Good afternoon. My name is Chris, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Revolve's Fourth Quarter and Full Year 2020 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] 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 fourth quarter and full year 2020 results. Before we begin, I'd like to mention that we have posted a presentation containing Q4 and full year financial highlights to our Investor Relations website located at investors.revolve.com. I would also like to remind you that this conference call will include forward-looking statements including statements related to economic conditions and their impact on consumer demand and our business, operating results and financial condition, our cost and inventory management, the impact of new fulfillment centers, our growth, including growth in active customers and product offerings market opportunities in related macroeconomic and industry trends are future events and our outlook for net sales, gross margin, operating expenses and effective tax rate. These statements are subject to various risks, uncertainties and assumptions that could cause our actual results to differ materially from these statements, including the risks mentioned in this afternoon's press release as well as other risks and uncertainties disclosed under the caption Risk Factors and elsewhere in our filings with the Securities and Exchange Commission, including, without limitation, our annual report on Form 10-K for the year ended December 31, 2021, and our subsequent quarterly reports on Form 10-Q, all of which can be found on our website at investors.revolve.com. We undertake no obligation to revise or update any forward-looking statements or information except as required by law. During our call today, we will also reference certain non-GAAP financial information, including adjusted EBITDA and free cash flow. We use non-GAAP measures in some of our financial discussions as we believe they provide valuable insights on our operational performance and underlying operating results. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP. 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 on 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.

Hello, everyone, and thanks for joining us today. 2022 was the 19th full year since Michael and I founded Revolve and I'm proud of our financial performance and the accomplishments our team delivered in such a dynamic operating environment. Our net sales for the year increased 24% to $1.1 billion. We delivered record growth in active customers, and we generated significant profitability and cash flow that further strengthened our balance sheet. There are three key messages, I want to focus your attention on today. First, our agility, operating discipline, and execution of key growth initiatives helped us deliver fourth quarter and full year results that we believe continue to outperform industry peers and relevant benchmarks, further extending our market share gains. Importantly, our combination of growth and profitability truly stands out within the fashion e-commerce sector and coupled with our strong balance sheet allows us to continue to prudently invest in our long-term growth opportunity at a time when others are forced to play defense. Second, while the macro environment remains a challenge for all companies. In the fourth quarter, we made solid progress with our inventory dynamics and we believe we are on track with our objective of rebalancing our inventory position by the end of the second quarter of 2023. The spread between our inventory growth year-over-year and our net sales growth year-over-year decreased by more than 50% in the fourth quarter on a sequential basis when compared to the third quarter of 2022, and we continue to expect to exit the second quarter of 2023 with an inventory position that is balanced for growth and efficiency. And third, this year is off to an encouraging start, which we believe further validates the power of our core competitive advantages and positions us very well for our large market…

Thanks, Mike. I am proud of our ability to deliver 24% year-over-year growth in net sales in 2022, achieving our long-term revenue growth target in a very dynamic and fluid operating environment all while maintaining a profitable and cash-generative business that further strengthens our balance sheet to give us the flexibility to continue to invest in key initiatives to drive growth and continued market share gains. Our cash position at year-end increased to $235 million with no debt. Our ability to overcome countless business challenges to deliver profitable growth is volume and by our leadership and our core competitive advantages that position us for continued success over the long term. Our technology-driven DNA and proprietary technology infrastructure, our operational excellence and agility and our powerful Revolve brand connection with the next-generation consumer. Since Mike talked about technology and operational excellence, I'll spend a few minutes on the strength of our brands in connection with the next-generation consumer that we continue to build as illustrated by our record growth in active customers in 2022. Consistent with our strategic focus, discussed on recent investor calls, in the fourth quarter, we continued to drive exceptional growth impacted consumer engagement on video content across our marketing channels. Our new views on wheels increased 600% year-over-year in the fourth quarter, and our new views on TikTok increased by nearly 800% year-over-year. I couldn't be more proud of how well our team has navigated this in the market and executed our brand marketing transition from our historically successful focus on Instagram photo content to where we are today the growing majority of our social media minds here are now coming via engaging video content channels. Also important, we believe our fast-growing engagement of TikTok and reels further expands our brand reach and awareness into a larger…

