Revolve Group - Q4 2022

Transcript

Operator (participant)

Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome to Revolve's Q4 and Full Year 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, please press star one again. At this time, I'd like to turn the conference over to Erik Randerson, Vice President of Investor Relations at Revolve. Thank you. You may begin.

Erik Randerson (VP, Investor Relations)

Good afternoon, everyone, and thanks for joining us to discuss Revolve's Q4 and full year 2022 results. Before we begin, I'd like to mention that we have posted a presentation containing Q4 and full year 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 economic conditions and their impact on consumer demand and our business, operating results and financial condition, our cost and inventory management, the impact of new fulfillment centers, our growth, including growth in active customers and product offerings, market opportunities and related macroeconomic and industry trends, our future events, and our outlook for net sales, gross margin, operating expenses, and effective tax rate.

These statements are subject to various risks, uncertainties, and assumptions that could cause our actual results to differ materially from these statements, including the risks mentioned in this afternoon's press release, as well as other risks and uncertainties disclosed under the caption Risk Factors and elsewhere in our filings with the Securities and Exchange Commission, including, without limitation, our annual report on Form 10-K for the year ended December 31, 2021, and our subsequent quarterly reports on Form 10-Q, all of which can be found on our website at investors.revolve.com. We undertake no obligation to revise or update any forward-looking statements or information except as required by law. During our call today, we will also reference certain non-GAAP financial information, including Adjusted EBITDA and free cash flow.

We use non-GAAP measures in some of our financial discussions as we believe they provide valuable insights on our operational performance and underlying operating results. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. Our non-GAAP measures may be different from non-GAAP measures used by other companies.

Reconciliations of non-GAAP measures to GAAP measures, as well as the definitions of each measure, their limitations and our rationale for using them, can be found in this afternoon's press release and in our SEC filings. Joining me on the call today are our co-founders and co-CEOs, Mike Karanikolas and Michael Mente, as well as Jesse Timmermans, our CFO. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn it over to Mike.

Mike Karanikolas (Co-Founder and Co-CEO)

Hello, everyone, and thanks for joining us today. 2022 was the 19th full year since Michael and I founded Revolve, and I'm proud of our financial performance and the accomplishments our team delivered in such a dynamic operating environment. Our net sales for the year increased 24% to $1.1 billion. We delivered record growth in active customers, and we generated significant profitability and cash flow that further strengthened our balance sheet.

There are three key messages I want to focus your attention on today. First, our agility, operating discipline, and execution of key growth initiatives helped us deliver Q4 and full year results that we believe continue to outperform industry peers and relevant benchmarks, further extending our market share gains.

Importantly, our combination of growth and profitability truly stands out within the fashion e-commerce sector and, coupled with our strong balance sheet, allows us to continue to prudently invest in our long-term growth opportunity at a time when others are forced to play defense. Second, while the macro environment remains a challenge for all companies, in the Q4, we made solid progress with our inventory dynamics, and we believe we are on track with our objective of rebalancing our inventory position by the end of the Q2 of 2023.

The spread between our inventory growth year-over-year and our net sales growth year-over-year decreased by more than 50% in the Q4 on a sequential basis when compared to the Q3 of 2022. We continue to expect to exit the Q2 of 2023 with an inventory position that is balanced for growth and efficiency. Third, this year is off to an encouraging start, which we believe further validates the power of our core competitive advantages and positions us very well for our large market opportunity over the long term.

Despite the very challenging comparison against our exceptional Q1 of 2022, I'm pleased to report that seven weeks into the Q1 of 2023, our net sales have increased by a mid-single-digit %. New customer growth remains healthy year-over-year. We drove a further sequential improvement in our inventory dynamics through the month of January 23 that Jesse will discuss in his remarks. I'll briefly discuss highlights from our Q4 results. In the face of many challenges, especially outside of the U.S., our net sales increased 8% in the Q4 compared to the prior year period.

We achieved growth across segments, Revolve and FWRD, and geographies, domestic and international. I'm particularly pleased to have delivered positive growth in international markets year-over-year, considering the significant currency headwinds discussed last quarter that make our product more expensive for consumers living abroad. The currency headwinds and weaker macroeconomic conditions led to a meaningful decline in net sales in the U.K. and Europe in the Q4, two of our larger and most developed international regions.

Stronger results in the Middle East and Canada, as well as a large and growing contribution from emerging markets such as Mexico and India, more than offset weakness in Europe and Australia and continued challenges in China in the Q4. Several of our emerging markets are benefiting from our investments to elevate service levels, highlighted by India, where we recently established a Revolve store within the Nykaa fashion marketplace. Which enabled us to offer free shipping and hassle-free returns in India.

Nykaa attracts more than 20 million unique visitors each month and is one of the fastest-growing fashion platforms in India, a market expected to overtake Japan and Germany to become the world's third-largest economy by 2030, according to industry forecasts. Net income for the Q4 was $8 million, or $0.11 per diluted share, and Adjusted EBITDA was $14 million.

As expected, profitability was significantly lower than our record Q4 performance in last year's Q4 due to reduced gross margins, higher return rates, and other cost pressures discussed on recent investor conference calls. In 2023, we are focused on initiatives to drive further cost efficiencies across the organization to help offset the persistent cost pressures in the current operating environment. With our long-term focus, I'll now shift to a review of our accomplishments for the full year 2022, before briefly touching on our key areas of focus for the coming year.

Starting with our top line, I'm excited that we crossed the $1 billion milestone in net sales in 2022, and very proud that we have delivered on our goal to grow 20% annually, as disclosed at the time of our IPO, growing through all the volatility and challenges of the past three years. Our net sales in 2022 were $1.1 billion, an increase of 24% year-over-year, and reflect a compound annual growth rate of 22% for the three full years since we completed our IPO in June 2019.

It's compelling to compare our growth trajectory during the three year period to legacy retailers offering premium price points, including higher-end department stores, where reported revenue from some larger players has been flat to lower than pre-pandemic levels. This comparison illustrates just how much the next generation of consumers is moving in our direction and how well our brands are connecting with her through our impactful and diversified marketing approach. We believe there remains a very large opportunity to gain further market share from these legacy retailers that generate tens of billions of dollars in revenue annually.

A key driver of our top-line expansion was delivering record growth in active customers for the second consecutive year. Our active customers grew to 2.3 million at year-end 2022, an increase of 500,000 or 27%, serving as further validation of our large market potential. Our customers' propensity to spend with us has continued to expand. Our average order value was $304 in 2022, an increase of 12% year-over-year, driven by healthy expansion of average order values at Revolve and FWRD.

