Revolve Group, Inc. Q2 FY2024 Earnings Call

Good afternoon. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to Revolve's Second Quarter 2024 Results Conference Call. 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 second quarter 2024 results. Before we begin, I'd like to mention that we have posted a presentation containing Q2 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 and operating initiatives, industry trends, our marketing events and impact, our partnerships and strategic acquisitions, our physical retail stores, 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 annual report on Form 10-K for the year ended December 31, 2023 and our subsequent quarterly reports on Form 10-Q, 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 the most directly comparable GAAP measures as well as the definitions of each measure, their limitations and the 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 delivered a strong second quarter, highlighted by a return to top line growth, net income more than doubling year-over-year, and nearly 350 basis point increase in our adjusted EBITDA margin year-over-year. Contributing to the significant growth in profitability was meaningfully better-than-expected marketing efficiency as well as increased logistics efficiencies that also outperformed our guidance, helped by improving trends in our return rate as many of our return-rate initiatives began to take hold late in the second quarter. Most importantly, we achieved these strong results while continuing to invest in initiatives to drive profitable growth and market share gains over the long term. With that introduction, let me step back and provide a brief recap of the second quarter. Net sales were $282 million, an increase of 3% year-over-year that was driven by improved year-over-year trends in both segments relative to our comparisons in the first quarter of 2024. Net sales in the REVOLVE segment increased 4% year-over-year, our best performance in 6 quarters. This was partially offset by a 4% decline in FWRD segment net sales, an improvement of 10 points from FWRD's year-over-year comparison in the first quarter of 2024. While we continue to see headwinds in a dynamic luxury environment where FWRD competes, as one of the financially strongest operators of a multi-brand luxury e-commerce platform, we are actively pursuing opportunities to capitalize on the current environment by investing in strategies to gain market share. Along these lines, Michael will talk about our acquisition of a majority interest in the revered luxury brand and longtime brand partner of FWRD, Alexandre Vauthier. Net income for the second quarter was $15 million or $0.21 per diluted share, an increase of 111% year-over-year. Adjusted EBITDA was $20 million, an increase of 97% year-over-year, driven by a nearly 350 basis point expansion of our adjusted EBITDA margin. Beyond the numbers, I'm excited by our team's execution that has led to continued great progress on the strategic priorities we have outlined on prior calls. I will discuss some of the key highlights since our update last quarter. First, I am pleased to report that we delivered even greater efficiencies in our logistics costs year-over-year than last quarter, contributing to our exceptional growth and profitability in the second quarter. Expressed as a percentage of net sales, selling and distribution expense decreased approximately 70 basis points year-over-year, and fulfillment expense decreased 15 basis points year-over-year. It was our first year-over-year decrease in fulfillment costs as a percentage of net sales in 2.5 years. I would like to acknowledge great execution by our operations team for driving these efficiencies in the U.S. and international markets. Shifting to the outlook for driving future efficiency gains, I'm thrilled to report that we are beginning to see early tangible benefits from the initiatives outlined on recent calls designed to reduce our return rates. As a proof point, our return rate declined year-over-year in the second quarter, representing the first year-over-year decline for any quarter in more than 3 years. The financial benefits of potentially reducing our return rate in the future are compelling, considering that for every 1-point decrease in our return rate, we'd expect to realize cost savings of approximately 30 to 50 basis points in reduced selling and distribution and fulfillment costs. Importantly, many of our efforts to reduce the return rate further elevate the customer experience, including by providing improved size guidance and leveraging technology and data for more personalized merchandising of products less likely to be returned. Second, we delivered strong results in expanding our international presence in the second quarter as net sales from international markets increased 13% year-over-year. Net sales increased across nearly all major regions, including China, where outstanding growth during the important 618 shopping festival in China led Revolve to be recognized as the second largest seller of fashion merchandise on Tmall Global. The 618 Festival is the second biggest event of the year in China for driving online sales, trailing only Singles Day in November. I'm also excited that we have recently launched a branded retail presence on the Douyin and RED e-commerce marketplaces that serve more than 750 million monthly active users on a combined basis. These incredibly popular platforms serve a young Gen Z demographic that skews female, a highly relevant audience for our fashion, beauty, and lifestyle offerings. Third, we remain committed to efficiently investing to expand our brand awareness, growing our customer base, and further strengthening our connection with the next-generation consumer. Our team delivered outstanding results in the second quarter across brand and performance marketing channels, leveraging the strength of our brands. For instance, the second quarter was our most efficient quarter for performance marketing investments in nearly 4 years based on our performance marketing investment calculated as a percentage of net sales. Michael will talk about important wins and brand marketing efficiency measures that are also a key contributor to the increased marketing efficiency reflected in our updated 2024 guidance for marketing investments. And lastly, we continue to leverage AI technology to drive growth and efficiency while further elevating the customer experience. A perfect example is our recent development and successful launch into production of an internally developed AI search algorithm on our FWRD site. For years, consumers have searched for products on our sites through a third-party search platform. With the emergence of AI and as part of our data-driven mindset, I challenged our team to develop and test our own AI search capabilities and test it against the incumbent retail search platform developed by a very large third-party technology company. It is incredibly impressive that our internal team of data scientists developed a solution that outperforms the third-party search technology, driving higher revenue per search and at a much lower operating cost. With this success, our internally developed AI search algorithm is now live on FWRD, and we are currently A/B testing the algorithm on our Revolve site with promising early results. To wrap up, we still have work to do, yet I feel great about the important progress we have made in the first half of the year. We began the third quarter of 2024 with solidly positive year-over-year growth in net sales for the month of July 2024, and there is momentum building across key growth and efficiency initiatives that we believe may further improve our foundation for profitable growth in the years to come.

