Revolve Group Inc

NYSE:RVLV

Earnings Call Transcript 2024-Q1

[Operator]

Good afternoon. My name is Jael, and I will be your conference operator today. At this time, I would like to welcome everyone to the Revolve's First Quarter 2024 Results Conference Call. [Operator Instructions] At this time, I'd like to turn the conference over to Erik Randerson, Vice President of Investor Relations at Revolve. You may begin.

[Erik Randerson, executive]

Good afternoon, everyone, and thanks for joining us to discuss Revolve's first quarter 2024 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 future growth, our inventory balance, our key priorities and operating initiatives, industry trends, our marketing events, our partnerships, our physical retail stores and our outlook for net sales, gross margin, operating expenses and effective tax rate.

These statements are subject to various risks, uncertainties and assumptions that could cause our actual results to differ materially from these statements, including the risks mentioned in this afternoon's press release, as well as other risks and uncertainties disclosed under the caption Risk Factors and Elsewhere in our filings with the Securities and Exchange Commission, including without limitation, our annual report on Form 10-K for the year ended December 31, 2023, and our subsequent quarterly reports on Form 10-Q, all of which can be found on our website at investors.revolve.com. We undertake no obligation to revise or update any forward-looking statements or information except as required by law.

During our call today, we 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.

[Michael Karanikolas, executive]

Hello, everyone, and thanks for joining us today. We had an encouraging first quarter on many levels, highlighted by meaningful gross margin expansion and year-over-year efficiency in our variable logistics costs that exceeded our guidance ranges. The great work by our operations team on the efficiency measures discussed on prior calls enabled us to achieve our first year-over-year decrease in selling and distribution costs as a percentage of net sales in 3 years.

These gains helped us to achieve significant profitability and cash flow in the first quarter, despite a slight decline in net sales year-over-year and the expected increase in marketing spend, due to the timing of our brand building investments in 2024.

Importantly, our net sales trajectory has improved since our last update, when net sales during the first 8 weeks of the first quarter had declined by a mid-single-digit percentage year-over-year. In fact, our net sales returned to positive year-over-year growth during March, and the momentum continued into April when our net sales growth remained positive to begin the second quarter.

Most importantly, we achieved these solid results while continuing to invest in the foundations for long-term success. With that introduction, let me step back and provide a brief recap of the first quarter.

Net sales were $271 million, a decrease of 3% year-over-year. Recall that in the first quarter of 2023, a much larger than normal percentage of our net sales were on markdown as we worked aggressively to reduce our inventory position a year ago. By comparison, in the first quarter of 2024, our inventory health was in a much better place. So the net sales comparison in Q1 2024 reflects increased net sales at full price year-over-year that was more than offset by lower net sales on markdown year-over-year.

Our gross margin expansion in the first quarter powerfully demonstrates the financial benefit of our much cleaner inventory position and a higher mix of net sales at full price year-over-year. Driven by the performance of the REVOLVE segment, our consolidated gross margin increased 250 basis points year-over-year in the first quarter. The margin gains resulted in increased gross profit dollars year-over-year despite the lower revenue.

By segment, REVOLVE net sales decreased 1% year-over-year in the first quarter.

FWRD net sales decreased 15% year-over-year, directionally consistent with external data points, including reports that U.S. luxury spending in March declined 18% year-over-year according to Citi credit card data, the lowest monthly rate in nearly 3 years. We view the luxury industry challenges as an exciting opportunity for Revolve to go on offense and invest in market share capture, supported by our consistent profitability and cash flow generation that sets us apart in fashion e-commerce.

Net income for the first quarter was $11 million or $0.15 per diluted share, and adjusted EBITDA was $13 million. As expected, both profitability measures declined year-over-year, but benefited from gross margin expansion and operating expense efficiency outperforming our guidance ranges.

Importantly, our business continues to generate meaningful cash flow. In the first quarter, we generated $38 million in operating cash flow, increasing our cash position by $28 million in just 3 months, even while we continue to enhance shareholder value through the repurchase of an additional $8 million in shares of our Class A common stock during the first quarter at what we believe were attractive prices.

Beyond the numbers, I'm excited by our team's execution that has led to early progress on the strategic priorities outlined last quarter. Before turning it over to Michael, I'll give you a brief recap on our progress on each initiative.

First, I'm extremely proud that we have delivered efficiencies in our logistics costs year-over-year. Selling and distribution expense as a percentage of net sales decreased 50 basis points year-over-year despite continued pressures from a higher return rate in the first quarter of 2024. Considering the meaningful potential to drive efficiency, if we can contain our return rate, we are extremely focused on initiatives designed to reduce our return rate and make returns more efficient. While not yet visible in our results, under the hood, we see early signs of progress from these tests and initiatives that we intend to scale in the coming quarters.

Some focus areas we are excited about include improved size guidance that primarily leverages technology partners and AR tools, testing of important new measures designed to prevent wardrobing, which refers to a customer wearing a purchase style out for an event and then returning it for a refund or exchange.

