Good afternoon, and welcome to Revolve Group Second Quarter 2020 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’d like to turn the conference over to Erik Randerson, Vice President of Investor Relations at REVOLVE. Thank you. You may begin..

Good afternoon, everyone, and thanks for joining us to discuss REVOLVE’s second quarter 2020 results. Before we begin, I would like to mention that we have posted a presentation containing Q2 2020 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.

These statements include our current expectations regarding the continued impact of the COVID-19 pandemic on our business, operations and financial results, and our outlook for net sales, gross margin, operating expenses, diluted share count and capital expenditures for the second half of this year.

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, 2019 and subsequent filings, 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 earnings per share.

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 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 the call over to Mike..

Thanks, Erik. Good afternoon everyone, and thanks for joining us today. We hope each of you and your families are in good health. I look forward to the day when we can see many of you in person again. So much has changed in just the past three months.

On our Q1 conference call, we discussed the negative impacts of the COVID-19 pandemic that led to a year-over-year decline in net sales of nearly 50% in the final weeks of March. Almost overnight, the shelter-in-place mandates put an abrupt pause on the special social occasions that often serve as a catalyst for customers to buy from REVOLVE.

We took swift and aggressive action to protect our people and to adjust our cost structure for what quickly became a highly uncertain demand environment. I am extremely proud of how well our team has executed against our priorities despite the continuing unprecedented headwinds brought on by COVID-19.

As we prepared for the worst, the teams re-engineered our entire approach to brand marketing and merchandising to position REVOLVE for success amidst significant changes in consumer buying behavior. There are three key highlights of our second quarter results that I hope each of you will take away from my remarks.

First, we delivered record EPS of $0.20 per share and record Adjusted EBITDA of $21 million in the second quarter. Each of these measures grew double digits year-over-year during the worst economic climate in decades. Second, we delivered record free cash flow of $53 million in the second quarter alone.

That’s more cash flow than we generated for the entire year of 2019. Third, a key contributor to the exceptional free cash flow generation was our meaningfully higher inventory turns in the second quarter. Inventory turns in our REVOLVE segment increased approximately 30% year-over-year, reaching our highest level in six years.

Impressive collaboration and agility by our team drove the strong financial and operational results. Despite the very difficult macro environment and with most of our teams continuing to work from home, we nonetheless realized efficiencies throughout the business while maintaining exceptional service levels for our customers.

With that, I’ll continue with the discussion of our second quarter results. Our monthly net sales in Q2 improved throughout the quarter. In fact, June was our first month of positive year-on-year growth in net sales since the pandemic began.

We believe the net sales improvement in the past few months reflects a better overall consumer spending environment combined with our effective marketing and merchandising strategies to capitalize on at-home categories like beauty, loungewear, intimates and accessories.

That said, we did experience some pockets of softness late in the quarter as states re-opened and COVID cases increased, especially in those states with higher COVID numbers. Shifting to the balance sheet and cash flows.

Recall that when we began to feel the severe impacts of COVID-19 in March, we immediately adjusted our inventory buys for a scenario that assumed no sales recovery in the remainder of 2020.

As a result, our reduced inventory buys combined with the better-than-expected net sales led to a 37% decrease in our inventory balance year-over-year in the second quarter. The significant decline in inventory coupled with a better-than-expected 12% decline in net sales translated to a significant increase in inventory turns year-over-year.

Working through our inventory position and improving inventory turns has been a key goal we have outlined for the past several quarters, so we are very pleased with our progress. The higher inventory turns had a very positive impact on our cash flows for the quarter.

As mentioned, we generated $53 million in free cash flow during the second quarter, up from $2 million in the prior year.

We now have $151 million in cash on the balance sheet, which we believe positions us to navigate through this uncertain time, re-invest in inventory to support future demand and further invest in the business to drive long-term growth.

The strong results and significantly improved cash position led us to quickly unwind many of the reductions to our cost structure that we discussed on last quarter’s conference call.

During the peak of COVID-19 uncertainty, we made the very difficult decision to adjust personnel costs, primarily through furloughs and reductions in salary, wages and hours, as well as layoffs.

