Revolve Group, Inc. (NYSE:RVLV) Q2 2022 Earnings Conference Call August 3, 2022 4:30 PM ET
Company Participants
Erik Randerson – Vice President of Investor Relations
Mike Karanikolas – Co-Founder, Co-Chief Executive Officer & Chairman of the Board
Michael Mente – Co-Founder, Co-Chief Executive Officer & Director
Jesse Timmermans – Chief Financial Officer
Conference Call Participants
Edward Yruma – Piper Sandler
Mark Altschwager – Baird
Camilo Lyon – BTIG
Michael Binetti – Credit Suisse
Anna Andreeva – Needham & Company
Lauren Schenk – Morgan Stanley
Jim Duffy – Stifel
Lorraine Hutchinson – Bank of America
Rick Patel – Raymond James
Simeon Siegel – BMO Capital Markets
Tom Nikic – Wedbush Securities
Matt Koranda – ROTH Capital Partners
Noah Zatzkin – KeyBanc Capital Markets
Operator
Good afternoon. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to Revolve’s Second Quarter 2022 Earnings Conference Call. [Operator Instructions] After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.
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
Good afternoon, everyone, and thanks for joining us to discuss Revolve’s second quarter 2022 results.
Before we begin, I’d like to mention we have posted a presentation containing Q2 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 in our business, operating results and financial condition, our current expectations regarding the continued impact of the COVID-19 pandemic on our business, operations and financial results, including on our near-term sales in Greater China, our growth, including growth in active customers and market opportunities and related macro and industry trends, the expected impact on delivery times from opening our first East Coast fulfillment center, our marketing and technology investments and marketing events, the launch of our Remi Beta collaboration, the extension of our brand ambassador program to include Forward our freight costs 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. And our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliations of non-GAAP measures to GAAP measures as well as the definitions of each measure their limitations and our rationale for using them can be found in this afternoon’s press release and in our SEC filings.
Joining me on the call today are our Co-Founders and Co-CEOs, Mike Karanikolas and Michael Mente; as well as Jesse Timmermans, our CFO. Following our prepared remarks, we’ll open the call for your questions.
With that, I’ll turn it over to Mike.
Mike Karanikolas
Hello, everyone. We delivered strong results in the second quarter, highlighted by record net sales that increased 27% year-over-year gross margin expansion to record levels for a second quarter and continued strong growth in active customers. We delivered these results despite macroeconomic conditions that became more challenging as the quarter progressed, creating cost pressures that impacted profitability and also contributed to a moderate year-over-year growth trend in net sales in June that has continued into the third quarter.
With that as an introduction, I’ll briefly recap our results. In the second quarter of 2022, our net sales were $290 million, a 27% increase year-over-year. We added 124,000 active customers during the quarter, the highest ever for a second quarter and representing 39% growth year-over-year. Impressively, growth in active customers in the first half of 2022 has already exceeded our total growth in active customers for the full year in 2019. Gross margin expanded approximately 30 basis points year-over-year to 55.9%, an all-time high for a second quarter despite inbound freight costs remaining elevated. However, below the gross margin line, we faced increasing pressure on operating expenses that contributed to softer-than-expected profitability measures in the second quarter.
Our second quarter net income of $16 million and adjusted EBITDA of $27 million declined 48% and 24% year-over-year, respectively, against a difficult prior year comparison when our net income had increased more than 100% year-over-year. Importantly, net income and adjusted EBITDA were 28% and 42% higher than pre-pandemic levels in the second quarter of 2019, respectively, further illustrating our continued focus on profitable growth. The increased cost pressures were mainly within selling and distribution and more specifically, customer shipping expenses. There are 2 main reasons why these costs came in higher than expected. First, we incur fuel surcharges on every package that we ship to our customers and on return packages. Our fuel surcharges in the second quarter were more than 4x what they were in the prior year and had a material impact on the selling and distribution line item for the second quarter.
While our premium price points enable us to absorb these costs more efficiently than if we’re operating at lower price points, and we do expect some moderation in costs from the peak. These surcharges continue to create real cost pressure in the near term. Second is our return rate. We had anticipated that our return rates would increase year-over-year as our product mix of net sales continued to normalize. However, our return rate has trended even higher than pre-COVID levels in the first half of the year. Historically, the main factors that influence return rates include the mix of sales by category, by geography, by segment and the mix of full price and markdown sales.
One of the primary drivers of the higher return rate compared to pre-COVID levels is a fast-growing percentage of our international net sales coming from countries like Canada, where we offer hassle-free returns a major growth catalyst that has resulted in Canada net sales quadrupling in just the past 6 quarters. Our return rate in Canada has approximately doubled since late 2020 when we launched hassle through returns for Canadian customers. Yet it’s a trade-off will make all day long, considering the exceptional growth of our localization efforts in the markets. Another factor was our mix of full price sales, which have a higher return rate. The mix of full price sales was higher than we anticipated for the second quarter and was significantly higher than in 2019.
And finally, on a normalized basis, we did experience an overall increase in the return rate this quarter due to what we believe is the shift in consumer behavior that is likely driven by the challenged macro environments effect on consumer sentiment. Shifting gears to net sales performance by geography, our U.S. net sales increased 30% year-over-year, outpacing international net sales growth of 14% from a year ago. Our international trends reflect continued strong growth in Western regions like Canada and the U.K., where we’ve made excellent progress with our localization initiatives, partially offset by foreign currency headwinds resulting from the stronger U.S. dollar and temporary headwinds in China due to COVID-19 preventative measures.
As I mentioned earlier, customer activity continues to be a bright spot. Our active customers are becoming more productive, illustrating our success in capturing a greater share of wallet. For the trailing 12-month period, net sales per active customer were $488, an increase of 9% year-over-year. This data is quite encouraging, considering that new customer growth has been really healthy for the past several quarters, and that revenue per customer tends to increase significantly over time. Consider that in 2021, customers who had purchased from Revolve in a previous year represented 49% of our total active customers for the year, yet these more tenured customers generated 77% of total net sales for the year.
