Revolve Group Inc

NYSE:RVLV

Earnings Call Analysis

Company Navigates Challenging Macroeconomic Landscape

Net sales dipped 4% year-over-year to $258 million in Q3, less than the 6% fall in Q2. U.S. sales slid 5%, while international sales dropped marginally by 1%. High growth in Mexico was counterbalanced by declining sales in Australia and China. The luxury-oriented FORWARD segment saw a 14% decline, reflecting the overall contraction in luxury spending. Inventory rebalance achieved within REVOLVE, but FORWARD's composition is suboptimal due to industry challenges. Active customers surpassed 2.5 million with increased new customer growth, yet average spending per active customer has decreased. Net income plummeted 73% year-over-year to $3 million, influenced by legal accrual costs. Strong cash flows resulted in a 33% increase in free cash flow to $11 million, supporting a $12.6 million stock buyback. Gross margin pressures persist due to a lower mix of higher-margin owned brands, highlighting the potential for margin expansion through own brand growth.

Active Customer Growth Amid Decreasing Sales and Earnings

Despite facing a challenging consumer discretionary spending environment, the company managed to grow its active customer base by 52,000 in the third quarter, crossing the 2.5 million milestone with a 12% increase year-over-year. However, net sales dipped to $258 million, marking a 4% decrease from the previous year. The REVOLVE segment saw a modest 2% sales decline, while the Forward segment experienced a steeper 14% drop. Average order values fell by 7% to $299, contributing to the decrease in net sales amid an elevated comparison of $320 from the prior year's quarter. This was also a period where customer orders increased by 9%, highlighting contrasting trends within the company's operational metrics.

Gross Margin Shrinks while Inventory Improves

The Consolidated gross margin slid by 127 basis points to 51.7%, slightly missing their guidance, owing to a lower proportion of full-priced sales and a decrease in owned-brand sales within the REVOLVE segment. This decline overshadows the company's successful effort in inventory rebalancing, where inventory levels dropped 5% year-over-year, outpacing the net sales decline. The company is focusing efforts on optimizing the Forward segment inventory following some progress in the REVOLVE segment.

Surge in Operating Expenses Offsets Marketing Efficiency Gains

Notable was a better-than-expected marketing efficiency, leading to a decreased marketing investment to 15.4% of net sales. However, these gains were negated by increased fulfillment and selling and distribution expenses, which climbed to 3.6% and 19% of net sales respectively. The jump in these costs was attributed to a higher return rate, diminishing average order values, and the escalated costs associated with operating an expanded fulfillment network.

Financial Health: Strong Cash Flow and No Debt

Despite the headwinds in net sales and margins, the company boasted an uptick in its financial health, with net cash from operating activities and free cash flow rising by double-digit percentages year-over-year. A new $100 million stock repurchase program was initiated, already seeing the acquisition of approximately 907,000 shares at an average price of $13.87 per share. Importantly, the company maintains a robust liquidity position with $267 million in cash and no debt.

Forward-looking Statements: Margin and Cost Structure

Looking ahead, the company expects some improvement in the gross margin for the fourth quarter of 2023, anticipating it to lie between 51.7% and 52%. Fulfillment costs are projected to remain around 3.6% for the fourth quarter, with similar figures expected through the end of the year. Selling and distribution expenses are forecasted to remain consistent at 19%. The company is also looking to make strides in 2024 by leveraging efficiencies in its global shipping and logistics operations. General and Administrative expenses are set to rise due to a $6.6 million legal matter, yet the marketing investment is expected to stabilize between 16.2% to 16.3% of net sales.

Challenges and Resilience

The company's agility in facing ongoing challenges such as the impact on sales due to the war in Israel, particularly in the Middle East, is noteworthy. They remain committed to long-term strategic investments to bolster competitive advantages and shareholder value while navigating a fluctuating market landscape. A focused cost management approach coupled with an expectation of facing more challenging net sales comparisons in November and December positions the company on a path of prudent growth and operational efficiency.

Earnings Call Transcript 2023-Q3

[Operator]

Good afternoon. My name is Julianne, and I will be your conference operator today. At this time, I would like to welcome everyone to Revolve's Third Quarter 2023 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Erik Randerson, Vice President of Investor Relations at Revolve. Thank you. Please go ahead.

[Erik Randerson, executive]

Good afternoon, everyone, and thanks for joining us to discuss Revolve's third quarter 2023 results. Before we begin, I'd like to mention that we have posted the presentation containing key 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 and profitability and ability to generate cash flow, macroeconomic industry trends, our competitive position, our business, operations and marketing initiatives and investments, average spending per active customer category expansion, international expansion, our inventory balance and management 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, 2022, 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. I will begin with a recap of our third quarter results, followed by updates on some key operating priorities and multiyear growth initiatives, consistent with our focus on investing for the long term to maximize shareholder value. .

Net sales decreased 4% year-over-year to $258 million in the third quarter, a slight improvement from the 6% decline in the second quarter of 2023. We believe spending on discretionary products by our consumer demographic is being pressured by many factors, particularly in the U.S., including persistent inflation compounded by higher interest rates, reduced savings and significant uncertainty in the macroeconomic and geopolitical climate. Net sales in the U.S. decreased 5% year-over-year, and net sales in international markets decreased 1% year-over-year. The relative outperformance in international was driven by exceptional growth in Mexico. It was offset by declining sales in Australia and China, two regions impacted by economic challenges and currency headwinds.

By segment, REVOLVE net sales decreased 2% year-over-year with going out styles like dresses detracting from growth against difficult comparisons. It's important to keep in mind that as previously shared, we have operated with new inventory buys down by a mid-teens percentage year-over-year to the first three quarters of 2023. A highlight of the REVOLVE segment is our accelerated growth in Beauty net sales that validates our long-term opportunity for category expansion. Michael will talk more about this exceptional execution of our beauty playbook in his remarks.

Forward net sales decreased 14% year-over-year. within the luxury sector that is recalibrating after two years of extraordinary growth coming out of COVID. Aspirational luxury consumers who were flushed with cash 18 months ago just don't have the same capacity to spend in the current environment. As a relevant benchmark, Bank of America recently reported that its credit card data reflects a 16% year-over-year decrease in luxury fashion spending by U.S. consumers in the third quarter.