I am very pleased to report that we have now brought back the majority of furloughed employees, and that by the end of this week, substantially all active employees, including executives as well as our independent board members, will have their compensation back to the pre-COVID run rate.

I again want to thank all of our employees for their sacrifice and agility during this difficult time.

With the better-than-expected sales trends, we have rapidly moved from a mode of trying to reduce inventory receipts at the beginning of the second quarter to now pursuing inventory opportunities to make sure we have the right mix and the right level of inventory in the second half of the year and as we enter 2021.

Aside from the strong Q2 financial results, I am encouraged by the innovation and positive impacts that are moving our business forward.

Our operations team delivered phenomenal results, delivering their most efficient quarter in the past seven quarters as the efficiency gains from the investments we’ve made over the last 18 months continue to provide benefits.

In early 2019, we invested in an expanded and consolidated distribution center, and throughout 2019 we layered in incremental automation. During this past quarter, we automated another key process in the distribution center, which is already having a positive impact on our distribution process.

And with capacity in our current facility for over four times our current unit levels, we have more room for improvement over the longer term.

Continuing on the topic of running the business as efficiently as possible, our buying and planning team was able to pivot quickly from initially reducing our inventory commitments and then quickly shifting back into investment mode as demand picked up.

We’ve also moved very quickly to merchandise into categories that are more aligned with the sudden change in consumer preference. For example, within just days after the CDC recommended that consumers wear masks in public, we had masks available on the site for purchase.

Today we have approximately 100 styles of masks across third-party brands and owned brands and it’s grown into a low seven-digit net sales business at attractive margins.

Through leveraging our read and react strategy, technology and team of data analysts, the buying and planning team was able to drive our merchandise reorders to a record high in July, when expressed as a percentage of total net sales.

Product reorders are very important because reorders improve inventory dynamics and reduce inventory risk since we only reorder those products that are selling well. In fact, often times the reordered product is already ordered by customers and reserved for them by the time the merchandise reaches our facility.

Arguably, most important from my vantage point, we are keeping our customers very happy. Our customer satisfaction levels continue to surpass our high standards, with the warehouse operating safely and efficiently fulfilling orders with the same best-in-class service levels despite everything going on in the world around us.

Customer inquiries are handled by customer service agents capably working from their homes, without missing a beat, continuing to drive brand loyalty for our valued customers.

Making our customers happy is what personally brings me the most joy, since I firmly believe businesses exist to serve customers and that customer satisfaction is key to long-term success. Having co- founded the company with a customer centric mindset from day one, to this day I still read every single piece of customer feedback.

Our very strong customer satisfaction metrics are a direct result of this organizational focus on the customer that is built into our DNA. Now, shifting to the more recent trends in the third quarter to date.

The positive year-over-year net sales growth in June carried through to July and early August with the quarter-to-date period showing low-single digit growth on a year-over-year basis.

It’s important to note that our net sales growth rate remained in the same general range in the last several weeks of July and into August, averaging low single digit year-over-year growth and remaining in positive growth territory despite the recent resurgence of COVID-19 cases and the reversal of many cities and states re-opening.

These COVID-19 setbacks led to a decline in U.S. consumer confidence in July that adds uncertainty to the slope and timing of a future recovery. By geography, in July, international net sales continued to remain stronger than net sales in the U.S.

This aligns with the trend we have witnessed in the second quarter with international outperforming the U.S. Michael will share a detailed breakdown of our net sales by product category in July, which demonstrates that customer shopping and purchasing behavior continues to be significantly influenced by the global pandemic.

A positive outcome of the category mix shift is a reduction in the percentage of merchandise returned, which benefits net sales and reduces certain operational expenses such as shipping and fulfillment costs. I am extremely pleased with our ability to navigate through these challenging times.

Time and time again, we have asked a lot of our team and they have delivered. So, thanks to all of our team members for your hard work and sacrifice, for staying nimble, and for your dedication to exceeding our customers’ expectations.

We’re not out of this yet and there will be challenges ahead, but I’m confident that we have the team in place and the organizational discipline to manage our way through this and come out stronger on the other side. With that, I’ll turn it over to Michael..