And finally, effective last week, we have reduced our window for product returns to 30 days for returns and 60 days for exchanges, consistent with the return and exchange window we have successfully offered for many years prior to the pandemic. You may recall that in March of 2020, after the onset of the pandemic, we increased the window for returns and exchanges to 60 days and 90 days, respectively.

Our analysis of the competitive landscape confirmed that our hassle-free return policy remains among the most customer-friendly in the industry, especially considering that most apparel retailers now charge customers of fee for online product returns. By comparison, we continue to encourage our customers to use the home as a dressing room, with a no hassle free shipping and returns policy, which we have offered since our launch in 2003, making us one of the pioneers of free returns.

Second, we further validated our opportunity to expand our share of walk-through continued expansion of emerging areas such as beauty, men's and home. Net sales in the beauty category increased 34% year-over-year in the first quarter, and our pipeline of coveted beauty brands we expect to onboard has never been stronger.

Third, we continue to expand our international presence, where we have remained focused on further elevating service levels to drive growth. Australia and the United Kingdom offer important proof points of our recent success. Our operational excellence and wide range of logistics partnerships drove shipping and cost efficiencies that enabled us to reduce the minimum purchase threshold for consumers in Australia and the U.K. to receive free international shipping.

As with many of our service level breakthroughs, consumer response has been incredible. We had improved year-over-year growth in both Australia and the U.K. in the first quarter, which helped us to offset a very tough comparison in China. Based on this success, we have already begun to expand this proven model to additional international countries.

Fourth, we remain committed to efficiently investing to expand our brand awareness, grow our customer base and strengthen our connection with the next-generation consumer. As Michael will expand upon, we reimagined the format of a REVOLVE Festival held last month to be even more intimate and exclusive this year while maintaining the elevated brand positioning that is so unique to Revolve. The marketing team delivered an incredible REVOLVE Festival event that generated a greater impact on our key metrics within the 1-day format in 2024 than we had achieved over an entire weekend for last year's REVOLVE Festival event.

And lastly, we continue to leverage AI and other technology to drive the business forward and even further elevate the customer experience. By leveraging AI and machine learning technology to better align product merchandising with customer preferences, we have driven notably higher conversion rates for our curated shops such as our Festival shop, where associated revenue increased more than 50% year-over-year in the period leading up to REVOLVE Festival.

To wrap up, we are pleased with how the year has begun, encouraged by the return to year-over-year growth in March and April, and we are excited about our growth and efficiency initiatives that we believe improve our foundation for profitable growth over the long term.

I would like to congratulate our team on the wins this quarter. We have a lot of work ahead of us, but with your relentless drive and commitment, we are confident in our ability to compete and win together in 2024 and beyond. Now over to Michael.

[Michael Mente, executive]

Thanks, Mike, and hello, everyone. I'm excited by the progress we have made on key priorities, especially the investments we are making in building our brands and continuing to strengthen our connections with the next-generation consumer. We are making the most of the opportunities at this important time to create brand heat and awareness as our core consumer gears up for an active lifestyle of events and travel in the months ahead.

For the seventh year, we held REVOLVE Festival in Palm Springs on April 13 and reimagine format that was better than ever. The more intimately the Resolve Festival this year was incredibly efficient, impactful and buzzing with energy flowing some Y2K theme performers, including Ludacris, T-Pain, Sean Paul and the Ying Yan Twins. Many top A-listers in the desert chose to attend REVOLVE Festival, including actors, musicians, athletes, celebrities and content creators such as Kendall Jenner, Rihanna, Teyana Taylor, ASAP Rocky, Billie Eilish, Megan Fox, Hailey and Justin Bieber, Zay Flowers, DeAndre Hopkins, Nina Dobrev, Lili Reinhart, Sean White, Emma Roberts and Natalia Bryant.

Most impressive is that we delivered our incredible REVOLVE Festival event while spending millions of dollars less than in recent years, and yet we delivered greater impact than before. In fact, press impressions from REVOLVE Festival in 2024 more than doubled year-over-year, while social media impressions also increased year-over-year for the 1-day event compared to last year's REVOLVE Festival event that took place over an entire weekend.

The key to our success is that our powerful Revolve brand consistently attracts the roster of top-tier client creators, brand partners and A-listers who understand that our events give them a unique platform to further strengthen their own personal brands.

Importantly, delivering meaningful efficiency and overall festival investment year-over-year has allowed us to significantly expand our marketing playbook in the second quarter. The 2 weeks after REVOLVE Festival, we hosted a successful activation at the Stagecoach Festival attended by A-Listers, including Post Malone, Tyga and Charli D'Amelio.

We also have exciting activations in the upcoming weeks in Jamaica, St. Tropez and Sicily. All told we are delivering a much broader range of activations in the second quarter in 2024 than in recent years, despite investing a lower percentage of net sales and our marketing investment year-over-year.

We are also continuing to invest in marketing, production and collaboration to drive success in our own brands. While contributions from own brands as a percentage of REVOLVE's segment revenue remains below its long-term potential, we have had some notable recent success that further validates this long-term opportunity.