Thanks, Mike, and hello, everyone. I'm excited by the great progress we have made on our key priorities, especially the meaningful increased efficiency of our marketing investments year-over-year as we invest to build our brands and further strengthen our connection with the next-generation consumer. Our newly reimagined REVOLVE Festival in April set the tone for the second quarter by exceeding our expectations and generating a much greater impact on our key metrics within the 1-day format in 2024 than we had achieved over the entire weekend for last year's event. But we didn't stop there. We had an incredibly active and efficient second quarter for brand building, hosting a passel of events at Stagecoach Festival, the Formula One Grand Prix in Miami, the Met Gala in New York and at our retail store in Aspen, as well as in international locations, such as Mexico, Jamaica, St. Tropez and Sicily. Particularly exciting was a REVOLVE and FWRD Met Gala afterparty with rap brand fashionista Cardi B that generated nearly 3 billion press impressions in top publications, including Vogue, Elle, W Magazine, The New York Times, MSN, E! News, and People. At the center of all the press attention was Cardi B's incredible dress at the afterparty that was custom-designed for her by our own brand team. Rave reviews in the press and on social media included Page 6 of the New York Post calling Cardi B's dress a red-hot atelier REVOLVE number. Most exciting, in Cosmopolitan's ranking of the best Met Gala afterparty looks, Cardi B and our REVOLVE atelier dress ranked #1, at the very top of the list. Most impressive is that we were much more active in the second quarter of 2024 and delivered significantly increased marketing impact while spending millions of dollars less year-over-year. In fact, for the second quarter, year-over-year growth in our press and social media impressions accelerated meaningfully, even though we spent $7.5 million less in brand marketing than in the second quarter of 2023. Our impactful marketing efforts in the second quarter also helped to drive a reacceleration of active customer growth. Trailing 12-month active customers increased by 26,000 during the second quarter, representing a tripled increase in active customers compared to the first quarter of 2024. Let's shift gears and talk about our recent acquisition of Alexandre Vauthier announced in June. We view the luxury industry challenges as an exciting opportunity to go on offense and invest in market share capture, supported by our consistent profitability and cash flow generation that sets us apart in fashion e-commerce. So we have had our eye out for opportunities, and we took on an exciting transaction late in the second quarter with the acquisition of an 80% ownership stake in Alexandre Vauthier, an iconic luxury fashion brand that we have sold for many years. Alexandre himself retains the other 20% ownership of the business and is equally excited to expand the partnership with the Revolve Group. Our team pursued a complex transaction in the depths of French bankruptcy courts, locking in a compelling opportunity to acquire the Alexandre Vauthier business for a commitment to invest EUR 6 million over the next 3 years. I will share just a few reasons why the entire Alexandre Vauthier team is so excited about the combination. Alexandre Vauthier is one of only 15 haute couture brands in the world, with recognition that is incredibly important to luxury customers. To provide some context, the term haute couture is legally protected and can only be used by brands approved by the Federation of Haute Couture and Fashion, including Chanel, Christian Dior, Givenchy, and Alexandre Vauthier. We expect REVOLVE and FWRD to benefit from the association with the revered luxury brand while giving us a direct line into the French fashion ecosystem to approximately 30 Alexandre Vauthier employees that are based in Paris. The brand marketing impact that Revolve can deliver is an ideal complement to the Alexandre Vauthier brand that has just an incredible range of A-listers on red carpets, including Kendall Jenner, Rihanna, Beyonce, Taylor Swift, Selena Gomez, Katy Perry, and Brigitte Macron, the First Lady of France. In close partnership with Alexandre, we intend to relaunch the Vauthier brand with a reimagined new collection in the fall, followed by a fashion show during Paris Couture Week in January 2025. Also compelling are the expected synergies from our e-commerce experience, data-driven merchandising experience, and operational excellence to help grow the Alexandre Vauthier direct-to-consumer business, which has historically been very small. Our creative teams are already working hard in designing a new Alexandre Vauthier e-commerce site. With the Vauthier brand coming off a period of underinvestment, in the near term, we will understand what we need to invest ahead of the financial benefits we expect to realize in future years. In summary, there is a whole lot of work to do, yet we see a ton of opportunity to grow the brand on our platform through wholesale and other distribution channels in the years to come. We have also increased our organic investment in our luxury business. Capitalizing on the availability of outstanding talent, we have made a variety of strategic investments at FWRD that we believe can advance our pursuit of the vast number of effectively abandoned luxury customers that are up for grabs with all the recent industry disruption. As a case in point, 2 weeks ago, luxury e-commerce retailer Matches Fashion was shut down entirely, a business that in 2022 reportedly generated $460 million in revenue. Also important, the recent industry malaise has reinforced to brands that FWRD is an attractive partner due to our product curation, distinctive styling point of view, and incredible brand marketing engine that has attracted young luxury customers. I am pleased to share that Nike has recently committed to sell their full range of products on FWRD for the first time, building on Nike's success and long-standing partnership signed with Revolve. Now I will conclude with an update on our evaluation of the physical retail opportunity. I am excited to share that our key performance metrics, such as traffic, sales, and customer engagement on our first permanent retail store in Aspen, continue to be encouraging. Summer has been a great selling season, further illustrating our potential in this new market opportunity. Our view is that our early momentum in physical retail is impressive considering that we are still learning a great deal in the early stages of our retail journey. Mike and I have always believed that when a part of the business is performing as strongly as Aspen has so far, we want to invest into that opportunity on a much bigger scale. Exploring retail expansion is especially fitting considering that most apparel sales still happen in physical stores. At the same time, we recognize that physical retail is a new and adjacent market opportunity for us that we haven't fully mastered. We have built an incredible brand that we believe can translate to physical retail. But before we move too quickly to truly assess the long-term core potential, we need to first validate we can replicate the success in Aspen in other locations. To guide us through the next phase of our journey in testing physical retail beyond Aspen, we have engaged one of the most accomplished retail advisory firms in the market. Our partner has played a key role in the retail expansion of some of the world's most respected consumer brands, including Apple, lululemon, Abercrombie & Fitch, and Restoration Hardware. Their deep industry experience will help us navigate critical decisions on potential markets, retail site selection, negotiation, architecture, and store design. We are very excited to further explore and test the launch of opportunity in physical retail. We should have an update on what comes next at our third quarter conference call in early November. To summarize, it feels great to see our team's hard work on growth and efficiency initiatives deliver results on the top and bottom line. With our powerful brands we have invested in for more than 20 years, operational excellence, and a strong financial position, especially compared to our fashion e-commerce peers, we believe we are well-positioned to pursue profitable growth and market share gains.