Thanks, Mike, and hello everyone. We have experienced a lot in our 17 years of operating REVOLVE but the past few months have been by far the most challenging.

We entered this period as a brand known for travel, music festivals and social gatherings, with an inventory position prepped for prime time starting with REVOLVE Festival that had been scheduled for April. And nearly overnight our customers couldn’t travel, gather in large groups, and in many cases couldn’t socialize and were locked down at home.

With the strength of our business, the power of our brand, and most importantly the sacrifice, commitment and execution of our team, we are able to deliver our most profitable quarter ever. I’m so deeply proud of what the team has accomplished in this face of fierce adversity and dramatic uncertainty.

I will focus my remarks on the opportunities we have to deepen our customer relationships in merchandising, marketing and using the power and voice of our brand. Starting with our merchandise.

The dramatic shift towards a more stay-at-home lifestyle has allowed us to further deepen the relationship with our consumer by highlighting our offering of incredible fashion and design, in areas that were not focal in times past.

Nascent categories such as beauty, intimates, activewear and loungewear have grown into key needs that our customer has begun to love coming to us for. It’s clear that we have been able to nurture and expand what REVOLVE is all about. By enhancing our merchandising strategy, we believe we can expand our share of wallet over the long-term.

It’s incredibly important to us that whatever our customer needs, she can always come to REVOLVE as her trusted source of style. For instance, in July we generated year-over-year growth rates in net sales of approximately 30% in denim, 80% in intimates and nearly 100% growth in accessories.

On the other hand, social distancing restrictions result in fewer opportunities to purchase outfits for special occasions outside the home, such as dresses, which is REVOLVE’s largest product category. Importantly, net sales trends in dresses have improved in recent months, although year-over-year comparisons remain negative.

To give you some guideposts, dresses decreased year-over-year as a percentage of REVOLVE segment net sales by about 6 percentage points in July. However, this year-over-year decrease in July is less than half of the year-over-year decrease in dresses as a percentage of REVOLVE segment net sales that we experienced in the month of April 2020.

We are very excited about the opportunity in the beauty category. The demand for REVOLVE Beauty products has been phenomenal, with net sales increasing approximately 140% year-over-year in July. This is the fourth straight month that the Beauty category net sales have increased more than 100% year-over-year.

Beauty is especially compelling because it is nearly all sold at full price with very little returns and is an incredible way to acquire new customers and expand our wallet share with our existing customers. With a base of over 5,000 of the most highly-coveted beauty products, we believe there is even more room for growth.

Major beauty brands that had traditionally relied on department stores for distribution are increasingly seeking to sell their coveted merchandise through REVOLVE.

These brands recognize the clear shift in consumer preference to buying online at a time when the number of mall-based department stores is expected to further decline by more than 50% by the end of 2021 according to published estimates. Our brand marketing strategy has dramatically evolved this summer with the changing times.

Despite being dealt a tough hand with an entire calendar of activations canceled, we’ve found powerful new ways to engage our customers on social media, adapting to a new lifestyle of spending more time at home.

As shared last quarter, we shifted our entire brand marketing focus to creating engaging and inspirational live content shows featuring influencers, designers and celebrities. Since the pandemic began, we have now produced over 140 videos that have been viewed 11 million times on Instagram Live or IGTV.

The new content strategy has been highly efficient as demonstrated by our customer acquisition metrics in the second quarter.

We drove exceptional increases in marketing efficiency during the quarter, as we nearly acquired the same number of new customers in the second quarter as we had in the prior-year period, despite our total marketing spend decreasing by 41% year on year. This marketing efficiency was a key driver of our strong profitability in the quarter.

I’m incredibly proud of how quickly and effectively the team responded by expanding our marketing playbook, enabling us to prove out an exciting new content strategy in creating video content on Instagram Live and IGTV.

I look forward to once again hosting in-person brand marketing events when it is safe to do so and continuing with our powerful new digital content strategy that has proven to be both highly engaging and extremely cost effective. We believe this combination will be a powerful driver of growth over the long term.