Taking it down to customer metrics, from day one we've been hyper-focused on the customer experience, consistently raising the bar on service levels. Our commitment to exceeding our customers' expectation continues to drive results as we delivered a record Net Promoter Score in 2022. In a year plagued with global supply chain and logistics challenges, I'm proud that our customer-facing teams and fulfillment operations didn't skip a beat. Our customers continued to spend with us at full price to look and feel her best.

Approximately 85% of our net sales in 2022 were at full price, just shy of our record performance in 2021 and six points higher than our best full price mix in pre-pandemic periods. We exited the year on a lower trajectory as we rebalance inventory in the near term, yet our consistently high mix of net sales at full price over many years is a powerful driver of our profitable business model. Our customer retention metrics provide further validation of our ability to connect with the next generation consumer and our best-in-class service levels. For the second consecutive year, a key customer retention metric performed above pre-COVID trends.

Recall that once a year, we disclose the revenue retention of our prior year customer cohorts, defined as the revenue retention rate from the previous year for all existing customers who had purchased from us in a prior year. In 2022, our revenue retention of the prior year customer cohorts was an exceptional 97%, meaning that even if we didn't add any new customers last year, our net sales would have remained nearly flat year-over-year. Retention is an important driver of our business since tenured customers generate an outsized share of our revenue in any given year.

I'll wrap up with a discussion of some of our key priorities for 2023. Our key focus is to continue to leverage our core competitive advantages of data-driven technology, operational excellence, and the strength of our brands to drive growth and operating efficiency throughout the organization.

First, we will continue to efficiently invest in our brands to grow our brand awareness, customer base, and strengthen the connection with next generation consumers. We have some exciting plans in store for 2023 that Michael will cover in his remarks. Second, we will continue to expand our assortment into adjacent product categories where we see exciting opportunities over the long term. With the trust we have earned from our loyal customers, our longer-term goal is to be our customers' first choice for every category and occasion.

Third, with our revenue scale now exceeding $1 billion annually, we see opportunities to invest in operational initiatives to drive the dual benefits of improving service levels for customers while driving efficiencies in our variable cost structure. An exciting milestone is that last month we began fulfilling customer orders from our new East Coast fulfillment center, which will allow us to reduce customer delivery time frames and reduce costs over time. We are also evaluating opportunities to launch small regional fulfillment centers in key international regions to provide similar benefits.

Fourth, we will further expand our international presence, where we see exciting opportunities to further elevate service levels to drive growth through our localization initiatives, including expansion of hassle-free returns, all-inclusive pricing, launching new payment methods, and further development of our websites and mobile apps. Finally, we will further enhance our technology stack and leverage our advanced technologies, such as AI and machine learning, that have become important in efficiently driving some key areas of our operations and customer experience.

When Michael and I founded Revolve 20 years ago, our data-driven approach and internally developed technology were critical in enabling us to operate in an agile and sustainably profitable business from the outset. The data-driven mindset remains firmly established in our team culture and has been a driving force in our leveraging of advanced technologies such as AI and machine learning applications to power key functions at Revolve, including fraud detection, personalized product recommendations, image recognition, similar item recommendations, and product attribute tagging.

We believe our proven ability to effectively leverage technology to deliver results is a key contributor to our capital efficiency and our revenue per employee generation being more than twice the average level of revenue per employee among fashion e-commerce peers in the U.S. by our calculation.

Our annual net sales per employee, based on the employee data we disclose annually, has increased by more than 30% in just the past three years. All told, I believe our results and outlook demonstrate we are striking an effective balance of navigating through a highly uncertain environment while thoughtfully investing in our tremendous growth opportunity. I'd like to thank our outstanding team for their incredible commitment, strength, and discipline that has put us in the enviable position we are in today. I am very proud of how well we've executed, and I'm excited about the path forward. Now, over to Michael.

Michael Mente (Co-Founder and Co-CEO)

Thanks, Mike. I am proud of our ability to deliver 24% year-over-year growth in net sales in 2022, achieving our long-term revenue growth target in a very dynamic and fluid operating environment, all while maintaining a profitable and cash-generative business that further strengthens our balance sheet to give us the flexibility to continue to invest in key initiatives to drive growth and continued market share gains. Our cash position at year-end increased to $235 million, with no debt. Our ability to overcome countless business challenges to deliver profitable growth speaks volume about our leadership and our core competitive advantages that position us for continued success over the long term.

Our technology-driven DNA and proprietary technology infrastructure, our operational excellence and agility, and our powerful Revolve brand in connection with the next generation consumer. Since Mike talked about technology and operational excellence, I'll spend a few minutes on the strength of our brands in connection with the next generation consumer that we continue to build, as illustrated by our record growth in active customers in 2022. Consistent with our strategic focus discussed on recent investor calls, in the Q4, we continued to drive exceptional growth, impact, and consumer engagement on video content across our marketing channels.

Our new views on Reels increased 600% year-over-year in the Q4, and our new views on TikTok increased by nearly 800% year-over-year. I couldn't be more proud of how well our team has navigated changes in the market and executed our brand marketing transition from our historically successful focus on Instagram photo content to where we are today, with the growing majority of our social media mindshare now coming via engagement video content channels. Also important, we believe our fast-growing engagement on TikTok and Reels further expands our brand reach and awareness into a larger audience and broader range of consumer demographics.

I know many analysts and investors follow our aspirational and engaged content on social channels. For those tracking Revolve on TikTok, you may have noticed that we are an early partner for TikTok Shop, which is TikTok's social e-commerce platform that has grown rapidly in Asia in recent years. Based on their overseas success, TikTok recently began testing the TikTok Shop live streaming e-commerce initiative with U.S. consumers.

This exciting development now enables a large and growing audience of consumers to initiate Revolve purchases directly on TikTok. We are among a limited set of brands selected to participate at this early stage, reinforcing our position at the forefront of innovation for consumer engagement on social channels. Shifting to a discussion of our impactful marketing events, we continue to be very active in elevating our brands with aspirational and lifestyle events intended to excite and delight our community of customers, partners, and influencers.

In the Q4, we hosted two events in partnership with industry-leading companies that we believe further validates the strength of our Revolve brand influence. In November, we partnered with an iconic luxury brand, Porsche, outside of the fashion industry, on marketing and brand building initiatives that is unlike anything we have done before.

We collaborated with Porsche on marketing events over multiple days to create impact and awareness regarding the customizable features of the Porsche Taycan among coveted next generation consumers. Participating were more than 100 Revolve brand ambassadors who were beyond excited to get behind the wheel of Porsche's first all-electric sports car at the Porsche Experience Center in L.A. The successful Porsche x REVOLVE activation generated tens of millions of impressions on social media and is highlighted on the Porsche website.

