positive activity on international than on the domestic side. So you can kind of generally align sales and the new customer growth there, which then impacts active customers. We do expect the active customer growth number to come down. I think that's an important note, given that last Q1 and Q1 of 2023, we had a record number of new customers. Now a lot of that growth came from markdown customers, given our mix and the inventory repositioning that we're going through at that time. So a really good, healthy customer base. The customer activity is healthier than the pre-COVID levels. But there are some near-term dynamics that we're working through there. And then the second part of your question?

Just for -- I think, I don't know, Mike or Michael, you had made the comment that this could be good to the market dislocation amongst the online luxury peers. So just how are you thinking about what the time line or different expectations that you’d expect to see to be able to see that turn. And again, I think that generally speaks to the revenues, but it would be also just helpful to hear your perspective on the gross margin opportunity there.

Yes, we're certainly hopeful we'll start to see some inflections in the back half of the year. And we saw some inventory to work through, but we believe the dislocation in the online luxury world should provide meaningful opportunities for us, and we're getting closer to seeing the kind of inventory trends we want on the FWRD side of the business. So hopefully, we see those margins improve and the sales trends improve in a significant way coming to the back half of the year.

Your next question comes from the line of Janine Stichter from BTIG.

I understand you're not planning to own brand penetration to grow this year, at least based on how you're buying the inventory. I was wondering if you could speak to some of the opportunity there just to retool the own brand mix and maybe fill in some of the gaps in the assortment. And we noticed the Marianna Hewitt at the launch, it feels a bit more casual, more versatile than what we've usually seen from the owned brands. Just was hoping you could speak to the strategy there.

Yes. On a high level, it's kind of like the categories or kind of like the broad categories, dresses, bottoms, that sort of stuff. One lens that we break down and share information, but also internally, we review end use and kind of segmentation even more important. So we'll see the diversification away from the categories other way, diversification into the zones outside of our historic strength like going out close warm weather. -- into areas of the wardrobe, areas of the closet and other -- the floors on the department store that we aren't just top of mind. So Marianna was as a strong zone into kind of a little bit more sophisticated, a little bit more sheet, a little bit more casual or potentially a little bit more modern workplace as well. The health collection, which is going stores also been a lot more casual away from dresses in terms of other aspects of the customers' lives, and we'll continue to see more and more diversification knowing that the customer loves us and the customer trusts us. And ultimately, there's just so much more opportunity to connect with her on different levels of what she needs.

Great. And then can you just remind us how much higher margin the owned brands are versus the broader assortment?

Yes. We haven't specifically quantified that other than to say it is meaningfully higher than the third-party. So we just leave it there. But it is an important long-term gross margin driver, especially on the REVOLVE side and then some opportunity longer term on FWRD as well.

Your next question comes from the line of Oliver Chen from TD Cowen.

You made a lot of progress in rightsizing inventories. How should we think about the modeling of the inventory relative to sales growth going forward and those distinctions? Also, as you think about categories, where were you outperforming or had opportunities for chasing if there were some in terms of outperforming versus underperforming categories? And then finally, you've been very creative and proactive with artificial intelligence. Would love your thoughts on how material this may be? It can definitely apply to supply chain and fraud detection, but it can also apply the very creative aspects. How would you help decipher what might actually be needle moving as you engage in that innovation?

Yes. So I'll take the first couple there, Oliver, and then pass it over. So on the inventory modeling, this quarter we closed with inventory down 5% on net sales down 1%. So an improved gap there from what you've been seeing earlier in the year. We do expect that overall gap to close in sales growth, inventory growth to roughly align. And again, just as a reminder, REVOLVE in much better shape. So that positive gap call it, on REVOLVE is much healthier versus FRWD where we still have work to do going into the year. But having -- going into the year with healthy full price, healthy margin and back into kind of inventory booking/receipts growth mode, we're pretty excited about it. And then outperformance versus underperformance, it's dresses down 5%, apparel down 8% and then offset by really strong growth in handbag, shoes and accessories of plus 7%. And then kind of the highlight was beauty at plus 28%. So that continues to really outperform. But I would say, no significant misses on missing demand or the opposite. We feel like we're in pretty good shape as we enter the year outside of FWRD.

Yes. And on the artificial intelligence side, it really has the aspect to touch every area of the business. So certainly, it's already had an impact on all the sort of things that we do. I think more broadly, most aspects of general operations can see some sort of benefit there. In terms of the website experience, there's a ton of opportunities in terms of personalization and new ways of product discovery in search and kind of browsing the website that we're actively working on both with third parties and also with our own internal team, which is tremendous. On the buying and planning side, it can assist with those buying and planning decisions, which maybe is a sub-aspect to supply chain, but a little bit more interesting one than warehouse rebalancing. And then to your point on kind of the most creative aspects, right, there's a ton of potential within imagery. And certainly, there's a lot of, I think, really exciting examples out there where we've all seen the power of what generative AI can do with imagery. Getting it to the point where it's productionized is something that we're working on. And by productionized, I mean you can do it consistently in a cost-effective way and in a repeatable way. And that's something our teams are actively working on. And I have confidence that, that is something that's going to occur sooner rather than later across the industry, and we certainly hope to be a leader there. And that kind of enables you to do so many more things than you could prior, right, where you can really customize the experience in the imagery to the individual user in terms of what those products looks like because we would hope to be able to kind of customize things and generate a lot more options than we could without the help of artificial intelligence.