We recently launched the first capsule of the L'Academie owned brand after Marianna Hewitt became its creative elector. Initial sell-through was outstanding, exceeding our expectations and strategically broadening our range of offerings. The L'Academie brand aesthetic expands our assortment to serve a wider range of our customers' lifestyles, including fashionable everyday essentials for the office.

In collaboration with Marianna as creative director extends our long-standing and successful partnership with her for many years. Marianna is a co-founder of Summer Fridays, a top selling beauty brand on Revolve, and she is one of the top performers in our proprietary Revolve brand ambassador program.

Another owned brand collection that has performed extremely well in recent months is Helsa, a collaboration with Supermodel Elsa Hosk that we introduced in 2022. In March, we introduced Helsa's eighth drop, and it has been one of the most successful owned brand capsules in our history. Of note, Helsa features higher-than-typical price points and has uniquely performed exceptionally well, both from REVOLVE and FWRD.

In fact, Helsa was one of the most search brands in the FWRD site in recent months. This is remarkable considering that FWRD offers some of the most iconic luxury brands in the world.

Another recent launch owned brand that is exclusively available on Revolve and FWRD is our first ever owned brand within our men's offering, Wao. We view expansion into men's as a large and compelling opportunity for growth in the years to come. We were thrilled to see trendsetter Justin Bieber looking stylish, sporting a Revolve polo at our REVOLVE Festival after party last month.

Now let's shift gears to discuss physical retail. Performance of our Revolve stores pop-up shopping experience in Aspen during the the first quarter was incredible, exceeding our initial financial goals. This exciting new channel for engaging customers in real life has been a whole month of brand building, acquiring new customers and even further strengthening our relationship with the brand partners we view our desirable Aspen presence as elevating to their brands.

They have still to partner with us in tackling two attractive customer demographics with a proven appetite for premium on-trend fashion. The Aspen results and feedback have so compelling that we have entered into a multiyear lease to operate our physical retail presence in Aspen. The economics alone are favorable, and even more importantly, we see this as a huge opportunity to expand and elevate our brand in this fashion haven for the rich and famous.

The incredible success in earnings and Aspen have led us to explore other regions where our retail shopping experience may offer similar potential for compelling financial returns and further elevation of our brands. We are excited to continue to test and learn more about physical retail, taking a thoughtful and measured approach consistent with our founder-led and investor first mindset.

We will keep you apprised of our plans and progress with exciting initiatives moving forward.

Now I'll close with an update on the dynamic competitive landscape within the luxury e-commerce sector. Challenges among certain of our luxury e-commerce competitors have further accelerated in recent months. With the resulting discussion affecting luxury and luxury brands creates a compelling opportunity for our profitable and cash generative company like Revolve that capitalize by investing in strategies to gain market share.

We believe there's an opportunity to pursue the millions of effectively abandoned luxury customers that are up for grabs in aftermath the recent industry malaise. We are also renewing our efforts to expand our luxury brand relationships in the current environment.

Beyond our financial strength, that is a huge competitive advantage, luxury brands see forward as a highly attractive partner due to our strength in North America, our product curation, a distinctive design point of view, that is attracted general luxury consumers and our incredible brand marketing engine supported by FWRD creative director Kendall Jenner.

Finally, while many competitors have no choice but to play defense in the current environment, we are aggressively investing in the future to drive revenue and efficiency through expansion in the use of AI. Just an example, in the first quarter, we delivered promising test of leveraging AI technology to intelligently route customer service inquiries that we believe could drive operating efficiency and even further raise the bar on our exceptional customer experience.

Most compelling is that in our testing, our internally developed AI technology solution has outperformed commercially available AI solution we had tested previously.

We have also recently assembled a dedicated internal generative AI team that is building on our early successes in leveraging AI imagery on our website and other digital channels, as well as to expand the use of AI across the business in pursuit of large market opportunity ahead of us.

To summarize, our powerful brands, connection with the consumer and our unwavering focus on the long term, along with our strong financial profile illustrated by the $38 million in cash flow from operations we generated in the first quarter enables us to invest in a multitude of initiatives in pursuit of our long-term growth opportunity ahead of us.

Now I'll turn it over to Jesse for a discussion of the financials.

[Jesse Timmermans, executive]

Thanks, Michael, and hello, everyone. I am pleased with our execution in the first quarter, highlighted by outperforming our guidance for gross margin expansion and selling and distribution cost efficiency, our largest operating expense line item.

I'll start by recapping our first quarter results and then close with updates on recent trends in the business and our outlook for gross margin and cost structure.

Starting with the first quarter results. Net sales were $271 million, a year-over-year decrease of 3%, as growth in net sales at full price was more than offset by a decrease in net sales on markdown year-over-year. REVOLVE segment net sales decreased 1% and FWRD segment net sales decreased 15% year-over-year within a luxury sector that remains challenged.

By territory, domestic net sales and international net sales each decreased 3% year-over-year.

Active customers, which is a trailing 12-month measure, due to 2.6 million, an increase of 5% year-over-year. Average order value, or AOV, increased 4% year-over-year to $299, benefiting from the higher mix of net sales at full price. The higher AOV was more than offset by a 2% decrease in total orders placed to $2.2 million and the year-over-year increase in return rate.