In December, we partnered with another leading brand in a completely different zone, AT&T, which served as cohost of our REVOLVE Winterland event, an experiential holiday-themed pop-up and social hub for our community of customers, ambassadors, and brands. A private invitation-only event was headlined by VIP attendees, including Khloé Kardashian, Natalia Bryant, Olivia Culpo, Winnie Harlow, and Draya Michele, many of whom were showcasing our latest winter collection.

In the days that followed, we opened up REVOLVE Winterland to the public, enabling us to directly engage with our customers and build deeper brand connections with our entire community through our aspirational lifestyle events. Our work as event partners with incredible brands, including Porsche and AT&T, further validates our Revolve brand momentum and powerful influence on the next generation of consumers. Moving to FWRD, our luxury destination, where we see a great deal of opportunity for growth over the long term.

FWRD delivered 23% revenue growth in 2022, expanding on FWRD's incredible 83% year-over-year growth in 2021. With this continued success, FWRD has emerged as an increasingly important player in the luxury space. FWRD has a distinct styling point of view that has truly captured the attention of younger luxury consumers and luxury brands alike.

In addition, as evidenced by Kendall Jenner serving as FWRD's creative director, we have trusted relationships with incredible celebrities and tastemakers based here in Los Angeles that have been an important part for Revolve brand building historically, and we are increasingly leveraging that brand marketing muscle for FWRD as well. During the Q4, Kendall hosted two successful FWRD events, highlighted by an incredibly impactful event in November to launch a new FWRD collection from iconic designer Jean Paul Gaultier. Our brand heat helped us organically attract A-listers to this event, including Megan Fox, Doja Cat, Chloe Bailey, Phoebe Gates, and Iris Apatow, who were covered extensively in the press and on social channels.

In the days that followed, numerous celebrities around the world were spotted wearing the very same Jean Paul Gaultier looks that Kendall, Megan, and others debuted at our launch event, which helped drive strong sales of these styles going forward. In her second year as creative director, Kendall continues to find exciting new ways to engage with our FWRD community. Last month, the FWRD website began featuring new Q&A content from Kendall's insightful conversations with some emerging luxury designers, including a very hot brand, KHAITE, that Kendall hand-selected for FWRD last year after a showroom visit. Looking ahead, we will continue to focus on cross-promoting FWRD to our larger Revolve customer base, including plans to include FWRD in some of our Revolve marketing events this year.

It's a great opportunity since both brands are still complementary, since Revolve is starting more focused on the discovery of trend-driven, ready-to-wear styles, while FWRD assortment is more heavily weighted towards your statement pieces, such as shoes and handbags. Wrapping up, I'll expand on some of the key priorities Mike outlined in his remarks. First, we will continue to efficiently invest in our brands to grow our brand awareness, customer base, and even further strengthen our connection with the next generation of consumers.

Our investments will include extending our outstanding recent progress in diversifying our marketing channels, highlighted by the incredible growth in video content I referenced earlier, as well as driving further expansion of our proprietary brand ambassador program now available on Revolve and FWRD.

We will also continue to elevate the brand with our premier aspirational events and by building on our momentum in partnering with major lifestyle brands. Second, we will continue to expand outside of our historical category strength to adjacent categories to solidify us as a destination for all aspects of our life, supported by marketing initiatives to increasingly emphasize newer categories where we see opportunity. For instance, we recently hired an accomplished and experienced leader for our beauty business that has grown nearly twice as fast as the overall business in 2019.

Beauty is a great opportunity to grow our share of wallet among our extremely loyal customer base. We have also hired new leadership in our men's business, which is quietly and nicely growing, yet still a small source of revenue that we believe offers a great deal of opportunity over the long term.

Third, just as we have done our first 20 years operating the business, we will continue to make investments that we believe will generate meaningful returns over the long term with an unwavering focus on the customer. In addition to continuing to gain existing market share as we execute on these key initiatives, we believe we are well positioned to continue to expand our position as a preferred fashion destination for Millennial and Gen Z consumers as their share of U.S. household net worth continues to increase.

Mike and I are more excited than ever about the opportunity ahead. We believe crossing the $1 billion milestone in annual revenue is just the beginning, and we remain squarely focused on continuing to take market share and building a much larger, more powerful collection of brands than we have today.

This year will not come without challenges, including our effort to offset cost pressures with efficiency gains and rebalancing our inventory position to drive gross margin. We remain incredibly excited about what lies ahead of us this year and for many years beyond. I'll turn it over to Jesse for a discussion on the financials.

Jesse Timmermans (CFO)

Thanks, Michael Mente, and hello, everyone. We are pleased with our Q4 and full year results, which demonstrate agility in navigating significant challenges in the short term while maintaining an unrelenting focus on the customer and making disciplined investments that position us for continued success over the long term. I'll start by recapping our Q4 results. Net sales were $259 million, a year-over-year increase of 8% and representing a three year compound annual growth rate of 21%. Revolve segment net sales increased 9% and FWRD segment net sales increased 5% year-over-year in the Q4.

By territory, domestic net sales increased 9% and international net sales increased 1% year-over-year, despite currency and macro headwinds overseas. Active customers increased by a healthy 91,000 during the Q4. This growth expanded our active customer count to 2.3 million, an increase of 27% year-over-year. Our customers placed 2 million orders in the Q4, an increase of 11% year-over-year. Average order value or AOV was $306, an increase of 5% year-over-year and a decrease of 4% sequentially from $320 in the Q3.

Shifting to gross profit. Consolidated gross margin was 51.4%, a decrease of 339 basis points year-over-year, primarily due to a lower mix of net sales at full price and deeper markdowns compared to the Q4 of 2021. The decrease in gross margin is directionally consistent with our commentary on last quarter's conference call, but did come in lower than our guidance range for the quarter.

Moving on to operating expenses. Fulfillment costs deleveraged 84 basis points year-over-year, primarily due to a year-over-year increase in our return rate, as well as increased labor costs and investments made to expand our fulfillment network. Selling and distribution costs deleveraged 165 basis points year-over-year and remained a significant headwind, primarily due to higher costs for customer shipments due to a higher return rate year-over-year and continued significant year-over-year growth in variable fuel surcharges. Our investment in marketing was more favorable than the outlook we provided on last quarter's conference call. Our marketing investments represented 15.4% of net sales in the Q4, up from 13.5% in the Q4 of 2021, yet below the 16.6% in the Q3 of 2022.