Last follow-up. Performance marketing, it's been a little more rational, but fairly volatile. What are you assuming for your customer acquisition cost? And anything you're seeing with keywords and also in light of the dislocation we're all speaking to?

Yes. So performance marketing is something that we've always kind of played quarter-by-quarter with obviously trying to keep things in a certain range in terms of our overall spend as a percentage of sales and then the various internal targets we have in terms of acquisition costs. So I'd say, overall, we've seen what I would call a more challenging environment in the past couple of quarters despite the improvement in marketing efficiency that you saw. So hopefully, we start to see things turn there. But for now, I can say, it's a little bit more challenging environment to be able to deploy the spend that we'd like and the efficiencies that we'd like to see. But that's always been kind of the case across the years where you have some periods where it's a little bit tougher and then some periods where opportunity opens up.

Your next question comes from the line of Ashley Owens from KeyBanc Capital Markets.

So just really quickly on fulfillment. I would appreciate some color on the shaping of that as we move through 2024 and then just how you're thinking about that return rate number and if we start to see any reversions to that? And then I have a follow-up.

Yes. On fulfillment, we expect to see some slight efficiencies as we progress through the year. So Q1, we were guiding towards 3.5%. And then for the full year, 3.3% to 3.5%. So there's always some quarter-to-quarter fluctuation there. But I would say, over the course of the year, some slight efficiencies. And then return rate, we are, at this point, modeling in no kind of benefit or detriment on return rate. We're modeling in a flattish return rate for this year, again considering the seasonal fluctuations across the year. But that said, optimistic on the things we have in works, but not quite there yet where we can model it in.

Okay. Great. And then just quickly, too. I saw that AOV for FWRD was slightly up year-over-year in the deck. So just curious as to what drove that? And then kind of as the inventory continues to rightsize here, where do you see this number normalizing?

Yes, that was great and good to pick up on that and a slight increase in the FWRD AOV. And maybe as a reminder as well, different from revolver where a heavy portion of the mix is dresses. FWRD is largely handbag shoes, accessories, and you can see the overall growth in handbag, shoes and accessories in some of our disclosures there. So we're seeing good growth in those higher price point categories. And then maybe just on the AOV point as well, slightly down minus 1% year-over-year on the REVOLVE AOV, which led to the 1% decline overall in AOV. And that is also a mix component there with Beauty growing phenomenally over the course of this year that does pick the AOV down. If you remove Beauty from both years, than AOV does increased slightly on REVOLVE as well.

Your final question comes from the line of Tom Nikic from Wedbush Securities.

Jesse, I want to ask about the margin structure of the business. So it looks like this year, you should see pretty nice improvement in both the gross margin and the OpEx sales ratio. I'm assuming we'd like to kind of build back towards some of the higher margin levels that you had before, perhaps back to the high single-digit range where you were pre-COVID. If we were to look down the road a couple of years, like what line items do you think would be able to help bridge the gap between that like 3% to 4% margin you're kind of implying for this year relative to the 8% or so that you were doing pre-COVID?

Yes. Yes. No, that's a great question, Tom. Thanks. I think in the near-term, you can -- we obviously gave the guidance around that. So expect to see some gross margin improvement and then starting to realize those efficiencies in that selling and distribution line. And this kind of plays out over the longer term, too, if you kind of extend that. We do expect further gross margin expansion, especially as we get forward, it's going to take a good part of this year to get forward right size. So once that happens, we get improved margin on the FWRD business. And then over the long-term, we talked about owned brands. Still a lot of opportunity on owned brands as we get into 2025 and beyond. So those are a couple of the gross margin drivers where we expect to get back closer into that mid-50s zone versus the, call it, 52.5% to 53% we're in today. Some moderate efficiency gains in fulfillment, not a huge lever there. And then selling and distribution, we've made great gains in the past quarter. It's looking good early on for the year and starting to realize some of the work that we put into that line item in 2023. So that's another meaningful line item. Marketing, we want to keep the pedal down there back to Mike's comments on just the large opportunity that we have. That's not one that we intend to pull back on. And then finally, G&A. Over the long term, and you can kind of see what we've done for a few years prior to COVID and gaining multiple points of efficiency on that selling and distribution line item. But that takes, obviously, getting back into growth mode, which we're optimistic about, but still too much uncertainty out there to call kind of timing and magnitude.

That's all the time we have for questions today. I will turn the call back to management for closing remarks.

Thanks for joining us for this 2023 year review. We're in a very, very challenging environment, but we're very excited about the progress that we made behind the scenes. Most proud of the team and the hard work with all the projects that we have in the upcoming quarters, and we'll be excited to share what we have in the quarters ahead. Thank you.

This concludes today's conference call. You may now disconnect.