Revolve Group, Inc. Q1 FY2025 Earnings Call

Good morning, afternoon, evening. My name is Danica and I will be your conference operator today. I would like to welcome everyone to Revolve's First Quarter 2025 Results Conference Call. I will now 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 first quarter 2025 results. Before we begin, I'd like to mention that we have posted a presentation containing Q1 2025 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 and innovation initiatives, industry trends, the impact of changes in international trade policies and our plant mitigation efforts, our marketing events and the expected 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, 2024 and our subsequent quarterly reports on Form 10-Q, all of which can be found on our website. We undertake no obligation to revise or update any forward-looking statements or information, except as required by law. During our call today, we will 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 presented and prepared 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 these measures, 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. Our strong execution within a dynamic environment resulted in outstanding first quarter results, highlighted by double-digit top line growth, 57% growth in operating income year-over-year and $45 million in operating cash flow that further strengthened our balance sheet. What's more? Our adjusted EBITDA margin increased by 160 basis points year-over-year and cash and cash equivalents on the balance sheet exceeded $300 million. It's a great start to the year in an environment that has become progressively more uncertain than when we last spoke at the end of February. We achieved these strong results while continuing to invest in key foundations for long-term success, including advancing our AI technology and personalization capabilities, international expansion, building our brands, capturing a greater share of wallet among existing consumers and developing new owned brands. With that introduction, I will begin by drilling deeper into our Q1 results, then I'll talk about the current environment and global tariff uncertainty before wrapping up with progress on our longer-term objectives. Starting with Q1 results. Our healthy top line performance illustrates that our strategic initiatives are working and that we are gaining market share during an uncertain time when industry peers with weaker foundations have dialed back investment plans. Net sales increased 10% year-over-year, driven by domestic and international net sales increases of 9% and 12% year-over-year, respectively. By segment, REVOLVE net sales increased 11% and FWRD net sales increased 3% year-over-year, our second consecutive quarter of growth within our luxury market that remains challenged. We see considerable opportunity for further gains amidst the disruption in the luxury market as evidenced by the recent bankruptcy and liquidation of Canada's iconic premium department store chain, Hudson's Bay. Now let's unpack the strong bottom line results, highlighted by a 57% increase in operating income and a 45% increase in adjusted EBITDA year-over-year. In addition to our top line gains, contributing to our strong growth and profitability was our brand strength that helped drive meaningful marketing efficiencies year-over-year as well as our successful efforts to drive efficiencies in our global logistics operations. In fact, our product return rate decreased by nearly 3 points year-over-year in the quarter, yielding significant operating efficiencies and contributing to further elevation of the customer experience. As an illustration of our progress, our operating income margin and adjusted EBITDA margin were the highest for any first quarter in 3 years. Our profitable growth converted very strongly to generation of cash flows which is a particular advantage in the current environment. We generated $45 million in operating cash flow in the first quarter, increasing our cash position by $44 million in just 3 months. Now I'll address the recent slate of tariff announcements that have created a great deal of uncertainty for our entire sector. The macro environment is facing geopolitical and macroeconomic uncertainty, particularly with the implementation of significant and broad-based tariffs presenting considerable challenges for our sector. It's very challenging to operate in an environment when applicable tariffs can change almost daily, yet our team is engaged, collaborating with brands and other partners daily to mitigate the impacts and we believe we are fully up to the challenge. Importantly, our leadership team has a strong track record for navigating times of extreme uncertainty and coming out stronger on the other end. In our more than 20 years of operating our business, we have successfully navigated through turbulent cycles, including the global financial crisis and COVID-19, and we have emerged stronger as a result. In contrast to many fashion e-commerce peers, we have a profitable and cash-generative business, proven financial discipline, a strong balance sheet and key competitive advantages that together with our strong team enable us to confidently invest in the large opportunity ahead of us. Beyond the numbers and despite the current macro challenges, I'm excited by our team's execution that has led to measurable progress on our strategic priorities. Before turning it over to Michael, I will briefly recap our progress. First, we continue to efficiently invest to expand our brand awareness, grow our customer base and strengthen our connection with the next-generation consumer. A powerful example is our eighth Annual REVOLVE Festival held last month which handily exceeded our expectations for delivering marketing impact, consumer engagement and efficiency, as Michael will talk about in his remarks. We are also encouraged that year-over-year growth in trailing 12-month active customers and average revenue per active customer accelerated in the first quarter, even while we achieved marketing efficiency of 100 basis points year-over-year. Second, we continue to expand our international presence, where we have made excellent progress in further improving the experience for our international customers by reducing friction in foreign currency payment processing and product returns, among many other service enhancements. In the first quarter, international net sales increased 12% year-over-year despite currency headwinds in most regions and what we hope is temporary weakness in Canada due to boycotts of U.S. retailers in response to U.S. policy. These very solid results further validate the underlying strength of our international business and growth opportunity. Beyond international, we are relentlessly focused on further elevating the experience for all customers. Since the beginning, the customer has been at the center of our focus. So I'm thrilled to report that in the first quarter, we achieved a modern record for our customer satisfaction score. Shipping efficiency is a great example of our continuous improvement in service levels. Customers love our 2-day express shipping offered in the U.S. free of charge. What's truly incredible is that we now deliver more than 1/3 of our U.S. shipments to customers in just 1 business day, free of charge, exceeding our 2-day promise by a full day. The percentage of U.S. packages we deliver to customers in only 1 business day has increased by 6 percentage points in the past 3 years, underscoring our progress in raising the bar to delight our loyal customers. And lastly, we continue to leverage AI and other technology to drive growth and efficiency. I'm excited to share that we have internally developed AI algorithms that we believe will drive efficiency and even further elevate the customer experience. Our internal data science team has developed AI technology algorithms that now automatically transcribe customer service phone calls, providing greatly increased visibility into agent performance and greater awareness of customer issues. It is early days, yet we are excited about the potential for increasing operating efficiency as well as improved learning and training opportunities for our customer service teams. We are also continuing to leverage AI to refine our shopping experience and personalization capabilities. I'm excited to share that in collaboration with a third party, we are testing a new AI-powered styling feature that enables shoppers on REVOLVE to virtually style recommended items by mixing and matching styles from our vast assortment. Virtual styling is a powerful use case for AI technology that we believe has the potential to elevate product discovery, increase consumer engagement and loyalty and advance our efforts to reduce product returns. To wrap up, we delivered a strong first quarter and continue to strengthen our foundation for profitable growth over the long term. I would like to thank our team for your hard work, for staying nimble and for your dedication to exceeding our customers' expectations. We are in a very challenging environment, yet I'm confident that we have the organizational discipline to manage our way through the uncertainty and gain further market share in 2025 and beyond. Now over to Michael.