Shifting to gross profit. Gross profit increased 2% year-over-year to $142 million despite the decline in net sales. Consolidated gross margin was 52.3%, an increase of 250 basis points year-over-year and exceeding the high end of our guidance range, driven by our REVOLVE segment. The increased gross margin primarily reflects a higher mix of net sales at full price and lower inventory valuation adjustments year-over-year.

Moving on to operating expenses. Fulfillment costs were 3.5% of net sales, consistent with our outlook and an increase of 23 basis points year-over-year. Selling and distribution costs were 17.9% of net sales, a decrease of 50 basis points year-over-year. That marks the first time in 3 years that selling and distribution costs have decreased as a percentage of net sales year-over-year.

Great execution in reducing logistics costs enabled us to outperform our guidance for selling and distribution cost efficiency despite the higher return rate year-over-year.

Our marketing investment also came in more favorable than expected in the first quarter, representing 15.3% of net sales. The increase of 158 basis points year-over-year is primarily due to a shift in the timing of our brand and marketing investments this year with a very active first quarter.

General and administrative costs were $33 million, consistent with our outlook. Around 40% of the year-over-year increase in G&A expense in the first quarter of 2024 reflects increased variable compensation expense in 2024 and increased stock-based compensation expense year-over-year.

Our tax rate was 26% in the first quarter, up slightly from 25% in the prior year and within our expected range. Net income was $11 million, or $0.15 per diluted share, a decrease of 21% year-over-year.

Net income in the first quarters of 2024 and 2023, each included an insurance recovery within other income. For the first quarter of 2024, the insurance recovery was $2.8 million, or $2.1 million net of tax, equivalent to $0.03 per diluted share.

Adjusted EBITDA was $13 million, a decrease of 12% year-over-year.

Moving on to the balance sheet and cash flow statement. Net cash provided by operating activities was $38 million and free cash flow was $37 million, further strengthening our balance sheet and supporting our commitment to enhance shareholder value through capital allocation. These cash flow metrics decreased 21% and 23%, respectively, versus the first quarter of 2023 when our cash flow benefited meaningfully from favorable working capital movements, including a large reduction in inventory during the prior year period.

Inventory at March 31, 2024, was $202 million, a decrease of 1% on a sequential basis compared to December 31, 2023, and an increase of 6% year-over-year. We continue to view our inventory position in the REVOLVE segment as very clean, consistent with our gross margin expansion year-over-year, and we have made continued progress in rebalancing FWRD inventory.

As of March 31, 2024, cash and cash equivalents were $273 million, an increase of $28 million, or 11%, from December 31, 2023, and we had no debt. The decrease in cash and cash equivalents year-over-year, compared to March 31, 2023, reflects strong cash flow from operations that was more than offset by our stock repurchases in the last 3 quarters.

Our strong financial position enabled us to continue to invest in the business while repurchasing Class A common shares as part of our commitment to enhance shareholder value. During the first quarter, we repurchased approximately 530,000 Class A common shares at an average price of $15.17. Approximately $61 million remained under our $100 million stock repurchase program as of March 31, 2024.

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 the second quarter and full year 2024.

Starting from the top, the return to positive year-on-year net sales growth in March has continued into the second quarter with net sales in April 2024 increasing by a low single-digit percentage year-over-year. Consistent with recent performance during the month of April, net sales comparisons in the REVOLVE segment continued to outperform the FWRD segment year-over-year.

Shifting to gross margin. We expect gross margin in the second quarter of 2024 of between 53.9% and 54.4%, which implies a slight increase year-over-year at the midpoint of the range. For the full year 2024, we continue to expect gross margin to be between 52.5% and 53%.

Fulfillment. We expect fulfillment as a percentage of net sales of approximately 3.4% for the second quarter of 2024, consistent with the fulfillment efficiency ratio in the second quarter of 2023. For the full year 2024, we continue to expect fulfillment costs of between 3.3% and 3.5% of net sales.

Selling and Distribution, we expect selling and distribution costs as a percentage of net sales of approximately 18% for the second quarter of 2024, which implies a year-over-year improvement of approximately 60 basis points. For the full year 2024, we continue to expect Selling and Distribution costs to improve to a range of between 17.8% and 18% of net sales.

Marketing, we have an extremely active calendar of brand-building events in the second quarter, including REVOLVE Festival, our recent activation at Stagecoach Festival and the many international events Michael mentioned.

Importantly, we expect the increased efficiency of our impactful REVOLVE Festival investment in 2024 and our operating discipline to help us achieve marketing efficiency year-over-year in the second quarter. We expect marketing in the second quarter of 2024 to be approximately 17% of net sales, a decrease of approximately 180 basis points year-over-year.

For the full year 2024, we continue to expect our marketing investment to represent between 16% and 16.2% of net sales.

General and Administrative. We expect G&A expense of approximately $34 million in the second quarter. For the full year 2024, we continue to expect G&A expense of between $130 million to $133 million, most likely towards the high end of the range as we continue to invest in the business and through a multitude of initiatives to drive long-term value creation.