The latest example of our marketing innovation is the virtual REVOLVE Summer, a three-week series of events that kicked off in mid-July. In years past, we have held REVOLVE Summer for weeks at a time in Bermuda, the Hamptons and Cuixmala, Mexico.

This year brings as curate virtual REVOLVE Summer event that has allowed us to bring the REVOLVE community together and inspire customers with new looks, all from the comfort of their homes.

125 influencers from around the world have participated as brand ambassadors in these special events that include designers launching new collections exclusively available on REVOLVE. Stepping back and looking at the long-term opportunity, there was already a seismic shift happening in the broader retail landscape even before COVID-19.

Purchasing power has been shifting to the next generation consumer and shopping is moving to the digital world with overall retail growth being driven purely by e-commerce. We believe that this shift, particularly the digital transformation, has been accelerated in the last several months and will continue to shift further post pandemic.

With our pure play digital strategy and focus on the next generation consumer, we believe REVOLVE sits squarely at the intersection of these two powerful shifts.

We believe this powerful shift, combined with our strong brand, deep connection with our customer and the strong foundation that we have built over the last 17 years, positions us well to capitalize on the opportunities ahead. Now, I’ll turn it over to Jesse for more detail on the financial results and trends..

The Q2 performance was better than our initial expectations, but we continue to believe gross margin will be challenged through the balance of the year and lower on a year-over-year basis.

While gross margins have improved from the peak of the COVID-19 uncertainty earlier in the second quarter and we do expect promotional pressure to abate, we are still operating in an uncertain environment and historically our gross margins in the back half of each year are typically lower than the first half.

For our selling and distribution and fulfillment cost line items. As pleased as I am with our fulfillment and selling and distribution cost efficiency in Q2, for modeling purposes, I would not guide anyone to expect this very high level of efficiency on these line items going forward.

These variable cost line items will largely fluctuate with net sales in the near-term.

We do expect continued efficiency gains over the next several years, particularly in the fulfillment line item as we grow into our capacity and continue to realize the benefits of automation, but we also continue to face ongoing external headwinds and will be exposed to additional cost pressures as the product mix and return rates continue to evolve in these uncertain times.

Marketing, we will continue to manage our marketing investment efficiently. Without the opportunity to activate large scale in-person events as we have done in prior years, we expect marketing as a percentage of net sales to continue to be lower year-over-year in the second half of 2020.

Note that the magnitude of the year-over-year decline in marketing spend in the second half will be much smaller than it was in the second quarter because historically, Q2 has the highest amount of brand marketing investment by a wide margin.

General and Administrative, as mentioned, we realized leverage on this line item in the second quarter with the aggressive cost reductions we made.

As we unwound most of those cost reductions over the course of June, July and August, we would expect to see a sequential increase in G&A for the third and fourth quarters when compared to the second quarter.

Note that we don’t expect to return to the pre-COVID run rate in the current year as we did have a number of layoffs and made other non-headcount cost reductions that will continue to benefit the cost structure in the current year.

Finally, we don’t expect significant movement in our diluted share count or capital expenditures from what we communicated last quarter. Now, I’ll turn it back over to Michael to close out our prepared remarks..

Thanks Jesse. COVID-19 has brought incredible challenges, but true to our resiliency and entrepreneurial spirit, our team responded very quickly by protecting our employees and our balance sheet while, at the same time, launching innovative new ways to engage with the consumer and deepen customer relationships.

Seeing our team execute so well while further expanding our growth potential at a time when many industry companies are just trying to survive makes me more even confident in our future.

We believe our agile team, strong brand, differentiated technology and deep customer connection, coupled with our balance sheet strength and flexible business model, positions us to thrive over the long-term. With that, I’ll turn it over to the operator for your questions..

[Operator Instructions] Our first question will come from Michael Binetti with Credit Suisse. Your line is open..

Hey guys, congrats on a really nice quarter in a tough factor out there. So I want to ask about the inventories, and perhaps if this is the new norm. Do you see anything in the business model that lets you think you could run it at these higher inventory turns? I know you said this is the highest, it’s been in a few years of just over 3x.