I’d also like to highlight that the significant majority of our newly acquired customers in recent quarters have purchased from us at full price since our full-price customers consistently generate a higher lifetime value than customers acquired through markdowns. Our consistently strong and cross financial results also reflect our long-term focus on building trust with the customer. Core to building this trust is operational excellence and exceptional service levels. I’m excited to share that we began operating our first East Coast fulfillment center, which we expect will raise the bar on our ability to delight customers with even faster delivery times for key East Coast geographies. We have seen firsthand how much our West Coast customers appreciate and value our 1-day delivery time frames available for many regions surrounding our Los Angeles fulfillment center. The power and stickiness of compelling service levels is also clearly evident in performance within our international markets. Almost universally, in international markets where we’ve invested to elevate service levels, our growth has accelerated in the months to follow.
To wrap up, we believe our results for the past several quarters demonstrate that we are gaining meaningful market share. And more importantly than just outpacing the competition, we’re uniquely doing that while generating significant profitability and cash flow year after year. Our ability to self-fund the strengthening of our balance sheet year after year affords us a great deal of financial flexibility to invest where we see opportunities to drive shareholder value. It’s particularly important in an uncertain market environment like we’re operating in today, where inflation is at a 40-year high and U.S. consumer sentiment was at the lowest reading on record in June. I’m extremely proud of how well our team has navigated through this increasingly challenging macro environment.
Mike, and I have seen multiple economic cycles over nearly 20 years, and we have complete confidence in our team’s ability to execute through in the most challenging environments as we demonstrated and profitably navigating through uncertainty in the early stages of the pandemic. Our team and technology are battle tested and have emerged stronger through this volatile period, and we are primed and ready for what lies ahead.
Now over to Michael.
Michael Mente
Thanks, Mike. Before I get into the details of the quarter, I want to pause in the highlight that with today’s results, we have now crossed the $1 billion in net sales milestone for our trailing 12-month period. This is a huge accomplishment for not only me and Mike, but for also the many employees that joined us along the way when we were doing $10 million, $100 million or even $500 million just a few years ago, being up to the IPO. Thanks to all of you, it has been fun, challenging, rewarding and even more expenses that we still have so much opportunity ahead.
Now as we think about the quarter, we were able to deliver strong double-digit growth in an environment that became increasingly challenging as the quarter progressed. Taking it a level deeper, our product category trends for the second quarter confirmed that our core Revolve customer was getting out again in force, driving incredible growth in dresses with particular strength in special event styling. She is traveling, going to wedding and living their life to the fullest begin. For these truly special occasions in life, Revolvers as the trusted source for integration and our go-to fashion destination. The reopening this year has been most evident in the Revolve segment, where net sales increased 30% year-over-year in the second quarter despite international headwinds.
To capitalize on the return of an active social lifestyle and channel this summer, we kicked off the second quarter with the exciting revival of Revolve Festival after a 2-year hiatus. Overall festival in 2022 was more of path than ever on many levels. event highlights featured our incredible line of performers, including Postale, Jack Harlow and Velo and the unbelievable caliber of failed attendees. We also hosted hundreds more influencers than ever before with a strategic focus on a new network of content creators to further expand our reach and diversity into parent new social media channels. I’m pleased to share that we have made great progress in connecting with our consumers through these newer social media channels. I’m especially encouraged by the increased engagement with our compelling video content on TikTok and Instagram wheels. In the second quarter, new views of our Titan more than doubled sequentially compared to the first quarter of 2022 and nearly tripled year-over-year.
As I touched on last quarter, we are teaming up with the context watercut model, Reeder to create a size-inclusive own brand collaboration that will launch next week. Remy has partnered with us in several margin activations over the past year, and our follower engagement and personal brand momentum is truly impressive. What’s especially exciting is that this is our first own brand collaboration, which truly expands our market potential and to increase the size. We have worked closely with our main to ensure that we provide the best products. And throughout the process, Remi has been sharing human lots of the design and development process with a highly engaged community.
On the heels of Revolve Festival, we will continue to invest and actively create even further excitement for our brands with our impactful in-person marketing events, building on our already strong connection with the next-generation consumer. The third quarter got off to an exciting start with our evolved summer activation in Puglia Italy and our team just returned from a successful brand ambassador event in the Dominican Republic. We have several other events planned highlighted by a return to New York for Fashion Week this September. And across the business, we will continue to invest heavily in our proprietary technology, which we view as a significant competitive advantage. My team is constantly building out internal technology to drive increased conversion rates and revenue, greater operating efficiencies and an even better experience for our customers.
For instance, within just the past few months, the technology and data science teams have developed proprietary internal applications that leverage machine learning and our rich data sector to further optimize the customer experience and drive further operating efficiencies through enhanced show detection and package optimization. And on the site, we continue to elevate our personalization, product recommendation and search functionality and recently launched an application that leverages machine learning algorithm to dynamically and in real time, recommend output for our customers to complete the look. We’re in the early innings of leveraging AI technology with some exciting projects in the pipeline that we believe will drive both revenue and operating efficiency in the mode.
Shifting gears Forward, our foreign net sales for the second quarter increased 14% year-over-year against an incredibly difficult prior year comparison when net sales increased over 150%. Importantly, over the last 3 years, our compound annual growth rate for net sales is 36%, meaningfully outpacing industry benchmarks. And we are continuing to innovate and invest. An exciting development was our recent launch of Forward buyback. Our proprietary sell program is dedicated to circular luxury shopping. Forward buyback extends life cycle of high-end designer bags from coveted brands, allowing our customers to exchange their past purchases for credit to shop our full product offering. It enables to expand our customer touch points and deepen our relationship with her while further strengthening the value proposition for our loyalty program members since in addition to the credit loyalty members earn up to 2,000 points for eligible handbag exchange.