Thanks, Michael, and hello, everyone. I am very pleased with our second quarter, both from a financial standpoint and even more so by the progress made by the team on our operational initiatives that gives me increased confidence in our financial outlook moving forward. I will start by recapping our second quarter results and then close with updates on recent trends in the business and our outlook for gross margin and cost structure for the balance of the year. Starting with the second quarter results, net sales were $282 million, a year-over-year increase of 3%. The REVOLVE segment net sales increased 4%, and FWRD segment net sales decreased 4% year-over-year. In terms of geography, both territories returned to year-over-year growth in the second quarter. Domestic net sales increased 1% year-over-year, and international net sales increased 13% year-over-year. Active customers, which is a trailing 12-month measure, grew to 2.6 million, an increase of 5% year-over-year. Total orders placed were $2.3 million, flat with the prior year. Average order value, or AOV, increased 2% year-over-year to $306, benefiting from the higher mix of net sales at full price year-over-year. Another contributor to the improved year-over-year net sales growth was that our return rate decreased year-over-year in the second quarter, as the many initiatives designed to reduce our return rate in customer-friendly ways have begun to deliver visible results. Consolidated gross margin was 54%, an increase of 7 basis points year-over-year, driven by a year-over-year increase in our higher-margin REVOLVE segment. Let's move on to operating expenses, which was a true highlight that drove our meaningful operating leverage in the second quarter. Of note, we delivered better-than-expected operating expense efficiency across each of the 4 line items that we guide to each quarter. Fulfillment costs were 3.3% of net sales, around 10 basis points more favorable than our guidance, and a decrease of 15 basis points year-over-year. Selling and distribution costs were 17.9% of net sales, also better than expected by approximately 10 basis points and lower by 73 basis points year-over-year. This year-over-year decrease reflects the continued great work by our teams to drive efficiency in our logistics costs while also benefiting from the slight decrease in our return rate year-over-year. The biggest source of outperformance in the second quarter versus our guidance was marketing, which came in at 15.2% of net sales, significantly below our guidance of 17% of net sales. This represents a 360 basis point decrease year-over-year compared to our marketing investment of 18.8% of net sales in the second quarter of 2023. General and administrative costs were $33.5 million, around $500,000 lower than our outlook, which reflects a year-over-year increase that continued to outpace our net sales growth as we continue to invest in initiatives that support our long-term growth opportunities. Our tax rate was 26% in the second quarter, up slightly from 25% in the prior year and within our expected range. The increased net sales and gross profit year-over-year, the meaningfully improved marketing efficiency, and the outstanding progress driving efficiencies in our logistics costs helped us drive impressive growth on the bottom line. Net income was $15 million or $0.21 per diluted share, an increase of 111% year-over-year. Adjusted EBITDA was $20 million, an increase of 97% year-over-year. Moving on to the balance sheet and cash flow statements, net cash used by operating activities was $25 million, and free cash flow was negative $27 million in the second quarter, primarily due to unfavorable working capital movements that more than offset the increased net income. For the 6-month year-to-date period in 2024, we generated positive operating and free cash flow, although lower year-over-year, primarily reflecting an increase in inventory investments to support a return to top line growth compared to a declining inventory balance in the first half of 2023 when we were very focused on rebalancing our inventory position. Inventory at June 30, 2024, was $234 million, an increase of 14% year-over-year. As of June 30, 2024, our balance sheet remained in a very strong position, with cash and cash equivalents of $245 million and no debt. The decrease in cash and cash equivalents year-over-year compared to June 30, 2023 primarily reflects positive cash flow from operations that was more than offset by our stock repurchases, exceeding $40 million in the last 4 quarters. Our strong financial position enabled us to execute on our capital allocation strategy in an effort to enhance shareholder value through: one, investing in the business to support the long-term growth opportunity ahead of us; two, opportunistically pursuing strategic M&A and