I know we’ve talked a few times about why the inventory turns for a digital model were driven by the data that you guys have, it doesn’t turn inventories faster. I think your language on that has been, we don’t have the urgency of having to turn shelf space as quickly.

And we can let inventory that we think is good, sit there for a while on some of the DCs, but I wonder if anything you’ve seen as you sped up the inventories and moved through inventory at a really fast pace here, has told you that you could operate this at faster terms going forward?.

Yes, definitely, Mike Karanikolas here. I think both sides of that argument are actually true. So we do have a lower carrying cost of carrying inventory between we can turn slower, we believe, without impacting margins and profits in the same way as a traditional retailer.

But it’s also very true that we believe we can turn inventory at a much faster rate with fairly minimal impact to revenue and demand. So it’s all about balancing those two factors. And I think the nice aspect of our business model is that we do have the flexibility to run in both ways.

And of course, we prefer to be closer to the zone we’re in right now versus the zone we were in a couple of quarters ago, but it’s about the strength of our balance between those two endpoints..

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

Good afternoon and nice job executing through this environment. In terms of the quarter-to-date trends you’re seeing, I wanted to dig into that a little bit further just to understand some of the drivers. I guess, any shifts from a category perspective versus what you’ve seen in recent months.

Just maybe help us understand the recovery in dresses versus the incremental demand in some of these emerging categories. And then secondarily, just with the leaner inventory, has the leaner inventory been a limiting factor in the quarter-to-date trend so far? Thanks..

Yes. Hi, Michael Mente here. With regards to the category shift, the pandemic hit lifestyle shift, you definitely saw a new overnight shift in certain categories where, of course, going out dresses and whatnot or heavily on the hardest but then – over a lot of the categories that we’ve already mentioned perform quite well.

As we’ve seen the consumer come back, we’ve seen continued strength in those more at-home categories, but we’ve also seen a rebound in some of the more going out category.

So it’s kind of a healthy balance for us, where the newly developed categories are continuing to perform quite, quite well and continue to have our highest turn, we also see the core categories coming back as well..

Our next question comes from Simeon Siegel with BMO Capital Markets. Your line is open..

Great, thanks. Good afternoon everyone. I hope you and your families are doing well through all of this. Congrats on the meaningfully better returns, that was great to see. Can you elaborate on your view whether that’s a new norm or a one-time pandemic side effect? So just talk through that if you can.

How was the return cadence over the quarter, and then really encouraging year about the net sales growth in June and beyond, how our gross sales quarter-to-date? Thank you..

Yes, definitely. So with regards to the return rates, we believe the impacts there are primarily due to the shifts in consumer behavior that have happened with the pandemic. And we have started to see that in return rate come back up.

It’s still far below historical norms but we have seen to start to come back up as consumer behavior starts to return closer to the norm. As far as at what extent any of that behavior continues for the long-term, I think it’s too early to say. There’s certainly some aspects that may continue over the longer run.

We’re very hopeful that our shift in product mix can represent an expanded wallet share. So in addition to performing really well in high return rate categories like dresses, we’re hopeful for the longer term that our jeans and beauty and some other categories also become drivers for us and that would have an impact on return rate.

And there’s a few other things we’ve done on the return rate side as well, but I think high level, it’s too early to say.

And with regards to trends on net sales and gross sales, as you might imagine with net sales in the low single digits, but meaningfully lower return rates year-over-year, that means our gross sales are still meaningfully lower year-over-year.

And we believe that as consumer purchasing behavior much more purposeful in terms of making a purchase that they have confidence that they’re going to keep. But we have seen as return rates creep back up a little bit, some improvement in sales numbers..

Great. Thanks so much. Best of luck for the rest of the year..

Thank you..

Our next question comes from Kimberly Greenberger with Morgan Stanley. Your line is open..

Thank you so much. Sorry about the background noise. I wanted to just follow-up on the inventory composition question. Do you feel like you got the right composition? And are you having to chase, or are you running out of the categories that are returning faster, in other words, with maximized revenue, if you race against little bit in lifestyle.

And then I have a follow-up question..