As we entered the year, a top priority was rebalancing our inventory. We achieved this objective in the third quarter as the spreads between our year-over-year inventory and sales trends were favorable in the third quarter for the first time in more than two years. This very important milestone was driven by the Revolve segment. where the year-over-year decline in inventory was steeper than the year-over-year decline in net sales by several points.

Shifting to the forward segment. While I'm thrilled with our successful effort to rebalance total company inventory, which has been beneficial to cash flows, the composition of our forage segment inventory is not yet optimal. As mentioned on previous calls, it will take longer to fully rebalance inventory forward, considering the current challenges in the luxury industry as well as markdown restrictions from luxury brands that extend the time frame from rebalancing our forward inventory. Moving to key metrics. As the company passionate about serving our customers incredibly well, I'm excited and proud that we crossed the 2.5 million active customer threshold in the third quarter. Notably, active customers increased by 52,000 in the third quarter, 53% higher than our growth in the second quarter of 2023. The improved results benefited from year-over-year growth in new customers and an efficient cost of acquisition that declined year-over-year. Most gratified is that our Net Promoter and customer satisfaction scores were higher than in any prior third quarter for at least fice years.

Not surprisingly, average spending per active customer has decreased year-over-year in the current environment, yet we hear loud and clear that our customers absolutely love REVOLVE. We view the lower average spending per active customer is a temporary dynamic that will normalize over time as the environment improves. Shifting to profitability. We are proud to be one of the only fashion e-commerce companies that generates consistent profitability and cash flow a meaningful competitive advantage that allows us to invest through business cycles.

Net income was $3 million or $0.04 per diluted share, a decline of 73% year-over-year that was negatively impacted by an accrual for a pending legal matter equivalent to $0.07 per diluted share. Adjusted EBITDA was $9 million, a decline of 46% year-over-year, which reflects a lower gross margin and continued pressure on selling and distribution and fulfillment expenses, primarily due to the higher return rate year-over-year partially offset by increased marketing efficiency.

Very important is our ability to continue to generate strong cash flows. Cash generated from operations and free cash flow were $12 million and $11 million in the third quarter a year-over-year increase of 25% and 33%, respectively. Our strong balance sheet enabled us to confidently invest our free cash flow into our $100 million stock repurchase program announced last quarter without sacrificing investment in the business. We deployed $12.6 million to repurchase approximately 907,000 shares of Class A common stock during the third quarter at an average cost of $13.87 per share.

Since we view the current environment as a near-term headwind and remain confident in our longer-term opportunity to drive growth and profitability, we view stock repurchases as an attractive and accretive use of our capital. Moreover, in a time when many fashion e-commerce periods have significantly reduced investment to limit their cash burn, our long-term mindset, strong balance sheet and consistent cash flow generation give us the confidence to continue to prudently invest throughout the cycle.

Our long-term approach to investment decisions should allow us to emerge in an even stronger competitive position when the environment improves.

With that in mind, I will now offer updates on our important growth and efficiency initiatives that we believe will further strengthen our foundation for profitable growth over the long term.

We remain extremely committed to driving cost efficiencies within our global shipping and logistics operations. The successful launch I discussed last quarter of consolidated customer return shipments from Canada to the U.S. and local refulfillment for certain product returns in the U.K. have reduced costs as intended but were overshadowed in our financials by the higher return rate year-over-year. Building on our early success in the coming months, we plan to extend our local refulfillment of certain product returns to Europe. We expect this initiative to reduce shipping costs and provide even faster service for our valued European customers.

I'm also excited by our innovation in establishing alternative shipping arrangements in certain U.S. regions that reduced our shipping costs in these regions, even further improved shipping time lines, particularly on the weekends. It is early days, yet we see great potential for our many initiatives to drive efficiency and even further improve on our exceptional service levels. With the increase in return rate year-over-year being such a headwind on our financial results, I'm spending a great deal of time and focus with the team on initiatives designed to reduce the return rate and make returns more efficient.

A recent survey on our product returns indicates that nearly 2/3 of returns relate to size and fit, validating our opportunity to move the needle over time as we believe we can leverage technology to do a much better job communicating the fit and sizing before the purchase. Some early results are promising. The virtual try-on and size comparison feature tool launched last quarter on board for handbags and accessories has shown excellent results in reducing return rates for customers who engage with it. We are planning to meaningfully extend the tools availability and have recently launched it on the REVOLVE site as an AB test.

We have also recently launched product videos on the product detail page for several brands and very soon, we will launch product fit guides to test additional efforts to reduce the size and uncertainty. If these efforts prove successful, the financial benefit should be compelling. Consider that for every 1 point decrease in our return rate, we would expect to realize cost savings of approximately 30 to 50 basis points in reduced selling and distribution and fulfillment costs. a reduced return rate would also drive higher net sales due to a lower percentage of orders being returned. We are also very focused on further expanding our capabilities and growth opportunities within owned brands.

As shared on recent earnings calls, the softening consumer demand in recent quarters has led us to be more conservative in planning our own brand inventory buys since own brand require a deeper inventory commitment per style than our third-party brands. the lower mix of owned brands year-over-year is a driver of the gross margin decline I mentioned since own brands have a much higher gross margin. Nonetheless, we are excited by and continue to invest in the long-term potential in own brands. which offer huge potential for product differentiation and margin expansion. Consider that our REVOLVE segment gross margin of 55% reported today was in the same zone as REVOLVE segment gross margin in the third quarter of 2019 even though the owned brand mix of the REVOLVE segment net sales in the third quarter of 2023 was roughly half of the owned red mix in the third quarter of 2019. This comparison illustrates the opportunity to drive margin improvement from own brand expansion in the coming years if we can continue to raise the bar through our ongoing investments.

Lastly, we continue to expand the use of AI and machine learning across several key areas of our operations to drive growth and efficiency, excited about our current application of AI technology that allows our customers to visually search for similar styles without any keywords. Currently in beta testing, the compelling user experience is especially relevant for driving discovery among the tens of thousands of styles on REVOLVE. We are also gearing up to launch a personalized recommendation ending page for returning customers. Leveraging outstanding development work by our data science team to tap into our deep data insights. We believe the increasingly personalized site experience will provide a more engaging and rewarding shopping experience and based on prior efforts could lead to improved conversion rates.

I am pleased with our team's execution on these important initiatives that are key building blocks for our continued long-term growth and profitability. In summary, while we face a multitude of challenges in the current environment, we will remain on offense. We continue to focus on our competitive advantages of technology innovation operating efficiency and brand building to guide us through these uncertain times as we invest in the long-term opportunity ahead of us. Now over to Michael.