General and administrative costs were $29 million, in line with our outlook provided last quarter. Our effective tax rate was 24%, 17 points higher than in the Q4 of 2021. The unusually low effective tax rate in the prior year comparable period primarily reflects excess tax benefits as a result of the exercise of non-qualified stock options. Net income was $8 million or $0.11 per diluted share, a decrease of 73% year-over-year that was impacted by the meaningful differences in our effective tax rate, the lower gross margin, and growth in operating expenses that outpaced our net sales growth year-over-year. Adjusted EBITDA was $14 million, a decrease of 59% year-over-year. Moving to the balance sheet and cash flow statement.

For the full year 2022, we generated $23 million in net cash provided by operating activities and $18 million in free cash flow, with both measures down significantly year-over-year from the exceptional cash flow generation in 2021. The decreases in both measures primarily reflect lower net income, which included much higher tax rates and cash payments for income taxes that increased by $20 million in 2022, as well as other changes in working capital. Looking forward, we expect significantly higher cash flow generation in 2023 based on expected favorable changes in working capital, including our expectation that our receipts of new inventory will be lower this year.

Our balance sheet remains debt-free, and cash and cash equivalents at year-end 2022 were $235 million, an increase of $60 million or 7% year-over-year. Since June 30, 2018, right after we completed our IPO, we have increased our cash balance by $190 million. Inventory at year-end 2022 was $215 million, a 26% increase year-over-year. To illustrate our progress towards rebalancing our inventory position, the unfavorable spread between our inventory growth rate year-over-year and our sales growth rate year-over-year peaked at 49 points in the Q2 of 2022, decreased to 40 points in the Q3 of 2022, and decreased significantly to 18 points in the Q4 announced today.

Most encouraging, our inventory balance as of the end of January 2023 has decreased by approximately $20 million from year-end 2022. I'm encouraged by our progress on our inventory dynamics, and we remain confident that we are on track to rebalance our inventory by the end of the Q2 of 2023. Let me update you on some recent trends in the business since the Q4 ended and provide some direction on our cost structure to helping your modeling of the business for 2023. Starting from the top. Despite a very challenging comparison in the Q1 of 2022, I'm pleased that through the first seven weeks of the Q1 of 2023, our net sales increased by a mid-single-digit % year-over-year.

As you think about modeling net sales for the full Q1, please keep in mind that in the back half of the Q1 of 2022 year ago, we had an exceptionally active calendar of impactful marketing activations, including the REVOLVE Social Club pop-up that featured special events almost every night throughout March of 2022. We believe our very strong finish to the Q1 in 2022 also benefited from building consumer excitement last year, heading into spring festival season after a two year hiatus. Considering the uncertain macro environment, we encourage investors to model moderation in our year-over-year net sales comparisons for the balance of the Q1 from the mid-single digit year-over-year growth during the first seven weeks of the quarter.

We expect year-over-year comparisons in 2023 to become less challenging after the Q1, especially in the second half of the year. As shared earlier, we are planning for lower inventory receipts year-over-year in 2023, and we continue to face a very uncertain macro environment. Shifting to average order value, a key metric that influences net sales and operating efficiency. After two years of significant growth in AOV during 2021 and 2022, we expect AOV to moderate in 2023.

Our AOV expansion over the past two years has benefited from a variety of factors, including a growing mix of net sales in the dress category, which has now normalized back to pre-pandemic levels, and a very high mix of full price net sales that, while still very healthy, will further moderate in 2023. Shifting to gross margin. We expect gross margin in the Q1 of 2023 of between 49% and 50%, a sequential quarter decrease in gross margin that is consistent with typical seasonality. Over the past several years, our gross margin has declined sequentially from the Q4 to the Q1 by an average of more than 2 points.

The Q1 of 2022 is an outlier, making it a more difficult year-over-year comparison, we expect that our Q1 gross margin this year will be the low point in 2023. For the full year 2023, we expect growth margin of between 52% and 53%. The anticipated decline from our 53.8% gross margin in 2022 primarily reflects our expectation that our full price mix of net sales in 2023 will be several points lower than the exceptional 85% full price mix of net sales in 2022. We continue to expect gross margin pressure in the first half of 2023 as we work through our inventory position, especially in the Q1, then becoming more favorable in the second half of the year.

Fulfillment. We expect that for the full year, fulfillment as a percentage of net sales will be approximately 2.9%, consistent with 2022. Looking at the anticipated cadence throughout the year, we expect fulfillment expense as a percentage of net sales to deleverage year-over-year in the first half of 2023 and achieve leverage year-over-year in the second half of 2023. One factor influencing fulfillment efficiency is that we recently meaningfully expanded our fulfillment center capacity to support future growth, optimize our customer experience, and benefit our fulfillment cost structure over the long term. Expansion of our fulfillment center capacity creates a temporary efficiency headwind until our growth and expansion enables us to again realize capacity utilization benefits over time. Selling and distribution.

In 2023, we expect selling and distribution costs to represent around 17.5% of net sales for the Q1. 17.3% of net sales for the full year, consistent with the full year in 2022. We expect return on streaming elevated in 2023, contributing to continued pressure on shipping costs, partially offset by some expected logistics efficiencies resulting from our new East Coast fulfillment center as it scales over time. Marketing. We will continue to efficiently invest in building our brands, expanding our base of loyal customers, and further strengthening our brand connection with our community. In the Q1, we expect our marketing investment to represent approximately 14.5% of net sales, a decrease from 16% in the very active Q1 of 2022.

We expect marketing as a percentage of net sales to be the highest in the Q2 at approximately 18%, relatively consistent with the Q2 of 2022. For the full year 2023, we expect marketing to represent approximately 16%-16.5% of net sales, a slight improvement at the midpoint of the range from the 16.5% of net sales in 2022. General and administrative. We expect G&A expense of approximately $28.5 million in the Q1 of 2023, and between $113 million-$116 million for the full year 2023. This implies a 1% year-over-year decline in G&A costs for the full year at the midpoint of the range. Lastly, let me touch on our tax rate.

We continue to expect our effective tax rate to be around 24%-26%. To recap, while there is still significant uncertainty in the macro environment, we continue to take a disciplined and longer-term approach to everything we do. Our leadership team is exploring many ways to leverage our technology, brands, and operational excellence to be even more efficient in 2023 and beyond. If these efforts prove successful, we could potentially drive greater efficiency in our cost structure than implied by our outlook.

To highlight just one example, we are exploring a multimillion-dollar annualized opportunity to reduce shipping costs by consolidating return shipments from some of our larger international regions, and in some cases, to hold international returns in country and fulfill orders from them locally without ever returning the items to the US.