Thanks, Mike and hello, everyone. I am extremely proud of our impressive first quarter results, particularly in light of the current macro environment. Our strong Q1 results were highlighted by double-digit top line growth and very strong cash flow as well as our outstanding progress on longer-term initiatives. Our success is a direct result of our continued strong execution by our team across the business, including merchandising, site experience, marketing, owned brands, technology and international that collectively have further strengthened our connections with our engaged community of brands, consumers and content creators. With that as an introduction, I will focus my remarks on some of the strategic areas we are investing in and that we are especially excited about. Brand-building investments highlighted by our REVOLVE Festival event, expansion of owned brands and physical retail exploration. First, REVOLVE Festival. As our core consumer gears up for an active lifestyle events in the months ahead, we are making the most of this opportunity to further build our brand heat and expand awareness. On April 12, we hosted our eighth annual REVOLVE Festival in Coachella Valley, bringing together the world of fashion, music and culture and an exclusive and immersive experience. The atmosphere in the desert was electric, elevated by high-octane performances by our incredible lineup featuring Lil Wayne, Tyga, Gelo and special guest Cardi B, who took the stage in custom REVOLVE Atelier look, designed exclusively for her by our owned brands team. The aspirational lifestyle event was very successful in elevating our brands and exciting and delighting our community of VIPs, brands, influencers, partners and fans who are fortunate enough to attend the invite-only activation at WWD called a hot ticket and the biggest celebrity draw of the weekend. The impressive range of A-list actors, musicians, athletes, celebrities and content creators attending our weekend festivities included Lisa BLACKPINK and White Lotus, Kendall Jenner, Kylie Jenner, Cara Delevingne, Charli and Dixie D'Amelio, Dwayne Wade, Chris Brown, Teyana Taylor, Emma Roberts, Ariana Greenblatt, Jordan Chiles, Julia Fox, Becky G, Wiz Khalifa, Landon Barker, Alix Earle, Christina Milian, Victor Cruz, Braxton Berrios, Ty Dolla $ign, Shaboozey, YG, Victoria Monet, Gracie Hunt, Alex Consani, Heidi Montag and Spencer Pratt. REVOLVE Festival has evolved into a vibrant fashion show for the next generation of consumers, featuring trendsetting styles from REVOLVE and FWRD. Guests captured their looks across a variety of photo moments and immersive brand activations, generating incredible content that dominated social media feeds and reaching hundreds of millions of people through the vast follower count of our A-list attendees. The proof of our success is in the incredible numbers. On the heels of last year's stellar festival results when we delivered significantly greater marketing impact while reducing spend by millions of dollars, we were able to raise the bar yet again as an encore. In fact, press impressions from REVOLVE Festival in 2025 increased by more than 40% year-over-year while social media impressions increased by more than 25% year-over-year, achieved on reduced spending year-over-year. Most impressive is that according to a data insight company, CreatorIQ, REVOLVE's earned media value ranked number 1 among brands from April 10 through April 20, coinciding with the Coachella Festival. This is a true testament to our brand strength and our very strong execution by the team. Second, owned brands, where our momentum has continued to build. In the first quarter, the mix of owned brand net sales as a percentage of REVOLVE segment net sales increased year-over-year for the first time in 2.5 years. It is particularly exciting considering that owned brands typically generate much higher gross margins than third-party brands and are exclusively available to REVOLVE and FWRD. Most important, our underlying foundational metrics for own brands continue to improve in the first quarter and in fact, significantly outperformed our third-party brands on key comparable metrics. This progress reinforces our confidence to invest in an incredible portfolio of new owned brand launches planned for the second half of 2025 and early '26. Also notable is that in the first quarter within our limited physical retail footprint, owned brands continue to generate a meaningful higher percentage of sales that we generate online. Particularly with our upcoming launches, we believe we can further increase our owned brand penetration of REVOLVE segment net sales in the years to come. Third, physical retail. We continue to be very excited about the growth opportunity in physical retail over the long term. We are making great progress towards opening our permanent store in Los Angeles at The Grove, an open-air destination that is one of the highest grossing shopping and entertainment centers in the U.S. Construction is underway and we are on track to open our doors in the fall in our central location with outstanding foot traffic. Our journey has already validated the physical retail channel as a great source for brand building, acquiring new customers and merchandising our high-margin owned brands. The retail channel has also featured a much lower return rate as compared to our online channel and further strengthened our relationships with brand partners who view our premium retail environment as brand elevating. As founders focused on maximizing shareholder value over the long term, Mike and I are measured in our approach for this new opportunity. The Los Angeles build will be our second retail store and our first in a major metropolitan market. With Aspen in Los Angeles, we will have 2 unique destinations to leverage as we continue to test, learn and iterate as we drive towards our internal performance goals. We have no plans to further expand our retail footprint beyond Los Angeles until we fully optimize and achieve our internal success targets within our existing footprint. To help ensure our success, I am excited to share that we hired a Head of Retail with deep industry experience. Our new leader brings a proven track record of success in opening and profitably operating retail stores for fashion and lifestyle brands. Her job number one will be to open our permanent Los Angeles stores at The Grove and leverage the strength of our brands and connection with next-generation consumers to maximize this exciting opportunity. Before I close, I want to touch on an exciting partnership in the works with Grammy Award-winning performer and global style icon, Cardi B. We believe this partnership can be especially powerful in that we are creating a long-term joint venture that is a first of its kind for both parties. The venture will leverage our strong operational, brand building and marketing expertise with Cardi's powerful brand, trendsetting fashion and global audience that extends beyond our current core target demographic, both within the U.S. and abroad. The venture will be multifaceted and will include the launch of apparel and beauty lines. After many successful brand collaborations together, Cardi is excited to create a much deeper and longer-term equity partnership for her namesake brand. She chose REVOLVE because it was important to her to find a partner that would stay true to her authenticity and she is also completely aligned with our long-term focus. We believe Cardi choosing REVOLVE is a testament to the strength of our brands and the powerful platform that we have built. Wrapping up, our strong financial profile, illustrated by the $45 million in operating cash flow we generated in the first quarter and a cash balance over $300 million, is a strategic advantage that gives us the capacity to invest for long term success. As our Q1 results attest, our investments are working and I am excited about the many initiatives underway that we believe will continue to drive profitable growth over the long term. Now, I will turn it over to Jesse for a discussion of the financials.