Yes. So in terms of the inventory composition, we feel much better about it certainly than we did enter into Q2. I think there is some level of opportunity cost in terms of our popular categories that we’re chasing. And there’s been a shift between third-party and own brand as we noted.

But we feel like we’re positioned well and we think there’s opportunities in the back half of the year if we can chase harder into some of those popular categories..

And then Jesse, just to follow-up on the marketing costs.

Is there any sort of magnitude that you can guide us to on second half reduction? And are you seeing any sort of change in payment behavior among consumers? Are they utilizing AfterPay for example a little bit more? Or I noticed you said there were some savings on the credits or the transaction cost, so I just wanted to follow-up on what the driver was there.

Thanks..

Yes, sure. Thanks, Kimberly. 2Q, we’re comping our peak marketing period in a year or so, and 2Q of 2019, it was 14.6%, I think, 14.5% of net sales, much lower this year given where we’re at. And then it starts to go down in the back half of the year as we don’t have the magnitude of in-person events in the prior years.

Q3 is relatively high as compared to Q4 with REVOLVE Summer. So you’ll see some savings there going forward, but the magnitude in 2H will be lower than that of that we saw Q2, so just keeping that in mind for modeling. And then on the customer payment types, we have seen a shift over time with the advent of the installment players out there.

So a shift from the traditional, Visa, MasterCard, Amex to the installment payments, which do carry a higher fee, so we’ve seen some pressure on those costs over the last, call it, a year to 18 months. But there is a benefit in the quarter, not only from comping that, but also from the returns, the lower return rate.

So we saw, call it, a 30 basis point improvement there on credit card fees and the way customers are purchasing..

Our next question comes from Ed Yruma with KeyBanc Capital Markets. Your line is open..

Hi. This is Abbie on for Ed. I have two questions.

So how do you expect the promotional environment to change in the back half? I know you said, you’ll still see growth margin pressure, but do you think promotions will be less deep or there’ll be less items on sale? And then second quickly, do you think you’ll develop an own brand in beauty since you’ve seen such good trends?.

Yes. This is Jesse. Maybe I’ll take the first part of that and talk about margins and promotional pressure and then pass it on. We do expect to see a year-over-year compression in gross margin continuing into the second half, but as we mentioned, the less so than the second quarter.

And just to back up and remind, we’re comping a record high margin in 2Q of 2019. So that’s where we’ll see that compression subside a bit in 2H still year-over-year decline.

And then the promotional pressure, I think it’s an extension of what we’ve seen already in the second quarter where that promotional pressure wasn’t as great as we first anticipated early in the COVID pandemic.

And as we get – as we’ve cycled through some of the markdown inventories and start to get the new inventory in the well-performing categories, we feel good about that full price mix coming back slightly.

And I think that was – and I guess, just to focus that on the REVOLVE segment, we do see increasing promotional pressure in that luxury segment of FORWARD and that we expect to continue in the near-term..

And with regard to own brand that’s something in the mix of long-term. I think there’s a lot of other higher priority things particularly in the Apparel segment that will continue to develop and make investments in. But own that long-term is definitely an opportunity for us. We’re carrying a lot of emerging brands and a lot of excitement in that.

I think that’s exactly what we did successful in manufacturing on the apparel side, so exciting opportunity for us..

Our next question comes from Oliver Chen with Cowen. Your line is open..

Hi. Thank you. Regarding average order value, how do you see that trending in the backup and as it relates to some of the category shifts that you’re seeing now? And a second follow-up question was just the changes that you’re witnessing and executing on in marketing.

Could you speak to which ones will stick for the long-term? And your own view on a longer-term, how marketing as a percentage of sales may change and evolve as you engage in what seems like really successful online customer acquisition techniques as well. Thanks..

Yes. I’ll take the – this is Jesse. Thanks, Oliver. I’ll take the first part of that and then pass it on to Michael for the longer-term marketing comments. That average order value, significant decline in the current quarter that 26%. We have seen it tick up slightly in July and August as the mix has shifted back.

Not only to that largest category dresses with the higher average selling price, but also a slight uptake in the full price sales, again, as we cycle through some of that mark down inventory. So we’d expect to see, I’ll call it a slight increase in average order value as we exit Q2 on a sequential basis still lower year-over-year.