Thanks, Michael, and hello, everyone. We are pleased with our fourth quarter and full year results, which demonstrate agility in navigating significant challenges in the short term while maintaining an unrelenting focus on the customer and making disciplined investments that position us for continued success over the long term. I'll start by recapping our fourth quarter results. Net sales were $259 million, a year-over-year increase of 8% and representing a three-year compound annual growth rate of 21%. Revolve segment net sales increased 9% and FRWD segment net sales increased 5% year-over-year in the fourth quarter. By territory, domestic net sales increased 9% and international net sales increased 1% year-over-year, despite currency and macro headwinds overseas. Active customers increased by healthy 91,000 during the fourth quarter. This growth expanded our active customer count to $2.3 million, an increase of 27% year-over-year. Our customers placed 2 million orders in the fourth quarter, an increase of 11% year-over-year. Average order value, or AOV, was $306 an increase of 5% year-over-year and a decrease of 4% sequentially from $320 in the third quarter. Shifting to gross profit. Consolidated gross margin was 51.4%, a decrease of 339 basis points year-over-year, primarily due to a lower mix of net sales at full price and deeper markdowns compared to the fourth quarter of 2021. The decrease in gross margin is directionally consistent with our commentary on last quarter's conference call, but did come in lower than our guidance range for the quarter. Moving on to operating expenses. Fulfillment costs deleveraged 84 basis points year-over-year, primarily due to a year-over-year increase in our return rate as well as increased labor costs and investments needed to extend our fulfillment network. Selling and distribution costs deleveraged 165 basis points year-over-year and remained a significant headwind primarily due to higher cost…

Thank you. [Operator Instructions] Our first question is from Oliver Chen with Cowen. Your line is open.

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

Yeah. This is Jesse. Thanks, Oliver. In terms of inventory composition, we feel good based on the progress we've made as we discussed from the peak in Q2 down to where we were in Q4 and even more importantly that $20 million reduction in January. As we said in the previous calls, we feel like the inventory is good. It's healthy. We're working through it. We're geared up and ready for the kind of our peak festival season. It is skewing higher on the FRWD side as we talked about in the past that it takes longer to work through that FRWD inventory than the Revolve inventory, starting to make some progress there now in the first quarter. But overall, good composition. And then kind of results to date on revenue and AOV. As we talked about in the prepared remarks, we don't expect that significant year-over-year AOV increase that we've been experiencing in the past two years to expect kind of a low to mid-single digit increase in AOV. That said, Q1 is lower seasonally with lower margin and higher markdown mix in Q1. So it will be kind of lower in Q1 compared to other quarters of the year, but still for the full year 2023, expect a moderate increase in AOV.

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

With regard our own brands, I think I'd say still very, very early innings. A lot of our efforts have really been focus on historically core categories and such, we know that there's a lot of opportunity all across the board. I think this really also reflects Revolve's large opportunity to expand categories in different aspects and different reps in the closet. So very excited about their -- the past three launches have been absolutely awesome [indiscernible] and Marianna Hewitt. So I think there's a lot of opportunity there. Of course, this gets modulated in periods of conservatism. We obviously have got some money with the cutback in own brand during COVID and then a type period like this, would be conservative as well. But long term, as I said it as ever.

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

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

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

Yeah. Sure. Post-pandemic [Technical Difficulty] kind of historic kind of activities missing, we return to very much the similar activities as we've done in times past. Now that, that -- we've celebrated that moment. And looking forward, we think it's a very exciting time to really think further ahead. So there will be a lot of different innovation, different ideas, different like concepts, which will affect cadence, which also evolve our storytelling and such. So it will be -- moving forward, it will be a mix of the things that you're very familiar with as well as a whole range of things that we'll be approaching. So it will be a fun year.

Sounds exciting. Best regards.

Thank you.

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

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

Yeah, maybe I'll take the second piece first. On a year-over-year basis, last year, it did appear that things [indiscernible] got easier, which had made for easier comps this year. But you really have to look at that three-year comp last year and compare back to 2019 because 2021 was kind of that inflection point in March where things were coming out of COVID. So kind of really paying attention to those three-year comps. We do anticipate tougher comps for the balance of this quarter. And we've already seen it in kind of the back half of that seven weeks where January started off stronger and then started to get weaker relative year-over-year in that kind of the last three weeks of that seven-week period. So definitely encouraging everyone to factor in some moderation there in the growth rate for Q1 and then maybe I'll pass it over to Michael for the consumer.

Yeah. So in terms of the consumer, I think we've seen things moderate a little bit in terms of the sort of weakness accelerating. But overall, we think our consumer is not in the place he was certainly 1.5 years ago in 2021, things still feel a little rough out there for her. And Revolve markets to aspirational consumers that are looking to look their best life and often are kind of spending a very large portion of their disposable income against fashion and travel and similar products. And so right now, things are a bit tight for her confidence in the future isn't as strong as it was 1.5 years ago, and we've been seeing that in the numbers in the past couple of quarters.

The one thing I would add is that, this is really compared to a year ago, 1.5 years ago, where money was flying from the sky and people were spending and people haven't been out and a lot of pent-up demand, but zooming out I think our consumers very engaged with our brand and is really still continuing to come to us for all the things that she loved. And we also see a lot of opportunity to continue to expand that. So zooming on taking a broader lens, I think we're in a great spot.

