Good afternoon and welcome to Revolve Group's second-quarter 2019 earnings conference call. Today's call is being recorded and we have allocated one hour for prepared remarks and Q&A. At this time, I would like to turn the conference over to Jesse Timmermans, Chief Financial Officer at Revolve. Thank you. You may begin..

Good afternoon, everyone, and thanks for joining us to discuss Revolve's second-quarter 2019 results. Before we begin, we would like to remind you that this conference call will include forward-looking statements.

These statements include our future expectations regarding financial results and guidance, market opportunities, our growth and increased efficiencies, our investments in customer experience, marketing opportunities, and our lower price point offerings.

These statements, which are subject to various risks, uncertainties, and assumptions, could cause our actual results to differ materially from these statements.

These risks, uncertainties, and assumptions are detailed in this afternoon's press release as well as our filings with the SEC, including our registration statement on Form S-1 that was filed with the SEC and the Form 10-Q that will be filed, 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, free cash flow, and adjusted diluted EPS.

We use non-GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business.

The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP. And our non-GAAP measures may be different from non-GAAP measures used by other companies.

Reconciliations of GAAP to non-GAAP measures as well as the description, limitations, and rationale for using each measure can be found in this afternoon's press release and in our SEC filings. Joining me on the call today are our Cofounders and co-CEOs Mike and Michael. Following our prepared remarks, we will open the call for your questions.

With that, I will turn the call over to Mike..

Thanks, Jesse. Good afternoon, everyone. Thanks for joining us on our second-quarter earnings call. We had an exceptional quarter, posting record net sales and profits in this first earnings call as a public company, even as we continue to make investments in our infrastructure and customer experience.

Our IPO was a very exciting milestone for us, but it was one step in a long journey. Before reviewing the quarter and recent developments, I want to briefly remind everyone of the core attributes and differentiators of Revolve. It starts with the vision and the team.

Michael and I have been fortunate enough to have been joined by an incredible group of executives and employees who have shared our vision and helped us build what we believe is the next generation of fashion retail. We wouldn't be here today without such a strong and devoted team and so I wanted to take this moment to thank them.

We believe we have a huge opportunity ahead of us, driven by the changing retail landscape. Revolve sits at the intersection of digital commerce and Gen Z and millennial purchasing power, all of which are rapidly growing markets.

We believe we have a better way of capturing these markets, both through our data-driven merchandising, which is powered by proprietary technology, and through our innovative marketing approach. As a result, we believe we have built the leading US online premium fashion destination targeted towards millennial and Gen Z consumers.

Our data-driven merchandising model allows us to offer broad yet curated assortments of on-trend apparel and accessories while minimizing fashion risk. We leverage our data-driven merchandising model to optimize our product offering and to develop new owned brands and new styles within our portfolio of owned brands.

Importantly, Revolve's owned brands are not private label. They are seen as real brands by our customers, carry similar average unit retail prices as our third-party brands, and actually garner outsized internal and external search volume as compared to third-party brands.

Each Revolve owned brand has its own unique ethos and aesthetic, and collectively, they have over 3 million social followers. We employ an innovative, efficient, and scalable marketing approach. It starts with our disruptive social media influencer and experiential brand marketing.

With an Instagram following of nearly 7 million across REVOLVE, FORWARD, and our owned brands, we continuously provide our customers with aspirational and engaging content. We amplify our message in a highly efficient manner through our network of over 3,500 influencers and buzzworthy experiential social events.

We pare our community-driven social-media-based brand marketing with sophisticated data-driven digital performance marketing efforts. The integration across all parts of the customer funnel allows us to efficiently increase brand awareness, promote customer acquisition, encourage retention, and maximize customer lifetime value.

Underlying all of this is our proprietary scalable technology platform which enables us to efficiently and seamlessly manage our merchandising, marketing, product development sourcing, and pricing decisions. And we are continuously working on opening new markets, offering unique experiences, and improving service levels globally.

We are more excited than ever about our future and the opportunities ahead of us. And now moving on to an overview of the second quarter and some recent developments. Overall, we are very pleased with our second-quarter results, reaching record sales and profitability.