We expect quarterly G&A expense in dollar terms to be relatively consistent throughout 2024. Note that this expectation is a change from the variability in quarterly G&A expense during 2022 and 2023 when we had non-routine accruals for 2 separate legal matters that we do not expect to incur this year.

And lastly, we continue to expect our effective tax rate to be around 24% to 26%, both in the second quarter and in the full year 2024.

To recap, we had a productive first quarter, solid profitability and strong cash flow that further strengthened our balance sheet. Our strong financial profile gives us the financial flexibility to invest in the business, pursue strategic opportunities and repurchase common stock to enhance long-term shareholder value.

Now we'll open it up for your questions.

[Operator]

[Operator Instruction] Your first question comes from the line of Michael Binetti of Evercore.

[Michael Binetti, analyst]

I just wanted to see if you could walk us through the market first of April a little bit. Is April -- Jesse, is April accelerating from March?

And I think you gave a little bit of color. I'm curious on the cadence. I'm trying to remember a year ago, if you give us a cadence of how much percent of sales in first quarter versus second quarter was on markdown. I'm just trying to think about how much that comparison changes as you get into the second quarter, considering full price sales are positive now, and it's an encouraging update.

And then I'm curious what would cause the selling and -- you seem to have some line of sight on selling and distribution improvements accelerating in the second half after decelerating a little bit in the second quarter? Maybe just a little bit to help us on the visibility you have there.

[Jesse Timmermans, executive]

Yes. Thanks, Michael. So maybe starting with the March and April trends. I wouldn't say it was an acceleration, deceleration. March closed in positive territory. April, positive low single digits. So on the surface, a slight acceleration.

April did have slightly easier comps. So there's a lot of puts and takes there, and Easter timing shift, I would say. Just nice to have positive growth in 2 consecutive months. So looking forward to the balance of the year.

On markdown, Q1 last year was a low point. We are on significant markdown working through inventory. So there was a significant increase in the full price ratio from Q1 to Q2. Also part of that is just the typical seasonality where we see Q2 at a higher full price mix. So we do expect increase in full price mix as we go from this Q1 into Q2 of this year. And you can see that in the margin guidance as well, not as significant as we saw last year, given the inventory shifts that we were doing, but still an increase there. And optimistic on, again, that growth in full price, not only sales but also customers under the surface.

And then repeat you're selling and distribution one again?

[Michael Binetti, analyst]

It sounds like it's -- so you have it going from -- it was like a high 17% in the first quarter to 18% in the second quarter and then, I guess, 17% to 18% for the year suggests that it starts to improve in the second half as a percent of sales in 2Q a little bit. I'm just -- it sounded like you were pretty happy with what you're seeing there. Maybe just a little bit of help on what you're seeing that should continue to compound on the gains you've seen so far.

[Jesse Timmermans, executive]

Yes. Yes. Great. Yes, really pleased with what we've seen there. And after talking about it for several quarters now, really good to see that come through in the numbers and a 60 basis point decrease year-over-year in Q2. There is some seasonality there, as well, with the higher full price return rate tends to tick up a little bit higher in Q2 just seasonally. So there is an impact on that line item in that Q2 period.

And then to your point, then it gets better in the back half of the year just due to seasonality. And then as these initiatives continue to layer on, we're optimistic about the trend there getting to that full year guidance that we outlined.

[Operator]

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

[Oliver Chen, analyst]

Mike and Jesse, regarding what you're seeing now and the revenue guidance, are you going to continue to see a negative transaction growth? How do you see that evolving along with average order values and as we also look to model the active customer growth. I would love your color on the back half.

Also, as we think about categories, are there any call-outs for better versus worse performing categories? That would be helpful as well.

And then you gave us a lot of color on return rates. How are return rates relative to your expectations? I know it's been a bit of a bumpy line item in terms of the bifurcated consumer and a consumer that's somewhat under pressure.

[Jesse Timmermans, executive]

Yes. Thanks, Oliver. Okay. Starting with the orders and number of transactions there. I guess, important to note that Q1 of last year was a significant markdown quarter for us, so that had an elevated number of orders relative to the sales. So we did comp that this quarter.

We'd expect to see that converge more or less with the net sales as we get to a more normalized place, -- really happy with the AOV trend being up 4%, and that's with beauty being up 34% this quarter. So peeling out beauty, AOV was actually increased much higher than that 4% overall. And we expect to continue to see kind of in that zone in the kind of low single-digit increase in AOV as the year progresses.

Active customers, up 5% this quarter. The growth rate has come down as we've communicated over the last few quarters, and we'd continue to expect that growth rate to come down until we lap out of that really robust customer growth quarter that we had in Q1 of last year, again, going back to that heavy markdown quarter that we had, where drove a lot of customers, lower AOV, higher orders. So until we got out of that period, it's going to be a tougher comp on that trailing 12-month active customer number.