We are continuing to strike a balance between managing operating expenses while at the same time investing in our brands and other key growth initiatives that are critical to maximizing our long-term growth potential. Guided by Mike and Michael, our two largest shareholders, who own nearly 45% of our common shares, we believe this is the right strategy to drive value for shareholders over the long term. We'll open it up for your questions.

Operator (participant)

Thank you. If you'd like to ask a question, please press star then the number one on your telephone keypad. Our first question is from Oliver Chen with Cowen. Your line is open.

Oliver Chen (Managing Director and Senior Equity Research Analyst)

Mike and Jesse, regarding the current inventory situation, what's ahead in terms of what's the nature of the composition that you have that you're working through? And on your comments on the trends quarter-to-date, the mid-single digit, what's happening with AOV there, and any implications for as we, you know, forecast the rest of the year? Thank you.

Jesse Timmermans (CFO)

Yeah, this is Jesse. Thanks, Oliver. You know, in terms of the inventory composition, we feel good, you know, based on the progress we've made, as we discussed from the peak in Q2 down to where we were in Q4, and then even more importantly, that $20 million reduction in January. You know, as we've said in the previous calls, we feel like the inventory is good, it's healthy, we're working through it. We're geared up and ready for the kind of our peak festival season. It is skewing higher on the FWRD side, as we talked about in the past, that it takes longer to work through that FWRD inventory than the Revolve inventory. Starting to make some progress there now in the Q1. You know, overall, good composition.

In the kind of results to date on revenue and AOV, as we talked about in the prepared remarks, you know, we don't expect that significant year-over-year AOV increase that we've been experiencing in the past two years. We do expect kind of a low to mid-single-digit increase in AOV. That said, Q1 is lower seasonally with, you know, a lower margin and higher markdown mix in Q1. It will be, you know, kind of lower in Q1 compared to other quarters of the year. Still, for the full year 2023, expect a moderate increase in AOV.

Oliver Chen (Managing Director and Senior Equity Research Analyst)

A follow-up on private label and private label capabilities. Any thoughts there in terms of where you are, and what inning and what capabilities, you see ahead? As we think about the marketing spend and marketing as a percentage of sales, what happened this quarter and what were you seeing, that led you to make decisions around changes there? Thank you.

Mike Karanikolas (Co-Founder and Co-CEO)

With regard to own brands, I think I'd say we're still, you know, very, very early innings. A lot of our efforts have really been focused on historically core categories and such, and we know that there's a lot of opportunity all across the board. I think this really also reflects, you know, Revolve's large opportunity to expand categories in different aspects and different racks in the closet. You know, very excited about their. You know, the past three launches have been absolutely awesome. You know, Elsa, Remi, and Marianna Hewitt. I think there's a lot of opportunity there. Of course, this gets modulated in periods of, you know, conservatism.

You know, I'm sure everyone's familiar with the cut back in own brand, during COVID, and then a tight period like this, you know, we're being conservative as well. Long term, you know, very as excited as ever.

Yeah. Then with regards to marketing, Oliver Chen, were you talking more Q4 marketing or Q1 marketing?

Oliver Chen (Managing Director and Senior Equity Research Analyst)

Both in terms of just strategies and also the CAC trends that you're seeing, with some of the volatility in the marketplace and conversion rates and IDFA.

Mike Karanikolas (Co-Founder and Co-CEO)

Yeah, definitely. You know, I'll start with talking about digital and performance marketing. You know, I think we have seen the worst of the IDFA impact from what we can tell. There isn't really further degradation as a result of IDFA. That's kind of leveled off. In terms of overall spend levels, you know, we stayed fairly aggressive with marketing through the Q4. As the quarter ended and then into Q1, we pulled back on the aggressiveness a bit and we've been investing more into optimizing the marketing mix. We're hopeful that'll bode well for marketing expenses in the coming quarters and coming year. Those are kind of the general trends we've seen on performance in digital. With regards to the brand marketing, or maybe Michael, you wanna jump in and talk about that?

Michael Mente (Co-Founder and Co-CEO)

Yeah, sure. You know, post-pandemic, it was of our kind of go historic kind of activities missing. We returned to very much the similar activities that we've kind of done in times past. Now that, you know, we've, you know, celebrated that moment and, you know, looking forward, we think it's a very exciting time to really think, you know, further ahead. There'll be a lot of different innovation, different ideas, and different like, you know, concepts which will also affect cadence, which also, you know, evolve our storytelling and such. It'll be, you know, moving forward, it'll be a mix of the things that you are very familiar with, as well as a whole range of different things that we'll be approaching. It'll be a fun year.

Oliver Chen (Managing Director and Senior Equity Research Analyst)

Sounds exciting. Best regards.

Michael Mente (Co-Founder and Co-CEO)

Thank you.

Operator (participant)

The next question is from Mark Altschwager with Baird. Your line is open.

Mark Altschwager (Senior Research Analyst)

Great, Thank you for taking my question. Just hoping you could share some thoughts and learnings regarding the health of your customer and appetite for ongoing appetite for fashion categories, even with the inflationary pressure. You know, it looks like the quarter finished a bit stronger than you expected and, you know, the mid-single-digit quarter-to-date is encouraging as well. Jesse, you know, you called out, you know, some reasons why things might decelerate in the back half of the quarter, but if I recall correctly, things actually decelerated in the back half of the quarter, Q1 of last year, setting up maybe a bit of an easier comparison. Is there a scenario where, you know, things could hold in or even accelerate from here?

Jesse Timmermans (CFO)

Yeah. Maybe I'll take that second piece first. On a year-over-year basis, last year it did appear that things or, you know, got easier, which would, you know, make for easier comps this year. You really have to look at that three-year comp last year and compare back to 2019 because 2021 was kind of that inflection point in March where, you know, things were coming out of COVID. Kind of really paying attention to those three-year comps.

We do anticipate tougher comps, you know, for the balance of this quarter, and we've already seen it in kind of the back half of that seven weeks where, you know, January started off stronger and then it started to get weaker relative year-over-year in that kind of the last three weeks of that seven-week period. Definitely, you know, encouraging everyone to factor in some moderation there in the growth rate for Q1. Maybe I'll pass it over to Michael for the consumer.

Michael Mente (Co-Founder and Co-CEO)

Yeah. In terms of the consumer, you know, I think we've seen things moderate a little bit in terms of the sort of weakness accelerating. Overall, we think our consumer is not in the place she was certainly a year and a half ago in 2021. Things still feel a little rough out there for her and, you know, Revolve markets to aspirational consumers that are, you know, looking to live their best life and often are kind of spending a very large portion of their disposable income against fashion and travel and similar products. Right now things are a bit tight for her.