Thanks, Michael and hello, everyone. I am very proud of our strong first quarter results on both the top and bottom lines, especially considering the current macroeconomic environment. I'll start by recapping our first quarter results and then I will provide context on our tariff exposure and mitigation strategies before closing with updates on recent trends in the business and guidance for the balance of the year. Starting with the first quarter results. Net sales were $297 million, a year-over-year increase of 10%. REVOLVE segment net sales increased 11% and FWRD segment net sales increased 3% year-over-year in the first quarter. By territory, domestic net sales increased 9% and international net sales increased 12% year-over-year. Active customers, a trailing 12-month measure, increased 6% year-over-year, a slight uptick from the recent trend. With only 2.7 million active customers at quarter end within what is a very large addressable market, we see a great deal of opportunity to further expand our customer base in the years ahead. Total orders placed were $2.3 million, an increase of 4% year-over-year. Average order value was $295, a decrease of 1% year-over-year that was primarily due to lower AOV in the FWRD segment, driven by product mix. Consolidated gross margin was 52%, a decrease of 30 basis points year-over-year that primarily reflects a lower mix of net sales at full price and deeper markdowns year-over-year, partially offset by an increased mix of owned brands year-over-year. As illustrated by the year-over-year AOV decline in the first quarter and with many consumers feeling pressure in the current environment, we are seeing customers begin to move to more accessible price points. Importantly, our operating discipline enabled us to meaningfully outperform our guidance for operating expenses by a much greater amount than the slight miss on gross margin. So now moving on to operating expenses. Fulfillment costs were 3.2% of net sales, a decrease of 32 basis points year-over-year. Selling and distribution costs showed greater-than-expected efficiency at 16.8% of net sales, a decrease of 106 basis points year-over-year. This impressive result reflects a meaningful decrease in our return rate year-over-year as well as great execution by our teams to drive efficiency in our logistics costs, partially offset by a lower AOV year-over-year. Our marketing investment was also more efficient than expected, representing 14.3% of net sales, a decrease of 100 basis points year-over-year that was primarily due to efficiencies in our brand marketing investments. General and administrative costs were $37.9 million, outperforming our guidance of $39.5 million, albeit an increase of 58 basis points year-over-year as a percentage of net sales. The increase in net sales and gross profit year-over-year and the meaningfully improved efficiency in our marketing and logistics costs helped us to achieve exceptional growth in operating profitability. Our GAAP income from operations increased 57% year-over-year in the first quarter. As a reminder, below the operating income line, in the first quarter of 2024, we recorded a nonroutine gain from an insurance recovery of $2.8 million which was reflected in other income last year. This largely explains the decrease in other income year-over-year in the first quarter. Our tax rate was 27% in the first quarter, up slightly from 26% in the prior year. Net income increased to $11 million or $0.16 per diluted share, up from $0.15 per diluted share in the first quarter of 2024. The insurance recovery in the prior year was equivalent to approximately $0.03 per diluted share. Adjusted EBITDA was $19 million, an impressive increase of 45% year-over-year. Moving on to the balance sheet and cash flow statement. We delivered strong cash flows in the first quarter. Net cash provided by operating activities and free cash flow were $45 million and $43 million, respectively, an increase of 18% and 17% year-over-year that further strengthened our balance sheet. As you think about modeling cash flow for the balance of the year, we expect the build-out of our permanent store in Los Angeles to add $8 million to $9 million to our CapEx in 2025 as we customize our space at The Grove ahead of the opening of this experiential retail destination later this year. Improved inventory dynamics were a key driver of our strong cash flow generation. Inventory at March 31, 2025, was $214 million, a decrease of $16 million or 7% compared to year-end 2024. Inventory increased 6% year-over-year which was outpaced by our 10% net sales growth for the first quarter. Importantly, the net sales growth to inventory growth differential was positive on both the REVOLVE and FWRD segments. As of March 31, 2025, cash and cash equivalents were $301 million, surpassing $300 million for the first time. Our balance of cash and cash equivalents increased by $44 million or 17% in just 3 months compared to year-end 2024 and we continue to have no debt. In the last 5 years, we have increased our net cash and cash equivalents balance fourfold, an increase of $227 million in 5 years, net of borrowings while returning more than $40 million to shareholders through our stock repurchase program. Now let's discuss our tariff exposure and mitigation strategies in more detail. First, our tariff exposure. We purchased the majority of our inventory from third-party brands under structures where we are not the importer of record. And so for these inventory purchases, we are not directly impacted by higher tariffs. More specifically, using 2024 as a benchmark, approximately 78% of our total inventory purchases last year came from third-party brands where the products were imported into the U.S. by our brand partners. Again, in these instances, we do not pay the tariffs. Now that leaves approximately 22% of our 2024 inventory receipts where we were the direct importer of record and where we do pay the tariffs directly. This bucket is composed of our owned brand products and from a limited number of third-party branded products where we are the importer of record. So to summarize, we have no direct tariff exposure for around 78% of our inventory receipts, whereas we do have direct tariff exposure for around 22% of our inventory receipts. Now given the very high tariff rate currently in place on China imports, let's talk about our China sourcing exposure. As mentioned, based on our 2024 data, approximately 22% of our inventory receipts have direct tariff exposure. Within that 22%, approximately 72% related to products we directly imported from China. Taking it one level deeper, the vast majority of our owned brand products were imported from China and a much lower but still significant portion of third-party products that we imported directly originated from China. Said differently and to summarize, approximately 16% of our total inventory purchases in 2024 were directly imported from China. For the 78% of inventory that was not