[Michael Mente, executive]

Thanks, Mike, and hello, everyone. It is the challenging few quarters contending with the macro environment and cycling through comparisons against a period of pent-up consumer spending coming out of COVID. A development benchmark, consumer sentiment in the U.S. is currently 64, which is well below the consumer sentiment during the depths of COVID. Nonetheless, as CEOs of a growth company, Mike and I are not satisfied with our current results. Even within the current difficult macro environment, we expect to outperform the benchmark as we have for most of the 20 years since we've done the Revolve. We have some work to do. Our team is up to the challenge, and I feel great about our early progress on growth initiatives and strategies that we believe offer exciting potential for our future. .

Our long history of operating the business is has taught es that periods of macro challenge can often present opportunity for market disruption. With a strong financial position, our fast pace and nimble operating structure and our innovative entrepreneurial mindset, we believe we are well positioned to drive improved results.

So I will provide an update on what has me excited about our future. First, we have some impactful and innovative brand marketing activations in the works for the fourth quarter and into early 2024 that I'm truly excited about. An important element of our brand building and our event tank strategy is to stay nimble, be relevant, fashion exciting. Our marketing plans for the fourth quarter and into early 2024, capture the strategy and our efforts to drive the greatest impact from our passionate community of consumers, influencers and brands.

One of our cornerstone brand selling events in the fourth quarter will be in an international region where we see a great deal of opportunity for future growth in the years ahead. This follows on the heels of a highly successful activation weeks ago where our third quarter sales and customer growth were again truly exceptional. Help to Buy further advances in service levels that drove another exceptional quarter of triple-digit growth in new customers. As we exit the fourth quarter and extending into 2024, we have a number of activities planned using both Revolve and for that we are very excited about. We will share more details on these plans at a later date.

We are also leveraging our core competencies and disruptive marketing and technology innovation to drive results and lay the foundation for future growth. Mike talked about how we are averaging AI for personalization and visual search on our website. Beyond this, it is important to understand that we are testing the use of AI broadly throughout the organization and an effort to drive growth and efficiency. In the coming weeks, we will also be experimenting with AI design images on our website and mobile app which is successful to proved to be a real game changer. We see many more applications for leveraging AI and the marketing well, building on the success of our innovative AI billboard campaign launched earlier this year.

Finally, on Friday, we will launch [indiscernible] REVOLVE from three emerging designers featuring new collections that were created entirely using AI design, produced by the three winners of the first ever AI fashion wee,k, looks are incredible and will be exclusively available for sale in Revolve.

And as a company known for leading innovation in social channel, it is exciting to see our collaboration with TikTok shop, showing a great deal of promise in the early stages. Net sales generated from TikTok increased meaningfully in the third quarter compared to the second quarter of 2023. Even though we only made available a limited selection of products on TikTok shop.

A key contributor to assess is our proven ability to create compelling content for social channels and engage with influencers to drive awareness and impact, combined with the conversion-driven nature of the TikTok platform.

Looking forward, we see an exciting opportunity to further leverage our experience in the TikTok platform and expand the range of REVOLVE products and categories that will resonate with a large audience of Gen Z consumers and on content creators on TikTok.

To capitalize on the exciting growth potential within this new channel, we recently launched a series of live streaming content videos, intending to further engage the Tiktok community with product insights, [indiscernible] and exclusive offerings. We also recently launched a dedicated TikTok beauty account with beauty specific content that will also have a beauty-focused store within TikTok shop.

Beauty is a great carat concerning that TikTok has a fanatical beauty community and that beauty is ideal for influencers to create compelling educational video content. For years, the viral nature of TikTok has been a powerful catalyst for the beauty category. And now with TikTok shops, consumers can discover and purchase products in 1 place.

Speaking of Beauty, I will wrap up the commentary on newer categories where we continue to see a lot of growth potential. The men's and beauty categories achieved strong double-digit sales growth in the third quarter, further validating our opportunity for category expansion. Beauty was the standout performer, so I'll focus my remarks here.

Beauty net sales increased 45% year-over-year and expanded to 4% of net sales from 3% in last year's third quarter, helping to offset the current softness in our apparel categories. Our team has done an incredible job executing, improving all aspects of the beauty business and bringing on impact on newbie brands to help drive the 36-point improvement in our year-over-year growth rate compared to the second quarter of 2023. Most exciting is our momentum in the checking intact new beauty brands, which is even stronger entering the fourth quarter.

In October, we added a full range of products in 1 of the most coveted beauty brands, Laura Mercier to both REVOLVE and FORWARD. This is a huge win that we believe may help build momentum in tracking other top duty brands. Also earlier this month, we extended our top zone by brand on reval, Charlotte Tilbury to list on store as well. And right away in the first week, Charlotte Tilbury became our top-selling beauty brand on board. We expect several more impactful beauty events to launch in the coming weeks just in time for the holidays.

Our goal is to become the preferred beauty destination for our customers. A big part of achievement this goal is having the right selection. We believe that as we continue to optimize our beauty assortment, our loyal customers will buy more and more duty from us because we have under addressed through our brand curation and best-in-class customer experience. We are off to a great start with the brand additions I mentioned and a healthy pipeline of brands interested in partnering with us in 2024.

In closing, while we continue to face challenges in the near term, our team is energized by the opportunity to drive improved results across a wide range of longer-term initiatives that leverage the core competencies that have served us well in the past 20 years. I want to express the heartfelt thanks to our talented team for their incredible efforts and persistence, particularly in the last few years. Now I'll turn it over to Jesse for a discussion of the financials.

[Jesse Timmermans, executive]

Thanks, Michael, and hello, everyone. I'll start by recapping our third quarter results and then close with updates on recent trends in the business and commentary on our cost structure as we look ahead.

Starting with the third quarter results. Net sales were $258 million, a year-over-year decrease of 4% within an environment for consumer discretionary spending that remains quite challenging. REVOLVE segment net sales decreased 2% and Forward segment net sales decreased 14% year-over-year in the third quarter. By territory, domestic net sales decreased 5% and international net sales decreased 1% year-over-year. Active customers, which is a trailing 12-month measure, increased by 52,000 customers during the third quarter. Our active customers crossed the 2.5 million customer milestone for the first time, an increase of 12% year-over-year. Our customers placed $2.1 million orders in the third quarter, an increase of 9% year-over-year.

