Q1 2024 Revolve Group Inc Earnings Call

Participants

Erik Randerson; Vice President, Investor Relations; Revolve Group Ltd

Michael Karanikolas; Chairman of the Board, Co-Chief Executive Officer, Co-Founder; Revolve Group Ltd

Michael Mente; Co-Chief Executive Officer, Co-Founder, Director; Revolve Group Ltd

Jesse Timmermans; Chief Financial Officer; Revolve Group Ltd

Michael Binetti; Analyst; Evercore ISI

Jay Sole; Analyst; UBS

Mark Altschwager; Analyst; Baird

Simeon Siegel; Analyst; BMO Capital Markets

Rick Patel; Analyst; Raymond James

Janet Kloppenburg; Analyst; JJK Research Associates

Presentation

Operator

Good afternoon. My name is Joel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Revolve 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

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 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 dot 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 are 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

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 three 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 eight weeks of the first quarter had declined by a single 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 in 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 mark down 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, FORWARD net sales decreased 15% year over year, directionally consistent of 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 three years. We view the luxury industry challenges as an exciting opportunity for REVOLVE 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 three months, even while we continued to enhance shareholder value through the repurchase of an additional $8 million 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, 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're excited about include improved size guidance, primarily leverages technology partners and our tools testing of important new measures designed to prevent wardrobing, which refers to a customer where in 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 in 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 a fee for online product returns.
By comparison, we continue to encourage our customers to use the home is addressing them with a no hassle free shipping and return policy, which we have offered since our launch in 23, making us one of the pioneers of free returns.
Second, we further validated our opportunity to expand our share of wallet 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 from 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 UK in the first quarter which helped us to offset a very tough comparison in China. Based on the 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 our 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 one-day format in 2024 than we had achieved over an entire weekend for last year's Revolve Festival Events.
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