directly imported by us, the percentage of products that have a China origin is much lower. Now let's talk about our mitigation strategies. Our focus is on the products that we directly import, primarily within our owned brands and to a lesser extent, in the limited number of instances where we are the importer of record for third-party branded products. The biggest area of mitigation opportunity is in owned brands, given the very high concentration of products imported from China. We are actively engaged in cost-sharing discussions with our owned brand manufacturing partners. And while there is a longer lead time, we are also working to diversify our manufacturing sources outside of China. Other mitigation measures that we expect will help us to offset some of the increased costs due to tariffs include optimizing our product import logistics, selectively increasing prices for our products and further optimization of our supply chain. We are also working hard to mitigate the tariff impact for the limited instances where we are the importer of record for third-party branded products, primarily by partnering with our third-party brands to reduce the direct tariff impact and to a lesser extent, selective price increases in partnership with our brand partners. Now for the approximately 78% of products that are not directly imported by us. We have a brand roster of over 1,000 brands that source from dozens of countries all over the world which provides us with optionality and flexibility in sourcing and product assortment. We are actively working with these brand partners to manage through what is hopefully a transitory period of economic and supply chain disruption. Our confidence in our ability to navigate through the tariff pressures that Mike alluded to is supported by our track record. We successfully navigated through the global financial crisis, the first wave of Trump tariffs in 2018 and 2019 and the COVID-19 pandemic, in all cases, coming out stronger. We are on even stronger footing today than we were during these previous cycles and we continue to have the financial discipline, balance sheet strength and long-term focus to support investing through this current cycle. Now let me update you on some recent trends in the business since the first quarter ended and provide some direction on our cost structure to help in your modeling of the business for 2025. Starting from the top, our net sales in the month of April increased by a mid-single-digit percentage year-over-year with international growth outpacing the U.S. For modeling purposes for the balance of 2025, given the challenging backdrop with U.S. consumer confidence declining every month in 2025 to a 5-year low and U.S. consumer sentiment having declined 30% year-to-date. It is clear that the consumer is feeling increasingly uncertain about the future. While we do not give revenue guidance, the increasingly uncertain backdrop has led us to moderate our internal revenue growth expectations for the full year. And as a result, we are taking a measured approach to planning our inventory buys for the balance of 2025. Now before we get into guidance, let me caveat that our outlook is based on the current status of tariffs as of today, May 6, 2025 and our estimate of the impact of potential mitigating activities that are currently underway. Our outlook for gross margin is especially susceptible to variability given the uncertainty surrounding the timing and level of tariffs that will ultimately be in effect as well as the timing and magnitude of the potential impact resulting from our mitigation efforts. With that, let's discuss our updated guidance for gross margin which includes our best estimate for the impact of tariffs, net of our mitigation efforts. We expect gross margin in the second quarter of 2025 of between 52% and 53% which assumes some tariff impact later in the second quarter. By comparison, we expect the magnitude of tariff impacts to increase in the third quarter and particularly in the fourth quarter of 2025. As a result, for the full year 2025, we now expect gross margin of between 50% and 52%. For additional context, the high end of the guidance range reflects a minimal tariff impact with the assumption that we are able to mitigate the vast majority of the impact and/or tariffs are reduced to a much lower level relative to where we stand today. The low end of the guidance range assumes elevated tariff rates and our best estimate of the impact of our mitigation efforts. Again, our guidance reflects our best estimate at this point in what is a very dynamic situation with a number of variables at play, all of which are very uncertain. Fulfillment, we expect fulfillment as a percentage of net sales of approximately 3.1% for the second quarter of 2025 and between 3% and 3.2% of net sales for the full year 2025, unchanged from our previous guidance. Selling and distribution. We expect selling and distribution costs as a percentage of net sales of approximately 17.9% for the second quarter of 2025 and we now expect a range of 17.2% to 17.5% for the full year 2025. The slight increase from our prior range primarily reflects our expectation for lower average order values in the coming months given the current macro environment. For context, lower average order values are a headwind to logistics efficiency because the lower AOV means that our shipping costs comprise a larger percentage of the revenue we generate on a per order basis. Marketing. We expect our marketing investment in the second quarter of 2025 to be approximately 15% of net sales, a slight decrease year-over-year. For the full year 2025, we expect our marketing investment to represent between 14.9% and 15.1% of net sales, unchanged from our prior guidance. General and administrative. We expect G&A expense of approximately $39 million in the second quarter of 2025 and between $154 million and $157 million for the full year 2025, a slight decrease from our prior full year guidance range. And lastly, due to some discrete items affecting our tax rate this year, we now expect our effective tax rate to be approximately 27% to 28% for the full year 2025, with the highest quarterly tax rate expected in the third quarter of 2025. In 2026, we expect our effective tax rate to return to our previous guidance range of between 24% and 26%. To recap, we delivered strong Q1 results in an environment that has become increasingly challenged. With our strong performance over the last few quarters and our very healthy balance sheet, we are entering into this time of turbulence on solid footing. We believe we are well positioned to navigate through the current tariff uncertainty and other macro challenges ahead, considering our financial strength that is supported by a premium price point and healthy gross margin, operating discipline and agility, our technology and data-driven DNA, our powerful brands and our connection with the next-generation consumer. Now we'll open it up for your questions.