On categories, I mentioned Beauty. That was the -- that was really the start up 34%. On the flip side, handbag, shoes, accessories were down 10%, and handbags, shoes, accessories skews more towards the forward segment. And you could see with FWRD being down 15% relative to that REVOLVE being down 1. Those are probably the 2 big ones to call out on the categories.

And then return rate, I would say it's in line with our expectations. On the surface, it increased probably more than expected. But when you peel that back and look at just a normalized full-price return rate, it was, call it, flattish. So kind of, I wouldn't say pleased yet, but kind of in line with expectations and excited to see how these return rate initiatives play out over the course of the year.

[Oliver Chen, analyst]

Okay. One quick follow-up on artificial intelligence. A lot of great color, and you've been tying the areas of test, read, and react as well as using data-driven dashboards. But as we think about AI and modeling, where do you see the financial impact in terms of merchandise margins or speed or inventory turns or more logical functions. Just would love some high-level thoughts on how that may manifest in value creation.

[Michael Karanikolas, executive]

Yes. I think that can really be an impact all across the board, a contest every aspect of the business. And I think in a couple of different ways, like certainly cost reductions in different areas. But I think when you get cost reductions, you have the opportunity to choose to invest some or all of those cost reductions into better service or better personalization.

So we've talked in the past about how on the imagery side of the business, there's a lot of opportunity to reduce cost. But then again, potentially reinvest it back into [Audio Gap] variants for things that are suited to what each individual user wants to see.

And so we're in the early stages, but we're continuing to make progress and get better and better with our efforts in terms of the quality of what we are able to churn out, how quickly we're able to churn it out and what kind of cost. So we feel great about the product risk there.

We mentioned on the call about some progress on helping route customer, kind of, inquiries, which is a smaller portion, but it just highlights how there are so many different things that can touch. Merchandise margins, as you mentioned, we already think we do a fantastic job managing those, but no doubt AI can unlock further gains on that side of the business, should our efforts continue to yield fruit.

So yes, really excited I think pretty much every aspect of the business has the potential to invest. And we feel great about our investments.

As we noted, while we do keep up with and test the latest and greatest external technology, we also have a really strong internal team that helps us, as well, which often produces better results than those external kind of efforts. It also provides kind of cost savings for us, right? So we're not at the mercy at whatever price some external vendor wants to charge.

[Operator]

Your next question comes from the line of Jay Sole of UBS.

[Jay Sole, analyst]

Mike, you talked about investments in increasing brand awareness, obviously, a lot of marketing. Can you just talk about where you see the brand awareness today, where you think you can get over a year or 3-year period? And how that brand awareness is going to turn into active customers?

[Michael Mente, executive]

I think that looking at the overall market here, just anecdotally, we see stronger indexes, of course, in like the major cities and kind of like the New Yorks and L.A.s But if you look at the global opportunity, this is a global opportunity. We're very, very early scratching the surface.

Historically, almost all of our marketing efforts have been [indiscernible] market, and we still have a long way to go there, but also look out elsewhere, we're just barely starting that journey very soon.

[Jay Sole, analyst]

And maybe if I can add one about logistics. Obviously, you talked about improved size guidance and preventing wardrobing and things like that. Do you have like a big picture sort of goal as to where you want to return rate to go? I mean, you talked a little bit about it on the other questions, but if you could just elaborate on that sort of bigger picture, where you think you can get it to, that would be helpful.

[Michael Karanikolas, executive]

Yes. There isn't a specific number we're looking to drive it to. Instead, there's kind of directional parameters in terms of what we're trying to accomplish. So we always want the home to be the dressing room. We understand no matter how much we improve the technology and the communication of information to the consumer, there will be a substantial number of returns. But we would like to get it meaningfully lower than where it's at today in the right ways that are neutral or beneficial to customer experience. And so we're already starting to see some success.

With some of the things we're working on were really helpful about a lot of the things that we have in the works. And so we'll see where that takes us, but this is going to be a multiyear journey with hopefully some big impact in the current year along the way.

[Operator]

Your next question comes from the line of Mark Altschwager of Baird.

[Mark Altschwager, analyst]

First, I was hoping to get a bit more color on the REVOLVE versus FWRD trend that you're seeing so far in the second quarter, that positive inflection. Is that happening across both segments?

And then international, that has been outperformiing in the U.S. in recent quarters. I think Q1 looks like it was more in line. Any surprises there? And maybe just speak to any trends you're seeing by region you'd like to call out?

[Jesse Timmermans, executive]

Yes. Mark, number one on the REVOLVE versus FWRD trend in April. I think as we mentioned, it's largely consistent with how we exited the quarter. REVOLVE positive FWRD, not yet, but good traction on the REVOLVE segment. And some of that goes back to the point we made in the prepared remarks around just luxury being so challenged -- challenged, aspirational consumer and still working through the inventory, while making progress on the FWRD side.

And then domestic versus international. Yes, on the surface, both down 3%. But keep in mind that international last year had a much more difficult comp. International last year in Q1 was plus 16% versus domestic minus 5%. So kind of normalizing for that, good international results and really solid growth, really, across the board outside of China, which was negative.

