Earnings Call Transcript - RVLV Q1 2022

Operator, Operator

Good afternoon. My name is Abby and I will be your conference operator today. At this time, I would like to welcome everyone to REVOLVE's First Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. And at this time, I'd like to turn the conference over to Erik Randerson, Vice President of Investor Relations at REVOLVE. Thank you and you may begin.

Erik Randerson, VP of Investor Relations

Good afternoon, everyone and thanks for joining us to discuss REVOLVE's first quarter 2022 results. Before we begin, I'd like to mention that we have posted a presentation containing Q1 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 current expectations regarding the continued impact of the COVID-19 pandemic on our business, operations and financial results, including near-term sales in Greater China, our growth and market opportunities and related macro and industry trends, our plans to broaden our offerings, our plans to expand our operations footprint and the expected impact on delivery times, our marketing investments and invest on seasonality pattern, our freight costs, the convergence of year-over-year growth rates at active customers and net sales 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, 2021 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 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 prepared and presented in accordance with GAAP. And our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliations of non-GAAP measures to GAAP measures as well as the definitions of each measure, their limitations and our rationale for using them can be found in this afternoon's press release and in our SEC filings. Joining me on the call today are our Co-Founders and Co-CEOs, Mike Karanikolas and Michael Mente; as well as Jesse Timmermans, our CFO. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn it over to Mike.

Mike Karanikolas, Co-CEO

Hello, everyone. We started the year out strong with another incredible quarter, highlighted by continued momentum across both segments. In the first quarter of 2022, our net sales were $283 million, a 58% increase year-over-year. The very strong results further accelerated our multiyear growth rate versus pre-pandemic periods and underscore our team's ability to navigate through what continues to be a very challenging macro environment. As founders, we've been focused on profitable growth from day one and this quarter was no exception, continuing our long track record of delivering a unique combination of growth and profitability. Net income was $23 million or $0.30 per share in the first quarter and adjusted EBITDA was $32 million, an increase of 35% year-over-year. Cash flow generation in the first quarter was nothing short of incredible. We generated a record $54 million in operating cash flow and $53 million in free cash flow, an exceptional increase of 62% year-over-year for both measures, further bolstering an already strong balance sheet. Looking at net sales performance by geography, the U.S. was incredibly strong, increasing 66% year-over-year, outpacing 28% growth in the international markets that faced a much more difficult comparison. All international regions increased year-over-year, highlighted by outstanding growth in Canada and the U.K., where we've made excellent progress with our localization initiatives. Late in the first quarter, we began to experience weaker trends in Greater China after COVID-19 restrictions negatively impacted consumer demand and logistics. With the current state of affairs, in the near term, we expect continued softness in Greater China which generated a low single-digit percentage of our total net sales in the first quarter. Now circling back to our consolidated results. Our results on a multiyear basis demonstrate just how much our business has strengthened during the past few years. Consider that in the past three years, our net sales have more than doubled; our adjusted EBITDA has nearly quadrupled; and our free cash flow today is almost 5x the free cash flow we reported in the first quarter of 2019. Our results for the past several quarters demonstrate that we are gaining meaningful market share. Our technology-driven DNA, data-driven merchandising, operational excellence, and digitally native approach have enabled us to connect in a very powerful and authentic way with the next-generation consumer and provide us with even more opportunity to address more aspects of their life and capture more share of their wallet. Our first quarter results offer encouraging indications of our progress. For instance, we added over 200,000 active customers in the first quarter, significantly exceeding our prior record achieved just three months ago. Only two quarters ago, I was thrilled that we added more than 100,000 active customers for the first time and now we surpassed twice that amount. Equally exciting is that our fast-growing base of active customers is becoming more productive, illustrating our success in capturing a greater share of wallet. In fact, for the trailing 12 months period, net sales per active customer were $488, an increase of 17% year-over-year. These exceptional results reinforce the path forward in the very large market opportunity we are pursuing, where purchasing power has continued to shift in our direction. Even with the recent growth acceleration, we still serve only two million active customers, representing what we believe to be just 3% penetration of our target demographic in the U.S. market. The early stage of our expansion and the much larger global market opportunity where the REVOLVE brand translates across geography is what gives us confidence to keep the pedal down on our marketing and brand-building investments. Our first quarter results demonstrate that our investments are working. Our continued strength and consistent delivery of results also reflect our long-term focus on building trust with our customers through our brand over the last nearly 20 years. Core to building this trust is operational excellence and exceptional service levels. We founded REVOLVE with a laser focus on customer satisfaction, which is key to our long-term success. With this customer-centric mindset from the outset, serving our customer incredibly well is consistent with an unrelenting organizational focus on the customer that is built into our DNA. Our Net Promoter Score once again remained at world-class record levels in the first quarter, underscoring how much customers love our brands and value our service levels. Importantly, we are on track to begin operating our first East Coast warehouse in the second half of this year, which we believe will even further raise the bar on our ability to delight customers with even faster delivery times for some of our key geographies. Having gained customers' trust, we've been able to expand our revenue per customer through category expansion. Increased customer loyalty has driven more orders per customer in recent periods and increased overlap between REVOLVE and FORWARD active customers. Recall that approximately one year ago, we launched the FORWARD royalty program that encouraged cross-shopping between REVOLVE and FORWARD. This was followed by more cross-marketing of the FORWARD destination through REVOLVE customers. Each month since the launch, we have expanded the overlap between REVOLVE and FORWARD active customers, yet the overlap is still less than 5%. This is particularly exciting, considering that at FORWARD, the average order value is around $650, and every additional percentage point overlap between REVOLVE and FORWARD active customers could drive more than $10 million in incremental net sales annually. Over the longer term, we believe that the foundation of our team, consistent delivery of operational excellence, the strength of our brands, competitive differentiation, and customer loyalty will enable us to not only continue to acquire new customers and gain market share but also significantly broaden our offerings to serve more aspects of our lives and expand our share of our wallet. Now over to Michael for an update on our exciting brand momentum.