Net sales were robust, up 23% year over year, with the REVOLVE business continuing to be the primary driver of growth with a year-over-year increase in net sales of 24%. We are also very pleased with the progress we made on the FORWARD business, which delivered positive year-on-year growth of 14%.

The return to growth is the culmination of a successful inventory repositioning effort that we have been executing over the past 18 months. We also continued to expand our customer base with total active customers surpassing 1.3 million. These customers placed nearly 1.3 million orders in the quarter, an increase of nearly 31%.

We delivered gross margin of 55.8% in the quarter, a 21-basis-point year-over-year increase, driven by a 30-basis-point year-over-year increase in the REVOLVE segment. Year to date, we expanded gross margin 92 basis points to 53.9%, with the REVOLVE segment increasing 61 basis points and the FORWARD segment increasing 45 basis points.

Within the REVOLVE segment, our owned brands continue to resonate with our customer and expand their share of the business. Our owned brand portfolio now includes 23 brands, with a couple of very exciting launches in the quarter that Michael will talk about later.

We continue to operate in a disciplined and cost-effective manner while making some significant investments in growth and scale during the first half of the year.

In the fourth quarter of 2018, we made the decision to consolidate multiple facilities into a single expanded and centralized warehouse and distribution center to support our growth and efficiency increases.

This transition was a substantial undertaking for the team, but we were able to successfully complete the transition into the new facility by the end of March. The new facility gives us capacity for the next several years and beyond. With the centralized facility, there are natural synergies and efficiencies to be realized.

But even more exciting is the opportunity this provides for increased automation and efficiencies in the years to come. The first phase of our automation launched in beta just a couple weeks ago. Given what was accomplished, I want to take a minute to acknowledge the great work by our operations team.

They executed the move within three months, and within three days of the move, we shipped a record number of orders out of the new facility. But they didn't stop there. Within four months of the move, the beta Phase 1 automation went live, all the while maintaining our annual CapEx in the low-single-digit percentage of net sales.

We continue to invest in and improve customer experience, extending same-day processing cutoffs, providing two-day delivery to the UK, two- to three-day delivery to Asia-Pacific and the Middle East, and one-day service in Southern California.

We extended our customer service hours to nearly 24 hours, and launched a partnership with Happy Returns, giving customers a way to make returns in person at select locations, receiving immediate credit for returned merchandise, and improving our already efficient return economics.

On the technology front, we continue to look for innovative ways to improve our shopping experience. We were one of the first retailers selected to be part of Instagram Checkout.

We launched visual navigation capabilities on the site, and are in the process of launching a progressive web app that we believe will increase our mobile site conversion by providing an app-like experience. Now I will turn the call over to Jesse to provide additional detail on our second-quarter results..

Thanks, Mike. Since this is our first earnings call as a public company, I want to provide a framework of our key performance metrics and how we evaluate the business.

The key metrics we will report on a quarterly basis, outside of the core financial statement metrics, include active customers, number of orders, average order value, free cash flow, and adjusted EBITDA. We believe these metrics best represent our results on a quarterly basis.

Annually, we will provide an update on the percentage of sales at full price and our owned brand penetration. These last two metrics can vary more on a quarter-to-quarter basis and we believe an annual update is most meaningful. Now to the second-quarter results.

As Mike mentioned, we delivered another strong quarter and we are very pleased with our performance. Total Company net sales increased 22.8% year over year for the second quarter, driven by the REVOLVE segment, which increased 24% to $143.9 million.

This strength in the REVOLVE segment was complemented by our FORWARD segment returning to growth, with net sales of $18 million, an increase of 14.4%. Our overall growth was driven by new customer additions as well as continued loyalty from our existing customers.

Our active customers increased 36.2% year over year to 1,359,000 active customers, and total orders placed increased 30.8% year over year. The significant increase in orders placed was partially offset by a slight decrease in our average order value to $275, a 2.2% decrease year over year due in part to a shift in sales mix towards REVOLVE.

That said, we believe our AOV is healthy and demonstrates the premium nature of our product. International net sales for the quarter were $25.8 million, representing 16% of total net sales and an increase of 4.3% year over year.

We continue to experience strength in regions such as the UK, where we have made investments in the customer experience and localized marketing, partially offset by macroeconomic headwinds internationally as well as regional specific headwinds.