But we do see some improvement there on a sequential basis..

Okay.

And Jesse, on that topic with gross margins and markdowns next quarter, will markdown be less or more than last year, next quarter, given that dynamic?.

Probably slightly more on the markdown side, year-over-year, but better on a sequential basis, again as we cycled through that Q2 inventory..

Thank you..

And with regards to the marketing mix, we’re very, very thrilled with what the team has been able to do in terms of expanding our playbook. These are things that are, of course, driving short term customer acquisition, but also long-term kind of arrows in our quiver.

We’re, of course, looking forward to the world opening up a bit for our consumer be out and about travel and by withstands and whatnot. And when that’s an important part of their lifestyle, we will subsequently return.

It’ll be a hybrid mix, which is very exciting, when it comes to the overall brand marketing in particularly it really will be a contingent of kind of the health of the overall business. Of course, we’re a very conservative at the moment, but as opportunity comes, the consumer comes in the macroeconomic environment improves.

We’ll definitely be ramping up as far as where it was in relation to historic times. It’s really kind of contingent to speaking about what the market is like, what our business is like in such. There will be a lot of flexibility there..

Thank you. Great quarter..

Our next question comes from Justin Post with Bank of America Merrill Lynch. Your line is open..

Hi, thanks for taking my question. This is Joanna Zhao for Justin Post. So I have two questions for you. One is, can you comment on like the trend of the percentage of pool price item sales in second quarter. Do you see there’s an improvement in the trend month over month since the pandemic started? And then my second question is from the strategy.

Shifting away from third party brands into – sorry. Shifting away from own brands into third party brands. And what do you see that mix, sort of be the goal of that mix for the second half of 2020 for both REVOLVE and forward..

Yes, sure. This is Jesse again. On the full price still meaningfully lower than the prior year, and that’s important to call out again. We’re comping a record high gross margin, and that was really driven by both own brand mix, as well as full price sales, which were really high in the prior year. So meaningfully, lower this year in the second quarter.

That said, we did see slight improvement as trends picked up as we assorted into the new inventory into July and August. But, I’ll emphasize that slight and still being year-over-year flat to down on a full price – full price markdown ratio where there’s more markdowns this year than prior year.

And then on the own brand mix we had commented in the prepared remarks, that own brand is approximately nine points lower year-on-year than we were in the prior year. So again, stepping back to the prior year, we were ramping aggressively on the own brand front.

And then earlier this year, we had communicated the recalibration of that own brand platform to reassort in two different categories and really refine that platform. So with that, and then the added pressure of COVID-19, we took that down significantly and that led to that nine point reduction.

We expect that year-over-year decline in own brand mix to be greater in the second half than it was in the second quarter, again, as we cycle through that inventory in just start to redesign and reassort into the back half of this year and early 2021..

Great. Thanks and congrats on the result again..

Thank you..

Our next question comes from Ralph Schackart with William Blair. Your line is open..

Good afternoon.

Maybe just on the customers in terms of newer cohorts and comparing them to your older cohorts, any color you could add on, spending patterns, how they’re behaving and, are you observing any newer customers coming in, for example, purchasing lounge wear, and maybe if you could highlight your incremental opportunities for you to advertise newer categories for them such as dresses going forward? Thanks..

Yes, definitely. Yes. We think that that’s one of the most exciting aspects of these newer categories. You’re not just expanding wallet share with existing customers, but they are a great avenue for new customer acquisitions particularly on the beauty side.

So, we saw that that category expansion was very beneficial on the new customer acquisition side, which I think is why you saw some pretty decent new customer acquisition numbers given the environment and given the really sharp reduction in marketing spend that we had during the quarter..

Okay, great. Thank you..

Our next question comes from Scott Drbul with Guggenheim. Your line is open..

Hi guys. Good afternoon. Just a couple of questions for me. The first one is, can you comment a little bit more on the international sales performance in the second quarter, maybe quarter to date, I don’t know, if you could talk month-to-month and even quarter to date would be helpful.