The increase in orders placed was offset by a decrease in average order value, or AOV, and the year-over-year increase in the return rate. AOV was $299, a decrease of 7% year-over-year against an elevated AOV comparison of $320 in the third quarter of 2022 that was the highest we have ever reported.

Shifting to gross profit. Consolidated gross margin was 51.7%, slightly below our guidance range. The decrease of 127 basis points year-over-year primarily reflects a lower mix of net sales at full price and the lower mix of owned brand net sales within our REVOLVE segment compared to the third quarter of 2022.

As you can see from our segment gross profit disclosures, the year-over-year comparison for segment gross margin is more favorable at REVOLVE than forward. which reflects the great progress we have made rebalancing the Revolve segment inventory. As Mike alluded to, while we have made progress with rebalancing forward, we still have work to do to fully optimize the Forward segment inventory. Moving on to operating expenses. The quick summary is that better-than-expected marketing efficiency in the third quarter was offset by our fulfillment expense and selling and distribution expense as a percentage of net sales coming in slightly higher than our outlook.

Fulfillment costs were 3.6% of net sales. The increase of 56 basis points year-over-year was primarily due to a year-over-year increase in our return rate, a year-over-year decrease in AOV, increased rent expense and other costs of operating our recently expanded fulfillment network and tire wages for our fulfillment center staff. We expect to realize efficiencies on fulfillment expense as a percentage of sales in the coming years as we grow into and optimize our increased fulfillment center capacity. Selling and distribution costs were 19% of net sales. The increase of 170 basis points year-over-year is primarily due to the higher return rate and lower AOV.

We are aggressively pursuing initiatives to reduce our shipping and logistics costs and to address the increasing return rate. Our marketing investment represented 15.4% of net sales, a decrease of 123 basis points year-over-year, reflecting a reduction in brand marketing investment and events in the third quarter of this year as compared to last year. as well as year-over-year efficiency and performance marketing investment as a percentage of net sales. The reduced brand marketing investment year-over-year is largely due to a shift in timing from the third quarter to the fourth quarter, with a very active calendar of brand building events in the fourth quarter of this year heading into 2024.

General and administrative costs were $35.2 million, including the $6.6 million accrual for a pending legal matter. Excluding the legal accrual, our G&A costs came in slightly lower than our outlook for the third quarter. Net income of $3 million or $0.04 per diluted share was impacted by the accrual for the pending legal matter equivalent to $0.07 per diluted share.

The 73% year-over-year decline in net income was also impacted by the net sales decline, a year-over-year decrease in gross profit and continued pressure on certain operating expenses. Adjusted EBITDA was $9 million, a decrease of 46% year-over-year. Moving to the balance sheet and cash flow statement. Inventory at September 30, 2023, was $203 million, a decrease of 5% year-over-year and down 1% sequentially from the second quarter of 2023. The year-over-year decline was 1 point steeper than our net sales decline, illustrating the progress we have made in rebalancing our inventory.

Net cash provided by operating activities and free cash flow in the third quarter increased by a strong double-digit percentage year-over-year. For the 9 months ended September 30, 2023, net cash provided by operating activities was $47 million, and free cash flow was $44 million, an increase of 37% and 44% year-over-year, respectively.

We put our cash flow to work towards the new $100 million stock repurchase program announced last quarter. We repurchased approximately 907,000 shares of Class A common stock during the third quarter. at an average cost of $13.87 per share.

Approximately $87 million remained available under the repurchase program at quarter end. As of September 30, 2023, cash and cash equivalents were $267 million, an increase of $23 million or 9% year-over-year, and we had no debt. Cash and cash equivalents decreased by $2 million on a sequential basis versus the second quarter of 2023 as a result of our stock repurchases.

Now let me update you on some recent trends in the business since the third quarter ended and provide some direction on our cost structure. Starting from the top, the top line pressure we experienced in the third quarter has continued with net sales for the month of October 2023, down a low single-digit percentage year-over-year. to assist in your modeling of our net sales in the fourth quarter of 2023, I want to highlight that our net sales comparisons are more difficult in the months of November and December on both a 1-year basis and on a multiyear basis. when compared to the October comparison.

Consistent with the third quarter results, during October, year-over-year net sales comparisons in the REVOLVE segment continued to outperform the Forward segment. I would also like to highlight at our October net sales in the Middle East, which has been a growth driver for International were impacted by the war in Israel. Our hearts go out to everyone affected at home and abroad, suffering tragic loss and hardship surrounding the recent events in the Middle East.

Shifting to gross margin. We expect gross margin in the fourth quarter of 2023 of between 51.7% and 52%, implying a year-over-year increase in gross margin compared to the fourth quarter of 2022. Taking into account our third quarter performance, we have fine-tuned our gross margin outlook for the full year 2023 to between 51.8% and 51.9%. fulfillment.

We expect fulfillment as a percentage of net sales to be around 3.6% for the fourth quarter of 2023 and now expect fulfillment to represent 3.5% of net sales for the full year 2023.

The selling and distribution. We expect selling and distribution costs for the fourth quarter of 2023 to be approximately 19%, consistent with the third quarter results and 18.7% of net sales for the full year 2023. The slight increase from our previous full year 2023 guidance primarily reflects a higher-than-expected return rate that has overshadowed early efficiency gains resulting from our shipping and logistics efficiency measures.

Looking beyond the fourth quarter, in 2024, we believe we can begin to benefit from our concerted efforts to drive efficiency in our shipping and logistics operations globally.

Marketing. We expect our marketing investment in the fourth quarter of 2023 to represent between 17% and 17.2% of net sales. For the full year 2023, we have narrowed our expectation for marketing investment to represent between 16.2% to 16.3% of net sales, which is unchanged at the midpoint from our prior full year range.

General and administrative. We expect G&A expense of approximately $29.6 million in the fourth quarter of 2023 and $121.5 million for the full year 2023. This increase in our full year G&A outlook is entirely due to the $6.6 million accrual for a pending legal matter recorded in the third quarter. And lastly, we continue to expect our effective tax rate to be around 24% to 26%. And consistent with the last several quarters.

To recap, we are laser focused on the large market opportunity ahead of us, leveraging our strong financial position and consistent with our focus on the long term, we will continue to prudently invest in a multitude of initiatives that we believe can extend our competitive advantages that maximize shareholder value in the years ahead. Now we'll open it up for your questions.