Consolidated gross margin was 55.8% for the second quarter, an increase of 21 basis points over the prior year. REVOLVE continues to be the driver of the gross margin expansion based on its high percentage of sales at full price and increased penetration of owned brands, which generally carry higher margin than our third-party brands.

REVOLVE gross margin for the quarter expanded 30 basis points to 57.5%, while FORWARD gross margin declined 149 basis points to 42.2%.

We are extremely proud of our ability to expand margins over, time, and we are very pleased with our recent results and the year-over-year expansion of 92 basis points for the year to date, with margin expansion in both segments. Now we will move down the P&L and give you some color on the expense line items.

Fulfillment, which reflects the costs incurred to staff and operate our distribution centers, totaled $5.3 million or 3.3% of net sales. The increase in both absolute dollars and as a percentage of net sales was generally in line with expectations as orders processed and unit growth continues to outpace sales growth.

We also incurred incremental costs associated with our investment in the new expanded and consolidated warehouse and distribution center that Mike discussed earlier. The new warehouse is 281,000 square feet and geographically close to our previous and existing facilities in Cerritos, California.

We expect the new facility will provide us capacity beyond 2021 and will also provide both near-term and long-term opportunities for operational efficiencies. We have already begun to realize natural efficiencies through a centralized location, including more efficient product movement, order consolidation, and extended shipping cutoff times.

Over the longer term, we expect to achieve further efficiencies through additional automation. As Mike mentioned, the first phase of this automation was launched in beta just a few weeks ago. And we are excited about the future opportunity for further efficiencies and improvements in customer experience.

Selling and distribution, which consist primarily of shipping, merchant processing fees, and customer service, was $23.6 million or 14.6% of net sales.

As a percentage of net sales, selling and distribution costs were slightly lower than expected as we achieved lower cost per order year over year, gaining efficiencies in freight and packaging costs while at the same time enhancing our service levels.

Marketing, which includes both our social-media-influencer-based brand marketing as well as our targeted online performance marketing costs, was $24.9 million or 15.4% of net sales. Marketing was more efficient year over year as a percentage of net sales, exceeding our expectations.

We continue to invest in marketing with a constant flow of events and activations that are further supported by our digital performance marketing efforts. Consistent with prior years, the second quarter included Revolve Festival in April, historically our most significant activation of the year.

We will continue to invest in acquiring and retaining customers, building the REVOLVE brand, and supporting and expanding our portfolio of owned brands with a long-term view towards driving customer lifetime value. General and administrative costs include the other general corporate functions and consist primarily of salaries and wages.

G&A was $18.8 million or 11.6% of net sales as compared to 12.2% of net sales in the prior year and was lower than planned. We are gaining efficiency with scale while at the same time making investments in our team and infrastructure to support growth and operating as a public company.

The combination of the strong sales momentum, expanding margin, and a well-managed cost structure resulted in net income for the quarter of $12.7 million, growth of 21.7% year over year. And adjusted EBITDA for the quarter of $19 million, 11.7% of sales and a year-over-year increase of 21.5%, well ahead of expectations.

I will touch quickly on EPS, but encourage you to focus more on net income and adjusted EBITDA, given isolated events that occurred in the quarter, including the corporate conversion and the IPO, which makes EPS less meaningful. Our net income of $12.7 million exceeded published consensus of $10.1 million.

Adjusted EBITDA of $19 million exceeded published consensus of $15.1 million. Our GAAP diluted EPS was negative $0.57 for the quarter, as it was impacted by the payment of $40.8 million to the holders of our pre-IPO preference units concurrent with the IPO.

Because this impact will not carry forward, and because EPS will not be comparable in future periods and is not reflective of our true operational performance in the quarter, we have provided non-GAAP adjusted diluted EPS, which excludes the impact of the preference payment.

It is also important to note that the share count in this first quarter as a public company is not reflective of a full quarter and will not be comparable to other periods. We continue to operate in a highly capital-efficient manner.

During the quarter, we generated $6.8 million of cash from operations as compared to $13.5 million in the prior year, with the year-over-year decrease largely driven by changes in working capital and timing, primarily related to the timing of tax payments.