Her confidence in the future isn't as strong as it was a year and a half ago, and we've been seeing that in the, in the numbers the past couple quarters.

The next-

One thing I'd that is that, you know, this is really compared to a year ago, a year and a half ago, where, you know, money was falling from the sky and people were spending and people haven't been out and there's a lot of pent-up demand. Zooming out, I think our consumer's, you know, very engaged with our brand and is really still continuing to come to us for all the things that she's loved, and we also see a lot of opportunity to continue to expand that. Zooming out and taking a broader lens view, I think we're in a great spot.

Operator (participant)

The next question is from Edward Yruma with Piper Sandler. Your line is open.

Edward Yruma (Managing Director and Senior Research Analyst)

To click down a little bit on FWRD for a second, I thank you for all the comments on AOV. Just trying to understand the implication of kind of taking a little longer to clear out some of that excess inventory. How do you feel about the FWRD business in the short to medium term? To your point earlier that it has been a lift to AOV, will it not be a lift then, I guess, for the balance of the year? Finally, are there any other things we should think about from a seasonality perspective as you kind of adjust the marketing this year? Thank you.

Mike Karanikolas (Co-Founder and Co-CEO)

For FWRD and Revolve, we expect both businesses to grow in a fairly similar zone, you know, this year. We wouldn't model in an AOV lift due to the mix shift there. As Jesse mentioned, we're still seeing some increase on the AOV side, just I think compared to the previous year. Those price increases and inflationary increases for the consumer have moderated quite a bit, so that's, you know, what we'd expect investors to model on their side.

Jesse Timmermans (CFO)

Yeah. Maybe on the seasonality, you know, we hope to get closer to that pre-pandemic, more normal seasonality, and you can see that in the marketing numbers that we guided towards in the prepared remarks, where Q1 is lighter, and then Q2 is our typical peak season with REVOLVE Festival and a lot of activity there. That'll be, you know, in that 18% zone.

Then in terms of sales as well, we'd hope to get back to some kind of normal seasonality where you see Q2 as the peak followed by Q3, and then you've got Q1 and kinda Q4 on the low end of the bookends there. You know, comps aside, because of course we will... You know, we're facing the really tough comps this Q1 and then, you know, call it halfway through Q2 before things start to ease up in the back half of the year.

Operator (participant)

The next question is from Anna Andreeva with Needham & Company. Your line is open.

Anna Andreeva (Managing Director and Senior Research Analyst)

Great. Thanks so much, and good afternoon, guys. Two questions from us. Regarding the own brands, penetration, I think you said 22% last year, significantly below even 2020 levels. Can you talk about what's the realistic level of penetration to think about for 2023? How have own brands, performed, and what do you see as a gross margin, differential there versus third party? Then, curious, what are you seeing with the return rates, quarter to date? Perhaps if you could elaborate on the returns, initiative that you mentioned. Thank you so much.

Jesse Timmermans (CFO)

Maybe I'll go in reverse order there. Return rate, you know, did tick slightly lower in Q4 compared to Q3. You know, that's largely seasonality where we see a lower return rate in the Q4. We're not anticipating a decrease in the return rate in 2023. You know, we're baking in this elevated return rate going forward. With some seasonality elements there, we see a higher return rate in Q2, for example, and, you know, that fluctuates with full price markdown mix and such. And then, you know, the differential on the own brand versus third party margin, we don't talk specifically about that other than to say that the own brand margin is meaningfully higher than the third party.

Mike Karanikolas (Co-Founder and Co-CEO)

With regards to penetration, one thing just wanna you know, kind of as a reminder that, you know, in periods of conservatism, you know, the depths of COVID as well as a period like now, own brands is an area where we cut back where the, you know, the units per style is greater than what we're able to do with third party, with third party, we can literally buy, you know, four to six units per style. In periods like these, we do definitely modulate down. We'll ramp up as the customer and the economy get a little bit more confidence in that zone.

Operator (participant)

The next question is from Rick Patel with Raymond James. Your line is open.

Rick Patel (Managing Director and Senior Research Analyst)

Thank you. Good afternoon, everyone. Can you provide a little more color on the impact of freight? I believe in the past, you've indicated that you wouldn't see a more meaningful benefit until later in 2023. Just given the outperformance and sell-through velocity being a little bit better than you expected three months ago, do you see the potential for the freight benefit to be a little bit more front-end loaded?

Jesse Timmermans (CFO)

Yeah. I would say always potential. Not factoring that in yet, though. We are still facing... Even though fuel, you know, is a piece of that, and fuel has leveled off. It's gonna level with Q3. It's off of the peak in Q2, but it's still up 78% year-over-year in Q4. You know, that is still a headwind. Then we have return rate, which is the biggest factor there where, you know, especially on a year-over-year basis, that's increased significantly and made a really big impact on selling distribution within that freight line item. We are ramping up the East Coast distribution center, which will provide some relief, but, you know, that'll take some time to play out. You know, we're still holding to that back half before we start to see some efficiencies there.

Operator (participant)

The next question is from Michael Binetti with Credit Suisse. Your line is open.

Michael Binetti (Managing Director)

Hey, guys. Thanks for taking all our questions. Jesse, just wanted to check on the January inventory number and the sales trends you pointed to, and I think you said January was stronger than February. I think that implies you're on track for sales to inventory, that ratio flipping back to positive in the Q1? I think that'll be the first time since early 2021, so I just wanted to check that.

Jesse Timmermans (CFO)

I think, flipping back to positive is probably aggressive. You know, we're still looking at that, you know, during Q2 at some point, you know, at least by the end of Q2 before that normalizes. You know, we feel good about the progress there.

Michael Binetti (Managing Director)

Okay

Jesse Timmermans (CFO)

... you know, heading into 2023 with that $20 million reduction.

Michael Binetti (Managing Director)

Right. I guess the bigger picture question is I think you told us. Okay, you said inventory will be aligned in two. I guess to look at it another way, when do you think the depth of inventories will be clean enough for you guys where it doesn't impact the future orders?

Jesse Timmermans (CFO)

Yeah. I'd say that's still, you know, call it in that mid-year timeframe. You know, we're already starting to book into that mid-year zone. You know, I think it still hangs right in that middle of the year. Again, keeping in mind that FWRD has such a long lead time that, you know, again, on the flip side, will take longer to play out.

Michael Binetti (Managing Director)

Is it the inflection point there is closer in on the Revolve side of the business?

Jesse Timmermans (CFO)

Right. Yeah, exactly. Yep.