[Operator]

[Operator Instructions] Our first question comes from Edward Yruma from Piper Sandler. .

[Edward Yruma, analyst]

I guess first, I wanted to understand a little bit more about TikTok shops. Is it your sense that this is an incremental customer? Or is this a customer that would have maybe seeing the media on Instagram and then going on the site. I'm just trying to understand maybe kind of how does the all and economics of it look? And then I guess just to get maybe a little bit more further clarity on getting the forward inventory numbers in line. Is that a multi-quarter kind of cool? Or do you get in the next quarter or two?

[Michael Karanikolas, executive]

Yes. I'll take the first one on TikTok Shop. Our sense is of what we've seen thus far is that it's more of an incremental customer. The nature of the orders is fairly different from what we typically see within kind of our other channels. which is an exciting opportunity. And kind of the other thing I'd point out is that in is still very new and nascent. It's going to evolve a lot in the coming months. We've already seen it be very dynamic within just kind of the initial month that we've been operating. So there's still a lot to play out here.

[Jesse Timmermans, executive]

Yes, this is Jesse. On the foreign inventory, of course, a lot of this is dependent on what happens in the macro environment looking ahead. But we'd say it's not three quarters. It's probably more like that 2-quarter scenario. So we're probably not quite there by year-end, but as we get into the back half of Q1 is our best estimate at this point before remedies on the inventory perspective on FORWARD.

[Michael Karanikolas, executive]

And Ed, actually, one clarification I'd add on the incremental customer. Just from a definitional standpoint, you should just be aware that we don't count those as additional active customers because they're coming in through a marketplace, and they're all tied to essentially sort of single account within our system, and we don't have those customers. We do have names and shipping addresses though and plenty of ways to certainly engage with those costs beyond TikTok Shop. .

[Operator]

Our next question comes from Oliver Chen from TD Cowen.

[Oliver Chen, analyst]

Michael, Mike Jesse. Regarding the environment and what you're seeing with return rates, it sounds incrementally worrisome given that focus. The customer macros maybe out of your control. So would love your thoughts on how that's interplaying with the future of return rates? And also as we look forward to average order value. And then on the customer acquisition costs, it sounded like the marketing efficiency was encouraging. What's driving that? And what are you forecasting going forward for customer acquisition costs? Thirdly, related to the first question, promotions, just on your base case for the promotional environment because the whole industry is experiencing a lot of the cautionary comments you made.

[Michael Karanikolas, executive]

Yes. So I'll maybe kind of start with the end of your question. With regards to the promotional environment, we definitely seeing increased promotional activity, particularly within Ford in the luxury segment. For REVOLVE, we certainly see it as well. We do think Revolthas the ability to stay above the fray with regards app. But at the same time, when consumers are feeling pressured, it certainly does have an impact within REVOLVE, and we've seen that I guess, you want to take the AOV question in the marketing kind of projections.

[Jesse Timmermans, executive]

Yes. Yes. On AOV, kind of separate from the return rate, we did see pressure on AOV this quarter, as you can see, maybe starting from the top with the segment breakdown. Ford is relatively flat, so it's more about decrease in the AOV on the REVOLVE side, but there was also an impact with the shift from FORWARD to REVOLVE. And as you know, FORWARD carries AOV that's 2.5x that have evolved. And when we do see that shift, we do see pressure on AOV. Then within the Revolve segment, that was a decrease of about 6%, just shy of 6%. That was largely due to both units per order and ASPs and that was in part due to that mix and shift towards beauty that carries that lower ASP.

So I think a lot of moving pieces there and then on top of comping to a record-high AOV in the prior third quarter. Looking ahead, we'd expect that to balance out, I would say, not going to be up against such a significant comp and full price mix is getting back to a really healthy place. And then maybe on the marketing efficiency was another piece of your question there. We did see efficiency on the CAC this quarter. So that was really encouraging. And to be fair, part of that was due to timing. So we did shift some of the brand marketing activities out of Q3 into Q4 and into Q1. So there is a piece there. But there was also efficiency on the performance marketing side, which we're really encouraged about. And then maybe I'll kick it back to Mike.

[Michael Karanikolas, executive]

Yes. And then to address the first part of your question on the return rate. We do think the environment is playing a large role. Just seeing how consumer confidence is so low right now even lower than COVID depths, there's certainly a lot of disparate indicators out there, but I think whether you look at kind of luxury spending data from Bakeofmerica consumer confidence or other things. And certainly, we're working with our customers. I think she's not feeling in a good place and that's affecting the return rate.

That said, we definitely recognize it's a reported cost pressure we're laser-focused on it. And we're not happy that our business is not as solidly profitable right now as we want it. We're still in more challenging times, delivering cash flow and earnings, but it's not at the level we want and so we're laser-focused on that and we certainly hope to drive some good improvement in the current quarters.

[Operator]

Our next question comes from Mark Altschwager from Baird.

[Mark Altschwager, analyst]

A lot of the headwinds you cite are more macro in nature. Given the macro picture remains uncertain and challenging heading into 2024, do you think it's reasonable to expect top line growth in the first half of next year? Are there incremental levers you see for next year to better offset the macro headwind versus what you've experienced thus far in 2023. I guess anything you can share on how you're thinking about that would be helpful. And then I have a follow-up on gross margin.

[Jesse Timmermans, executive]

Yes. Maybe I'll start and then if anybody else has anything to add. We're not going to comment too much beyond what we've said in the script. We did comment that October is down low single digits, but we are up against some slightly more difficult comps in November and December, so we just want everybody to keep that in mind. To your point, Macro is very uncertain. There's a lot of good things happening internally.

But to your point, a lot of it is macro driven at this point. So we're going to continue to stay nimble, invest where we think there's meaningful return in the marketing. And we'll get back to inventory growth, at least on the on the Revolve side as we get into early next year. So we're optimistic about that. But not much more beyond that, that we can say at this point, given all the uncertainty.

[Mark Altschwager, analyst]

And then, Jesse, can you help us better understand the factors that drove Q3 gross margin a bit below the guidance and then just given the better inventory position, do you see less risk for Q4? And zooming in on REVOLVE, I mean the gross margins there have been a bit more stable the last couple of quarters. Is 55% kind of the right level to be thinking about?