We generated $2 million of free cash flow in the second quarter as compared to $12.8 million in the second quarter of last year. The decrease in free cash flow is primarily due to the lower cash generated from operations as well as an increase in CapEx with the investment in our fulfillment capabilities, as mentioned earlier.

The fulfillment center expansion and automation has been a meaningful undertaking for us. And even with this investment, we remain very capital efficient with CapEx at approximately 3% of net sales for the year to date.

Our balance sheet remains strong with no debt and cash and cash equivalents of $44.8 million at the end of the quarter, including approximately $12.5 million in net proceeds from the IPO after deducting underwriter discounts, operating costs, and the repurchase of shares from holders of our pre-IPO preference units.

The cash balance of $44.8 million compares to $20 million at the end of the second quarter last year. We ended the quarter with $102.5 million in inventory as compared to $82.2 million at the end of the second quarter of 2018.

As a reminder, with the adoption of the new revenue recognition standard, we reclassified a portion of our inventory to prepaid and other current assets starting in 2019. The amount of this re-class on the June 30 inventory balance was $13.6 million. Looking ahead, we are focused on the long term and our approach on guidance reflects this.

We will provide annual guidance and provide updates quarterly on any changes to this annual guidance. Initially, our annual guidance will refer to ranges of net sales and adjusted EBITDA dollars and annual growth rates as well as a range of adjusted EBITDA margin rate.

As the share count stabilizes in the future quarters and EPS becomes more meaningful on a comparative basis, we will layer this into our guidance. With that, I will turn to our full-year 2019 guidance. We expect net sales to be between $598 million and $608 million, which represents growth over fiscal 2018 of between 20% and 22%.

Adjusted EBITDA is expected to be between $51 million and $56 million, growth of 10% to 20% over fiscal 2018, and a margin of 8.5% to 9.2% as compared to 9.3% in 2018. Now I will turn it over to Michael to talk about some additional Q2 highlights and developments with our strategic initiatives..

data-driven merchandising, curation, influencer-based marketing, and the development of owned brands. We started cross-marketing to the REVOLVE customer in the quarter, the early results of which have been very exciting.

We have a number of initiatives in play that we believe will further drive demand, including faster shipping, regional pricing, installment payments, and some unique marketing opportunities.

On the other end of the spectrum, we continue to believe the lower price points provide an entry point for Gen Z customers before they move up to the core REVOLVE offering, increasing the total addressable market for new customers. We know there is interest in this demographic, as approximately one-third of our followers are Gen Z.

To target this emerging customer, we supplemented our already successful lower price point brands with the launch of the Superdown brand on the REVOLVE site in early Q1. In Q2, we launched superdown.com as a dedicated lower price point site that features our lower price point brands as well as a select range of third-party brands.

We chose to launch a dedicated site and social media presence so that we could speak to this customer in a way that is more direct and relevant to them. It's too early to talk about the specific results here, but we are excited about the launch and opportunity and we will keep you up-to-date on progress here.

As you can see, we continue to be relentless in our goal of being the trusted premium lifestyle brand and go-to source for discovery and inspiration for millennial and Gen Z consumers. We are very proud of our continued success, delivering record results this quarter and more excited than ever about what's ahead.

I will wrap this up by thanking the team for all their tremendous efforts. It's been a great first quarter as a public company and we are looking forward to us continuing to execute against the long-term opportunity in front of us. Thank you. We are looking forward to hearing your questions..

[Operator Instructions]. Your first question comes from the line of Kimberly Greenberger from Morgan Stanley. Please go ahead. Your line is open..

Great, thank you so much. A very nice quarter here. I wanted to ask about the trend in AOV. And I would have thought perhaps with the FORWARD segment re-accelerating that the AOV would show a little bit of upward momentum.

So I am wondering if you can sort of break down AOV between the brands and talk about the dynamic, especially at the REVOLVE segment..

Yes, sure. Thanks, Kim. So on AOV, if you remember last year is when we started to introduce the lower price points. So in the back half of 2018, we did see AOV start to decrease. Since then, it has come back sequentially. So in Q1, we were down kind of in the high-single digits as compared to Q2, which was down 2.2%.