Forward buyback leverages our renowned customer experience and service capabilities to deliver an extensive assortment of Tron handbags from our top luxury brand at incredible value, including from the causes of Forward Save Director, Kendall Jenner. The response has been very exciting, exceeding our expectations. Initial feedback from our luxury brand partners has been outstanding, and we been just in the first couple of weeks, we drove more than 40% sell-through of our initial inventory. We also continue to expect the successful cost marketing efforts to so Forward to our much larger base of all customers, capitalize on our strong customer loyalty and the highly complementary merchandising assortment between Revolve and Forward.
Ever since we launched the Forward loyalty program last year, we have driven increased overlap between Revolve and Forward active customer base month after month. And we are still in the very early innings with a long runway for driving further cross shopping between Revolve and Forward in the future. In the coming months, we plan to expand our successful Revolve brand ambassador program with an platform to include Forward. The Forward expansion of the brand ambassador program will leverage the same proprietary technologies of all program. Momentum in the Revolve brand ambassador program has been nothing short of incredible, so we have high hopes for the potential for the Forward brand and baster program as well, particularly since Forward has historically been less active relative to Revolve in working with influencers. So stay tuned as this exciting launch in the weeks ahead.
To wrap up, I am very proud of how well our team has navigated through the extreme cycles of ups and downs in the past few years. We believe we have demonstrated a unique track record for outperforming the competition in times of disruption and volatility, leveraging our strong team, operational excellence and data-driven and customer-centric approach to nearly everything we do at Revolve. While there is considerable uncertainty ahead, I’m extremely confident in the team and know that we are in a position of strength heading into whatever lies ahead with the economy. I’m excited about our future and believe we are well positioned to gain further market share, particularly from legacy retailers in the months and years to come.
Now, I’ll turn it over to Jesse for a discussion of the financials.
Jesse Timmermans
Thanks, Michael and hello, everyone. I’m quite pleased with our accomplishments in the second quarter delivered by the team within an extremely difficult economic climate that became even more challenging as the quarter progressed.
I’ll start by recapping the second quarter results, highlighted by solid top line growth, continued strong profitability and rapid expansion of our customer base, and we’re doing it at scale. Net sales were $290 million, a year-over-year increase of 27% and an increase of 21% on a 3-year CAGR basis. Revolve segment net sales increased 30% and forward net sales grew 14% year-over-year. Recall that Forward faced an extremely difficult comparison in the year ago period when forward net sales increased 161% year-over-year.
From a merchandise standpoint, the dresses category represented 32% of total net sales, an increase of 8 points year-over-year and trended higher than peak levels in 2019, when Justice generated 30% of net sales. By territories, domestic net sales increased 30% year-over-year, outpacing international growth of 14% that was impacted by currency headwinds that negatively impacted our international customers. Active customers increased by $124,000 compared to the first quarter of 2022, our highest ever growth for the second quarter. This growth expanded our active customer count to $2.2 million, an increase of 39% year-over-year.
Looking forward, we continue to expect moderation in the quarterly growth of active customers in the second half of the year as we cycle out of the COVID comparison period for this trailing 12-month measure. Our customers placed a record 2.2 million orders in the quarter, an increase of 27% year-over-year. Average order value, or AOV, was $303, an increase of 19% year-over-year that benefited from the exceptional year-over-year growth in dresses and a very strong full price sales mix. Shifting to gross profit. Consolidated gross margin was 55.9%, our best ever margin for our second quarter and an increase of 29 basis points year-over-year.
Moving on to operating expenses. Fulfillment costs deleveraged 40 basis points year-over-year, primarily due to a year-over-year increase in our return rate as well as increased labor cost. Selling and distribution costs were a significant headwind year-over-year, coming in higher as a percentage of net sales than we had expected due primarily to our return rate trending above 2019 levels and to a massive increase in fuel surcharges that are included in our shipping costs for customer shipments. To offer some context, our fuel surcharges increased nearly 60% on a sequential basis compared to just the first quarter of 2022. Marketing deleveraged year-over-year as expected since we hosted our largest and most impactful brand marketing event of the year, Revolve Festival for the first time in 3 years.
Since the Revolve Festival investments were not in the prior year comparable quarter, our brand marketing investments increased by a meaningful $9 million year-over-year. We view these investments as important to building the strength of our brands over the long term. General and administrative costs also deleveraged year-over-year due entirely to a $5 million pool in connection with the penny legal matter. Adjustment for this nonroutine accrual, we achieved G&A leverage as our 27% net sales growth outpaced the growth in the remainder of the G&A expenses in the second quarter. Our effective tax rates were very different for the year-over-year comparison. Our tax rate for the second quarter of 2022 was 23%, almost 20 points higher than the 3% tax rate in the second quarter of 2021 that included meaningfully higher tax benefits.
Net income was $16.3 million or $0.22 per diluted share, a decrease year-over-year that was impacted by the meaningful differences in our effective tax rate, the cost pressures referenced earlier as well as the nonroutine accrual for the pending legal matter and G&A expense. Please note that the legal accrual is reflected in net income, since net income is a GAAP measure, but was excluded as a nonroutine items from adjusted EBITDA, our non-GAAP profitability measures. Adjusted EBITDA was $26.9 million, a decrease of 24% year-over-year against a very difficult prior year comparison as adjusted EBITDA has increased 70% in the second quarter of 2021. Looking back to the pre-pandemic period of the benchmark, our adjusted EBITDA for the second quarter was 42% higher than the adjusted EBITDA reported for the second quarter of 2019.
Moving to the balance sheet and cash flow statement. Lower net income year-over-year and working capital changes led to negative operating cash flow and free cash flow in the second quarter. These working capital changes primarily included continued investments in inventory, which increased $29 million during the quarter. Our inventory investments are reflective of our efforts to keep pace with the robust consumer demand we had experienced over the past several quarters. However, with the demand trend shifting during the second quarter, as discussed, our inventory balance ended the quarter in a place that is higher than we would like. While we feel good about the quality of inventory, the overall balance is elevated, and we are working diligently to bring it back in balance. Also impacting our cash flow was significantly higher cash payments for income taxes, which increased by $14 million year-on-year and sequentially compared to the first quarter.