And the second question is on shipping costs, there’s been a lot of discussion around surcharges heading into the back half of the year. Just wondered if – is that something you guys expect in the coming quarters? Thanks..

Definitely. So, on the international side, in Q2, we saw strength there versus the domestic what were – the international, what was growing, call it, moderately faster than the domestic market? We’ve seen that continue to Q3 with maybe, a little bit of acceleration on the international side, but it’s still early.

And then with regards to shipping costs and surcharges there is potential risk there. That’s something that we’re actively kind of working on and doing work behind the scenes and still TBD, how that plays out.

But I think working in our favors that we are not a very seasonal shipper, which is very good for the [carers], who are normally slammed in Q4 and in contrast, most others, Q4 is not our biggest quarter. So, we upgraded the market..

Okay..

Our next question comes from Ross Sandler with Barclays. Your line is open..

Okay. This is Thomas on for Ross. Where are the customer acquisition trends like in 2Q and in 3Q, and how might [indiscernible] in your business? Also, any update on the Facebook ads performance, the company’s been flagging e-commerce as a strong area. Thanks..

Yes. So, we saw the customer acquisition trends in Q2. And as I mentioned, given the sharp reduction in marketing spend, we’re very happy with how that’s trended, math said as you’ve seen – starting to see some increases in traffic costs as the macroenvironment has recovered somewhat or there’s been a little bit of a contraction there.

But in general, very happy with the results and with regards to TikTok. TikTok is still a very nascent marketing channel for us. So, it’s an area, where we do have a decent amount of activity, but very nascent in terms of delivering results. So, we don’t expect any meaningful impact from whatever ends up happening with TikTok.

And in fact, what we’re particularly excited about is with the Instagram reels, the TikTok competitor. Since they’ve launched that we’ve had some really meaningful traction there, actually, I believe over a million and a half memes and in just a couple of days since the team mobilized on Instagram Reels.

So if anything, it might be an opportunity that opens up depending on again, what talk goes on with TikTok. And then the third part of your question, I had trouble hearing you.

Can you restate it?.

Just any update on the Facebook ad performance as they were flagging e-commerce as a strong area? It was just a lot more..

Yes. So, Facebook ad performance, it’s been similar to the overall market where we’ve seen cheaper traffic earlier in the quarter and then increases throughout the quarter as the macro environment recovered..

We have time for one more question. Our final question comes from Susan Anderson with B. Riley FBR. Your line is open..

Hi, good evening. Thanks for fitting me in, and nice job on managing the quarter. I guess, on the supply chain front, I was curious if you’re seeing any issues such as delayed deliveries for the back half. And then also, are you seeing lower product cost for the back half? And then just a quick follow-up on the third-party brands.

It sounds like you’re picking up quite a few in home and beauty and as serious processing for footwear and apparel..

Yes. Sure, yes. Hi Susan, thank, this is Jesse. In regards to the supply chain, we did see an initial impact in some delayed deliveries, particularly for fall. But since then it’s been relatively stable, there is probably a little bit of lack of supply just given that nobody is at 100% right now, that’s not a significant impact from our perspective.

And in product costs, not a meaningful decrease in product cost in the second half either. There is – for us in particular, a shift in a category mix, as we assort into those categories that are performing well during the COVID pandemic. So there is definitely a product cost component there, but not on a like-for-like basis..

This concludes our allotted time for the Q&A session. I will now turn the call back over to management for closing remarks..

So definitely an extremely challenging quarter, but again, really, really proud of how the team executed, there was a lot of sacrifice on a personal level, a lot of sacrifice with working from home and really the rapid shift behind the scenes were incredible.

The operational staff did an incredible job to maintain customer service levels which Mike mentioned is extremely, extremely important to us. And I think in these challenging times, we feel very confident about continuing to acquire new customers, deepening the relationships with our existing customers.

And with a competitive dynamic, we also feel that exiting these challenging times, we positioned incredibly well. Of course, it’s not fun for a lot of people out there. But similar to our positioning in the last downturn, we really view this as a brushfire clearing out some of the growth to really provide and pave the way for what’s coming.

So challenging times and great, great work for the team, the future will be incredible and exciting for us..

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