So there is still some mix shift going on there towards the REVOLVE segment, lesser than in prior periods, with FORWARD returning to growth, but there is still some there. And then to your point, there is a slight decrease year over year in AOV on the segment level. But again, we are still comping higher AOVs in the first half of the year last year..

Okay, great. And Jesse, my follow-up is just on the inventory numbers. I assume the new accounting convention was applied also at the end of Q1.

Is that correct?.

That's right. Yes, we started it on January 1, 2019. So Q1 and Q2 are under the new method..

Okay. So end of Q1, it looks like inventory was up 41%; end of Q2, it looks like it's up 24.7%. It's looking directionally like it's quite clean.

And I'm wondering if there were any sort of inventory reduction efforts here in the second quarter that you guys were engaged with? Or was it just simply slowing down inbound orders that allowed the inventory to really get cleaned up?.

No, nothing specific. And just to clarify, you need to add back that 13.6 into the inventory that reflect kind of a comparative to last year. That doesn't apply to Q1. So to your point, there has been some improvement in inventory there.

And also, in that inventory, keep in mind that we have been investing in the owned brand expansion, the Superdown expansion, where we invested in the lower price points. And then finally, FORWARD returning to growth for the first time in at least 12 months, where FORWARD had year-on-year positive inventory growth.

So some investments being made there, but we feel good about the inventory balance looking into the second half of the year and beyond..

Great. Thank you, Jesse..

Your next question comes from the line of Michael Binetti from Credit Suisse. Please go ahead. Your line is open..

Hey, guys. Thanks for all the detail today and congrats on the IPO. And great to talk to you guys after the first quarter out of the gate. I have to -- I want to ask about the gross margin comments by segment. I think when we spoke through the IPO process, I don't think you were expecting much in the near term.

You had a lot of moving parts with DCs and obviously launching new brands and mix math, everything like that. But you did mention that REVOLVE was up 30 basis points. I'm curious if that was in line with your thinking on how REVOLVE would be in the quarter.

I seem to remember that it seemed like it might be a little bit ahead of where you thought it would be. But then also on FORWARD, obviously there has been a meaningful inventory reset there. You mentioned that gross margins were down a little bit.

Maybe just a little bit of color on what pushed the margin down on FORWARD and how you see the two components rolling forward through the year as they fit into the guidance you gave..

Yes, thanks, Michael. So I would say that overall, gross margins are in line with our expectations. REVOLVE had solid margin continued expansion year over year with that owned brand expansion and also really strong full price sales. And we are comping a really strong Q2 last year as well, so it's important to keep that in mind.

And then on that comp point, it's highlighted on FORWARD where we had really strong gross margin last year in Q2. So in general, in line with our expectations and feel good about margin this quarter..

And how should we think about the gross margins, and maybe even by segment, as we think about the EBITDA guidance that you gave us for the year?.

Yes. As we look ahead to 3Q and 4Q, another thing to call it is just to keep in mind that 2Q is seasonally higher margin. So you shouldn't expect to see this high of margin in the back half of the year, but that's natural and consistent with prior years.

So we expect to continue to see strong full price sales and margin on a comparative basis, but again, keep that seasonality in mind..

Okay. And can I just ask you -- sneak in one on the mix of owned brand in the quarter? Can you help us think -- I know you don't want to get into the game of giving directional percent or percent -- exact percentage on owned brand mix year over year.

But can you help us think about how the mix of owned brand trended year over year in the quarter on the REVOLVE side? And is that something we should assume as far as a similar magnitude tailwind on the revenue margin components through the year?.

Yes, so maybe I will step back and look at Q1 that we disclosed in the S-1, which was 35.8%. And it was a little bit lower than that for the trailing 12 months; I think around 33%. So kind of using that as a level set. And then year over year, we did see an increase in owned brand penetration.

Without talking specific percentages, we feel good about the increase there. And as Michael mentioned, we had a couple good product launches this quarter, and then we have FORWARD owned brand coming later this year..

Okay. Thanks a lot for the help, guys..

Your next question comes from the line of Oliver Chen from Cowen and Company. Please go ahead. Your line is open. .

Hi, thank you. The tariff situation is quite dynamic.