Michael Binetti (Managing Director)

Okay. Okay, very, very helpful. Thank you.

Jesse Timmermans (CFO)

If you look, just quick, you know, if you look at the composition of the inventory, you know, kind of the sales mix of FWRD and Revolve versus the inventory mix of FWRD and Revolve, the inventory mix is much higher than the sales mix. That's another way to kinda triangulate around it.

Michael Binetti (Managing Director)

I, you know, I. Could I just ask you, inventory, any way to break out dollars versus units at the end of the quarter?

Jesse Timmermans (CFO)

Yeah, maybe not specifically. If you think about that 18-point differential between the net sales growth and the inventory growth, the unit growth on inventory was much lower, but of course the sales unit growth was also lower. You know, call it it's, you know, not half of that differential, but close to half of that differential, lower on a unit basis than the sales basis.

Michael Binetti (Managing Director)

Okay. Thank you very much.

Operator (participant)

The next question is from Lorraine Hutchinson with Bank of America. Your line is open.

Lorraine Hutchinson (Managing Director and Senior Equity Research Analyst)

Thanks. Good afternoon. As you move through the excess inventory, what type of customer is buying on discount? Is it an existing customer looking for value or maybe a new customer who might trade up into full price?

Mike Karanikolas (Co-Founder and Co-CEO)

Yeah, you know, it's a mix of the two. You know, as we look at our mix of new customers and kinda where we acquire them for off-price versus full price and, you know, versus our sales mix, generally markdown products are a bit more effective at the new customer acquisition, but it's not in an extreme end. Ultimately it's a mix of those existing customers and new customers that we bring in that hopefully over time we can trade up.

Lorraine Hutchinson (Managing Director and Senior Equity Research Analyst)

You had commented last quarter about the lower priced consumer a little softer than the higher end. Is that relationship holding up through Q4 and into the Q1?

Jesse Timmermans (CFO)

Yeah. Yeah. I think it holds consistent with what we said on the prior call, where if you look within that full price, the higher priced items are holding up better than the lower priced items. You know, that said, with the, with the, you know, heavy movement of inventory into that markdown, you know, markdowns of course did outperform, which you can see in the margin. You know, if you look just within a, the full price category, then the higher end did hold up better.

Lorraine Hutchinson (Managing Director and Senior Equity Research Analyst)

Thank you.

Operator (participant)

The next question is from Simeon Siegel with BMO. Your line is open.

Simeon Siegel (Managing Director and Senior Analyst)

Thanks. Hey, everyone. Good afternoon. Jesse, do you have any way to quantify the moving pieces in gross margin embedded within the, your Q1 and full year guide? Any updated thoughts on long-term gross margin rates? Just curious how you're thinking about inventory turns for next year. Thank you.

Jesse Timmermans (CFO)

Yeah. Maybe on the kind of breaking it down a little bit more, you know, we'd expect Revolve to be in that 55% zone, FWRD to be more in the kinda low 40s zone. You know, the year-over-year impact is largely due to the full price mix. We were checking at 85%, which is just off of the record high of 87% in 2021. We expect that to come down several points. If you go back to even pre-COVID levels, we were at 79, which we felt good about. We think we can do better than 79, but it's not gonna be at 85. That's the biggest factor there on the margin.

you know, exiting the year in a much healthier place as we work through the inventory in the first half. turns, expect much better turns in 2023, given one, inventory recalibration, and then again, just kind of back half trends and getting things normalized.

Operator (participant)

The next question is from Janine Stichter with BTIG. Your line is open.

Janine Stichter (Managing Director and Consumer Retail and Lifestyle Brands Analyst)

Great. Thanks so much. Wanted to ask about the G&A. I think you said down 1% year-over-year on the midpoint. If you could just talk a bit about where those savings are coming from. I think it's the first year we'd have down G&A with the exception of the COVID year. Just some thoughts on your expense philosophy there. As a follow-up, just was curious how you're thinking about inventory in the channel. It sounds like you're making nice progress on your own inventory, but just curious what you're seeing from an overall industry-wide promotionality standpoint. Thank you.

Jesse Timmermans (CFO)

Yeah. On the G&A front, you know, that's starting to level off, that's coming off of, you know, a really robust investment cycle coming out of COVID, where we were keeping up with that just really robust demand and rebuilding the team, et cetera. You know, this is more of what we'd expect, you know, going forward. If you look over the course of the last three years from 2019 to 2022, we've gained three points of leverage on that G&A line item. It's, you know, we call it semi-fixed. It's kinda two-thirds, salaries and wages. You know, as we get into a more normalized growth cadence, we can get leverage there in the next few years. Then promotional activity, you know, I think you guys know just as well as we do.

You know, it's been elevated. It was elevated in Q4. It kinda ramped towards the back half of Q4. You know, continued into Q1, I think, as everybody works through their inventory positions. You know, I guess it's as we expected, higher year-on-year especially, and then kind of, you know, a little bit higher than kind of pre-pandemic 2019 levels.

Operator (participant)

The next question is from Jim Duffy with Stifel. Your line is open.

Peter McGoldrick (Research Analyst)

Hi, this is Peter McGoldrick on for Jim. Thanks for taking our questions. You added a half a million new customers in 2022. Can you talk about any cohort differences compared to your seasoned customers? Any distinction in channels of acquisition, full price engagement, or frequency of purchase to call out?

Mike Karanikolas (Co-Founder and Co-CEO)

Yeah. Obviously, things can change quarter to quarter, you know, mix shifts in different marketing channels and whatnot. By and large, the cohorts look similar to cohorts we've acquired in the past. You know, per what I mentioned earlier, obviously with more markdown merchandise, you've got a bit of a larger portion of them coming on the markdown side. Again, not, you know, in any sort of extreme sense. I think other, you know, differences, beauty has certainly been a very nice customer acquisition source for us, and we saw that in particular in the Q4. That's an area of the business that we've been expanding, has been growing at a healthy rate, and we hope to do so for many years to come.

Operator (participant)

The next question is from Dylan Carden with William Blair. Your line is open.

Dylan Carden (Senior Equity Research Analyst)

Thanks a lot. Trying to think through the spread between the degradation in the Adjusted EBITDA margin and the free cash flow margin over these last three years. Is there some inefficiency in the model now that it's at a certain scale and kinda reading the body language on sort of necessary investment in additional fulfillment capacity that, you know, you might see in these next couple of years? I mean, your overall CapEx as it relates to sort of relative top line is still pretty low, but how are you thinking about getting the free cash flow profile, you know, maybe from an efficiency standpoint?