I appreciate all the detail here. Jesse, maybe if we could drill a little bit more into some of the tariff math and assumptions as we try to unpack that. So if I understand correctly, the low end of your gross margin guidance assumes the tariff costs with little mitigation. Is that right? And then I guess if I look at the gross margin guidance reduction, 240 basis points at the low end on consensus revenue this year, that's about $30 million of gross profit dollars. I guess, is that a rough approximation of the gross costs you're thinking about for the back half of the year? Maybe let's just start there and then I have a follow-up.

To clarify on the guidance, it assumes the elevated tariff rates that are currently in effect and our best estimate of our mitigation efforts. The key difference here is that it's not minimal mitigation efforts; it's our best estimate. You can calculate the gross margin impact based on the guidance we provided, and it does represent a significant impact in dollar terms.

And how quickly could you theoretically pivot to a higher percent of the third-party sourced inventory? Or asked another way, maybe help us better understand the inventory commitments or flexibility you have on the owned brand front.

Yes, we can flex pretty quickly. I wouldn't say it's necessarily a shift from owned brand to third party. We're still very optimistic on the owned brand expansion, especially this quarter and see a great opportunity there in the future, especially given the premium margin that owned brand carries. Now if you think about diversification of owned brand sourcing out of China, that is a longer lead time. We can make some progress this year but it's more of a 2026 story there.

And then just finally, on the demand backdrop. Are you seeing the tariff news and weaker sentiment affecting customer traffic and conversion trends at this point? Or maybe what gives you the confidence you can sustain growth, especially in the U.S. as we look at the steeper comparisons in the coming quarters here?