What your thoughts as you think about elasticity and also your assortment and pricing planning across your portfolio? And then our follow-up was just regarding Superdown and as you think about executing on lower price points and the tests you have done and efforts to just minimize cannibalization risk. Thank you..

Sure, this is Jesse. I will take the first one, the tariff question, and then pass it on to Michael for some discussion on Superdown. So on the tariffs, they are here. 10% is better than 25%, but we are by no means immune to them. But we do have ways to manage through the tariff impact as we look ahead.

And first is we have great relationships with our vendors in China, so we expect to gain some leverage there. Second, we have been working on diversification really over the last 12 to 18 months and continue to make progress there.

And then third, because you probably heard those before, what makes us maybe a little bit more unique is our premium average order values and the very low overlap that we have with other retailers.

The combination of emerging and owned brands is over 70% of the product mix, so these are brands and styles that you really can't find anywhere else unless you are really looking. So our shopper comes to us not to price compare, but to look for what is new and exciting.

So with that, to your point on elasticity, if mitigation factor number one and two don't fully offset, we do have the option to pass some of that impact on to the consumer without, we believe, a significant impact to demand..

And regarding Superdown, I think Superdown is a perfect example of our business philosophy in terms of read and react. Like our merchandising model or test and iterate is how we speak on the technology side. And our investment with the launch of Superdown was quite small and we are learning very, very quickly.

So we will keep you guys up to date as things develop. Cannibalization is very, very top of mind for us. And we think that we know that this consumer loves REVOLVE. We also know that the younger consumer not necessarily could afford to shop on REVOLVE on a regular basis.

But by focusing on this younger consumer, it also allows us to engage with influencers that were not appropriate for REVOLVE. It really -- not only does it expand our TAM, but it also expands our marketing capabilities, leveraging our proven techniques with a different set of influencers for a different audience.

So this is something very top of mind, and as I said, to keep you guys posted quarter to quarter as the brand and the business develop..

Thank you. Best regards..

Your next question comes from the line of Randy Konik from Jefferies. Please go ahead. Your line is open..

Yes, thanks a lot. So I guess a question for Jesse. You spoke about slightly higher fulfillment costs in the quarter, but it seems as if that has the opportunity to kind of get leverage over time. So kind of give us some thoughts on that.

And then on the marketing side, you got some nice leverage it looks like or came in much more efficient than expected.

So it looks like to me that the REVOLVE platform creates this platform for the influencers themselves that draws in more influencers that you can thereby leverage that marketing expansion and distort it across the business more efficiently.

So kind of walk us through your plan to kind of think about distortion of marketing expense going forward to kind of -- and the process that you are seeing of influencers seeing other influencers on your platform and wanting to get a piece of this REVOLVE action, if you will..

Yes, sure. So I will take the first part there on the fulfillment. So to your point, higher year on year, so we lost some efficiency there. And that was primarily due to the investment in the fulfillment center, so we are carrying some excess capacity, some excess facility right now. But we expect to, to your point, gain leverage in the future.

We won't see a meaningful impact on that until 2020, but feel really good about our capacity and our ability to grow into that facility. And not just grow into it, but we are also layering in the automation, which should give us efficiencies in the future. And then just to call out quick to you, that inefficiency is year-on-year inefficiency.

We actually gained some leverage sequentially from Q1. And then I will pass it on for the exciting influencer one..

Yes, so on the marketing side, you are right. It was a great quarter for us on the marketing front, particularly from an efficiency standpoint. I think there is a couple important things to understand.

One is that quarter to quarter, you are going to see some fluctuations on the marketing side, changing competitive dynamics, changing kind of opportunities for us. So Q1, if you recall, was actually a little bit up year over year and then we had a little bit of efficiency year over year in Q2.

We think it was driven in large part by some really spectacular brand marketing activations that we had in Q2 that really resonated and hit home. To your point long term on marketing, we are definitely of the belief that there is potential long-term upside as the kind of platform effect of REVOLVE kind of continues to take root with consumers.

And we kind of grow our influencer network, our network of products on the site, and the consumer shopping us. So yes, some great dynamics in Q2. I wouldn't expect anything in particular in terms of back half of the year. Related to those, there are fluctuations quarter to quarter, but long term I think there is opportunity for us..