Michael Mente, Co-CEO

Thanks, Mike. I'm super excited about the momentum in the business. With our strong operations and service levels as a foundation, we kicked off the year with a marketing book that is back to full strength and driving incredible momentum in the business. I'm so proud of the team's execution that delivered outstanding results in the first quarter. Net sales growth in the REVOLVE segment increased 56% year-over-year, the segment's highest first quarter growth in at least eight years, and FORWARD delivered a stronger 71% growth in net sales year-over-year in the first quarter. To deliver nearly 50% top-line growth in an environment with inflationary pressures, supply chain headwinds, China lockdown, and the war in Ukraine is truly remarkable. While the macro environment is challenged, we see strong demand from a resilient consumer who is finally able to live her life to the fullest again. After being quiet for two years, the content accessible season has come back strong, user travel has significantly accelerated in recent months and 2022 is expected to be the busiest wedding season in nearly four years. In all these scenarios, our customer wants to look and feel her best. As the go-to fashion destination for millennial and Gen-Z consumers, our aspirational life elements provide the inspiration she used to seek. We believe we are entering an exciting new phase of growth and consumer engagement, and we are investing in this opportunity to engage our community and build on the strong momentum of our events. After patiently waiting for most of the past two years, our impressive marketing events are coming back stronger than ever. Starting in February with our exclusive homecoming event held in Los Angeles during Super Bowl weekend, that was attended by an unbelievable number of A-listers. Our timing was perfect, and the event generated over 2.5 billion impressions. We continued the momentum in March with the launch of the Good American brand under REVOLVE, hosting a fantastic event with co-founders Khloé Kardashian and Emma Grede, attended by Kourtney Kardashian, Kendall Jenner, and Travis Barker, among others. We also reopened the REVOLVE Social Club, an experiential pop-up retail concept combined with a retail store, lounge, cafe, bar, and wellness center, all in one, along with an incredible backdrop for guests to experience and share on social media. The Social Club was open to the public, enabling the community to experience the REVOLVE lifestyle in real life by shopping, engaging, and joining over 25 fashion events. Over approximately six weeks, we hosted over 300 influencers and VIP guests, including Kendall Jenner, Kim Kardashian, Sofia Richie, Paris Hilton, just to name a few. The Social Club was highly effective in building excitement within our community and driving traffic to our sites, up to our flagship event, the REVOLVE festival. To illustrate the consumer excitement for the return of festival season, our sales generated from the festival shop portion of revolve.com and the REVOLVE Space have more than doubled compared to the same period in 2019 when we last held our REVOLVE festival events. The two-year hiatus from REVOLVE festival, combined with the brand steadily building among millennial and Gen-Z consumers, and the incredible lineup has led to overwhelming consumer demand to attend our REVOLVE festival event. When guests arrived at the REVOLVE festival, focusing on the feedback that people had the time of their lives. In so many ways, REVOLVE festival was the best event we've ever had. The musical lineup featuring an invite-only crowd of around 2,500 people was incredible, featuring performances from Post Malone, Latto, Ty Dolla Sign, Willow Smith, Migos, Travis Scott, and Jack Harlow, whose recent hit song debuted at number one on the Billboard Hot 100. It was also really exciting to see Jack Harlow and Ty Dolla Sign perform some of our latest hits in their sets. The event was even more impactful than ever across several dimensions, with incredible attendance and a wide range of personalities, actors, celebrities, designers, athletes, Instagram influencers, and TikTok stars in attendance. Notable VIPs included Kendall Jenner, Kim Kardashian, Kylie Jenner, Hailey Bieber, Justin Bieber, Timothée Chalamet, Leonardo DiCaprio, Sydney Sweeney, Diddy, Peter Dundas, and more. When compared to our most recent REVOLVE festival in 2019, we hosted 100 more influencers and forged partnerships with even more top-tier consumer-facing brands, including Spotify, Venmo, and Postmates. Brands are increasingly recognizing the power of REVOLVE and place a high value on the strong connection with millennial and Gen-Z consumers. With such an impressive caliber of performers, attendees, and partners generating an impact for our event, the search interest for our REVOLVE brand was higher during the week of the REVOLVE festival than ever before according to Google Trends. The excitement surrounding the return of REVOLVE festival resulted in demand for our incredible events being much higher than we anticipated. We even temporarily experienced logistics challenges late on the first day of the REVOLVE festival when our venue reached full capacity, causing longer wait times for guests entering and resulting in some not being able to attend. We have reached out to all those affected to make amends, and we believe we have identified solutions to avoid similar circumstances at future events. We believe our brand-building investments have further strengthened our connection with the next-generation consumer, demonstrated by the very positive sense of consumer engagement. In the first quarter, we drove record quarterly growth in active customers by a wide margin, and shopping through our sites and mobile apps increased significantly year-over-year. Monetization of this larger base of traffic continues to increase, helped by a 13% increase in our average order value year-over-year and continuing strength in net sales. Consumers are spending more with us across various aspects of their lives, further validating the trust we have earned, which provides us with even more opportunities to deepen relationships over time. Encouragingly, net sales across virtually all product categories increased year-over-year in the first quarter, illustrating how we have expanded our customer relationships during recent years. Activewear presents particularly exciting growth potential, as our customer lifestyle is increasingly oriented towards active pursuits. We've recently launched our first activewear owned brand, which has performed strongly with early growth through sustainable materials thoughtfully designed for this market, and it advances our strategy to diversify our own brand assortment into new categories. We have also launched the Khloe Kardashian collaboration with Good American on REVOLVE, which has resonated extremely well with our customers and generated significant interest. Continuing with our inclusivity theme, we recently announced plans to create a size-inclusive collaboration for our owned brands with a content creator and curve model, slated to launch in the fall of 2022. Lastly, I will provide an update on the new brand ambassador program discussed in last quarter's conference call, which leverages our proprietary technology. This community-driven extension of our influential marketing strategy has proven to be a powerful driver for the business. Traffic from this initiative increased by more than 80% in the first quarter compared to the fourth quarter of 2021. It's encouraging that the brand ambassador program has already driven meaningful incremental engagement and generated significant excitement within the ambassador community, interested in gaining access to events and additional support for the program. We are investing to further expand the brand ambassador team and drive exciting innovation for FORWARD in the months ahead. To wrap up, I am extremely proud of the outstanding results we have achieved to date, especially over the last two years, navigating disruption and volatility. I'm even more excited about the future. We have had an incredible few months with amazing interest in events that have generated significant brand momentum, but we are just getting started. We will continue to invest in marketing and building the brand, and with our data-driven approach, operational excellence, and very strong connection with the next-generation consumer, we believe that we are well-positioned to further gain market share in the months and years ahead. Now, I'll turn it over to Jesse for a discussion of the financials.