partnerships; and three, returning capital through our stock repurchase program, where we repurchased approximately 119,000 Class A common shares at an average price of $15.83 during the quarter. Approximately $60 million remained under our $100 million stock repurchase program as of June 30, 2024. Now let me update you on some recent trends in the business since the second quarter ended and provide some direction on our cost structure to help in your modeling of the business for the third quarter and full year 2024. Starting from the top. Our return to positive year-over-year net sales growth has continued into the third quarter, with net sales in July 2024 increasing by a mid-single-digit percentage year-over-year, a sequential improvement compared to the year-over-year trends we reported for the second quarter of 2024. Shifting to gross margin, we expect gross margin in the third quarter of 2024 of between 52.3% and 52.5%, which implies an increase of approximately 70 basis points year-over-year at the midpoint of the range. For the full year 2024, we continue to expect gross margin to be between 52.5% and 53%. Fulfillment, we expect fulfillment as a percentage of net sales of approximately 3.4% for the third quarter of 2024, a decrease of approximately 20 basis points from the fulfillment efficiency ratio in the third quarter of 2023. For the full year 2024, we continue to expect fulfillment costs of between 3.3% and 3.5% of net sales. Selling and distribution, we expect selling and distribution costs as a percentage of net sales of approximately 18.3% for the third quarter of 2024, which implies a year-over-year improvement of approximately 70 basis points. For the full year 2024, we continue to expect selling and distribution costs to improve to a range of between 17.8% and 18% of net sales. I also want to note that our outlook for fulfillment costs and selling and distribution costs continues to assume a return rate that is flat year-over-year for the full year 2024, consistent with our expectation at the beginning of the year. We are optimistic that our great progress in the second quarter of 2024 in reducing the return rate year-over-year will continue, and the team is working hard to achieve it. However, since the improved return rate happened late in the second quarter, as encouraged as we are, I am not yet comfortable factoring in a lower return rate into our financial outlook until we can prove it out for a longer period. Marketing. We believe our strategies to drive impactful marketing campaigns at an increased level of efficiency will continue. We expect our marketing investment in the third quarter of 2024 to be approximately 15.2% of net sales, a decrease of approximately 20 basis points year-over-year. For the full year 2024, we now expect our marketing investment to represent between 15.3% and 15.5% of net sales, which is a decrease of 70 basis points from our prior full year 2024 guidance range for marketing investments. General and administrative. Offsetting some of the increased marketing efficiencies is our expectation for higher G&A costs than our prior full year guidance. We expect G&A expense of approximately $35.5 million in the third quarter. For modeling purposes, remember that our G&A expense in the third quarter of 2023 a year ago included a nonroutine accrual of $6.6 million for a pending legal matter that we do not expect to reoccur this year. For the full year 2024, we now expect G&A expense of between $135 million and $138 million, which at the midpoint is an increase of $3.5 million from the high end of our prior G&A guidance range that we guided to on last quarter's earnings call. The majority of the G&A increase from our prior outlook is related to the Alexandre Vauthier acquisition completed late in the second quarter, including around 30 employees based in Paris and our investment to relaunch the Alexandre Vauthier brand and D2C website in the coming months. The remainder of the increase in our G&A outlook for the full year 2024 relates to increased investment in certain key areas where we see timely opportunities to invest today to even further increase our competitive position and drive future results, such as the forward investments that Michael discussed, and continued investment in AI technology, where we have already delivered meaningful growth and efficiency gains throughout the company. And lastly, we expect our effective tax rate to be around 24% to 26% in the third quarter and 25% to 26% for the full year 2024. To recap, I am very encouraged by our second quarter results, highlighted by the return to top line growth, operating discipline that drove a more than doubling of net income year-over-year, and driving the first year-over-year decrease in our return rate in more than 3 years. Now we'll open it up for your questions.