Yes, I believe that based on our prepared remarks, we are currently observing a shift towards more accessible price points, which is affecting our average order value. This change is also impacting consumer confidence, leading us to moderate our expectations as we look ahead for the remainder of the year, assuming that the current situation remains unchanged.

This is Katy on for Oliver. I'd like to kind of go back to the owned brand strategy and just kind of learn more about how you're thinking about launches for owned brands and sort of that product development, specifically around the second half. Are you delaying any innovation there to shift to third party? And then I'll have one follow-up after that.

Yes. We've definitely taken into account and there's been some pushback in some place and some don't. We also have very, very, very exciting things launching in H2. So there's been adjustments but we have to be nimble in this environment and we think we have some awesome product our customers will love coming very, very soon. We're excited to share with you guys.

And then as a follow-up to the selling and distribution expense line item, could you just talk a little bit more about really the savings there and just thinking about what you can leverage to have any incremental savings this year?

Yes. Yes, we did guide up slightly for the second quarter based on what we're seeing in average order values which increases that selling and distribution as a percentage of net sales. Now that's not to take away from everything that the team has been doing. They've been doing a phenomenal job in making that line item, especially more efficient. There's also a significant impact from a lower return rate on that line item. So that's the largest driver of the decreases we've been seeing and then the team has been doing great work there. But we do anticipate some pressure from that lower average order value that we've been seeing for the last month or 2.

Jesse, thank you for all the color on tariffs. Very helpful. We wanted to ask, you mentioned higher markdowns in 1Q and also the shift to more accessible price points as of late. Are you guys planning to pull the promotional lever more to stimulate demand? Are you starting to see the industry get incrementally more promotional so far in the second quarter? And just curious, there's been some anecdotal evidence of demand pull forward ahead of tariffs, at least in some categories out there. Do you expect to still see that here in early 2Q?

Yes. Regarding the markdown strategy, we are noticing that customers are opting for more accessible price points, which may involve moving from full price to markdown or increasing markdowns within that category. However, we are not changing our markdown strategy as a reaction to this trend. Our approach is guided by our algorithms, ensuring we maintain the right inventory balance for our customers and our profitability. Therefore, we will not be directly responding to industry moves in this area. We will prioritize what is best for the business overall. As for the pull forward, given our customers' buy now, wear now behavior, we did not observe any significant signs of a pull forward in our business.

I just want to ask, you mentioned, I think you said you're moderating your internal sales expectations. Can you just give us a little bit more color on that, like the magnitude of that? And does that include any impact from some of the tariff mitigation strategies? In other words, if you're assuming that you have to raise price, do you assume that there's sort of elasticities are such that maybe there's a disproportionate negative impact on unit volumes? Just any color around that would be super helpful.

Yes, I think the key point is that we are experiencing some softening, and we want to communicate that we are adjusting our inventory purchases accordingly to stay aligned. We need to be cautious in case tariffs are reduced and the market reopens, requiring us to be very adaptable. Regarding our planning for inventory and price increases, it is quite dynamic, and we are considering all relevant factors in our purchasing decisions. On the topic of elasticity, it's important to note that this cannot be examined in isolation. A single percentage increase in price does not necessarily influence consumer behavior uniformly. We must take into account various factors, including consumer sentiment, and analyze the situation on a case-by-case basis for each product and price point.

I was wondering for the 78% of inventory purchases from third-party brands, what are you hearing from them on price increase? Is that a strategy they intend to take? And how do you balance that with the customer kind of looking for better value in a tighter spending environment?

Yes. Yes, we are partnering very closely with those third-party brands and we are seeing some price increases, again, very product by product, brand by brand. And also keeping in mind prices comparable across different destinations, across different products. But we are seeing some of that. And then I lost your second part of that question.

I understand that the reduction in revenue correlates with lower sales projections, but could you explain your reasoning for maintaining marketing spend at around 15%? Additionally, we've noted some early signs in this earnings season of improved marketing efficiency and other brands reducing their marketing efforts. Does that benefit you, especially considering your previous comments on incorporating AI into some of your engagement marketing strategies?

Sure. I can address the marketing aspect. The market projection is based on current trends we observe and what we believe is the appropriate spending level for the remainder of the year. Regarding the softness in marketing, it's true that historically, during economic downturns, brands often reduce their marketing budgets, creating opportunities for others. So far, we haven't noticed any significant changes in that regard. We are still figuring out the implications of tariffs and whether they will persist or be lifted, which might impact things further down the line. However, we haven't seen any substantial trends indicating reduced marketing costs or lost opportunities. Nevertheless, our team excelled this quarter in achieving marketing efficiencies through improved tactics and strategies, particularly with the excellent execution of the REVOLVE Festival. We are confident in our marketing strategy for the rest of the year, and the current environment appears similar to what we have experienced before.

I have a few questions regarding the model. It's great to see the improvement in product return percentages again. Will we start to see a slowdown in our models over the next few quarters as we begin to compare with some major improvements from a year ago? Are there any incremental changes you could share that will help keep driving these figures lower year-over-year? I'm also interested to know if there is any hesitation or shift to more accessible price points outside the U.S. Additionally, could you provide some insight into the selling and distribution in Q2? It seems significantly higher than the rate you mentioned for the year. Is there anything unique about Q2?