Jesse Timmermans, CFO

Thanks, Michael and hello, everyone. We believe our first quarter results demonstrate the incredible momentum of our brands, our competitive differentiation, and our focus on operational excellence. I'll start by recapping the first quarter results, highlighted by exceptional top-line growth and record growth in active customers for the third consecutive quarter. Net sales were $283 million, a year-over-year increase of 58% and an increase of 18% on a sequential basis from the fourth quarter. Both segments contributed to our exceptional growth. The REVOLVE segment net sales increased 56% and the FORWARD segment net sales increased 71% year-over-year in the first quarter. From a merchandise standpoint, the dresses category further accelerated to nearly 150% growth year-over-year, demonstrating that our customer is out again, living a very active social lifestyle. Own brands as a percentage of REVOLVE segment net sales also increased year-over-year for the second consecutive quarter. By territory, both domestic and international markets contributed to the strong top-line results. Active customers increased by an exceptional 201,000 compared to the fourth quarter of 2021, exceeding our prior record performance announced just last quarter. This growth expanded our active customer count to two million, an increase of 38% year-over-year. Looking forward, since active customers is a trailing 12-month measure, comparisons become more difficult as our new customer growth began to accelerate in the second quarter of 2021. We continue to expect year-over-year growth rates of active customers and net sales to converge in the coming quarters as we cycle out of the COVID period that negatively impacted the trailing 12-month measure for active customers. Our customer is very active, placing a record 2.2 million orders in the quarter, an increase of 68% year-over-year. Average order value, or AOV, was $288, an increase of 13% year-over-year that benefited from strong growth in dresses and an increasing mix from the FORWARD segment. Shifting to gross profit, consolidated gross margin was 54.5%, our best-ever margin for our first quarter and an increase of 44 basis points year-over-year. Moving on to operating expenses. Fulfillment, selling and distribution, and marketing expenses were generally consistent with our full year 2022 outlook commentary on these measures from last quarter. We continue to drive very efficient results in fulfillment despite inflation headwinds and a year-over-year increase in our return rate. As expected, selling and distribution costs were a significant headwind year-over-year due to higher return rates that came with a shift in mix back to dresses and other growing categories and higher shipping costs industry-wide. Increased oil prices have also driven incremental fuel surcharges, further increasing shipping costs that comprise the majority of this line item. For marketing, we continue to keep the pedal down on our investments to capitalize on the current momentum in our business. We are very pleased with the early results of our increased marketing investment and continue to believe that our in-person marketing activations have a long tail and will continue to provide benefits over the long term, just as they have historically. General and administrative costs in dollar terms came in slightly higher than the Q1 outlook we provided last quarter. Nonetheless, our very strong top-line results enabled us to achieve operating leverage as our 58% net sales growth outpaced the 35% growth in G&A expenses during the first quarter. Income before income tax increased 38% year-over-year, driven by the strong top-line results. Our effective tax rates were fairly different for the year-over-year comparison. Our tax rate for the first quarter of 2022 was 22%, 28 points higher than the negative 6% tax rate in the first quarter of 2021 that included meaningfully higher tax benefits. Net income was $23 million or $0.30 per diluted share, flat year-over-year due to the meaningfully higher tax rate in the first quarter of 2022 that I just mentioned. Adjusting for the differences in our effective tax rates between both years, earnings per share would have increased 37% year-over-year. We delivered adjusted EBITDA of $31.5 million, an increase of 35% year-over-year on top of a huge increase in adjusted EBITDA from a year ago. Adjusted EBITDA has now nearly quadrupled in just three years when compared to the first quarter of 2019. Moving to the balance sheet and cash flow statement, we had net cash provided by operating activities and free cash flow of $54 million and $53 million, respectively, an increase of 62% year-over-year for each measure. The strong cash flow generation has further strengthened our balance sheet and liquidity. We remain debt-free and cash and cash equivalents as of March 31, 2022, were $271 million, an increase of $52 million or 24% from just last quarter and an increase of $88 million or 48% from a year ago. Most impressive, our cash and cash equivalents net of borrowings were more than 250% higher than just two years ago. We are proud of our incredible results, especially considering the supply chain headwinds and uncertain macro environment that have dominated the headlines daily. Our team has remained agile and focused on the customer throughout, rising to the occasion to successfully navigate through these operating challenges. 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. Starting from the top, through the month of April, we have continued to deliver strong top-line growth with a year-over-year growth rate of more than 30% that was achieved on a more difficult comparison than we faced in the first quarter. As you think about modeling net sales growth for the full second quarter, it is important to keep seasonality and prior period comparisons in mind. Recall that our strong sales trends in April of 2021 continued into May and June of 2021, but the monthly growth rates in 2021 were skewed by the COVID dynamics of 2020. We believe it is more informative to view the 2021 comps on a two-year basis versus 2019. To provide some context, on a combined basis, the net sales comparisons we faced in May and June of 2021 are more than 10 points higher than the April comparison we faced on a two-year growth basis versus 2019. Also keep in mind that in light of the exceptional sequential sales growth of 18% from the fourth quarter of 2021 into the first quarter of 2022, which was significantly above the historical trend line, we expect the sequential growth from the first quarter of 2022 into the second quarter of 2022 to moderate versus historical pre-COVID levels such as 2019. We continue to expect the second quarter ending on June 30 to be the peak sales quarter for the full year, and we expect year-over-year growth for the second quarter to exceed our long-term target growth rate of 20%. Shifting to gross margin, we are very pleased with our gross margin performance that exceeded our Q1 outlook provided last quarter despite continuing headwinds on inbound freight costs that remain significantly higher than pre-pandemic levels. We expect continued gross margin strength and expect gross margin in the second quarter of 2022 to be between 55% and 55.5%, improving sequentially from the first quarter margin of 54.5%, consistent with typical seasonality. For the full year 2022, we continue to expect gross margin to be flat to slightly down versus our record gross margin of 55% in 2021 for the reasons I outlined last quarter. Regarding fulfillment, we continue to expect fulfillment expenses of around 2.5% of net sales for the full year 2022, which we view as very efficient among peers and gratifying considering the current inflationary environment and rising input costs. Selling and distribution, in 2022, we continue to expect selling and distribution costs to be around 16% of net sales, but we remain very cautious and are closely monitoring fuel surcharges from our carriers, which is a key driver of shipping costs that comprise the majority of this line item. Marketing, we continue to expect our marketing investment to remain approximately flat with the 2021 rate of 15.8% of net sales as we keep the pedal down to fully capitalize on our current momentum. With the return of our REVOLVE Festival bigger and more impactful than ever, we expect the second quarter to represent the highest level of marketing investment of the year, comprising at least 17% of net sales. General and administrative, we expect G&A expense of approximately $28 million in the second quarter and now expect the full year to be approximately $110 million at the high end of the previously provided range for the full year 2022 as we continue to invest to support our growth and expansion. Lastly, let me touch on our tax rate. Absent tax benefits in future quarters, we continue to expect our effective tax rate to be around 24% to 26%. To recap, we are incredibly excited about our outstanding start to the year with strength across segments and geographies, supported by a very loyal customer. While mindful of everything going on in the world around us in the current environment, including continuing macro headwinds and geopolitical uncertainties, we remain focused on the customer and on the long term, and we are investing in the business to build our brands and capitalize on the incredible growth opportunities ahead. Now, we'll open it up for your questions.