For the 6-month year-to-date period, net cash provided by operating activities was $24 million and free cash flow was $22 million, with bulk measures down significantly year-over-year from the record cash flow generation in the prior year period. Our balance sheet remains debt free and cash and cash equivalents as of June 30, 2020, were $238 million, an increase of $18 million from June 30, 2021, yet lower than the first quarter of 2022. Weather has understandably been quarter-to-quarter fluctuation, consider our cash generation over the 3 years that we have been public. The cash position on our balance sheet at quarter end was more than 5x higher than our cash position 3 years ago on June 30, 2019, just after we completed the IPO. And this cash generation was purely operational without external financing, a clear and powerful indicator of our operational strength and scale.
Now, let me update you on some recent trends in the business since the second quarter ended and provide some direction on our cost structure to help in your modeling of the business. Starting from the top, as Mike mentioned, there is a great deal of weighing on the consumer today with inflation at a 40-year high and U.S. consumer sentiment reaching a record low point in June. It’s also important to recognize that our customer is younger and earlier in her career and income progression, often spending a disproportionate share of her wallet on discretionary apparel. The let stock market could also have a dampening influence on consumer discretionary spending with a higher income luxury consumer. These pressures mounted as the quarter progressed, negatively impacting consumer demand and our top line, particularly in June and continuing into the third quarter with net sales growth of approximately 10% year-over-year for the month of July.
Given the uncertain macro environment and considering that our comparisons are more difficult in the second half, we encourage investors to model further moderation in our year-over-year net sales comparisons for the balance of the third quarter from the approximately 10% growth in July. And since our net sales growth rate accelerated through 2021 and with the economy looking uncertain at best, we continue to expect the fourth quarter to be the most difficult comparison of the year. Shifting to gross margin. We are very pleased with our gross margin performance that exceeded our second quarter outlook provided just last quarter despite continuing headwinds on inbound freight power. A key driver of our strong gross margin performance for the past 2 quarters has been full price selling at record levels. However, consistent with the outlook we shared coming into the year and particularly with greater inflationary pressures and very low consumer confidence, we continue to expect our mix of full price sales to moderate in 2022.
We expect this moderation to begin in the third quarter and further moderate in the fourth quarter on a sequential basis, while still remaining higher than pre-pandemic levels for the full year 2022. As a result, for the third quarter, we expect gross margin of between 53.5% and 54%, and we expect the fourth quarter gross margin to be sequentially lower than the third quarter. Fulfillment, we now expect fulfillment expense of around 2.7% of net sales for the full year 2022, consistent with our performance for the first half of the year. We continue to view our fulfillment operations is extremely efficient from a cost and performance standpoint within the context of the broader industry, particularly in the current environment.
Selling and distribution; we now expect selling and distribution costs as a percentage of net sales to remain around the 18% range for the rest of 2022, relatively consistent with the second quarter’s 17.9% of net sales. This higher run rate than our previous outlook is due to our return rate trending higher than 2019 pre-pandemic levels and to the exponential increase in fuel surcharges that I talked about earlier. Marketing. Late in the second quarter, we began to feel the effects of the weaker consumer in our marketing efficiency measures. With many consumers coming back in the current environment, we are simply seeing a less responsive consumer. We now expect our marketing investment to be in a range of approximately 17% to 17.5% of net sales in 2022 and up from our prior outlook of 15.8% of net sales as we assume that marketing efficiency will remain challenged in the near term.
For the third quarter, we expect marketing to represent approximately 18% of net sales, down from the 19% in the third quarter of 2021. General and administrative. We now expect G&A expense of approximately $115 million for the full year, with the increase from our prior estimates entirely due to the $5 million accrual I mentioned earlier related to a pending legal matter. For the third quarter, we expect G&A expense of approximately $29.5 million.
Lastly, let me touch on our tax rate. Asset tax benefits in future quarters, we continue to expect our effective tax rate to be around 24% to 26%. While we anticipate a very challenging macro environment in the months ahead, we are confident that with our strong brand and operational excellence, we can navigate through these short-term challenges and continue to gain market share. And we believe we remain well positioned to deliver on our long-term profitability targets over time.
With that, we’ll open it up for your questions.
Question-and-Answer Session
Operator
[Operator Instructions] And your first question is from the line of Edward Yruma with Piper Sandler. Please go ahead.
Edward Yruma
Hey, guys, thanks so much for taking my questions. I want to click down a little bit on inventory. I know you said obviously that levels are a little higher than you would like. Can you talk about how long you think it will be to get the order book resized, actions you’re taking? And I guess how much of it is influencing order book versus taking markdowns on inventory that’s already on the balance sheet. Thank you.
Mike Karanikolas
Yes. So it’s a whole we feel good about the quality of our inventory. We think it’s good stuff that’s generally going to retain its value. We just have too much of it. And a lot of that is because of the softening demand that we saw in the quarter and into Q3. So from our perspective, we want to work through it at a measured moderate rate. We think it’s good inventory, so we don’t feel the need to do excessive markdowns. At the same time, there’s going to be some level of activity that will decrease gross margins. So you should expect to see a little of that throughout the year. In terms of lending inventory position right sizes, certainly, it’s our hope that by the end of the year, we’ll be in a much better place on inventory, but it is an uncertain environment. So we’re going to have to see how everything plays out.
Edward Yruma
Thank you.
Operator
Your next question is from the line of Mark Altschwager with Baird. Please go ahead.
Mark Altschwager
Good afternoon, thanks for taking my questions. I wanted to start just a bigger picture question on the revenue growth outlook. I guess a pretty wide gap between what’s implied for the growth rate in Q3 and Q4 and the longer-term plans for 20% plus. So we fall on the macro. But just hoping you could provide us with a little bit more color on how you’re thinking about the medium-term growth outlook for the company with this weaker macro backdrop? And also how you’re planning spending and the level of flexibility we should expect as we model out the margins. Thank you.