Congrats on the great progress. I was hoping to get some additional color on second quarter results by month. And also, any additional color you can add to quarter-to-date trends as you think about the REVOLVE platform versus FWRD? And I'm curious if the KPIs that drove the second quarter results are the same ones that you're seeing drive a modest acceleration through July.

Yes. Thanks, Rick, and thanks for joining. This is Jesse. On the intra-quarter trends for Q2, if you remember last quarter, we said we were up in the low single-digit range through April, and we closed that plus 3. So I think, relatively consistent throughout the quarter with maybe a slight improvement as we progressed through the quarter, and then that continued into July. And then if you look at July, I'd say largely the same trend in July as you saw in Q2 with REVOLVE and international outperforming the domestic and FWRD businesses. But overall, really healthy and good progress, again, as we move through the quarter and then into July, and similar KPIs as well.

Great. And on the return rate, it sounds like you're not baking in the progress that you saw late in the second quarter for the rest of the year. Does this reflect conservatism until you see a little bit more traction? Or is there something about maybe the seasonality of the business where returns usually tick up around holiday or certain other peak periods that would give you pause in incorporating that into updated guidance?

Yes. I think I wouldn't necessarily say that it bakes in conservatism. I think it trended well, but in the back half of the quarter, so we don't want to get too excited yet. There's great progress, but we want to see a little more traction before we bake that in. And I think we talked about the year-over-year decrease in the return rate, but I think even more importantly is there is seasonality with return rate from Q1 to Q2. Q2 is certainly our highest return rate quarter of the year. And we saw Q1 to Q2 being flat. So just another data point to support that return rate in the second quarter.

This is Jesalyn Wong on behalf of Michael Binetti. Just a little bit on the marketing costs. We lowered the full-year guidance even though the second quarter came in lower. And I know we alluded to higher efficiencies in the marketing. Should we be seeing this coming on efficiencies kind of flow through in the out-years? And then the other question would be on the active customers trend. How should we think about that heading into the second half of the year?

