Revolve Group Inc (RVLV) Q2 2021 Earnings Call Transcript

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Revolve Group Inc (RVLV -1.87%)
Q2 2021 Earnings Call
Aug 4, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon. My name is RJ, and I will be your conference operator today. At this time, I would like to welcome everyone to REVOLVE's Second Quarter 2021 Earnings Conference Call. [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 -- Vice President of Investor Relations

Good afternoon, everyone, and thanks for joining us to discuss REVOLVE's Second Quarter 2021 Results. Before we begin, I'd like to mention that 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. These statements include our current expectation regarding the continued impact of the COVID-19 pandemic on our business, operations and financial results and our outlook for operating expenses for 2021. 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, 2020, 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, adjusted EBITDA margin 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 Co-Founders and Co-CEOs, Mike Karanikolas and Michael Mente; as well as Jesse Timmermans, our CFO. Following our prepared remarks, we'll open the call for your questions.

With that, I'll turn it over to Mike.

Mike Karanikolas -- Co-Chief Executive Officer and Director

Good afternoon, everybody. We're excited to update you today on the momentum in our business that has been building since the last time we spoke. There are three key takeaways that I want everyone to walk away with today. First, we delivered record top and bottom line results in the second quarter with accelerating top line growth compared to 2019. The very strong revenue growth trajectory discussed in our Q1 investor call last quarter improved in May and June and has continued strong through July. We also meaningfully outpaced the record profitability we had delivered in the second quarter of 2020 at a time when REVOLVE uniquely reported very profitable results during the depths of COVID. In fact, our net income and earnings per share more than doubled year-over-year on top of record Q2 performance from a year ago. Second, a powerful driver of our exceptional top line growth in Q2 was the further acceleration of growth within our FORWARD segment, which grew more than 120% on a two-year growth basis versus the second quarter of 2019.

A clear and measurable catalyst at FORWARD was the launch of our FORWARD loyalty program early in the second quarter that is fully integrated with REVOLVE. The amount of FORWARD customers coming directly from our existing REVOLVE customer base accelerated almost overnight after we launched the FORWARD loyalty program, contributing strongly to our FORWARD segment growth in the second quarter. Michael will talk more about our cross-marketing efforts between the REVOLVE and the FORWARD segments, where the percentage of REVOLVE active customers who also shop on FORWARD is less than 5%. Third, as the world has started to reopen, we see our core customer coming back to us in a powerful way. In the second quarter, we generated record growth in new customers and unprecedented numbers of reactivated customers who hadn't purchased from us in several quarters while social events were on pause.

As a result, we delivered our strongest quarterly sequential growth in active customers in nearly two years. With that as an introduction, I'll provide an overview of our second quarter results and recent developments. The strong growth in new customers, the return of our existing customers and our ability to engage with her through our marketing and merchandising resulted in record net sales of $229 million in the second quarter, an increase of 60% year-over-year and 41% on a two-year growth basis compared to the second quarter of 2019. This is 11 points higher than the 30% two-year growth we reported in the first quarter of 2021. Our profitability and cash flow in the second quarter were also outstanding. Net income was a record $32 million or $0.42 per diluted share, up more than 100% on a year-over-year basis versus our prior record Q2 results from a year ago. On a trailing 12-month basis, we have now generated more than $100 million in adjusted EBITDA during some really challenging times over the past four quarters.

That's higher than the combined adjusted EBITDA we generated in the four years leading up to our IPO in 2019. These results demonstrate how we have leveraged our scalable technology and operating platforms to drive higher margins over time. And the profitability is converting to substantial cash flow. For the first six months of 2021, we generated $65 million in free cash flow. This significantly strengthened our balance sheet and positions us to invest in future growth opportunities. Turning to our people and operations. With the very strong growth in net sales in the second quarter, we have shifted into aggressive hiring mode. We are bringing on talent, not only to support consumer demand and exciting growth opportunities, but also to ensure we continue to serve our customer incredibly well. I would like to acknowledge and express my sincere thanks to our customer-facing teams in areas such as fulfillment and customer service for your dedication and perseverance in handling such a strong uptick in customer orders in recent months while we scaled up the teams to add capacity. From a financial standpoint, it is gratifying to see evidence of scale efficiencies come through on the income statement, resulting from the higher demand.

For instance, we delivered leverage on fulfillment costs as a result of automation efficiencies as well as our increased scale; and on general and administrative expense, where the costs are more fixed in nature and are spread out across a much larger base of revenue. These operational efficiencies were achieved despite an increasing return rate year-over-year and were key contributors to our record profitability in the second quarter. We also continue to manage our inventory very well. This is best illustrated by our gross margin expansion, heated by a record mix of net sales at full-price and shallower markdowns in the second quarter. Our clean inventory position at quarter end with low markdown levels further illustrates the competitive advantages of our data-driven merchandising that helps us to quickly adjust our assortment to align with the fast-moving shifts in consumer preference. We increased our activity on the marketing front this quarter, and we are planning to significantly increase our activity in the coming quarters. We will be investing more than ever in what we believe are some truly exciting initiatives to be unveiled in the upcoming weeks. We believe this is the right time to invest and that these investments will help us to further capitalize on our current business momentum, drive incremental consumer awareness and customer activity and further elevate the brand for the next phase of growth.

Shifting gears, our strong results have not come without challenge, and there remains uncertainty in the macro environment. We are closely monitoring the recent rise in COVID cases around the world and the varying levels of restrictions that are being reinstated, including here in Los Angeles recently. This serves as a reminder that we are not out of the woods yet. Relatedly, the industrywide supply chain challenges had a progressively larger, albeit manageable, impact in the last few months. This came through in a decrease in the percentage of on-time deliveries from our suppliers and an increase in our inbound shipping rates. And finally, the potential challenges presented by the recent Apple iOS changes that I mentioned last quarter started to become evident late in the quarter. So it's an area we'll continue to focus on with our advertising partners. These headwinds are not unique to us and affect all companies.