Mike Karanikolas
Yes. So with regards to the longer-term growth outlook, we feel very confident in that, certainly in the short term, medium term, if you will, if you’re looking a couple of quarters out. We continue to see a challenged macro environment and softening consumer demand. And so that should certainly be reflected in expectations for upcoming growth in the next quarters. From our perspective, the softening consumer demand we’re seeing currently doesn’t have any impact on the long-term trajectory and long-term story. Obviously, we’ve been through a pretty choppy macro environment in the past 2 years. And unfortunately, we’re seeing a little bit more of that, but it doesn’t really change any of our plans or our 2023 outlook.
Mark Altschwager
Thank you. And maybe just a quick follow-up there. We obviously all saw the flexibility in the model as you manage through the pandemic. I guess, how would you approach marketing any differently? Or would you approach marketing differently as we enter this slowdown? The last time we had events totally shut down, consumers shut down and buying key elements of your assortment. I’m just wondering how you think about marketing in a slowdown scenario.
Mike Karanikolas
Yes, it’s interesting. I think last time it was a very unique situation in terms of the level of depth of change to consumer behavior as well as our ability to execute events. That said, we generally like to go with kind of where the wins are going. And the Revolve brand is centered around consumers looking and feeling great and living their best life. And certainly, right now, consumers aren’t feeling that way. So I think it’s a balance of continuing to invest for the long term. We have some really exciting events and investments that we’re going to be making in Q3 that we plan to continue to do. We think those are great investments. But as well as taking into account what is the best timing for those investments in general?
Michael Mente
Yes. This is Michael Mente speaking. One other thing I would add is that we are really built to the balance sheet is extremely strong. So we’ll also be opportunistic. One thing I looked before I do very much so is that in more challenged economies, there’s definitely less competition for certain resources, whether it be employee talent or that being marketing resources, both digital performance marketing or brand marketing with insurances and such. So we’ll be very opportunistic to really not lose focus on staying long-term minded and doing what we think is best over the long term. So it could be a great time for us in that regard.
Operator
Your next question is from the line of Camilo Lyon with BTIG. Please go ahead.
Camilo Lyon
Thank you. I was hoping you could unpack a little bit more about the components of the deceleration that you saw in fold here at the end of the quarter and into the start of Q3. Specifically, around like basket size category changes, frequency, trade down, anything you’re seeing and how we should think about the assortment changes, if any, outside of the inventory rationalization that you’re contemplating to meet a more kind of inflationary sort of compressed environment.
Mike Karanikolas
Yes. So generally, the slowdown that we saw was fairly broad-based in nature. That said, there are some interesting takeaways. One is actually that the higher priced items are holding up better than some of the mid- and low-priced items. That’s not to say some of the discounting won’t come into play, but it seems clear from our consumers that those levels are holding up a bit better. I think in terms of other trends also on the traffic side, we’re seeing that not hold up as well as conversion rates and revenue per session, which I think is consistent with the remarks we made about, we feel like the inventory we have is good. We just have a bit too much of it.
Jesse Timmermans
Yes. And then Camilo, it’s Jesse. Maybe I’ll just add a couple of things to that. We did see it get progressively more challenging as the quarter for guess. If you recall, we had communicated that April was growing at plus 30% and then closing the quarter, of course, lower than plus 30%. You can see how that played out. And then of July at plus 10. So it really started to hit us in June is going to really start to see that macro pressure. And then also across the geographies, we have seen more challenged internationally with the strong U.S. dollar putting more kind of currency pressure on that international customer? And then also COVID lockdowns and other challenges internationally that didn’t have as big of an impact domestically. So domestic definitely outperformed this quarter.
Camilo Lyon
Got it. And then just one follow-up, if I could. Is there — are you testing anything to incentivize lower return rates to maybe help out on that cost side? Or are you contemplating flowing through some of those house pressures to your consumer to alleviate the margin pressure that you’re absorbing?
Mike Karanikolas
Mike here. No, we’re not looking to do any sort of things that would decrease the consumer expense or add cost to the consumer side. While the increase in between rates certainly did pressure the margins, albeit particularly in conjunction with really unusual historical fuel surcharges. The model is still quite profitable, right? And we talked about how in Canada, the results we saw investing in the customer experience. So that said, we are investing a lot of time and attention into ways to reduce the return rate, but just not in ways that pass the cost along to consumers, the ways in which it makes it more likely they’re going to get what they want or easier to make the decision to keep what they want.
Operator
Your next question is from the line of Michael Binetti with Credit Suisse. Please go ahead.
Michael Binetti
Hey, guys, thanks for taking my questions. I was wondering if you could help us unpack the AOV upside in the quarter here a little bit, a significant contributor in the second quarter, but the order frequency we see coming down, obviously, on a tougher compare. I expect — I’m just kind of curious, Jesse, what you’re expecting in the back half, I mean, in some of your metrics there as the mix maybe continues to stabilize. And then I’m wondering, good work on the customer growth being strong. I know you mentioned that you think it moderates. But as we take the 10% July total revenue growth rate and moderated further, it’s just hard to say, but is there a chance we see a minus sign on revenues in one of the next few quarters considering the cadence you gave us such as it’s a little counterintuitive with the consumer where you have them today, the customer growth rate where you have it today. But you did caution us to that it would slow a little bit so.
Jesse Timmermans
Yes, sure. So on the AOV, a few things playing into that. So — number one, with the strong full price mix came in stronger than we had anticipated. We’ve been communicating for the last several quarters that we will see some shift back to markdown under that record high full-price mix that we’ve been experiencing, but continue to hold really strong through the second quarter. So that’s one component. The other component is the mix of dresses, being higher than last year, of course, 32% versus that 24%, but also higher than the prepandemic quarter of 2Q 2019. So that positively impact. And then even with Indesit’s a more special event an occasion where dresses having a higher price point. We also saw the mix shift between Revolve and Forward. Revolve outperforming forward this — or sorry, office — sorry, that was a pressure point. And then just overall price increases, we’re seeing kind of mid- to high single-digit price increases. This just kind of naturally flow through from our third-party vendors and then we adjust on brands accordingly.