Operator, Operator

And your first question comes from Lorraine Hutchinson with Bank of America.

Lorraine Hutchinson, Analyst

I just wanted to follow up on your comments around inventory. It looks like you're in good shape for Q2, but have you had any struggle getting the inventory you need? Are you seeing any logistical challenges with the more recent COVID outbreak in China? And what's your outlook for inventory availability and levels going into the back half?

Mike Karanikolas, Co-CEO

Definitely. Mike Karanikolas here. We feel really good about our inventory position at the moment. We feel like we're well supplied. Certainly, there have been challenges and we expect there to continue to be challenges for the back half of the year. At the same time, this is really consistent with the environment we've been dealing with over the past two years, and we feel confident in our ability to execute and deliver results regardless.

Operator, Operator

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

Anna Andreeva, Analyst

We just wanted to follow up on the quarter-to-date trend. You said sales are up in the 30s. Should we think it's a similar dynamic like the last couple of quarters that FORWARD is outpacing the growth of the REVOLVE segment? What are you guys seeing with the international business quarter-to-date, just given the macro? And curious if you could talk about how you feel about the pipeline of in-person events ahead for Q2?

Mike Karanikolas, Co-CEO

Yes. So with regards to REVOLVE and FORWARD, we feel really good about the trends in both businesses, and they continue to perform strongly. And then – sorry, what was the second part of the question?

Anna Andreeva, Analyst

International quarter-to-date?

Mike Karanikolas, Co-CEO

All right. International quarter-to-date. Yes. So on a one-year basis, the international is not quite as strong as domestic. On a multiyear basis, we feel really good about the international, and it continues to perform well.

Jesse Timmermans, CFO

Regarding the pipeline of events, we're feeling great that the world is open. So we're back to full strength with our full range of capabilities and a full calendar. REVOLVE festival is a large investment to begin the warm weather season, and there will be other interesting events in Q2. In H2, we will have similar-scale events as REVOLVE festival as we pursue the cold weather season. So, but you'll see a lot more of us. Our customers will see a lot more of us in the rest of the year.

Operator, Operator

We will take our next question from the line of Mark Altschwager with Baird.