Great.

And can I ask I guess a follow-up on if we think about the influencer brand collaborations, I guess what we would be really interested in hearing about is how do you think about the size of or the penetration of those collaborations? I.e., the number of collaborations you may want to get to? And then how deep you go with those partnerships and how -- what's the duration of those partnerships with those influencers? And then if you can expand upon that from a financial perspective, is there any real differential in the margin characteristics greatly from the owned brand margins that you see relative to third party? Thanks..

Yes, the brand collaborations for us is at a really early stage. We have launched two with significant focus. And they were incredible launches, as we mentioned in the earlier session, that they were the best launches of any brand -- any two brands we have ever had on the site in our history. So we really think we are on to something great here.

And it really depends, in terms over the long term, where we have to constantly be aware of where fashions are going, where influencers are going, and how they relate. So we are very opportunistically seeking to expand this.

We think that it's early stages here and it's definitely something that due to the massive success we will continue to explore and explore opportunities..

And then really quick, Randy, on your question on the margins. Those owned brands carry meaningfully higher margin than a third party would..

Right.

So is the influencer brands collaboration kind of -- are they considered third party or are they considered partly owned brand? How does the financial arrangement work there?.

We classify them as an owned brand..

And from a financial standpoint, they are much more similar to owned brand financial characteristics than third party..

Perfect. That's all I needed. Thank you. Thanks, guys..

Your next question comes from the line of Bob Drbul from Guggenheim. Please go ahead. Your line is open. .

Hi, guys, good afternoon. I guess just two questions that I would have. I think you had 100,000 new customers quarter over quarter and I think 360,000 year over year.

Can you just talk to international customers or where you are on the international side and how much of the new customer is international, given was it Aimee Song and Camila? If you could talk to that, that would be helpful.

And then the second question that I have is on the return rates, I guess are you making any changes to your return policies and assumptions around the acceptance and usage of Happy Returns so far? Thanks..

win-win solutions where the customer wins and we also win as a Company. So much more convenient for customers to do those returns. They get an immediate credit at the Happy Returns kiosk versus having to wait.

But then for us, it actually improves the return economics because we are able to get some shipping costs out of the consolidation that comes from Happy Returns. So a number of things that we are focused on. We think long term it's a big opportunity and point of leverage for us..

Great. Thank you very much, guys..

Your next question comes from the line of Ross Sandler from Barclays. Please go ahead. Your line is open..

Hi.

Can you let us know what kind of ROI you are seeing from influencer marketing today versus one year ago?.

Yes, I mean, as we discussed, it was a great quarter from a marketing efficiency standpoint in the second quarter. And that was actually driven in large part by a lot of the great brand marketing visions that we had. So we actually saw increased efficiency year over year in terms of an ROI perspective on our influencer marketing..

Your next question comes from the line of Ralph Schackart from William Blair. Please go ahead. Your line is open..

Good afternoon and thanks for taking the question. Just curious your overall thoughts and what you are seeing in terms of the health of the consumer. Orders were certainly higher than we had modeled and expected in the quarter. But I think you talked about some international headwinds perhaps and some geographic location.

So any color you could add there. And then just a follow-on. Any commentary you could add just in terms of initial reads on Instagram beta with the new Checkout feature and how that is performing. Thank you..

Yes, definitely. So on the domestic side, we saw great consumer strength with some really strong continued growth on the domestic side of our business. And then international, as we noted, there were some headwinds there. Really macro headwinds, currency headwinds worldwide.

In our major regions across the world, currency shifted about 5% to 8% against us. We also had a 10% GST tax in Australia. Between those two things, Australia customers actually faced close to a 20% price increase for the same product and then none of that 20% drops to our income statement.

So I think really challenging macro environment internationally; despite that, international business continued to grow. We think it is a huge long-term opportunity. And also, we think as we cycle some of these really likely short- and midterm headwinds, we think a strong potential to accelerate out of that.

And then sorry, what was the back half again? Oh, Instagram Checkout. Yes, so Instagram Checkout is really exciting for us. We are really excited about kind of all the new things Instagram is working on. We were part of the initial beta launch; a really select group of companies.