And on the forward growth outlook for the next couple of quarters, it’s more about scenario planning. There is certainly a scenario that has a minus in front of it, but there’s also other scenarios that we’re working through, but it’s a really dynamic environment right now. So just kind of scenario planning at this point.
Michael Binetti
And did you say the surcharges, I think, accelerated in 2Q. Are you anticipating that level of surcharges to be stable to 2Q levels in the back half? Or it looks like some of the commentary we’ve heard around the space has heard some loosening up in freight and surcharges. Are you expecting this level of intensity to continue?
Jesse Timmermans
Yes. We are seeing it, I don’t know, soften may be a strong word, but definitely moderate. We’re not banking on significant alleviation on that front for the balance of the year, but maybe more hope than anything that it does continue to come down and give us some relief there.
Michael Binetti
Thanks for the color.
Operator
Your next question is from the line of Anna Andreeva with Needham & Company. Please go ahead.
Anna Andreeva
Great. Good afternoon, guys, and thank you for taking my questions. I have one quick question and a follow-up, if I may. Could you remind us what’s the percentage of your core demographic of wallet spend on apparel and accessories? I know it’s higher than average or some of the older demos, but just curious if you have any update there? And secondly, balance sheet is in great shape. CapEx levels pretty low. Can you guys talk about how you think about uses of cash? Is share buyback something that the Board would consider. Thank you so much.
Jesse Timmermans
Yes. So this is Jesse. As we talked about on the prepared remarks, our customer is younger. She’s earlier in her career and income progression. So not putting a specific percentage on that, but she does spend a disproportionate amount of her wallet on apparel and on discretionary apparel. And then on the uses cash, yes, to your point, really strong balance sheet as you compare just compared to a few years ago when we went public. So we feel really good about that. Number 1 use is really putting it back into the business, and we think that’s the best return on investment. And that’s back to some of the earlier comments on marketing. We’re going to be opportunistic. We’re going to keep pushing. We’re going to tighten screws in some areas, but really continue to invest for the long term. So that’s number 1 use. And we do kick around other alternative uses for that cash and return to investors, including buybacks, but also looking at opportunistic M&A as well. So when we looked at a lot of things, and hopefully, go back to Michael’s point on maybe some opportunity in this time, there could be some interesting things over the next quarters to years.
Operator
Your next question is from the line of Oliver Chen with Cowen. Please go ahead.
Unidentified Analyst
This is Jon [ph] on for Oliver. Thank you for taking my questions. Just curious to know what you’re seeing in terms of the promotional environment currently and your strategy there? And also, how should we think about the return rates trending in the second half? Should we still expect that trend higher, but just is probably going to be smaller in the back half. So any color will be helpful. Thank you.
Mike Karanikolas
Yes. So in terms of the general promotional environment, we are seeing it get a lot more promotional out there with other apparel retailers in the space and including companies that are kind of closer to us. So we think that sort of thing does affect general consumer mindset. And as we mentioned, based on what we’re seeing and certainly based on the consumer sentiment surveys, the consumer is not feeling great right now. But just to kind of double down in my earlier comments, we think the inventory that we have is quite good. We do have too much of it. Consumers are feeling quite as good right now. So there’ll be some level of increased discounting, but we don’t plan to do anything particularly significant on that front at this time.
Jesse Timmermans
Yes. And then on the return rate, we’re factoring in an elevated return rate for the balance of the year. That said, there are some potential benefits, not encouraging you to model the benefits in. But as we see mix shift out of full pricing to markdown. Markdown generally has a lower return rate than the full price product, and that’s one of the pressure points on return rate over the last several quarters. So if we do see that shift out of full price spec towards markdown. Markdown on the return rate there. And then also mix, as you mentioned, really record mix of addresses in the quarter at that 32%. So a mix shift back to some of those other categories, which is somewhat seasonal. There could be some relief on the return rate there. But as I mentioned, factoring in elevated return rates as we look ahead.
Operator
Your next question is from the line of Lauren Schenk with Morgan Stanley. Please go ahead.
Lauren Schenk
Great. Thanks. Just wanted to double click on inventory a little bit more. I guess when you say you hope to have worked through by the end of the year, what sort of year-over-year growth rate are you looking to end the year at? And then how are you thinking about or planning your inventory buys into 2023. Is it fair to assume that if you’re — if you can get back to 20%, that’s sort of the level you’re buying to? And then just lastly, the inventory valuation adjustment in the second quarter gross margin. Just any more color on that and how large it was? Thanks.
Mike Karanikolas
Yes. So I’ll take some of the first part of the question, then maybe Jesse can handle some of the technical elements at the end. As far as inventory levels we’re targeting. I wouldn’t want to guide to a specific level because, again, the economic environment is pretty dynamic right now. But we’re certainly looking to be in a better position with regards to terms of inventory and also kind of rightsizing incoming inventory shipments versus the level of demand that we’re currently seeing. So that’s kind of our goal as we exit the year. Looking at 2023, for the first half of the year, we’re definitely looking at moderated inventory purchases. At this time, it isn’t clear how many quarters it’s going to take to work through the softening consumer demand. So we want to hear on the side of conservatism, certainly to open up the year.
Jesse Timmermans
Yes. And on the inventory valuation adjustments, that’s really business as usual. We’re making adjustments every month, every quarter. That said, when you’re going into times like last year where we’re kind of chasing the demand and have lower inventory balance, there is less of that valuation adjustments and in times like that where the demand falls off and there’s an elevated inventory balance, but it is business as usual. So larger this year than it was in the prior year, but it balances out over time.
Operator
Your next question is from the line of Jim Duffy with Stifel. Please go ahead.