Mark Altschwager, Analyst

The active customer productivity metrics have been pretty impressive. I think $488 net sales per active customer on a trailing 12-month basis. Is it your expectation that these higher levels of productivity are sustainable? I guess the key drivers that you've outlined, I think you have them on Page 6 of the slide deck. I mean, they all sound pretty structural, but I'm curious if there's a view that some pent-up demand, does that play here as well?

Jesse Timmermans, CFO

Yes. Mark, this is Jesse. Yes, we're really pleased with the active customer growth this quarter again after several quarters of really robust growth. That said, we have commented in the past that, that active customer growth number will start to come down as we kind of cycle out of those COVID periods of past and active customer growth will converge closer to net sales growth. But to your point, structurally, we anticipate and expect continued productivity from those customers. I think one important driver there is that overlap between the REVOLVE and FORWARD customers, and that FORWARD customer AOV is much higher than the REVOLVE customer AOV. So we see a lot of opportunity there and structurally just really good momentum in terms of customer productivity and retention across the board.

Operator, Operator

And your next question comes from the line of Seth Sigman with Guggenheim.

Seth Sigman, Analyst

I wanted to follow up on the seasonality of the business. I think you did say you expected higher revenue in Q2 than Q1 but not the same seasonal increase that you would typically see. I guess, when you go back to 2019, is there a reason why we wouldn't see a similar 18% type of quarter-to-quarter growth rate? Was there a pull forward or anything else that we should be thinking about here?

Jesse Timmermans, CFO

Yes. No, great question. And we definitely wanted to call that. I think the main point here is that we just had an exceptional Q1, and that sequential growth coming out of Q4 of '21 into Q1 of '22 is phenomenal at that 18%. You didn't see that back in 2019. So kind of balancing between the Q4 to Q1 and then Q1 to Q2 and then just factoring in all the uncertainty out there; we just wanted to provide some caution on that sequential growth but still expect Q2 to be the seasonal high for the year and then with that 30% growth in April. So Q2 to date performing well.

Operator, Operator

And your next question comes from the line of Michael Binetti with Credit Suisse.

Michael Binetti, Analyst

I had a thought similar to Seth's. If we consider the three-year period leading up to the pandemic, the 30% you're indicating for April appears to show a slowdown of about 15 points compared to Q1. I'm not sure why there would be a slowdown since demand seems robust this quarter. Regarding Seth's question, it appears that the latest data is more reflective of the current demand landscape than looking back at the pre-COVID world. It seems to me that the categories you are focusing on are performing well. The festival appeared to have gone quite well. I'm curious if you believe we should consider any seasonal variations beyond Q2. Additionally, is there anything specific from Q1 that might have contributed to some pent-up demand that could be tapering off?

Jesse Timmermans, CFO

Yes, yes. I think the three-year is the most appropriate way to look at it. Going back to 2019, which is the most recent kind of normal period that we had and more similar to 2021 with festivals in both years – or sorry, 2022 of both similar festivals in both years. I think difference being we had a lot of activity early in the current year, starting with the Super Bowl and then heading into Social Club, which then led into a festival. We're a little bit lighter in 2019 in that Q1 period. So there are some seasonal shifts within the quarter and into April. But again, it's really tough to call on what's going to happen out there. So we're cautious, but still really excited with the performance thus far.

Michael Binetti, Analyst

Jessie, I’d like to follow up. You reported revenues about $30 million higher than expected in the first quarter, with EBITDA around $3 million above projections. Should we consider incremental margins for the rest of the year if our revenue continues to exceed consensus expectations? How should we approach flow-through? Is it comparable to what we experienced in the first quarter? Did you advance any marketing initiatives or similar strategies to make a strong impact at the first REVOLVE fest in a few years? Any insights would be appreciated.

Jesse Timmermans, CFO

Yes. I wouldn't factor in too much incremental flow-through looking ahead. I think, in Q1, we didn't feel the full pressure from inflation, fuel surcharges, costs, etc. The return rate was also just sequentially increasing as people started to get back out and started buying dresses again. So I think we'll see some of those pressures continue, and it's still uncertain out there what freight charges and fuel surcharges do for the balance of the year, inflation and everything else that's in the headlines. So again, phenomenal quarter. We continue to invest in marketing and continue to pace those cost pressures. So I wouldn't factor too much incremental flow-through as you look into the back half of the year. And in G&A, we mentioned being at the higher end of that range for the full year.

Operator, Operator

Your next question comes from the line of Lauren Schenk with Morgan Stanley.

Lauren Schenk, Analyst

Similar question as some of the others but on the gross margin line. Obviously, the first quarter gross margin is better than expected. Wondering why perhaps we shouldn't assume that flows through to the full year relative to your comments that you're still expecting flat to down slightly for the full year. And then as a part of that, how are you thinking about the promotional environment for the industry more broadly through the course of the year?

Jesse Timmermans, CFO

Yes. Yes. Gross margin performed really well again this quarter, driven by continued full-price strength, again, really strong this quarter as we've seen in the last several quarters, and that held through Q1. We did see slightly higher markdowns within that markdown mix, a smaller portion, of course, but we did see some offset there. And then back to the plus side, our own brand mix did increase, and those products performed really well in Q1. So recall that we're in at a 20% mix in 2021, so that increased slightly, an increase from the exit rate that we had in 2021 as well. So I think great margin performance. We're holding the full year outlook there as we do anticipate just natural inventory flow through that the full-price mix will come down, that markdown margin will come down as well, just naturally; but great performance in Q1 thus far. And in the promotional environment, we're not seeing anything too dramatic out there. I think there's maybe brand by brand, some incremental promotion. We're not really focused on trying to compete there. We just maintain our cadence and watch the inventory flow through and velocity.