[Jesse Timmermans, executive]

Yes. Yes, maybe I'll start with the REVOLVE even though that was kind of a lesser impact this quarter. The year-over-year decline there is roughly split half and half between the full price to markdown shift. We were slightly lower on full price this year this quarter than last year's third quarter. Again, that's in a really healthy place if you compare it to pre-COVID, but still relative to last year, it is lower. And then own brands is the other half of that year-on-year decline where owned brand mix was lower this year than it was last year.

A lot of opportunity there, given the comments in the prepared remarks, we are more cautious on that. own brand inventory in times when we're pulling back and managing that inventory balance. So that's something we've all said and to your point, more stable and kind of less risk there as we look into Q4.

On the Ford side, this is where year-on-year significant decline in margin and also sequentially, which was -- I would say, maybe surprises too aggressive, but we are working through the inventory. It is taking longer the macro pressures are adding to that and kind of extending the time frame there.

And then on promotional environment, we did move more aggressively into that markdown inventory and the markdowns were more significant than they were in Q2 and last year. So I think we're probably at or near the trough on FORWARD. But we probably have another couple of quarters of challenge there.

[Operator]

Our next question comes from Rick Patel from Raymond James. .

[Rakesh Patel, analyst]

You touched on it, but I'm hoping you can expand on how you're planning inventory for the spring of '24. It sounds like you're seeing signs of encouragement for the Revolve brand and the beauty category. But just hoping for more color there, and if there's any other areas of the business that are worth calling out from an inventory planning perspective.

[Jesse Timmermans, executive]

Yes. Yes. Maybe starting with Revolve your point. We are further ahead on the inventory rebalancing and feel good about that inventory turns are up year-on-year. So we're at the point now where we'll start to see buys increase year-on-year as we get into Q1 of '24. .

On the Forward side, as I mentioned, we've still got another quarter or two rebalancing there. So the kind of lean in the inventory will be a couple of quarters lagging. So we're probably not looking -- probably looking more at like midyear on the forward side. And then owned brands is a longer tail, it takes longer to kind of recalibrate and spin that up. So I think as we approach the back half of next year, we're seeing some increases there, but as a percentage of the overall mix, not factoring anything dramatic in for 2024 on the own brand mix different from where we're at today.

And maybe just to touch on Beauty as well because we are really excited about the beauty the brands that we've added in Q3, a really healthy roster, and Michael mentioned this on the prepared remarks, really healthy roster of brands coming on in Q4 and into 2024. So really excited about that in that area.

[Operator]

Our next question comes from Kunal Madhukar from UBS. .

[Unknown Analyst]

One on asset clients. That number is still growing. Can you talk about where that -- you're adding active clients, whether it is U.S., international and any demographic that you could give us? And second, on the efficiency on the marketing side, Is that driven by lower price on a per ad basis? Or is that driven by better targeting or better maybe channel mix?

[Jesse Timmermans, executive]

Yes, Kunal. On the first one on active customers, by geography, it skews higher on a growth perspective in national versus domestic. So roughly not in line, but a similar dynamic to our overall sales growth where you see international outpacing domestic. Within domestic, you see markdown growth outpacing the full price growth, but full price still very strong in, call it, 2/3 plus, almost 3/4 of the new customers are coming from full price, so a really healthy customer base. And then revolve for it. Again, similar to the net sales dynamics where forward legs that have revolve is similar on the new customer side.

[Michael Karanikolas, executive]

Yes. And then in terms of the marketing efficiency, it's a combination of things. We've been tweaking kind of the performance marketing budget over the past few quarters. running kind of various tests and kind of adding to our ability to optimize the marketing. And I'd say really we're kind of halfway to that feature that process. So it's a little bit of that, and then it's a little bit of timing in terms of brand marketing activities, which are more long term in terms of how they impact the business. But overall, we is one of the bright spots of the quarter that we're able to have strong active customer growth with some more efficient marketing.

[Operator]

Our next question comes from Janine Stichter from BTIG. .

[Janine Hoffman Stichter, analyst]

I want to ask a bit more about returns and some of the initiatives you have to improve fit certainty. I think you talked about a few initiatives, virtual try-on videos products fit guides, but it seems like they're all in the kind of earlier stages of rollout. So I just want to understand when we could see that rolled out more broadly. And then on that, within selling and distribution expense, I think you targeting 18.7% this year. And you've talked about getting to kind of the high 17% range, maybe even the low 17s longer term. Just any structural changes to that thinking based on what you're seeing on return rates now.

[Michael Karanikolas, executive]

Yes. So in terms of the return initiatives, they are in the earlier stages. And in terms of broader rollout, it's a couple of things. One, we need to see there's significance on the impact that we're trying to make. And then two, for a number of them, and it depends on kind of which one, but a number of them require a lot of manpower to do now, manpower that's well compared to the cost savings, but it will take time to kind of ramp that up once we get sort of the full confirmation that these targeted efforts work, then we have to roll out more broadly and make sure we have the right team to support. And then in terms of selling distribution costs and kind of forecast on those going forward. I'll turn it over to Jesse.

[Jesse Timmermans, executive]

Yes. Yes, we got hit on a number of fronts on that selling and distribution this quarter. The return rate was a big factor in that year-over-year increase that we saw lower AOV also had a pretty significant impact there. And those two pressures, we had some really great cost savings initiatives that started to take place and really have an impact in Q3, but not enough to offset those two factors. So if you look on a cost per order basis, the cost per order on selling and distribution was actually lower by, call it, 4% year-on-year. So some good early gains there, just not enough to offset the pressures that we saw this quarter. So we factored that into our guidance for Q4 and taking a cautious stance there. But as we look ahead into 2024, we are optimistic. And we're in the early stages of those efficiency and cost-fitting initiatives.

So we are optimistic. I think it's probably from the time we talked last quarter, it's -- that time line has probably extended given some of the increased pressures that we've seen in return rate kind of at those elevated levels. Also on a sequential basis, we saw fuel tick up again. So it's kind of up 10% sequentially from just last quarter. We're still lower on a year-over-year basis. But some of those things just work in our favor this quarter, but feel optimistic over the mid- to long term on that line item.

[Operator]

Our next question comes from Alice Chao from Bank of America. .

[Wenjing Zhao, analyst]

Where do you see beauty shake out as a percentage of sales longer term? How quickly are you expanding that business, signing up new brands. What's the crossover for customers that purchase apparel versus beauty now? How much lower is beauty AOV and what are long-term margin implications you have a higher percentage of beauty longer term. Just more details on beauty would be helpful since it seems to be the one kind of category of bright spot.