Yes. This is Jesse again. On the marketing, yes, we had a great quarter in terms of efficiency, and it's both on the brand marketing side, as Michael mentioned, investing $7.5 million less in REVOLVE Festival than we did last year and getting even better results. So that was the big driver in Q2, and we're continuing to see that efficiency on the brand marketing side in the back half of Q2 and into the back half of the year. But also important to note is that we did see efficiency on the performance marketing side as well. So that's what we baked into our guidance. If you look into the out-years, we'll continue to be opportunistic when it comes to marketing and kind of read the landscape. So not commenting too much more beyond that, but really happy with the efficiency this quarter. And then on active customers, it's great to see that active customer number holding at plus 5% and an incremental increase in the active customer count. As we have communicated on prior calls, we expected that growth rate to come down and approximate the net sales growth rate over time as we lap some of those higher customer growth periods of last year. So I think we'll continue to expect to see similar as we go into the back half of the year, but not a significant increase to that growth rate until we lap out of that Q1 2023 heavy markdown period that we were in that drove a lot of new customers. And I think on that customer point, also important to note that the growth came from full-price customers, which are very healthy customers, partially offset by lower-markdown customers, again, as we compare that Q1 2023 period.

Just curious, any update on beauty, men's attachment rates or sort of how the business has been trending? And any help you can give on, I know it's early days, sort of timing of the retail strategy? I guess you just engaged the consultants, but is that, in your mind, something like a 2025 rollout? Or anything there would be helpful as well.

Yes, I'll start with the beauty and men's. Seeing great progress on both of those areas of the business. As we commented, a 25% growth on beauty, men's growing nicely as well. We're also seeing really great growth in the home product category, very small, but still really healthy growth there. So good progress. The team continues to execute, add new and exciting brands, especially on the beauty front. And then timing of retail, I think we mentioned on the prepared remarks, we have engaged the consultants. We are actively, I guess, pursuing, investigating, learning. But we want to caution that we are moving very, very pragmatically, learning as we go, and we'll have an update in our next quarterly call.

Yes. In the marketplace, we think that the opportunities have really provided some unique opportunities here. We think that forever in our zone to our customer, strong design talent, and unique design talent and brands that align with our overall brand ethos is important. So we're excited to come across this. And if we're able to come across other opportunities with similar-type profiles and metrics, we wouldn't hesitate to pursue more.

I also wanted to follow up on marketing. Significant upside to your plan there, significant change to the guide for the year. So I just want to better understand where you're seeing the efficiencies, what has changed in the landscape relative to a few months ago. I know you said you're pleased with REVOLVE Festival, but I guess the spend there was known at the time that you guided. And just any change to the underlying expectation on the top line that informs that guide for the year?

I’ll focus on brand marketing where we’ve seen considerable improvements, achieving better results with significantly reduced spending compared to last year. We've encouraged the team to adapt and enhance their efforts. The external landscape for our brand activities is quite extensive, but within it, we have a diverse portfolio. We have redirected our resources towards certain areas and strategies that have proven to be very effective, and the team has demonstrated their ability to achieve more with less. We will keep pushing in this direction. This will allow us to experiment with new tools and strategies in the future. There’s a lot of exciting and innovative work ahead that you’ll see from us at the right time. Our aim is to increase efficiency, lower spending, and maintain performance according to our internal metrics.

Yes. And certainly, on the digital or performance marketing side, we challenged the team to do more with less, and they delivered. That said, I'd say it's very landscape-dependent. And so sometimes we'll see periods where we're able to get some nice efficiencies. There are also periods where the environment is a little bit more challenging. So I think it's difficult to say whether it's a trend that continues through the back half of the year, but we're very pleased with the results on the performance marketing side that we've seen thus far.

Yes. No significant implications as we look at the back half of the year. I think this year, different from years past. And of course, the last few years have been very abnormal with COVID, coming out of COVID, inventory correction, et cetera. But if you go back in time, there has been more of a seasonal impact there, but also a much different kind of skew on the full price markdown mix that was more consistent this Q1, Q2 than it has been in the past.

As we look forward to Q4, the comparison toughens a little bit. What are some major catalysts for Q4 in terms of the potential to maintain that comp or improve? And any catalysts we should think about for back-to-school and holiday? Also, would love your view on customer behavior. As you know, the macroeconomics, we've been seeing bifurcation and inflation pressure, but your growth continues to be really nice. So would love your thoughts on how the macros and the health of your customer are interplaying with what you're seeing.