[Mark Altschwager, analyst]

And I wanted to follow up on marketing. It sounds like you're pleased with the results you're seeing with the evolving strategy. What are the key learnings so far and implications for the business moving forward as you look to engage with new and younger customers.

And maybe -- I'm sorry, quantitatively, it doesn't seem like you're looking for much efficiency in the back half of the year. Can you just walk us through what's different in the back half versus how you're approaching Q2 where you seem to be guiding to fairly material efficiency?

[Michael Mente, executive]

Yes. I think the one thing that we're really noticing which is really encouraging is that we are confident that our customer knows that in certain zones -- we're very strong in dresses, very strong warm weather, very strong in vacation. But she's also eager and anxious to hear from us in other places. So as we invest in energy and marketing dollars in other places, we see a great connection with the customer a great efficiency and message being received very well.

Which kind of leads directly to the back half of the spending, which I think Jesse can get into in a little more detail.

[Jesse Timmermans, executive]

Yes. Yes. To your point, Mark, lower in the back half of the year relative to the first half of the year, again, in Q1, we saw that call it, 160 basis point increase. Q2 for our guidance down 180 basis points. So then in the back half of the year, call it, roughly consistent with 2023. But keep in mind, we're always opportunistic in there, so timing shifts with the brand marketing activation. So quarter-to-quarter, there could be some volatility. But if you look on a kind of 2H basis, call it roughly in line to get to that full year in the 16% to 16.2% versus 16.1% last year.

[Operator]

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

[Anna Andreeva, analyst]

Great. Great to see positive trends in the business. Two quick ones from us. On inventories, I think you said REVOLVE inventories are pretty clean. Can you just talk about your comfort level at FWRD? And at which point do you think inventories there will be closer with the sales trend?

And then secondly, on return rate. You mentioned green shoots a couple of times. So should we expect improvement in return rates in the back half as some of these initiatives scale up?

And I think in the past, you've said that each percentage change in return rate is equal to about 20 basis points on selling and distro on an annual basis. Just curious if that's still the right math.

[Jesse Timmermans, executive]

Yes. Thanks, Anna. On inventory, we feel really good about the REVOLVE inventory, and that shows in the full price mix and a really solid margin. Quick note on that margin. It's 2 points higher on REVOLVE than it was in 2019 with, call it, half the own brand mix. I think that just goes to show the real strength in REVOLVE inventory and full price margin.

FWRD, we are making good progress. We still have some work to do. I'd say, well, I think targeting midyear before we feel kind of balance there, not to say that sales and inventory will exactly match, but we'll feel good about the balance.

And also important to note that, that inventory of plus 6%, most of that increase is coming from that clean REVOLVE segment as we're leaning in there. FWRD just slightly positive year-over-year. So overall, I feel good, REVOLVE strong. Still some work to do on the FWRD.

On return rate, we are optimistic about all the work going into that and the changes we've made, some green shoots. We're not baking in any of those improvements into the guidance or into our modeling. We're still modeling that kind of flat to last year, and then hope for better than that, but not counting on it yet.

And did you have one third one?

[crosstalk]

It's a little Yes, a little north of that. It's kind of in the 30% to 50% if you include both fulfillment and selling and distribution combined. So on those 2 line items.

[Operator]

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

[Janine Hoffman Stichter, analyst]

So I wanted to ask about FWRD, understanding we're going through some challenges right now in the luxury or the aspirational luxury market. But how do you think about taking advantage of that dislocation that you mentioned with some of the other online e-commerce players and just leveraging your strong balance sheet here to take advantage of that.

[Michael Karanikolas, executive]

Yes. I think there's a couple of different ways. Certainly, with all the disruption and the business is in turmoil. We're on the lookout for strong people from those companies. We're on the lookout for opportunities potentially take market share and revenue share. And then in some cases, we're looking at some of those asset opportunities themselves. So there's certainly a lot of opportunities, I think, offset obviously by the short-term weakness that's continuing in terms of that aspirational luxury consumer.

And so we'll have to see how it all plays out. Again, things are tough, but we think over the long term, that kind of disruption and the damaged brands that come out of that, that are likely losing significant share. It leaves an opportunity for others to take advantage of. So we're hopeful that we can start to take advantage of that in a bigger way and hopeful that we can exit the year with some momentum there.

[Janine Hoffman Stichter, analyst]

Great. And then just on physical retail, it sounds like the few experiences that you've launched this year have gone really well. So just any update to how you're thinking about potential further total retail pop-ups.

[Michael Mente, executive]

Yes. The experience in Aspen was like a real eye opening really encouraging. Sales strong, obviously, we're probably very strong. Obviously, we return rates [indiscernible] compared to online. New customer acquisition was incredible. So we thought that, wow, this is a huge, huge lane for us. We've, of course, been focused on the online market for the past 2 decades.

But looking at the ultimate potential where the business can be, we really see an opportunity with physical retail. We do recognize that it is an adjacent business, but it is a different business and our early wins are very, very encouraging. So we're definitely putting a lot of -- at this point, I would say, more energy and focus, but not dollars toward jets yet. We're really trying to build the muscle, and really trying to get smarter. But ultimately, over the long term, we think it's a massive opportunity for us.