Mike Karanikolas (Co-Founder and Co-CEO)

Yeah. Well, I think we're in a somewhat unique period right now, right, where inventory levels have risen a lot year-over-year, and, and that's by and large the, the biggest driver of the difference between free cash flow and margin. Any periods where inventory is climbing, you're going to see that conversion ratio not look as good. Historically, we feel great about our track record of converting EBITDA into free cash flow. We have very low CapEx. Historically, we don't expect that to increase in any significant way going forward.

Obviously, we'll be opportunistic, never say never, but we don't expect things to change on that side. We have very few adjustments to our Adjusted EBITDA versus EBITDA versus a lot of companies out there. You know, I don't think there should be any body language around there, but if we sent the wrong body language, we'd like to clarify.

Dylan Carden (Senior Equity Research Analyst)

I guess it just means that, you know, it sounds like you're investing in fulfillment capacity. Not to say that's gonna spike up meaningfully, but is there a certain inefficiency? I mean, you know, I mean, it's all spelled out, you know, 2% free cash flow margin at the end of last year, down from 12% three years ago. EBITDA has gone from 10% to 8%. You know, I get the inventory overhang, but, you know, is there a need here for some sort of greater efficiency in distribution or fulfillment, you know, taken aside to some of the general operating deleverage in the model? I guess is the ultimate question. I'll have to take that offline, I guess, maybe if it's too in the weeds.

I guess the last question I have is any update on the cross-selling initiatives between FWRD and Revolve? Just sort of following from that, you know, the higher levels of retention that you're seeing. You know, is there a natural, you know, go-forward new level of marketing spend that you think the model can withstand as you're kind of seeing those initiatives play out? Thanks.

Mike Karanikolas (Co-Founder and Co-CEO)

Yes. With regards to Revolve and FWRD, we feel very good about the cross-selling initiatives we have there. That's a huge long-term opportunity for us, and there we're gonna continue to invest in a big way. We've talked about on previous calls how it's essentially mid-single digits % of overlap, and we think in the future, it can be much, much larger than that. We feel like a very large portion of Revolve customers are shopping the products on FWRD, that's a huge opportunity for us. And then just to kind of, you know, I guess turn back to the model question.

I think Jesse helpfully gave some good color in his comments there, you know, I just wanna reiterate, we're very confident in that 14% long-term margin. You know, in the current period, we're not pleased with the gross margins that we delivered. You know, we expect as the inventory position normalizes, that those gross margins are gonna go back up significantly. Also, own brand continues to be a big long-term opportunity to gain gross margin and share there. Operating leverage, you know, Jesse mentioned, you know, gaining 300 basis points on the G&A side over a multi-year period. You know, as well as additional efficiencies, and that does include, right, you know, scale on the distribution side.

That is something that we think is an opportunity and is something that we're focused on. You know, I just wouldn't necessarily say the model needs it so much as obviously to maximize the economic opportunity for investors, where we're certainly gonna make sure we're maximizing those opportunities on the scale side that we have with distribution.

Jesse Timmermans (CFO)

Yeah. Sorry, not to drag this one out longer, but also keep in mind the tax rate and those cash tax payments this year versus the last couple of years, where we've experienced a much lower tax rate that has a drag on the free cash flow. That's where you're also seeing a bigger differential this year between the free cash flow and the Adjusted EBITDA.

Operator (participant)

The next question is from Matt Koranda with ROTH Capital. Your line is open.

Matt Koranda (Managing Director and Senior Research Analyst)

Hey, guys. Thanks. Just wanted to get your thoughts on active customer growth and how we should be thinking about it for 2023 after such a good couple of years for net adds. It doesn't seem like you're particularly leaning hard into marketing this year, just given the guidance you gave. Just curious the leverage you have to pull and sort of how we should be thinking about growth in active customers.

Jesse Timmermans (CFO)

Yeah. Yeah, I think it holds consistent with our previous remarks on other calls where, you know, because it is a trailing 12-month number, you have some comp dynamics there. As we get, you know, closer towards the middle of 2023, we'd expect that active customer growth to converge closer to the net sales growth. You know, given the really robust adds in Q4, you know, I think we're confident we can keep that active customer growth to a positive number throughout 2023. We feel good, you know, keeping in mind that Q1 of 2022 is, you know, kind of an all-time record, not just for sales, but for new customers as well.

Operator (participant)

We have time for one more question, which is from Tom Nikic with Wedbush Securities. Your line is open.

Tom Nikic (Senior Equity Research Analyst)

Hey, guys. Thanks for squeezing me in here. Just wanted to ask quickly about the own brands. I know the penetration ticked up a bit in 2022, but still well below where you were in 2019. Just wanted to, you know, get your thoughts on how we should think about, you know, own brand, own brand penetration, what that does to gross margin over time? et cetera.

Mike Karanikolas (Co-Founder and Co-CEO)

Definitely. Yeah. With the period of, you know, conservatism and, you know, inventory being where it is, where we're, you know, working through and, you know, past our peak and, but still been in a period of conservatism. We definitely will scale back own brands because it is kind of like one of the highest leverage points for reducing inventory while maintaining a broad consumer offering. As we work through inventory and, you know, as we look into beyond, we, you know, won't really see it too much in 2023, but beyond, we'll see the ramp up of own brand as well, kind of back to our historic core and such. You know, long-term wise, we think there's an incredible amount of opportunity. Our capabilities have been enhanced quite a bit over the past few years during the COVID years.

There's a lot of more capability in categories that own brand didn't touch. Feeling as optimistic as ever in that zone. All of our recent drops have been awesome. You know, the Helsa brand is doing absolutely incredible, and it's expanded into categories and price points that we weren't engaging historically. You know, the Remi collection was awesome as well in terms of, you know, broader size ranges. The most recent drop with Marianna Hewitt, which was focused on less going out clothes, a little bit more sophisticated kind of wear, workwear, which has been awesome as well. It really has been, you know, kind of like the early form of like, the next stages of own brand expansion.

Operator (participant)

That's all the time we have for questions today. I'll now turn it back to management for any closing remarks.

Mike Karanikolas (Co-Founder and Co-CEO)

Well, just thanks, guys, for joining us on this quarter and this final year. Hitting $1 billion in annual revenue is something we always dreamed of. We were, you know, finally able to achieve that, which is awesome. This coming year, you know, post-pandemic, post kind of crazy economic times, will still be a very exciting and interesting year. We'll be celebrating our 20th anniversary this year. We have a lot in tune, and we're very excited for next quarter and beyond as we think about the next 20 years.

Operator (participant)

Ladies and gentlemen, this concludes today's conference.