Operator, Operator

Your next question comes from the line of Camilo Lyon with BTIG.

Camilo Lyon, Analyst

On the return rates, it looks like you got back to that 2019 level in that 54% range. But then in 2019, it really does start to kind of decelerate going into the back half of the year. Is that the right way to think about how the return rate should unfold for the balance of the year?

Jesse Timmermans, CFO

Yes, historically we have observed that the full-price and dress mix reaches a peak in the second quarter, with dresses and full-price items showing higher return rates at that time. After that, return rates typically decline for the rest of the year. Assuming a consistent mix and similar seasonality, we can expect to see something comparable this year. However, it's important to note that over the past three years, we have expanded into nearly 10 additional countries, implementing all-inclusive pricing, free shipping, and free returns internationally, which has significantly increased international return rates. This situation is affecting our return rates this year compared to 2019. If we compare the return rates this year to those in 2019, we see an increase of just over one percentage point, primarily due to international factors and new customer service initiatives. On the domestic front and when normalizing for the full-price mix, we actually noticed a slight decrease in return rates. Ultimately, the return rates for the remainder of the year will depend on the mix of full-price and dress items.

Camilo Lyon, Analyst

Very helpful. And then just one final question. If we take a closer look at the metrics you've shared today and consider your consumers' purchasing behavior, are you noticing any signs of decreased spending, such as a reduction in basket size or a shift to cheaper products? Is there anything indicating that inflationary pressures are affecting their purchasing decisions?

Jesse Timmermans, CFO

Just speaking through Q1 kind of results to date, we're not. You can see it AOV at $288. I think it's a Q1 high record. We're seeing the orders per customer checking really well. So just kind of across the board, purchase frequency, the types of products, dresses coming back in a really big way. And then even within dresses, the special occasion kind of going out type dresses. So not really seeing any downturn; but we see that continued overlap between the REVOLVE and FORWARD customer, continuing to increase. So kind of her even moving up the chain a little bit in terms of AOV and purchasing. So not yet; not to say that won't change but so far, so good.

Operator, Operator

And your next question comes from the line of Oliver Chen with Cowen.

Oliver Chen, Analyst

The average order values were impressive. Going forward, what are your thoughts on that dynamic as it applies to dresses and/or the mix? And second, as we think about new customers, what are your thoughts on retention and the retention strategies? I also noticed that you increased performance marketing with IDFA and new customers. Just would love some color on why and why that made sense. And finally, on the more markdown, are there implications for how you're planning inventory given that you have slightly deeper markdowns, I know you're up against a lot of very full-price selling.

Jesse Timmermans, CFO

Yes. Maybe I'll take that first and last one on the AOV and then the inventory, in particular, Mike, for the IDFA performance marketing. So AOV is largely dependent on what mix does in terms of dresses in full price. Again, full-price continues to check. We do expect that just the mix to balance out over the course of the year, especially in the back half of the year, just typical seasonality. But we expect continued strength on that AOV. Again, really strong full price and then calling out that FORWARD REVOLVE customer overlap again with FORWARD, having a 2-plus times AOV than REVOLVE. And on the inventory, we're constantly balancing inventory. And when I say the markdowns were slightly deeper on that markdown, it was slightly and it was natural and expected. So I don't think that has changed anything in terms of how we're planning inventory for the balance of the year. We did stock up ahead of the increased demand and felt really good coming out of last year and into this quarter. We are able to support that robust demand we saw in Q1.

Michael Mente, Co-CEO

Yes, and regarding IDFA, although we are encountering industry challenges, our diverse marketing strategy has generally mitigated the impact more than others. Our brand marketing has performed exceptionally well, and word of mouth has been a significant driver of customer acquisition. However, this will still have some effects, and we can expect fluctuations from quarter to quarter across our various marketing channels.

Oliver Chen, Analyst

Okay. Lastly, it looks like private label has had really good momentum. How do you feel about the capabilities you have there and what we should know relative to the past? And I was also curious about Super down and/or lower average unit retail strategies. FORWARD is doing excellently. But as you think about broadening to lower price points, is that on your radar as well?

Michael Mente, Co-CEO

Michael Mente here. The capabilities over the past two years obviously pulled back and are accelerating, and we have had an incredible quarter, moving forward, there's going to be a big diversity of capabilities in owned brands across price points, across fabrications, and across end uses. As we saw this last quarter, the launch of Active is performing extremely well. And you'll see a lot more things in that nature with a diversified offering. We've been already classically great at something being an out category like dresses and such. And we've really seen that the consumer, not just our own brand but across the board wants to shop a broader selection for us, not just going out, and the festivals and travel due to the pandemic at home, active, beauty, and just to range across the board. So diversely across the board is there which we think ultimately, going back to an earlier question, long-term-wise, we're really optimistic that this will really increase productivity per consumer as we have the broader offering, of course, to integration with FORWARD handbags, shoes, and accessories and all that. When it comes down to low price, the capabilities are strong there, but we think a greater opportunity over the long term is in our core as well as to continue upmarket. I think there's an appropriate balance of low-price product that we have. And I think we've calibrated quite well. But I think it's important for us being premium brands. The real white space is in our core price point, and we think that there's a lot of opportunities to continue to migrate at core price points up over time. So don't anticipate seeing any more higher portions or ratios of low-priced products in the future.

Operator, Operator

And your next question comes from the line of Matt Koranda with ROTH Capital Partners.