Thanks, Mike, and hello, everyone. I'm excited by the progress we have made and key priorities, especially the investments we are making in building our brands and continue to strengthen our question with the next-generation consumer.
We are making the most of the opportunities at this point in time to create brand heat and awareness mix as our core consumer gives us one type of lifestyle events and travel in the months ahead.
For the seventh year, we held Revolve Festival Palm Springs on April 13 in a reimagine format that was better than ever. The more intimate venue for Revolve Festival this year was incredibly efficient, impactful and buzzing with energy flowing from some Y2K themed performers, including Ludacriss, T-Pain, Sean Paul, and the Ying Yang Twins.
Many top A-Listers in the desert chose to attend Revolve Festival, including actors, musicians and athletes, celebrities and content creators, such as Kendall Jenner, Rihanna, John Taylor, ASAP Rocky, Zoe Eilish, Megan Fox, Hayley and Justin Bieber, DeAndre Hopkins, Nina Dobrev, Lili Reinhart, Shaun White, Emma Robins, and Natalia Bryant.
Most impressive is that we delivered our incredible robots as well that are spending millions of dollars less than in recent years and yet we delivered greater impact than before. In fact, test impression some of our customers on 2024 more than doubled year over year of social media impressions also increased year over year for the one-day impact compared to last year's one-off taxable event that took place over an entire weekend.
Key to our success is that our powerful REVOLVE brand consistency and structure lost touch with content creators and partners and agents just to understand that our events give them a unique platform to further strengthen their own personal brands. Importantly, delivering meaningful efficiency and out of AlphaSmart investment year over year has allowed us to significantly expand our marketing playbook in the second quarter just to reset all of our customer, we hosted a successful activation at the stage Coach customer attended by investors, including Post Malone, tighter and tighter.
We also have exciting activations in the upcoming leases, Jamaica, central pain, Sicily All told, we are delivering a much broader range of activations in the second quarter in 2024 than in recent years, despite investing and or percentage of net sales and our marketing investment year over year. We also continue to invest in marketing production and collaboration to drive success in our own brands, while contributions from owned brands as a percentage of REVOLVE segment revenue remains below its long-term potential. We have had some notable recent success that further validates the long-term opportunity.
The recently launched the first half's local Academy on brand. After Mariana. She would deem as Creative Director national starting with outstanding exceeding expectations and strategically broadening our range of offerings. You would see a dummy brand aesthetic expands our assortment to serve a wider range of our customers' lifestyle, including Stash, more everyday essentials for office collaboration with Merial as Creative Director extends our long-standing and successful partnership with Ariba mangers, Mariana as a co-founder of some refineries. I touched on the panel evolve and she has one of the top performance in our proprietary REVOLVE brand ambassador program and other owned brand collection that has performed extremely well in recent months.
It's helps a collaboration with supermodel also have them introduced in 2022. In March, we introduced Telford a drop and it has been one of the most successful own-brand capsules in our history of note, also features higher than typical price points and has uniquely performed exceptionally well, both REVOLVE and FORWARD, the fact that Houston was one of the most search brands on the forward side.
Mr. Myles, this is remarkable considering that for us offer some of the most iconic luxury brands in the world, another recent launch on brand that is exclusively available on our bond forward as our first ever own brand within our men's offering. While 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 Beaver, looking stylish funding, allow Pollo at our vault. That's why after body last month.
Now let's shift gears to discuss physical retail performance of our evolving for top-up shopping experience. At Aspen during the first quarter was incredible exceeding our initial financial goals. This exciting new channel for engaging customers in real life has been a hallmark of brand-building quite and customers and even further strengthening our relationship with the brand partners to view our desirable Aspen prevalence of LTE into their brands if they want to partner with us and tap into attractive customer demographic with a proven appetite for premium on-trend fashion vascular results and feedback have been so compelling that we have entered into a multiyear lease to operate a physical retail pending financing, the economics alone are favorable.
But even more importantly, we see this as a huge opportunity to expand and elevate our brands in this fashion patent for the missing payments be incredibly successful as an asset and have led us to explore other regions for our retail shopping experience may offer similar potential for compelling financial returns for the elevation of our brand we are excited to continue to test and learn more about physical retail, taking a thoughtful and measured approach consistent with our standard that an investor first mindset, we'll keep you apprised of our plans and progress with exciting initial moving forward.
Now I'll close with an update on a dynamic competitive landscape within that luxury e-commerce sector challenges amongst certain of our luxury e-commerce competitors have further accelerated in recent months with 14 disruption affecting luxury consumers and luxury brands creates a compelling opportunity for a profitable and cash-generative company.
Like of all the capitalized by investing in strategies to gain market share. We believe there's an opportunity to pursue them effectively abandoned luxury customers that are up for grabs and aftermath of the recent industry malaise we are also renewing our efforts to expand our management, better relationships in the current environment beyond our financial strength, it is a huge competitive advantage by through BNC forward as a highly attractive partner due to our strength in North America, our product curation for distinctive style point of view that is attracting younger luxury consumers and our incredible brand marketing engine supported by 40 Cleopatra 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 Israel, just one example. The first quarter we delivered promising test of leveraging AI technology to intelligently route customer service increase that we believe could drive operating efficiency, even further based upon our exceptional customer experience.
Most compelling was that in our testing, our internally developed AI technology solution has outperformed commercially available, a solution. We attach a PC. We've also recently, some of the dedicated internal generally have a team that is building on our early successes and leveraging at the imagery on our website and other digital channels as well as to expand the use of a across the business in pursuit of large market opportunity ahead of us.
To summarize our path for banks, connection with the consumer and our unwavering focus in the long term, along with our strong financial profile, illustrated by the $38 million 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

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 an update on recent trends in the business and our outlook for gross margin and cost structure.
Starting with the first quarter result, 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, we've owned segment net sales decreased 1% and FORWARD segment net sales decreased 15% year over year within the 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, grew 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 a year over year increase in return rates.
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 three years that selling and distribution costs have decreased as a percentage of net sales year over year.
Great execution and reducing logistics costs enabled us to outperform our guidance for selling and distribution cost efficiencies 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, primarily due to a shift in the timing of our brand 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 2020 for 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 31st, 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 forward 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 three 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 2020, following starting from the top three returned 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 FORWARD 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 and 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. And 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 two 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 with 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.