Yes. So we feel really good about the trends we saw in the second quarter continuing into Q3. And we know others out there have commented on some weakening of the customer and some macro pressures. Thankfully, it's not something we're seeing in our own data. How much that speaks to the macro environment versus us just executing well and gaining strength in the market, I think is too early to say. But we feel great about our own trends that we're seeing there. As we look at the back half of the year, I'll leave it to Jesse to go into any comp discussion, but we're focused on making our business the best it can be. We feel good about the trends, and we're hopeful that bodes well for H2.

Yes. Yes, nothing significant to add on the comps. You mentioned the comps do get slightly tougher. The holiday season, as you know, isn't as big for us as it is for others in terms of seasonality. So I know there's that tough shorter holiday season. But while it may have some impact, we don't expect a significant impact there. Back-to-school is a great season as well, but again, not over-indexing for us like it does for others. So I would say nothing specific to call out. And then I think just all of the initiatives that the team has been working on through last year and into the first half of this year that continue to really take effect and you could see visibly in the results this quarter will continue to build.

Yes, there has been significant effort in this area. The broadening of our product range over the past few years, along with refinements, has been a key factor driving performance in a challenging environment, and we anticipate that this will continue to foster growth going forward. Regarding our owned brands, we've experienced cycles of expansion and contraction, and currently, we are in a phase of decline, but we believe steady growth will follow in both the near and long term. Part of this involves expanding beyond our traditional strength in dresses, which remains robust, to other categories we view as core essentials. These products can be stylish and fashionable while still offering premium quality, aligning with what our customers are seeking, even if they don’t always consider us first. We will be focusing our efforts in this area. Additionally, we see potential for growth among younger consumers, which has yet to be fully developed. Thus, we have a broader strategy to enhance the owned brand experience throughout the entire customer journey and in all areas of the closet, indicating significant room for growth.

Just can you put a finer point, Jesse, for us on the progression of third quarter last year? Remind us, I think you said comps get tougher, but I'm not sure if you were talking about fourth quarter or you were talking about the progression of the third quarter, so maybe August and September, if you could do that.

Yes. Yes, sure. Yes, I was more referencing the fourth quarter that gets a little tougher that Oliver was referencing. If we look at the third quarter last year, if you recall, we commented that July was down mid-single digits. We closed the quarter at minus 4%. So it's plus or minus in the zone where we're roughly even comps through the quarter.

Yes. So on the REVOLVE side, we feel very good about the health of the inventory. It is turning a tick slower than we would like to see, but we feel like the health is good. And the areas we're a little bit overinvested in are areas of lower markdown risk. Some room for optimization, but we think it's within the zone of a healthy turn that we're able to manage well. And it's something we have our eye on, but we feel good about the mix and the path going forward with the inventory.

Yes. And maybe just to add to that, Matt, the increase that we're seeing is primarily on the REVOLVE side, which, as you know, is much more in favor for us, easier to control, and the assortment is great, like Mike said. FWRD, a few quarters ago and for the past several quarters, we've been commenting that we feel like around midyear, we'd be more back in check on the FWRD side. We've made great progress there. The differential on the inventory sales growth for FWRD is much tighter. And so I think essentially, they're on FWRD.

This is Peter McGoldrick on for Jim. Jesse, can you break out the increase in G&A dollars in guidance between the Vauthier business and other investment areas? As we think about normalized G&A run rate going forward, is there any component that's a one-time cost related to the relaunch that should not recur? And then related to that, how should we be thinking about the contribution to the top line from the Vauthier brand?

Yes, absolutely. Looking at the second half of the year and the increase of about $3.5 million, I would estimate that just over half of that comes from Vauthier specifically. Additionally, a significant portion of the remaining increase is attributed to the investments we discussed, particularly in AI and some promising investments in the FWRD side of the business. If we examine the non-routine and investment areas, G&A is in the mid-single-digit percentage range, which aligns more closely with sales growth. Regarding the contribution from Vauthier to our top line, we anticipate seeing movement there later this year and into early next year. As we noted, this is essentially a restart and rebuild phase, with plans to launch the new website and the first collections later this year and into early next year.