[Operator]

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

[Simeon Siegel, analyst]

Just to follow up briefly on the quarter date again. So just with the positive inflection in net sales, a function of just now having lapped through the prior year markdown selling? Or do you see improvement in full price selling as well? Sorry if I missed that.

And then I know the trailing 12-month dynamic is something we -- at least I get tripped up on. But could you elaborate on your thoughts on the gap between the ongoing customer growth versus the order count and revenue trajectory? Just trying to think like are you seeing fewer orders per customer? And if so, any thoughts as to why and when that should more closely converge?

[Jesse Timmermans, executive]

Yes. Yes, sure. On the full price dynamic, in addition to the shift in full price sales, we are seeing an increase just like-for-like in full price sales, offset, of course, by just a significantly lower markdown sales.

And that continued into April, not to the extent of Q1, but still healthy. And the majority of the customers are full price, even in those heavy markdown periods, so optimistic there, and those are really strong customers for us, which leads into your customer question.

Again, Q1 of last year was a really heavy customer add quarter, with the heavy markdowns. So until we lap out of that, the active customers will be challenged. Orders per customer are down year-on-year kind of from those peaks that we saw in '21 and '22. And then also just, again, a heavy order activity in Q1 of last year, but still higher than 2019.

So we're seeing overall just good, healthy, active customer behavior. It's just working through these volatile comps.

[Simeon Siegel, analyst]

Okay. So just any thought when the active customer growth will more closely align with order growth or revenue growth, whichever way we want to look at it?

[Jesse Timmermans, executive]

Yes. I think it's really kind of Q4 this year, Q1 of next year.

[Operator]

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

[Rakesh Patel, analyst]

Great progress, guys. Can you provide color on what percent of your returns happen outside of that 30-day window right now and what that looked like before the policy changed during COVID? I know your assumptions are for this to not be that much of a needle mover this year. But just curious where you see this mix settling.

[Michael Karanikolas, executive]

Yes. It's a fairly significant portion of the returns that occur outside 30 days. It's a minority, but it's a substantial portion, and that portion has increased over time. So we'll have to see what kind of impact the return policy has.

We're certainly hopeful there could be some level of impact, but I think it's one of those things where you certainly can't say with any confidence whether there'll be a positive impact or not until you roll it out. So we'll have to see what kind of impact it has on the overall return rate.

[Rakesh Patel, analyst]

And it sounds like you're making good progress on owned brands. I know national brands have been more of a focus over the last couple of years, but just curious how we should think about a potential acceleration for owned brands and whether that's something that could be a needle mover this year.

[Jesse Timmermans, executive]

Yes. As the business has been stable over the past year or so -- or about, call it, 18 months, as we have taken down old brand style delivery, we're starting to be a little bit more opportunistic. We haven't really planned for the acceleration at this point. We think now we're in a really, really healthy position to really start to think about expansion once again.

The inventory has been cleaned up, and the new brands are performing extremely well. So I think we're -- and hopefully, a near a tipping point for us to advance that saturation.

[Operator]

Our last question comes from the line of Janet Joseph of JJK Research Associates.

[Janet Joseph, analyst]

Congrats on the progress. I just wanted to ask about FWRD. You're saying that the handbag and accessories business continues to be weak. So I was wondering if you could discuss any strategies in place to -- in terms of assortment architecture, where you think that these comp declines can moderate? And if there's a possibility that they could flatten out or even some positive as the year goes along.

And I was wondering about opening price points there. We're seeing some of the luxury brands tweak down their opening price points. And I was just wondering how you're thinking about your assortment in terms of categories and about your pricing.

[Michael Karanikolas, executive]

Yes, definitely. Yes. So handbags, as we noted, have been particularly challenged. I think you're spot on that a lot of the price increases that the luxury brands have put in over the past couple of years have put a crimp on demand. And so as consumers continue to adjust to the new normal and hopefully, as luxury brands start to rationalize price in kind of a more accessible way. We're certainly hopeful we'll start to see that turn.

And then obviously, comps are a big deal also. So even without those changes, just hopeful as comps get a bit easier, that we'll start to see some better momentum in the FWRD business as we exit the back half of the year, especially with all that disruption and opportunity and revenue share loss from those disrupted brands.

[Janet Joseph, analyst]

Okay. Anything on assortments and how do you think they should be better positioned?

[Michael Mente, executive]

Yes. From the uncertain perspective, we're really thinking a little bit more expansion. I think it's not really just -- it's a lot of the core, say, categories per se, but kind of end use and functionality and being meaningfully different. So I think that's really where heads our focus is -- really tapping into the other aspects of lifestyle, but beyond the [indiscernible] lifestyle, which loves us already.

[Operator]

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

[Michael Karanikolas, executive]

I want to thank everyone for joining us today. Thank you to the REVOLVE team for all the great progress we've made through this quarter. We feel great about the trends, particularly exiting the quarter, progress made on margin and sales. And we're excited to hopefully continue the building momentum throughout the rest of the year. So thank you.

[Operator]

This concludes today's conference call.