Question and Answer Session

Operator

(Operator Instructions)
Michael Binetti, ISI.

Michael Binetti

Hey, guys. Thanks for taking the question here. I just wanted to see if you could walk us through on the market for, say April a little bit is April, Jefferies April, accelerating from March, and I think you I gave a little bit of color and I'm curious on the cadence of turnover.
A year ago, you gave us the 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 is 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 distribution improvements accelerating in the second half after decelerating a little bit in the second quarter. Maybe just a little bit help us on the visibility you have there?

Jesse Timmermans

Yes. I think Michael can maybe starting with the March and April trends?

Michael Mente

I wouldn't say it was a acceleration deceleration in March, closed in positive territory, April, positive, low single digits on the surface, a slight acceleration from April did have slightly 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 two consecutive months and so looking forward to the balance of the year on markdown on Q1 last year was a low point.
We were 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 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 your selling and distribution once again.

Michael Binetti

It sounds like it's you have it going from like 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. It sounded like you're 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

Yes, 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. Am I 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 Okay.

Michael Binetti

Thanks a lot. Congrats, guys. Thanks.

Operator

Oliver Chen, TD Cowen.

Hi Michael, Mike and Jesse, regarding what you're seeing now and the revenue guidance, are you going to continue to see and negative transaction growth?
I'm how do you see that evolving along with average order values and as we also look to model the active customer growth. 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 were lower 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. Thanks a lot.

Jesse Timmermans

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 contact this quarter. We'd expect to see that UNO 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 appealing out beauty AOV was actually increased much higher than that 4% overall. And we'd expect to continue to see kind of in that zone in that 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've continued 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, that heavy markdown quarter that we had where we drove a lot of customers lower AOV, higher orders. So until we got out of that period and 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 star up 34%.
On the flip side, handbags, shoes, accessories were down 10% and handbags, shoes, accessories skews more towards the FORWARD segment. And you could see with Ford being down 15% relative to that REVOLVE being down one. And those are probably the two 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 it's more some more than expected.
But when you peel that back and look at just the 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.

Okay.

Erik Randerson

Thanks, Jesse. And one quick follow up on artificial intelligence here. A lot of great color and you've been pioneers 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. Thanks.

Michael Karanikolas

Yes, I think it can really impact all across the board. I can touch every aspect of the business unit 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 do to invest some or all of those cost reductions into better service or better personalization.
So we've talked in past about on the inventory side of the business, there's a lot of opportunity to reduce costs, but then again, potentially reinvested back into forbearance for things that are proceeding with 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, what we're able to churn out how quickly we're able to churning out at what kind of cost. So we feel great about the progress there.
And we mentioned on the call about some progress on helping routes customer kind of inquiries, which is a smaller portion, but it just highlights how there's 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 and a I can unlock further gains on that side of the of the business. It should our efforts continue to yield fruit so on. So we are really excited.
You know, 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.
It's well if which often produces better results than those external clinical efforts and also provides a kind of cost savings growth rates. We're not at the mercy of whatever price, some external vendor wants to charge.

Operator

Jay Sole, UBS.

Jay Sole

Great. Thank you so much. Mike, you talked about investments in increasing brand awareness, obviously, marketing. Can you talk about where you see the brand awareness today where you get over a year or three year period and how that brand awareness is going to turn into active customers. Thank you.

Michael Mente

I think that when you're looking at the overall market here, just anecdotally, we see, you know, some of the indexes of question like the major cities and kind of like the New York and LA, but if you look at the global opportunity, we view this as a global opportunity. We're very, very early scratching the surface you know, historically, you know, almost all of our marketing efforts have been on the 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

Thanks. And maybe if I can add one about logistics. Obviously, you talked about improved size guidance and preventing wardrobing and things like that. If you had like a big picture sort of goal as to where you want the return rate to go. I mean, you talked a little bit about one of 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. Thank you.