I can begin by discussing the return rate. We have several initiatives in progress that we hope will enhance our return rate. However, since these R&D initiatives are still untested for modeling and forecasting purposes, we are not including any anticipated impact from them in our projections. Consequently, we expect the improvements in the return rate to moderate as the year progresses, particularly since we've already seen significant advancements in the latter half of the year.

Yes. And maybe to double-click on that one, too. I think if you rewind to last quarter where we said we had factored in a flat return rate year-over-year, not to take away from our optimism, given the significant reduction we had in Q1. We're now modeling in a slight decrease for the full year given our performance in Q1. And then on the hesitation outside of the U.S., nothing significant to call out there on a geo basis. We mentioned some pullback from Canadian customers. That's not necessarily price point but just complete pullback. And then selling and distribution, in Q2, that is generally higher. That's when we see a higher return rate, et cetera. So it typically in Q2 is seasonally higher than other quarters.

Just a little bit more on the April trend. I guess can you help us understand how you're thinking about what's driving that decel? And any way to kind of frame the micro versus macro in that? And then on the gross margin guidance reduction, is that fully or almost fully attributable to tariffs? Or any other factors to call out there?

Yes. On the April trend, I think we attribute this mostly to macro. The team has been performing exceptionally well. We're driving a lot of significant gains, conversion gains, et cetera. So I think everything we can control is going well. It's just this macro uncertainty and overhang. And then your second part of the question, gross margin fully attributable to tariffs. Yes, I think if you took tariffs out of the equation, we would probably guide slightly lower for gross margin on the full year, just slightly, just given what we saw in Q1 and that shift to the more accessible price points, markdown, et cetera. Now you can't completely take tariffs out of the equation because tariffs did have an impact on consumer sentiment. So it's hard to peel those apart but we did see a shift from full price and then deeper markdowns within that markdown bucket.

First, just back to the April trends. Could you clarify just how much of a differential there was between U.S. and international growth? I think you said international is a little bit better. And on the comment around the Canada weakness, in particular, in 1Q, has that subsided in 2Q? Or has that persisted?

Yes. On a month-to-month basis, we don't get into excruciating detail there just because it is only a month other than to say that international did outpace the U.S. So not much more to say there.

Yes. And then with regards to Canada, we are continuing to see an impact in the Canadian markets due to the sentiment shift in Canada and we saw a pretty sharp turn in that market when a lot of the tariff policy and other policies that Canadians subjected to started rolling out.

And then second question, just on the 78% of inventory imported by partners. I think the comment was that, that's a lower ratio than the 72% of where you're the importer of record coming from China. But could you get more specific as to like how much lower that China mix is? And is that kind of the North Star of where you envision your mix of what you import going to over time? Just trying to understand how much lower it is and where your mix could go over time.

Yes. There isn't much more detail to add except that it is significantly lower than 72%. To help clarify, that 72% refers to the 22% that is directly sourced. A large majority of our owned brands come from China, while a smaller percentage of those direct imports are third-party sourced. Hopefully, this gives you a better understanding.

Yes. And then in terms of the long-term North Star, it really depends on how the environment unfolds. Certainly, we expect later this year to have some meaningful reduction in China exposure with regards to owned brand and a much bigger impact in 2026. And then it depends on the tariff situation and other kind of macro issues going forward. But there's certainly a world where China could be very little of our production. But at this point, it's too early to say. It depends on a lot of policy factors and other things that have yet to unfold.

Maybe just spinning back to consumer health and the message here. I guess, could you touch on more directly sort of how the uncertainty and the lower confidence shows up in your customer behavior most prominently? It sounds mostly like lower AOVs. It sounds like at least in the past, we have a precursor of kind of higher return rates a couple of years ago. What else are you seeing in terms of the change in behavior? Are there more percentage of transactions financed via buy now, pay later? What are the other sort of metrics we should be looking for?

Yes. Those are all the main metrics that we've seen thus far. We closely track the consumer sentiment and consumer confidence because we know that historically, that can often have an impact on our consumers' purchasing behavior and very central to the REVOLVE brand is consumers feeling good and feeling great and living their best life. And so certainly, when disruption or macro weakness first hits, it can often affect our consumers' purchase behavior. And then we saw a fairly meaningful shift in price points, as Jesse mentioned, around the same time. So along with a modest decel in the growth rates that we were tracking. So to Jesse's point, it seems pretty clear to us that the macro factors are at play. And macro stuff always works itself out over the long run. We actually feel great about the underlying trends and momentum that we've had through the past couple of quarters and through Q1. And also, we feel great about our mitigation efforts and what our supply chain will look like over the long term. So yes, in the short term, there's a bit of impact but we think all the factors for success are in place. And we'll watch to see how things play out over the next couple of quarters given the macro environment, particularly if it weakens but we think we're well positioned.

Any willingness to just talk about sort of the return rate that you saw quarter-to-date? Has it changed materially since the first quarter? Just maybe puts and takes around what's driving the net sales mid-single-digit growth rate that you highlighted?