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

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

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

Yes. And maybe on the seasonality, we hope to get closer to that pre-pandemic more normal seasonality. And you can see that in the marketing numbers that we guided towards in the prepared remarks, where Q1 is lighter and then Q2 is our typical peak season with Revolve Festival and a lot of activity there. So that will be in that 18% zone. And then in terms of sales as well, we hope to get back to some kind of normal seasonality where you see Q2 of the peak followed by Q3, and then you've got Q1 and kind of Q4 on the low end of the bookends there, comps aside because, of course, we will we're facing the really tough comps this first quarter and then, call it, halfway through second quarter before things start to ease up in the back half of the year.

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

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

Yes. Maybe I'll go in reverse order there. Return rate did tick slightly lower in 4Q as compared to 3Q. That's largely seasonality over to return rate in the fourth quarter. We're not anticipating a decrease in the return rate in 2023, we're kind of baking in this elevated return rate going forward with some seasonality elements there. We see a higher return rate in Q2, for example. And that fluctuates a full price markdown mix and such. And then the differential on the owned brand versus third-party margin. We don't talk specifically about that other than to say that the owned brand margin is meaningfully higher than the third-parties.

And with regards to penetration, one thing just [indiscernible] kind of reminder that periods of conservatism, the depth of COVID as well as appear like now own brands is an area where we cut back where the units per style is greater than what we're able to do with third party with a third party, we can buy 4 to 6 units per style. So in periods like these, we do definitely modulate down and will ramp up as the customer and the economy gets we get a little bit more confidence in that zone.

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

Thank you. Good afternoon, everyone. Can you provide a little more color on the impact of freight. I believe in the past, you've indicated that you wouldn't see a more meaningful benefit until later in '23. But just given the outperformance and sell-through velocity being a little bit better than you expected three months ago, do you see the potential for the freight benefit to be a little bit more front-end loaded?

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

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

Hey, guys. Thanks for taking our questions. Jesse, I just wanted to check on the January inventory number and the sales trends you pointed to, and I think you said January was stronger than February. I think that implies you're on track for sales to inventory that ratio flipping back to positive in the first quarter. I think that will be the first time since early '21. So I just wanted to check that.

Yeah. I think flipping back to positive is probably aggressive. We're still looking at that -- during Q2 at some point, at least by the end of Q2 before that normalizes? But we feel good about the progress there and especially heading into 2023 with that $20 million reduction.

Right. I guess then the bigger picture question is, I think you told us, okay. You said inventory will be aligned in 2Q. I guess to look at it another way, when do you think the depth of inventories will be clean enough for you guys where it doesn't impact the future orders?

Yeah, I'd say that's still, call it, in that mid-year time frame. We are already starting to book into that midyear zone. So I think it still hangs right in that middle of the year. And again, keeping in mind that FRWD has such a long lead time that, again, on the flip side will take longer to play out.

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

Right. Yes, exactly.

Okay. Great. Very helpful. Thank you.

I will give that just quickly. If you look at the composition of the inventory, the sales mix of FRWD and Revolve versus the inventory mix of FRWD and Revolve, the inventory mix is much higher than the sales mix. So that's another way to kind of triangulate around it.

Can I just ask you an inventory anyway breakout dollars versus units at the end of the quarter?

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

Okay. Thank you very much.

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

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

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

And you had commented last quarter about the lower priced consumer a little softer than the higher end. Is that relationship holding up through 4Q and into the first quarter?

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

Thank you.

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

Thanks everyone. Good afternoon. Jesse, any way to quantify the moving pieces in gross margin embedded within your 1Q and full year guide? Any updated thoughts on long-term gross margin rates? And then just curious how you're thinking about inventory turns for next year? Thank you.

Yes. Maybe on kind of breaking it down a little bit more. We'd expect to evolve to be in that 55% zone FRWD to be more in the kind of low 40s zone. The year-over-year impact is largely due to the full price mix. We were checking at 85%, which is just off of the record high of 87% in 2021. So we expect that to come down several points. If you go back to even pre-COVID levels, we're at 79%, which we felt good about. We think we can do better than 79%, but it's not going to be at 85%. So that's the biggest factor there on the margin. And then exiting the year in a much healthier place as we work through the inventory in the first half. Turns expect much better trends in 2023, given one inventory recalibration. And then again, just kind of back half trends and tinting normalize.

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

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

Yeah. On the G&A front that's starting to level off, but that's coming off of a really robust investment cycle coming out of COVID, where we're keeping up with that is really robust demand and rebuilding the team, et cetera. So this is more of what we'd expect going forward. If you look over the course of the last three years from 2019 to we've gained 3 points of leverage on that G&A line item. It's -- we call it semi-fixed, it's kind of two-thirds salaries and wages. So as we get into a more normalized growth cadence, we can leverage there in the next few years. And then promotional activity, I think you guys know just as well as we do. It's been elevated. It was elevated in Q4, it kind of ramped towards the back half of Q4 continued into Q1. I think as everybody works through their inventory positions. But I guess it's as we expected higher year-on-year, especially and then kind of a little bit higher than kind of pre-pandemic 2019 levels.