Jim Duffy
Well, thank you, good afternoon. I wanted to ask a little bit more about the shift in demand that you’ve seen in June and quarter-to-date. Can you speak how that’s manifested in both new customer acquisition and also maybe speak to some of the behavioral changes you’re seeing with the heritage customer base.
Jesse Timmermans
Yes, it’s really — sorry, go ahead, I was just going to — it’s really cost board. And that, I think, points to what we believe is just the macro factor playing into the demand. So you do new customers down relative to where they were in that peak Q1 period and lower year-on-year growth, but repeat customers deforming relatively the same as that. So really broad-based, no change in customer, call it, loyalty kind of retention rates or anything like that, still a very strong customer who’s coming in at full price. I think that’s going to play out really well over the long term but we do believe it is largely macro.
And like I said, it did get progressively more challenging as the quarter progressed, in particular, June and then into July as we disclosed. And Mike mentioned it as well, but seeing more pressure on those in the lower end price has been kind of mid-last premium into the luxury price point.
Operator
Your next question is from the line of Lorraine Hutchinson with Bank of America. Please go ahead.
Lorraine Hutchinson
I wanted to just ask for some more clarity on the difference between the behavior of the Revolve and the Forward customers understand that the comparisons are very different. Can you just point to any metrics that would illustrate if is holding up a little better or just how those 2 customers are behaving differently in this inflationary environment?
Mike Karanikolas
Yes. I think from a quarterly trend results perspective, we saw actually Forward Desal in a greater way. But as you mentioned, it’s really important to note just the incredible comp part was coming off of plus 150% year-over-year. So leading that think the huge role in the Ford results as well as we think Ford was a bit more impacted — both businesses were impacted by for a bit more so by some of the currency pressures making Forward products, which generally come from a lot of big-name brands, at least more so than Revolve, less competitively priced in some international markets. That said, we think Ford trajectory momentum is great, and we see it holding up relatively well, but certainly impacted by the comps in particular, but also by the same macro kind of sentiment shift that we’re seeing impact…
Operator
Your next question is from the line of Rick Patel with Raymond James. Please go ahead.
Rick Patel
Hi, good afternoon, thanks for taking the questions. Can you provide color on your expectations for gross margin for Revolve versus Forward for the rest of the year? I’m just curious if you think about elevated inventory, if it skews more towards one banner versus the other? And also, if there’s any other puts and takes to call out for gross margins across each of those segments.
Mike Karanikolas
Yes. I think pressure on both segments. They’ve both been operating at really record full price mix and also really high markdown margin within that markdown mix. So we do expect to see increased pressure there, both just naturally, as we’ve communicated over the last couple of quarters. And then with an increased promotional environment out there that does get more challenging, and then laying that inventory position that we mentioned. But we think over time and the last next couple of quarters, still on relative to previous period. On the Forward side, 47% down to that 49% that we did last Q2, but call it, 5 points higher than our kind of pre-COVID era. So really good progress by the Ford team there and generally strong margins. But it is a dynamic environment. There is some seasonality there, too, where Q2 generally are our highest margin quarter, and that’s in part due to the mix of dresses. So it just kind of naturally come down in Q3 and then Q4 as well. But I think the biggest factor there is that full price markdown shift.
Rick Patel
And you touched on taking pricing up mid- to high single digits, but it looks like markdowns will also increase as you address inventory. So can you help us just with where this shakes out. I’m curious if pricing ends up being a year-over-year tailwind or a headwind as you think about the back half?
Mike Karanikolas
Yes. I think it probably balances. I think the bigger impact on AVS probably a mix shift coming off a peak quarter objective. And you can see that historically, too in pre-COVID period. We do expect price increases to moderate in the back half of the year into 2023. We’re starting to see those come through at takes some time for them to come through, like you said, offset by the shift to markdown, but plus or minus. So nothing significant to call out there.
Rick Patel
Thank you.
Operator
Your next question is from the line of Simeon Siegel with BMO Capital Markets. Please go ahead.
Simeon Siegel
Thanks, everyone. Good afternoon. Jesse, what did inventory grow in units rather than reported dollars? And then I don’t know if return product ends up back in inventory. So if I’m thinking about the accounting ranges, let me know, but any way to gauge what return product represents as a percent of your ending inventory? And just whether there’s been any meaningful difference in that percentage versus prior years? Thank you.
Jesse Timmermans
Yes. The unit growth in inventory is much less than the dollar growth. And part of that is mix between Forward and Revolve. And then part of that is just the price increases that we talked about. And also, part of it is just that mix shift from last year where we were chasing inventory into the specialty then going out categories and now being stocked in those higher price point just in special categories. Like Mike said, we think the inventory is good. It’s just too much of a demand shifting so percolating. It left us in an elevated position. So units significantly less than that dollar growth — and then you’re right, the return dollars and units go back into inventory, that is elevated as the return rate is higher in the same proportion that you see in pre- COVID, of course, in the COVID time when return rates were significantly lower and the mix was different. You saw a much lower mix of that returned inventory coming back in.
And on that point, I think important to call out, we don’t talk about it a lot, but the full price sales of that returned inventory is really close to the full price mix of initial the initial outgoing sales. So back to the kind of health of inventory point that we made. It’s not an inventory pressure point per se.
Operator
Your next question is from the line of Tom Nikic with Wedbush Securities. Please go ahead.
Tom Nikic
Hi, good afternoon, guys. Thanks for taking my questions . So when you look at your overall EBITDA margin, before COVID, it was coming in the high single-digit range kind of based on the inputs you gave us guess looks like it’s probably going to be something like 150, 200 basis points below that this year. Like how do we kind of think about the bigger picture margin structure for this business? Like I mean, do you think that over the long term, it’s a high single-digit margin business? Do you think at some point you can get to the double-digit margins you had during the pandemic? How do we kind of think about margins in a more kind of normal environment? Thanks.