[Michael Mente, executive]

Yes. There's other right spots, but definitely Beauty is really, really shining. Long-term wise, we look at kind of historic competitors, whether it be previous generation kind of like legacy players like the department stores like a [ Osteomas ] and things like that. And we triangulate, call it, 15-ish percent, some of some competitors we've seen higher closer to 20. But ultimately, in a mature state, we think the business should be something in that zone.

So we have a long way to go. Of course, over the long term, we anticipate kind of our core payroll business to continue to grow. So we think from a dollars perspective, that 15% to 20% will hopefully get larger and larger over time. So moving targets there. So quite excited about that. Of course, it's super obvious that our customers are buying close to go out. Of course, they're wearing make for beauty. So of course, that natural fit there. Long-term wise, we look at the economics, just probably the best first in terms of talking about the puts and takes and the long-term opportunity there.

[Jesse Timmermans, executive]

Yes. Yes, sure. And maybe just to corroborate kind of something Michael mentioned, 15% plus or minus of our new customers came from Beauty. So it shows the potential of that mix increasing over time. And and some of that overlap that we do experience. And then those beauty customers do come back and purchase that higher AOVs over time, similar to our overall customer but at a greater kind of increased AOV basis. So opportunity to continue to upsell cross-sell those beauty customers.

From a kind of an economic standpoint. So gross margin is lower on those beauty products, but other things to keep in mind as you work down through to contribution margin. The return rate is significantly lower. So we're talking kind of mid-single-digit return rate versus our overall return rate is much higher than that. We think it's a very healthy customer. It's a very healthy kind of product category to have and balance out the mix there.

[Operator]

Next question comes from Ashley Owens from KeyBanc Capital Markets. .

[Unknown Analyst]

Great. Just would be curious to hear comments on the inventory mix within Ford kind of as it stands today. Are there any categories that you feel are closer to being rightsized? And then inversely, any that you're having a harder time clearing through that are creating some of those rebalancing lags?

[Michael Karanikolas, executive]

Yes. So as a whole, we certainly have too much inventory. It is concentrated in brands that have more markdown restrictions that kind of prevent us from going through a normal kind of markdown cadence on the website itself. And then from a category standpoint, it is concentrated in categories that tend to hold their value well, things like handbags, cues, accessories, logo products. So we feel good from that standpoint. But it's certainly been a challenging situation and a bit frustrating that the inventory still isn't fully rebalanced. But to Jesse's earlier comments, we're hopefully in the coming quarters, we'll start to see that turn. .

[Operator]

Our next question comes from Dylan Carden from William Blair.

[Dylan Carden, analyst]

I know you're not going to give hard numbers, but can you at least sort of somehow gives a sense of the dynamics on sort of the return number? Is it sort of increasing steadily in the quarter? Is it something that's stabilizing just at a higher rate? Just trying to get my hands around.

[Michael Karanikolas, executive]

Yes. I mean to there's a lot of moving parts every quarter, and we certainly break it down in a number of different ways. So I couldn't give you a conclusive answer on that, but I'd say directionally, as we interpret the data, there was continued pressure in Q3. And it didn't look like a stabilization. Now whether it was continued increasing kind of quarter-over-quarter rise is hard to say because there's too many moving parts quarter-by-quarter in terms of mix shifts and other dynamics. But we haven't seen clear signs of stabilization.

[Dylan Carden, analyst]

Okay. And it's something I caught in passing in the prepared remarks. Is there a dynamic in the model now where if your sales come in higher than you expect your earnings actually come in lower because they come with higher returns. Is that a dynamic that was at play in this quarter? Did I misunderstand that?

[Jesse Timmermans, executive]

No I don't think -- not necessarily. I think a lot depending on the mix and AOV that course, but I would say not directly a result of net sales coming in at...

[Michael Karanikolas, executive]

In general, higher net sales are good for everything in obviously, it depends on the dynamics where marketing expenditure is higher, where gross margin is lower, where return rates higher. But all things being equal, more net sales is a good thing.

[Operator]

Our next question comes from Simeon Siegel from BMO Capital Markets.

[Simeon Siegel, analyst]

I appreciate you making your comments regarding Israel. So congrats on topping the $2.5 million, how are you thinking about the active customer trajectory for the short and longer-term opportunity from here? Are you seeing any meaningful spending pattern differences in the new customers versus the existing. And then just how do the existing active customers break down between domestic and international?

[Jesse Timmermans, executive]

Yes. Yes. Let's see. So I think new customers continue to grow on the new customer front and holding up on the active customer front. That growth is compressing as we as we work through these quarters. So the year-on-year growth for active customers is going to be a little bit lighter in Q4 than it is in Q3. And over time, those two will get back to, kind of, call it, the old days after we cycle out of all these comps, where the net sales and the active customer growth are plus or minus in the same zone. And what we're seeing from the new customers, nothing significant that popped out from a particular cohort of new customers, all cohorts behaving relatively the same. You do see differences and we're shifting between full price and markdown and the beauty customer is new to us. So we'll see how that plays out over the long term. But as I mentioned, those customers are coming back at higher average order value.

So we're optimistic about that. And then I'd say no significant difference between the kind of retention patterns between domestic and international. A lot of that is dependent on the localization efforts that we've made over the past several years. So that retention dynamic is much stronger given the free shipping, free returns and the customer experience that we've optimized over the last few years?

[Simeon Siegel, analyst]

Okay. And then just how many of the customers are international? And then if I can within AOV did you or could you know what ASP was versus units per order. And I think that's an LTM number. How is AOV or ASP for this quarter versus the prior year period.

[Jesse Timmermans, executive]

Yes. Yes. So I guess not breaking out specifically the international versus domestic active customers that roughly in the same zone as the domestic. But keep in mind that -- or sorry, international sees a little bit heavier forward, so it would be a little bit lighter on a customer versus a revenue basis. on AOB and ASP versus UPO, there was a decrease in both of those, both ASP and UPO. UPO was the biggest impact this quarter on a year-over-year basis. And some of that was due to the shift in mix towards beauty and specifically that TikTok shop. There are a lot of single item orders. So that skewed the UPO lower.