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

Hi. This is Peter McGoldrick on for Jim. Thanks for taking our questions. You added 0.5 million new customers in 2022. Can you talk about any cohort differences compared to your seasoned customers any distinction in channels of acquisition, full price engagement or frequency of purchase to call out?

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

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

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

Yeah. Well, I think we're in a somewhat unique period right now, right, where inventory levels have risen a lot year-over-year, and that's by and large, the biggest driver of the difference between free cash flow and margin. And so any incurred where inventory is climbing, you're going to see that conversion ratio not look as good. Historically, we feel great about our track record of converting EBITDA into free cash flow. We have very low CapEx. Historically, we don't expect that to increase in any significant way going forward. And obviously, we'll be opportunistic never say never, but we don't expect things to change on that side. We have very few adjustments to our adjusted EBITDA versus a lot of companies out there. So I don't think there should be any body language around there, but if we sent the wrong body language, we'd like to clarify.

No, I guess it means it sounds like you're investing in fulfillment capacity, not to say it's going to spike up meaningfully, but is there a certain in efficiency. I mean, I mean, you stalled out, 2% free cash flow margin at the end of last year, down from 12% 3 years ago. EBITDA has gone from 10% to 8%. So I get the inventory overhang, but is there a need here for some sort of greater efficiency in distribution or fulfillment taking aside some of the general operating deleverage in the model? I guess deal is in the question -- but I'm happy to take that off-line. I guess, maybe if it's turn the weeds, I guess. The last question I have is, any update on the cross-selling initiatives between FRWD and Revolve? And just sort of following from that, the higher levels of retention that you're seeing, is there a natural go-forward new level of marketing spend that you think the model can withstand as you're kind of seeing those initiatives play out? Thanks.

Yes. So with regards to Revolve and FRWD, we feel very good about the cross-selling initiatives we have there. That's a huge long-term opportunity for us and an area we're going to continue to invest in a big way. We've talked about in previous calls how it's essentially mid-single digits percent of overlap. And we think in the future, it can be much, much larger than that. We feel like a very large portion of Revolve customers are shopping the products on board. And so that's a huge opportunity for us. And then just to kind of, I guess, turn back to the model question. I think, Jesse, hopefully gave some good color in his comments there, but I just want to reiterate, we're very confident in that 14% long-term margin. In the current period, we're not pleased with the gross margins that we delivered. We expect that the inventory position normalizes that those gross margins are going to go back up significantly. Also, Home brand continues to be a big long-term opportunity to gain gross margin and share there. Operating leverage, Jesse mentioned getting 300 basis points on the G&A side over a multiyear period, as well as additional efficiencies. And that does include, right, scale on the distribution side. So that is something that we think is an opportunity and something that we're focused on. I just wouldn't necessarily say that the model needs it so much is obviously to maximize the economic opportunity for investors where we're certainly going to make sure we're maximizing those opportunities on the scale side that we have with the distribution.

Yes. And sorry, not to drag this one out longer. But also keep in mind the tax rate and those cash tax payments this year versus the last couple of years where we've experienced a much lower tax rate. How's a drag on the free cash flow. So that's where you're also seeing a bigger differential this year between the free cash flow and the adjusted EBITDA.

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

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

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

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

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

Definitely Yes. With the period of conservatism and inventory being where it is, where we're working through a peak and but still been in a period of conservatism. We definitely will scale back own brands because it is kind of one of the highest stage points for reducing inventory while maintaining a broad consumer offering. As we work through inventory and looking to be on, we've been won't really see it too much in 2023, but beyond, we'll see the ramp-up of own brand as well, kind of back to our historic core and such. Long-term wise, we think there's an incredible amount of opportunity. Our capabilities have been in hands, quite a bit over the past few years during the COVID years. So there's a lot of more capability in categories that own brand didn't touch, so feeling as augmented as ever in that zone. All of our recent drops have been awesome. The [indiscernible] brand is doing absolutely incredible and it expanded into categories and price points that we weren't engaging historically. The Remi collection was lot, as well in terms of broader size ranges and the most recent job with Marianna Hewitt, which was focused on less going out a little bit more sophisticated kind of workwear been awesome as well. So it really is been kind of like the early form of like the next stages of home brand expansion.

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

Thanks, guys for joining us on this quarter and this final year, hitting $1 billion in annual revenue. It's not something I always dreamed up and we were finally able to achieve that which is awesome. This coming year, post-pandemic, post kind of crazy economic times will still be a very exciting and interesting year. We'll be celebrating our 20th anniversary this year, and we have a lot in tune and we're very excited for next quarter and beyond as we think about the next 20 years.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.