It has been very exciting for us thus far, but I think it is still small and nascent. Consumers I think are still kind of learning how to use it; still learning how to view Instagram as kind of a shopping partner. But we are excited for the long-term potential for this to be a major channel for us..

Great. And one more if I could please.

Just in terms of the full-year guidance, what is contemplated in there in terms of FX for the full year?.

No significant fluctuations in FX. We have factored in that year-on-year comp for the things like Mike talked about, the GST. We started facing the currency headwinds in the second half of last year. So those things are factored in, but no significant currency fluctuations..

Great. Thanks, Jesse. Thanks, Mike..

Your next question comes from the line of Aaron Kessler, Raymond James..

Yes, hi, guys. Congrats on the first quarter. Just a couple questions. Maybe first on the localization efforts internationally as well.

Can you just talk to us maybe about where you are with different -- in terms of the different markets at which stage you are for localization? And then maybe some of the newer categories that we didn't cover, such as men's and beauty. Kind of where are we at in terms of development of those categories as well? Thank you..

Definitely, so I will cover the international and then pass men's and beauty over to Michael. So we are furthest along with our localization in the UK. We still have work to do, but we have made a lot of great upgrades. Really trying to bring that experience as close as possible to the US experience.

After the UK, I would say Western Europe and Australia are probably kind of next closest. And call them maybe halfway there in terms of -- compared to where we want them to be. And then you can kind of go down the list of Canada, which is a little bit behind those two, and then probably Asian markets and rest of world is earliest in the cycle.

But we think there is huge opportunities to bring up the experience. And again, we think the UK is a really powerful proof point of what can happen when we take that core service level proposition that REVOLVE has to our worldwide markets..

And the second question is on -- I think we are definitely -- I guess this has been a gift from the Christmas since that like. We are uniquely positioned to really take advantage of a lot of opportunities, so that is why it's ultra important for us to really prioritize it.

I think it is -- as entrepreneurs by nature, new opportunities are very, very exciting. But also of course, as public co-CEOs, we are very, very focused on prioritization and discipline.

So beauty and men's remains things that are a little bit lower investment while we really concentrate on the core, of course, with REVOLVE but also FORWARD and Superdown. But it's great to note that both of those segments are showing improvements, both men's as well as beauty, with minimal investment of resources and time.

When the time comes to prioritize those opportunities, it will be very exciting to pursue that for sure..

Great, thank you..

Your next question comes from the line of Justin Post from Bank of America. Please go ahead. Your line is open..

Hello, thank you for taking my question. This is Joanna Zhao for Justin Post. I have a question on your advertising spend mix on the new customers versus existing customers. Do you see that trend changing for the remainder of 2019 or 2020? And my second question is on the tariff. I understand that there was a question asked on the tariff earlier.

And I just want to better understand in terms of passing the pricing on to the customer versus looking for new suppliers in China.

What do you think of the timing of that we would expect? Would it be the second half of this year or more so in 2020?.

Yes, I can take that one, Joanna. So on the first one on the marketing spend, you know, we are not seeing significant shifts in the -- we are not talking specifics about new and repeat customer and spend there on a quarterly basis. But no significant shifts. Our cohorts continue to behave very consistently over time, generating that 6.3x four-year LTV.

And then just keep in mind that, and as Mike mentioned to you, Q2 is seasonally high with Revolve Festival. So if you are looking at just very finite quarters and half years, keep that in mind. And then on the tariffs, no specific step function timing there. It is definitely a process.

I think everybody knows the timing of the tariffs hitting on September 1, so it is not to say that everything is going to hit on September 1. There will be a slow roll and we have to work through our inventory. So you won't see, like I said, a necessary step function in either customer pricing or margins or anything else..

Okay, thank you..

And now I would like to turn the call back to Mike and Michael..

Hi, everyone. Well, of course the IPO was very, very exciting for us. And honestly this earnings call with you guys is very, very exciting for us. But at the same time, we are very, very focused on the long term. We have been doing this for a long time. We are looking at a small three-month period and we have been doing this for 15-plus years.

So we'll remain focused on building the biggest business we can. And we look forward to chatting with you guys for decades and decades to come..

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