On top of that, Q3 of last year, we had a really phenomenal UPO quarter. So there's a little bit of a dynamic there. And the ASP. And this is all on the Revolve side because Ford is plus or minus in the same zone on AOV. So ASP on Revolve was also down year-on-year and much of that was due to the shift in mix to beauty. So you kind of strip beauty out ASPs were of a healthy number outside of that duty category. So largely due to mix on both of those factors.

[Operator]

Our next question comes from Jim Duffy from Stifel. .

[Unknown Analyst]

This is Peter McGoldrick on for Jim. I wanted to ask on social marketing, you offered some valuable insight on customer engagement through TikTok, driving the playbook for customers in beauty. Can you provide some sense how important this channel is to driving platform discovery for new customers overall, perhaps size it against the magnitude of static posts on Instagram.

[Michael Mente, executive]

Now overall, we saw the long-term trending that TikTok is the growing platform with and of course, with growing platforms provides a growing opportunity into them being a little bit more mature, is very, very important for us and then we're still very focused on of course, staying on top of where the puck is moving patting the developments there in the success there is very, very, very quite encouraging. As Mike mentioned on some clearer questions and such that it is very dynamic and very early. So we're quite excited with the early success. The early success in direct selling has succeeded mature success in Instagram direct selling and being in the early zone that if TikTok gets this right, it could be a massive -- very, very massive at this point, it's very early, but super encouraging.

[Unknown Analyst]

And then I just had one follow-up on Mexico. This market continues to show strong customer traction. Can you size this business as an overall mix of international and offer some sort of guide as to how big this could be or contribute to revenue looking ahead?

[Michael Karanikolas, executive]

Yes. So certainly -- I mean, one of our more important international markets. It's in our top five countries now in terms of size. And so -- it's certainly a meaningful portion of the mix, but at the same time, we do sell worldwide. So it's not like it has some dominant share. But it's starting to get to a size where at the current growth rates, it does have a meaningful impact on the overall growth of the international business. We're hopeful we can continue our efforts there. and it will drive more and more total growth as that market gets larger and larger.

[Operator]

Next question comes from Matt Koranda from Roth MKM.

[Matt Koranda, analyst]

Just wanted to see if we could back up real quickly to the October trend that you mentioned, the down low single digits. It just doesn't sound like a big deceleration despite all the concerns and the headwinds that your consumer is facing. So anything you can unpack for us as to why that's holding up despite some of the incremental headwinds she's facing. And then just, Jesse, maybe any month comp dynamics to call out for the fourth quarter as we think about modeling top line growth. .

[Michael Mente, executive]

Yes. I would agree that -- of course, a negative growth quarter, but you're looking at the big picture, it could be a lot worse I think it really kind of highlights the competitive landscape where us being a premium player we're competing against the legacy players of decades ago, and we continue to do that quite well, especially in times of challenge. We see very intended competition in the luxury zone with conglomerates and we also see at the kind of mass markets with the rise seen against the incumbents we see they're taking over that business. But in the middle premium zone, we are unique and we don't face any direct model competitors. So I think that the long multi-decade trend of us competing against legacy players continues to be a long-term trend that ultimately drive continued success.

[Matt Koranda, analyst]

And Jesse, maybe on the the monthly call outs that would be great.

[Jesse Timmermans, executive]

Yes, nothing significantly incremental to what you mentioned on the call in that November and December are slightly tougher, both on a 1-year and multiyear comparing to 2019 basis. So we just wanted to call that out so you could factor that into the fourth quarter. But yes, nothing more outside of that.

[Matt Koranda, analyst]

Okay. Got it. And then just -- I was a little surprised to see you guys leaning into the marketing in the fourth quarter commentary. Despite somewhat of a weak environment. So are we seeing an opportunity to play offense to -- for customer acquisition? Is there brand spend going on in the fourth quarter? Just maybe help us understand sort of the incremental lean in there.

[Michael Mente, executive]

Yes. I would say it's a long-term offense. In times like this, we really see that competition and the appetite A lot of -- your intuition, I think, is quite common, and I think that's kind of how a lot of people got the situation. But I think it's kind of in with people aging being opportunistic when people are conservative, especially when the core business is strong and especially where we have a long-term mindset. So we do see opportunities coming up and we'll continue to invest. .

[Operator]

We have time for 1 more question, and it will come from Tom Nikic from Wedbush Securities.

[Tom Nikic, analyst]

Jesse, I think, obviously, your margins have come under pressure in the last couple of years. Is there any way we should or could think about what is recoverable and that may be structural relative to, I guess, margins that we were seeing a couple of years ago?

[Jesse Timmermans, executive]

Yes. Great question, Tom. Yes, I think a large portion of it is recoverable. I think if you start at the gross margin level, we are coming off of an inventory rebalancing period. We're still being pressured by forward something that Mike mentioned in his prepared remarks that I think is important in that we're roughly in the same zone on gross margin for REVOLVE now as we were in 3Q of 2019. despite the fact that own brands is half the mix that it was back then. So I think that shows, one, the great success we've made on both own brand and third-party gross margin stand-alone. And then second, the opportunity we have looking ahead as we increase that own brand mix. So that's number one. And I would say largely recoverable and not just recoverable, but getting in excess of where we were kind of pre-COVID level. .

Fulfillment, we're at a point now where we're getting pressured by, again, the return rate, the AOV, also capacity, where we expanded our fulfillment footprint last year around this time. We haven't fully optimized, fully grown into that. So there is opportunity there. So that is maybe not 100%, but largely recoverable. Selling and distribution is tougher given the return rate pressure that we've experienced, the increase in rates over the past several years, fuel in particular. So we do think there is a lot of opportunity there, and we have a lot of initiatives that play internally. We're already starting to see the savings there. But that is, I would say, recoverable, but not to the extent of those other two, if we can get return rate right, which we think there's a lot of opportunity there.

Marketing is a lever we can pull. If I've been called out a recoverable or unrecoverable, that's kind of an opportunity and a lever we can pull in G&A is very recoverable and has a lot of leverage as we look ahead and get back into growth territory and get some get some scale leverage there. So and if you look at that line item, a couple of points over the last 3 years, we think that's achievable over the next few years as well.

[Operator]

This concludes today's Q&A session. I would like to turn the call back over to management for closing remarks.

[Michael Mente, executive]

Guys, thanks for joining us for another quarter. I cite to continue to stay focused. Our team is working on a lot of exciting things as they now so decided to share the positive exciting results of the hardware and the foundation that we're laying now.

[Operator]

This concludes today's conference call. Thank you for your participation. You may now...