Jesse Timmermans
Yes. We still feel good about our 14% EBITDA target over time. Now that said, we’re facing a unique time with cost pressure. So maybe if we take it kind of line by line. If you look at gross margin, we’ve been delivering around that 55% gross margin, which was our target. And there’s going to be quarter-to-quarter fluctuation, but we still feel good about that 55% gross margin target, especially given that owned brands was 20% last year, we hit our peak at 36%. We still think there’s a lot of room to go there over time. We’re going to do that at a moderate pace. But — so I feel good about the gross margin. Then if you go to fulfillment at, call it, 2.7%, that compares to 3.3% in the pre-COVID era. So gaining really good efficiencies there. And you just kind of continuous automation improvements, whether that’s automation here at the main warehouse or expanding into that East Coast warehouse, which we do think will provide efficiencies over time. We think there’s room there.
The selling and distribution, we’re just in a really unique and challenging time right now with those fuel surcharges and inflation. So that’s been a real pressure point, not just the year-on-year because you have the additional factor of return rates and lower return rate last year versus the higher return rate this year. But even on a post-COVID versus pre-COVID comparison, significantly elevated fuel surcharges and therefore, cost at getting into that. And that line item is 2/3 shipping. So it has a really meaningful impact there. That’s — we do what we can there. That’s one of the line items that’s less in our control. So we have to manage through this time that we’re in.
And then marketing, marketing with demand coming off as we progressed through the quarter, that’s at elevated levels. We want to continue to invest in the brand marketing events, really build the brand performance marketing [indiscernible] and there’s ongoing cost pressures there over time, especially if you look over a 3-year period from pre-post-COVID thought we want to keep the puddle down. I think there is efficiencies to be gained over time with scale, especially on that brand marketing component.
And then the last one is G&A, which is largely, call it, fixed or at least semi-fixed. We’re really tied on that line item. So over time, with the top line growing, we expect to get some pretty meaningful efficiencies out of that line item. So in the end, like I said, still feel good about our 14% EBITDA target over time, of course. And it’s going to be a challenging couple of quarters, but just feel good a bit long term.
Operator
Your next question is from the line of Matt Koranda with ROTH Capital Partners. Please go ahead.
Matt Koranda
Hey, guys. Maybe just attacking the promotional environment question in a different way. Is there any way you can just share your thinking around your markdown approach in the second half, your commentary, I guess, suggests that you’re going to be a little bit more Q4 weighted in promotionality. And I guess the simple question is just why not just mark down now and in the near term, what’s the advantage to ramping in the promotions in the current macro environment?
Jesse Timmermans
Yes. Maybe I’ll take the second part, and then you can hit on that. Kind of — I think it was probably related to my comments on the kind of sequential movement in the margin. That’s more related to the full price markdown mix and that dynamic and working through Inventory not necessarily like a higher intentional promotional push in Q4 versus Q3.
Matt Koranda
Okay. Got it. And then…
Mike Karanikolas
Sorry, go ahead, sorry. There’s an element of seasonality coming from Q2 to Q3. From a strategy standpoint, we’re not trying to kick the can down the road or anything. We just want to take a measured approach, given that we think the inventory is quality inventory. And so that means the markdowns will happen over time. And yes, accumulate over time as well, which is the other reason you’ll see kind of more impact on Q4. But we’ve found that historically taken a more measured approach versus just putting a bunch of stuff on marked on all at one tends to be more effective for us.
Matt Koranda
Okay, that’s fair. And then on selling and distribution, if I could. On the deleverage 390 bps roughly year-over-year. Could you just break out cleanly for us, Jesse, maybe how much was fuel surcharge related versus the higher return rate? Or how can we quantify the entire return rates in the current quarter? And then on the well, if I could any color quarter-to-date in terms of change in returns is still running at the same rate we were in 2Q?
Jesse Timmermans
Yes. I’d call it roughly the same level. I would say it’s not significantly increasing or decreasing. So I wouldn’t factor any big movements from Q2 to Q3. And probably the best way to quantify that or kind of bifurcate the impact of return rates versus the field is really looking at selling and distribution kind of pre-COVID look at a 2019 level versus today’s level where the return rate was closer, still a notch higher than it was back in the 2019 era, but probably closer to that. Hope looks at that, it’s 14.5% versus 17.5% and there’s price increases that happened over time and a mix shift towards international with those return packages coming in. So that’s a significant cost with that localization. But that’s probably the best way to kind of break it out. And then maybe a different way on that or another maybe data point. If you look at that selling and distribution and think about 2/3 of that is freight. — probably 25% is the return. Returns come in at a slower and cheaper method than the outbound shipments. So kind of bifurcating that shipping component of the selling and distribution into those 2 may be helpful.
Operator
We have time for one final question, and it comes from the line of Noah Zatzkin from KeyBanc Capital Markets. Please go ahead.
Noah Zatzkin
Thanks for taking my questions. Are there any P&L benefits we should be thinking about in the second half and, of course, longer term related to the opening of our East Coast DC? And if return rates were to remain elevated in the second half, should we expect less of an impact relative to operating with a single DC? Thanks.
Jesse Timmermans
Yes. Over time, benefits, both on the outbound being able to shift to customers closer from that distribution center versus shipping all the way from L.A. to the East Coast. That’s — it’s not going to be 100% of the inventory, but there is a small impact there. And then on the return side as well, being able to accept returns in that facility, whether that’s from kind of the eastern region of Canada or the U.S. and taking the inventory into that facility and then whether keeping it in that facility or both shipping it back to L.A. for then redistribution. So — those are probably a couple more meaningful benefits of that. It wouldn’t factor anything in this year. There’s always some upstart cost, and it will be on the fringes. But over time, you think it is meaningful.
Noah Zatzkin
Thank you.
Operator
And that’s all the time we have for questions today. I will turn the call back to management for closing remarks.
Mike Karanikolas
Well, thank you, everyone, for joining us today and helping support us in our journey towards building one of the world’s biggest fashion brands.
Operator
This concludes today’s conference call. You may now disconnect.
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