Yes. So with regards to the return rate, we're not seeing a meaningful shift in the return rate at this point. Of course, as you know, returns can be a lagging indicator but in the data we have thus far, there aren't any signs of the consumer sentiment impacting return rate just yet. And as you mentioned, it could be something that happens in the future. And again, we saw a modest decel from Q1 and you're always going to have some variance up and down month by month also. But certainly, combined again with the price point shift and those sentiment indicators, it was pretty telling to us that there was some macro sentiment shift. I will say as we exited April, we start to see some of those indicators reverse a bit but again, it's a very volatile environment. And so at this point, we certainly wouldn't count on the direction of consumer sentiment being reversed or permanently reversed.

Can you talk about the outlook for owned brands? I think typically, during uncertain times, the company has pulled back here and lean more into national brands but you're pushing ahead with accelerating owned brands this year. So just curious what gives you the confidence in doing so this time around and whether we should expect owned brands to continue outperforming the rest of this year.

The team has been doing. There's been many, many years of investment improvement and it's really, really showing from top line metrics that we shared today as well as all of our internal metrics that we think are very, very forward leading. So the team is strong. We're performing well and we'll continue to invest in because we see it as an exciting part of the business, both from a brand building and a margin building perspective.

We certainly have the ability to make further general and administrative reductions, but that is not our plan at all. We are focused on positioning the business for long-term success rather than achieving short-term results from a profit maximization perspective. We believe we have strong underlying trends and want to continue building for the long term. Additionally, we are well positioned to navigate this period with our initiatives, our efforts on tariff mitigation, and our substantial cash balance of $300 million. We do not want to take any shortsighted actions that could compromise long-term opportunities.

Just a couple for me on inventory. Nice to see the favorable inventory sales spread there. I was wondering if you could comment on the inventory composition at both brands. I think last quarter, you talked about being a little bit more weighted in the markdowns at REVOLVE. So just wondering if there's still any pockets of excess anywhere. And then maybe just a bit more color on how much you're cutting back inventory for the back half? And then how much flexibility you have in the model if we do need to reaccelerate inventory buys?

Yes. On the first one, I think we called it out in the prepared remarks, too but very encouraging was that inventory to sales growth differential is positive on both FWRD and REVOLVE. So we saw great progress on the REVOLVE segment versus the progress that we saw in FWRD over the last couple of quarters. So we feel good about the inventory composition today on both segments. And the full price markdown ratio is in a zone that feels comfortable as well. And then on inventory purchases, we're very flexible and we want to keep that in mind as we think about moderating our inventory buys but also staying flexible enough so that if and when demand does pick up, if these tariffs are moderated, we can get back into the inventory and meet the demand.

I wanted to understand your philosophy on investing in the near-term opportunities drive share balanced against income statement performance. You mentioned investing while peers are pulling back. Can you help us think about these dynamics?

Yes, absolutely. I believe there are some key examples to consider. Firstly, when we discuss our owned brand, we have the ability to manage our inventory effectively. While there will be challenges due to the tariff situation, we are making significant progress, and this represents a substantial opportunity for us in terms of margins, growth, and customer experience. We will continue to invest in this area. Additionally, we have seen considerable benefits from AI technology and tech investments over the past few quarters, and this will remain a focus for us. We're also committed to enhancing every aspect of the customer experience and optimizing logistics and return efficiencies, which are reflected in our financial results for this quarter. Overall, we believe there are many positive elements at play, and all our investment decisions will be evaluated based on their return on investment rather than their immediate impact on our income statement for this quarter. Yes. So we continue to invest on the marketing side. We're finding great opportunities, obviously, both from retention standpoint but continuing to acquire large amounts of new customers. And there's a huge untapped market and opportunity for us on the new customer side, obviously, continuing to invest in all of our existing channels. But one thing we haven't talked about much on this earnings call, obviously, with the tariff focus but is the exciting opportunity of the physical retail expansion. And one of the really neat stats on the physical retail side is that we find significant amounts of the purchases, close to half at our Grove store came from new customers. And that's in essentially our hometown, our home market of Los Angeles. So there's huge upside for us long term to continue to acquire those new customers on top of that category expansion, continuing to invest and expand internationally. So we feel great about the trajectory.

I apologize. We have time for one more question. We'll go to the line of Lucas Cohen with BMO.

This is Lucas Cohen on for Simeon Siegel. I see second straight quarter, no repurchases but obviously, a new dynamic here with CapEx investment in new stores as you build that out. That being said, it would still be great to get some context on what the future plans are for repurchases going forward.

Yes. Thanks, Lucas. Yes, to your point, we haven't been active in the last 2 quarters. Now that said, we were active in Q2 of this year. So we still have a plan in place. We still see that as a great return of capital to shareholders. And we have a strong cash balance such that we can invest in both the stock repurchases and our initiatives on the core business.

Guys, thanks for joining us for this earnings release. We're really proud of all the work that we've invested and put into the organization and we're seeing a lot of progress across the board. We really think that these macro challenges really provide a lot of opportunities and we're excited and focused for the challenges and opportunities ahead.

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