Yes. Q2 was a really strong quarter for international, both in terms of the absolute result and also just broadly speaking across regions. We saw nearly every region in the green internationally in Q2. And the standout regions continue to be some of the standout regions of past quarters. So Mexico, in particular, we continue to see really strong growth in. But we're really encouraged by regions like you noted in China, that we saw growth in China despite there being some headwinds there. We feel like we've made some good solid progress in China. As you know, a couple of quarters ago, we mentioned we were making a little bit more investments into that region. Obviously, there's a huge opportunity there. And so we started to see some impacts of those investments this quarter, and we're hopeful we'll see more of that in the quarters to come.

I had one on the return rate initiatives. It looks like we shortened the return window on these AI fraud detection to sort of avoid wardrobing. Good to see the progress there. I guess I'm curious, has there been any discernible pushback from consumers? Have they reacted to that at all? I guess with us seeing a little bit less than one order per quarter on average, is that something we would have seen in period or something that we're sort of keeping an eye out in future quarters?

Yes. Great question. So through our own customer service channels, we haven't seen really any kind of pushback against the return policy change. And it's still a very generous, arguably industry-leading or certainly amongst the industry leaders in terms of the generousness of the return policy. So the return window was shortened to 30 days for cash credit, but actually 60 days for store credit. So consumers still have quite a long time to return items, and we're very friendly with customers if there's any kind of issue or exception. So we think it's been a very positive change. As we look at our own data, there's a whole host of things we've been working on with regards to returns. We think some of the impact in the second quarter may have been from that policy change, but we think a lot of the impact was through a number of these other areas that we've been working on, some of which started to exact earlier in the quarter, some of which are still in the early phases as we fine-tune them and get them right. So we'll have to see how the year progresses, but we're hopeful, over time, we can continue to make a big impact there.

Yes, yes. No, we think over the course of the last 4 quarters, it's been a great investment. And like you said, we still have $60 million there available. So we'll continue to be active. No comment on kind of when and how and at what price we buy, but I'm happy with the progress thus far.

Just a quick one for me, maybe on FWRD, but also a little about the inventory progress there. Just any color on how return rates are looking? And then any insight on the gross margins there? Are we at the point of inflection yet? Or when should we start to expect to see that shift?

Yes. No specific comment on return rate specific to FWRD, I think just commenting on that overall. And to highlight, the return policy change that Michael was mentioning was made on REVOLVE only. We never shifted the FWRD return policy during COVID like we did on REVOLVE. So not an impact there on FWRD. In terms of margin, as I mentioned, we made great progress on the inventory balance. Markdown margin is still lower than where we want it to be, and that is showing up in the overall gross margin for FWRD with the goal of getting that back into the 40s over the kind of near to midterm.

You got Ethan Saghi on for Janine. I just want to ask one quick one on owned brands. I was just wondering, as you guys are looking to start expanding that penetration again, if you have a target in mind of where you'd like that to get? And if so, what the timeline would be to get there?

We don't have a specific target for owned brand. Our main goal is to present the best product to our consumers. Although our penetration has decreased from its peak, our internal metrics for each style are at an all-time high, which is very encouraging. While we don’t have a long-term target, we expect modest improvements in the near term. If we continue to perform well over the coming years, there's no reason we can't achieve the penetration levels we reached in the past, though we believe that is a distant goal.

Congratulations on the progress. I just had two quick questions, just getting back to the inventory. I think you said it was isolated to REVOLVE. Is that new categories or deeper investment in private label? Maybe help us understand the direction of inventory as we think about the end of the third quarter. And just lastly, as you think about July and your solid trends, any discernible change in spending on dress up versus casual or denim or anything like that, that you think you're well-positioned for?

Yes. Sure, Janet. Thanks for the questions. On inventory, we expect to be kind of year-over-year increase in the same zone as we are in Q3 as we are today. No specific kind of categories or third-party versus owned brand dynamics to call out. But we feel good about the health of the inventory there. And again, being on REVOLVE, much more versatile, kind of in our control than on the FWRD side, so very manageable. And then no comments on any more specifics around the July trend, I think other than to say what we already said with REVOLVE and international continue to outpace the domestic and FWRD side of the business.

Thank you for joining us on this quarterly earnings call. We are proud of our results and the progress we've made. Our achievements have been broad-based across multiple functions, with the entire team performing at a high level. A lot of groundwork has been laid over many quarters. We are excited about our continued progress, knowing we have a great product and many more opportunities ahead. We are prepared for any challenges that may arise, just as we have been in the past, and we look forward to the dynamic landscape ahead and to another call with you soon.

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