Matt Koranda, Analyst

A lot has been asked and answered. I just wanted to discuss the loyalty program and if you could comment on the interaction between FORWARD and REVOLVE in the latest quarter. In the past, you have quantified the number of active customers who shop from both FORWARD and REVOLVE, so I'm hoping you can provide an update on that. Additionally, what benefits do you expect from the events you have planned in Q2 and throughout the rest of this year related to the loyalty program?

Mike Karanikolas, Co-CEO

Yes, it continues to be a huge success for us, and it's really more of the same of what we've been seeing, where we're continuing with each passing month to increase the percentage of active customer overlap between the REVOLVE and FORWARD. I think we last disclosed that it's less than 5% of the business. It's still less than 5%, but it's starting to get a lot closer to that number. And we think long-term, the opportunity is huge. We believe the vast majority of REVOLVE customers shop products that FORWARD carries. And so we're just excited to keep driving that number month after month, quarter after quarter. The loyalty program is a big driver of that.

Operator, Operator

And your next question comes from the line of Tom Nikic with Wedbush Securities.

Tom Nikic, Analyst

I want to follow up on the gross margins. I'm sorry if this was mentioned already earlier, but there was a disparity between the year-over-year changes in gross margin between REVOLVE and FORWARD. I think REVOLVE was up about 100 basis points and FORWARD was down over 100 basis points. Can you help us understand why there was the disparity between the two segments?

Jesse Timmermans, CFO

Yes. Tom, this is Jesse. It's really about inventory timing and FORWARD accelerating faster than REVOLVE last year. If you recall, last Q2, we had a phenomenal quarter for FORWARD. So, heading into that, you had higher full price and then it's kind of transitioning faster on the FORWARD segment than it is on the REVOLVE segment, but still really strong on both fronts.

Operator, Operator

Got it. If I could ask one more question, you mentioned the pop-up store you had, the REVOLVE Social Club. You're clearly performing well online, but is this an indication that increasing physical presence could be advantageous, and might we see more pop-up store events in the future?

Michael Mente, Co-CEO

The pop-up store events are fantastic. They allow us to connect directly with consumers and engage with our community effectively. These events provide an excellent opportunity for us to test new retail concepts. We've learned a lot from the REVOLVE Social Club, and I expect we will have more iterations in the future. Pop-ups can easily be integrated into several of our upcoming events. For example, there isn't currently a pop-up store at REVOLVE, but if executed properly, it could add significant value to future events. We've conducted similar initiatives in the past, and we continue to learn from them. We will definitely see ongoing experimentation and evolution of our current strategies.

Operator, Operator

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

Jim Duffy, Analyst

The traffic growth in the active customers, I recognize this a rolling 12-month metric, but can you comment even directionally on the composition of customers, net new to the data file versus the reengagement of those who may have lapsed during the COVID influence period?

Jesse Timmermans, CFO

This quarter reflected both new and returning customers. We observed a notable recovery among previously inactive customers in the lead-up to Q1, as many had already re-engaged with us. Historically, full-price customers have always performed well over their lifetime, and with a strong mix of full-price sales over the last year, we've seen impressive retention, maintaining the 120% level we achieved in 2021. Additionally, friend referrals have proven to be an excellent source of traffic for us, aiding both retention and attracting new customers. It's encouraging to witness this trend as social activities resume, extending beyond our specific events and into everyday interactions.

Jim Duffy, Analyst

And I wanted to ask how this relates to marketing investment. It seems you're pleased with the return on performance marketing and event spend against prospecting for net new customers. You mentioned pedal down on marketing. As sales came through strong, did you reinvest in marketing? Was this prioritized towards prospecting? And will that be the continued strategy as the year unfolds if sales over deliver relative to the budget?

Mike Karanikolas, Co-CEO

Yes. So Q1 was fantastic for us from a revenue standpoint and from a customer acquisition standpoint. We feel we're getting great returns on our marketing investments in the first quarter. And when we do that, we tend to spend against it. In our view, both are important. We don't view it as one or the other. We think it's important to market both new and repeat customers. But we feel like our results for the quarter were fantastic. And I think if you look at the active customers and the revenue, it really supports that.

Operator, Operator

And your next question comes from the line of Dylan Carden with William Blair.

Dylan Carden, Analyst

Since you're giving this metric about sort of every incremental percentage point overlap between the two brands, I'm just kind of curious how you're thinking about what that ultimate sort of crossover spend could be. And if the sort of the shopping behavior between the two brands is sort of as you expected? I think the idea here was that it would be sort of an accessories FORWARD customer that then rounds out the wardrobe on REVOLVE. Is that kind of spending pattern that you're actually seeing?

Mike Karanikolas, Co-CEO

Yes. That's only the spending pattern that we're seeing. That said, we have a diverse set of customers, so there's plenty of REVOLVE customers who will spend on the dresses and apparel on FORWARD as well. But we think the biggest opportunity is in the handbags, shoes, and accessories. We feel great about our success driving the incremental increases. And yes, every point has a huge contribution to the business. And what's really exciting to us is it's not even about the current size of the business, right? REVOLVE is growing at a tremendously fast rate. So the size of that opportunity is going to grow as REVOLVE continues to grow. So we really just think more big picture in terms of a long-term opportunity in the luxury space, where it's a multibillion-dollar opportunity for us.

Operator, Operator

And your next question comes from the line of Aaron Kessler with Raymond James.

Aaron Kessler, Analyst

A couple of questions. Maybe just on international. I know you mentioned China. Any other regions you would call out kind of positively or negatively? And then labor costs, obviously, have been coming up a lot for kind of e-commerce companies. Anything you would comment there as well?