Michael Karanikolas

Yes, there isn't a specific number we're looking to drive it to instead just kind of directional parameters in terms of what we're trying to accomplish. So we always want the home to be addressing that, and 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. We're really hopeful that a lot of things that we have in the works. And so we'll see where that takes us. But that's going to be a multiyear journey with hopefully some some bids, big impact in the current year along the way.

Jay Sole

Got it. Okay. Thank you so much.

Operator

Mark Altschwager, Baird.

Mark Altschwager

Thank you.
Good afternoon.
I guess first was hoping to get a bit more color on the REVOLVE versus FORWARD trend that you're seeing so far in the second quarter, that positive inflection is that happening across both segments and then international that had been outperforming the US in recent quarters?
I think Q1 looks like it was more in line. So any surprises there? And maybe just speak to any trends you're seeing by region you'd like to call out?

Michael Karanikolas

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

Jay Sole

And then domestic versus international?

Michael Karanikolas

Yes, on the surface, both down 3%, but keep in mind that international last year had a much more difficult comp international last year and Q1 was plus 16 versus domestic minus five. 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

Thank you. 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 quality or 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 thinking?

Michael Mente

Yes, I think that one thing that we're really noticing, which is really encouraging is that we are confident that our customer knows that in certain zones was very strong and draft is very strong to weather very strong and vacation, but he's a little eager and anxious to hear from us and other people too as we invest in our energy and marketing and other places, we see a great connection with the customer, greater efficiency and try methods being used to treat very well with handle lead directly to them back half of the spending was share, which I think you get into a little more detail.

Michael Karanikolas

Yes, yes, to your point, Mark lower in the back half of the year relative to the first half of the year. In Q1, we saw the 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 And keep in mind, we're always opportunistic and there's always 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 IQstream on last year.

Operator

Anna Andreeva, Needham.

Great. Thanks so much. Thanks for taking our question and great to see positive trends in the business. Two quick ones from us on inventories, I think you said revolved inventories are pretty clean up. Can you just talk about your comfort level at forward? And at which point, do you think inventories there will be closer with the sales trend?
And then secondly, on return rates. You mentioned green shoots a couple of times. So should we expect improvement in return rate 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 US selling industrial on an annual basis. Just curious if that's still the right math. Thanks so much.

Michael Karanikolas

Yes, I think center on inventory 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 is two 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 forward. We are making good progress. We still have some work to do on the table.
Yes, I think targeting midyear before we feel kind of balanced 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 six most of that increase is coming from that clean REVOLVE segment as we're leaning in their forward, which is slightly positive year over year.
So overall, feel good revolve strong, still some work to do on the forward on return rate. We are optimistic about the all the work going into that and the changes we've made and some green shoots. We're not baking in any of those improvements into the 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 not counting on it yet.
And did you have third one?

Jesse Timmermans

I'll add. Yes. Now that are selling a bit, obviously. Yes, one percentage. Yes. Yes, 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 two line items.

Okay, great. Very helpful. Thank you, guys.

Operator

Janine Stichter, BTIG.

Hi, good afternoon. Thanks for taking my question. And I wanted to ask about Howard 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 and with some of the other online e-commerce players and just leveraging your strong balance sheet here, take advantage of that.

Michael Karanikolas

Yes. I think there's a couple different ways. You know, certainly with all the disruption it ends in, you've got businesses interim, while we're on the lookout for strong people from those companies were on the lookout for opportunities to potentially take market share and revenue share. And then in some cases, we're looking at some of those asset opportunities themselves. So, you know, there's really a lot of opportunities. I think offset, obviously by the short term weakness that's continuing in terms of the 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. That 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.

and then just on physical retail, it sounds like the key experience that you've lost this year have gone really well. Is any update to how you're thinking about potential further? It's a coffee cup?