Mike Karanikolas, Co-CEO

Yes, definitely. So, yes, China with the lockdown, we certainly saw softness in China, particularly in the back half of Q1 and continuing into Q2. In terms of the rest of international, generally quite strong, particularly Canada, as we've mentioned on a number of calls, continues to perform phenomenally with triple-digit growth rates in the quarter. The U.K. also is extremely strong. And in general, I think we are seeing really nice growth across most of our major regions.

Jesse Timmermans, CFO

And then on the cost side, yes, we are seeing incremental pressure there more so than in past years, but we're managing through it, and with that higher AOV, we are able to absorb those costs more than some of the others in the space. So we continue to balance and make up for it where we can through efficiencies like the warehouse automation and other things.

Aaron Kessler, Analyst

Got it. And maybe just on the AOV quickly. How much are you increasing pricing as well on the kind of the same item basis?

Jesse Timmermans, CFO

Yes. On the third-party side, it's largely pass-through. We are seeing kind of, call it, mid-single-digit price increases there. And then on the owned brand side, we go style by style to adjust and make sure it's comparable to that third party, and we're balancing, again, on a style-by-style basis. So, call it in that mid- to high single digits.

Operator, Operator

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

Simeon Siegel, Analyst

Did you guys say how you're thinking about gross margin for REVOLVE and FORWARD over the year embedded within your gross margin guide? And then any way to tell us about inventory units versus the inventory dollars that you're seeing? And then just thoughts on maybe just updating us on your views on inventory turn over the next couple of years.

Jesse Timmermans, CFO

Yes. Let's see. So the first one, margin outlook for REVOLVE and FORWARD. Specifically, we're not providing that in our commentary for the outlook other than to say, we'll keep shooting for that, call it, 55% or slightly lower for the full year. And again, full-price is strong; that dress is coming back with a higher margin strong; owned brands with a slightly higher mix. And then FORWARD has a slightly offsetting impact there with the lower comparative margin to that of REVOLVE. Regarding inventory turns, maybe I'll hit that one next. With the inventory dynamic and stocking up ahead of the demand, we are seeing slightly lower turns than our target, but that is somewhat seasonal, and we expect those to tick up over time. And I think we'd like to see them slightly higher, but really comfortable with the inventory health and where we're sitting and being able to support the demand that we're seeing. And then, on a unit basis, it tracks largely to the dollars. That said, with the increase in FORWARD and FORWARD taking mix over the years and that higher comparative AOV, you do see units slightly lower on a growth basis than you do on the dollar basis.

Operator, Operator

Your next question comes from the line of Trevor Young with Barclays.

Trevor Young, Analyst

At the risk of belaboring the inventory point, obviously, growing north of 75% year-on-year for four straight quarters outpacing revenue growth. I think you mentioned you feel pretty good about inventory levels now. Looking at the slower revenue growth going forward for the next couple of quarters, should we expect that inventory growth to slow a little bit? Or will there still be some build on the new distribution coming later in the year? And then a second one, you mentioned the diversity in marketing channels. Any update on early success or lack thereof using TikTok and how that's comping against Instagram this year?

Jesse Timmermans, CFO

Yes, I'll take the first one there on inventory. Yes, we'll definitely see the year-over-year inventory growth start to moderate. It already has started to moderate kind of on an intra-quarter basis, but especially as we get into H2. And that was anticipated getting ahead of the demand. And then also getting back to a more kind of pre-COVID historical normal seasonality, where the inventory comes in ahead of that peak spring/summer demand that we see right around this time. So I definitely expect that inventory growth to balance, especially in the back half of the year.

Michael Mente, Co-CEO

Yes, we are very pleased with the progress we've made with TikTok, especially at our first REVOLVE festival where TikTok played a significant role for consumers. We made the right investments, resulting in a 25% increase in new followers in just one month, which is remarkable. There is strong momentum, and much of our top-performing cross-channel efforts were driven by TikTok in a more diverse manner than ever before. I am truly proud of the team and our progress, and it is crucial for us to remain focused and maintain this momentum.

Operator, Operator

And we have time for one more question. Your final question will come from the line of Susan Anderson with B. Riley.

Susan Anderson, Analyst

I was just curious maybe if you could talk a little bit about capital allocation with the cash on the balance sheet. I guess, would you ever start to think about returning cash to shareholders? Or is there an opportunity to make acquisitions? Or should we just think about continued investment in the business?

Jesse Timmermans, CFO

Yes. Thanks, Susan. Yes, we are constantly thinking about it. I think number one to call out, which is very capital efficient; it doesn't take a lot to run the business, not a lot of CapEx. Even as we think about this distribution centered in the back half of the year, that will be a very minor investment in terms of capital. So that leaves us with the other alternatives. The next one up is opportunistic M&A. We continue to look at things, think about things. But again, we're very disciplined. When the time and price are right, we'll make a move there. And then we do think about long-term other ways to return capital, such as buybacks and dividends, but that's probably further down the road.

Operator, Operator

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

Michael Mente, Co-CEO

Well, thank you guys for joining us for the quarter. We're very, very proud of the results that were driven. It's been a choppy two years, but we're really at a point where everything within our control is going extremely well and a lot of opportunity ahead. We're prepared for, on a macro level, whatever comes; I think we'll continue to gain strength and gain momentum and I'm quite confident in our competitive abilities in the marketplace. So feeling great and excited for you guys to join us in a few months.

Operator, Operator

And ladies and gentlemen, this concludes today's conference call. You may now disconnect.