Michael Mente

Yes, that is for international is like really eye-opening really encouraging. You know, Sales, John, obviously, the profitably very strong, obviously would tolerate return, which minuscule compared to online new customer acquisition was incredible.
So we thought that while this is a huge, huge win for us in a given quarter, we focus on the online market for the past through that gate. But looking at the ultimate potential weather because it can be released here, you know, opportunity with physical retail, we do recognize that it is in a shape of business but it is a different business than our early wins are very, very encouraging.
So we are definitely putting a lot of detail at this point. I would say more and more energy and focus, but not with the other two are just yet in terms of luck on which, I guess, Martin, but ultimately, over the long term, we think it's a massive opportunity for us.

Great. Thanks so much.

Operator

Simeon Siegel, BMO Capital Markets.

Simeon Siegel

Thanks, guys.
Good afternoon, and hope you're all doing well. And just to follow briefly on the quarter data again.
So just with the positive inflection in net sales function of just now having lapped through the prior year markdown selling? Or did 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 are always like 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 close more closely converge that?

Jesse Timmermans

Yes, you're on the full price and a dynamic in addition to the shift in full price sales, we are seeing an increase just like for like in in full-price sales, offset, of course, by just 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 period.
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 and 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, that heavy heavy order activity in Q1 of last year, but still higher than 2019. So we're seeing overall just good, healthy active customer behavior.
Just working through these volatile comp.

Simeon Siegel

Again, just any thought to 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

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

Simeon Siegel

Perfect. Thanks a lot, guys. Best of luck for the rest of year.

Jesse Timmermans

Yes, thanks.

Operator

Rick Patel, Raymond James.

Rick Patel

Hey, good afternoon and great progress guys. Can you provide color on what percentage of your returns happen outside of that 30-day window right now and what that looked like before the policy change during COVID? I know your assumptions are for this, so not be that much of a needle mover this year, but just curious where you see this mix settling?

Michael Karanikolas

Yes. It's a fairly significant portion of returns that occur outside 30 days. It's a minority but it's but it's a substantial portion in it. And that portion has increased over time. So you'll look 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 see with any confidence whether it will be a positive impact or not in until you roll it out. So we'll have to see what kind of impact it has on the overall return rate.

Rick Patel

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

Michael Mente

As the business has been stabilized over the past year or so are new about call it 18 months but we know we as we have taken our own brand style delivery, where it's going 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. You know, the new brands are performing extremely well for new work and hopefully out of New York, a tipping point for us to advance data saturation.

Rick Patel

Thanks very much.

Operator

Janet Kloppenburg, JJK Research Associates.

Janet Kloppenburg

Hi, everybody, and congrats on the progress. I just wanted to ask about forward on are you saying that the handbag and accessories business continues to be weak.
So I was wondering if you could discuss any strategies in place for them two in terms of assortment architecture, where you think that these comp declines can I'll moderate and if there's a possibility that you know, they could flatten out or even turn 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, so opening price points. And I was just wondering how you're thinking about your assortments in terms of categories and about your pricing? Thank you.

Michael Karanikolas

Yes, definitely on 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 could 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 of in a kind of a more successful way. We're certainly hopeful we'll start to see that turn.
And then, obviously, comps are you 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 forward business as we exit at the back half of the year, especially with all that disruption and opportunity and revenue share loss from those disrupted.

Janet Kloppenburg

Okay. Any anything on in our assortments and I think they should be better positioned and from the segment perspective, we really think and, you know, a little bit more expansion.

Michael Mente

I think it's not really the Netherlands, of course, a category per se, but kind of end use and functionality into being meaningfully different. So I think that's really where I'd say our focus is really tapping into the other aspects of lifestyle, but for some it will be under that was their lifestyle where she 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

Want to thank everyone for joining us today, and thank you to the REVOLVE team for all the great progress we 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 them building momentum throughout the rest of the year. Thank you.

Operator

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