We believe REVOLVE is well positioned to continue to effectively navigate through the many challenges presented in this very dynamic environment. I'll wrap up with a discussion of regional performance. I'm excited by the strong growth in the U.S. market, which increased 59% year-over-year in the second quarter and continues to be strong months after the most recent government stimulus payments. Meanwhile, our international business continues to perform very well and represents an exciting opportunity for future growth. International net sales grew 63% in the second quarter of 2021 relative to the prior year, driven by strength in all major regions in illustrating how well our brand is translating across cultures and geographies. Drilling into some specifics. Our Q2 results illustrate how our international investments can drive growth and customer satisfaction. For instance, Canada was again a standout contributor for the REVOLVE segment after our recent launch of all-inclusive pricing that further raised the bar on our Canadian customer experience.

Building on this success, in June, we introduced all-inclusive pricing on our FORWARD segment for Canadian customers. It's early, yet the improved service offering has driven a powerful improvement in the growth trajectory at FORWARD off of a small base. Next up, we plan to launch all-inclusive pricing on FORWARD in the U.K., another of our largest international markets where we see a meaningful opportunity to expand our luxury offering.

Before I turn it over to Michael, I will just reiterate that while there is still some uncertainty out there, our results demonstrate that we are continuing to navigate the challenges very effectively. Moving forward, we are focused on actively investing in our growth opportunity, and we are excited for the path that lies ahead.

Michael Mente -- Co-Chief Executive Officer and Director

Thanks, Mike. We are more excited than ever about the future of the REVOLVE and FORWARD brand and our ability to continue to capture consumer mind share and wallet share over the long term. Our ability to react to the extreme shifts in demand and consumer preferences over the past 18 months have shown how scalable our platform is and how agile we can be. Last year, when travel and social activities were halted overnight, we were able to react very quickly with merchandise and marketing that connected with their new stand on lifestyle. Our team and systems enabled us to manage through a very turbulent time, staying connected with our customer and delivering record profitability and cash flow in 2020. More recently, we were able to get ahead of the significant increase in demand and a shift in consumer preference as economies opened up.

As our customers started traveling and socializing in person again, we quickly shifted our product mix and reactivated our powerful in-person brand marketing strategy. Outfits for going out on the town and special events are once again among the styles in the highest demand. Dresses and skirts returned to outstanding year-over-year growth in the second quarter even while we continue to drive growth in newer categories. As Mike mentioned, our loyal customers are coming back to us for these core offerings to look their best as they get out again. Our ability to get ahead of the increased demand for going-out categories and have the right products for our customers at the right time is a key driver of the REVOLVE segment's acceleration in net sales in the second quarter of 2021.

Combined with our successful management of inventory, we achieved a record percentage of net sales at full price in the second quarter. The strength of our operational execution, inventory management and merchandise selection were leveraged throughout the business and were very evident in the success of FORWARD, our luxury segment that delivered Q2 results that was nothing short of incredible. While momentum has been building at FORWARD for some time, the second quarter was a breakout moment. Net sales increased 151% year-over-year and increased 122% on a two-year growth basis compared to the second quarter of 2019. FORWARD also delivered record gross margins in the second quarter. The strong results underscore FORWARD's differentiated position in the market as a preferred destination for the next-generation consumers seeking curated luxury offerings.

As another signal of our momentum, next week, we are excited to launch another coveted luxury brand on the FORWARD side, the women's collection from Tom Ford. Even more compelling is the power of the combined REVOLVE and FORWARD brands. From a customer and assortment perspective, the two brands are both synergistic and complementary. REVOLVE has historically been focused on the discovery of trend-driven ready-to-wear styles, while FORWARD has been more heavily weighted toward the statement pieces in a wardrobe, choosing handbags, categories that we know the REVOLVE customer loves and spends on. We have only recently started to invest to fully leverage our broader platform and custom-ready to cross-market the REVOLVE and FORWARD offerings to maximize our long-term opportunity. Recall that on our last quarter's investor call, we had just introduced our FORWARD loyalty program that is fully integrated with our REVOLVE loyalty program. So for the first time ever, we are now directly rewarding and incentivizing customers to cross-shop on REVOLVE and FORWARD.

The results have far exceeded our expectations in the early going. We can see in the numbers that the launch of the FORWARD loyalty program was a meaningful contributor to the FORWARD segment growth in the second quarter. After launching the FORWARD loyalty program, we saw a significant increase in the percentage of REVOLVE loyalty shoppers who cross-shop FORWARD. Encouragingly, this rate of overlap continued to increase throughout the second quarter. We estimate that the increase versus the baseline levels alone generated more than 10% of FORWARD net sales in the U.S. in the second quarter and contributed more than 30 points to our year-over-year growth for the segment's U.S. results. More importantly, we believe we are just getting started. The percentage of REVOLVE back to customers who also shop on FORWARD remains below 5%, despite the highly complementary merchandise I described. And we have yet to introduce any loyalty programs outside of the U.S., which is an exciting future opportunity.

We see the global e-commerce market for luxury as offering significant growth potential, and we are excited to continue our investment in FORWARD to capture this opportunity. We are also increasing the investment in our powerful brand marketing initiatives. The brand marketing team has been agile and responsive in this very dynamic environment, delivering the right inspiration to our customers at the right time. This increased level of activity and the aspirational content reflective of the current lifestyle, further supported by the appropriate merchandising mix, was a key driver in the record new customer additions and the reactivation of our strong existing customer base that lapsed during the depth of the COVID pandemic last year. When it became clear that our customer is ready to travel again, we captured their attention by hosting exciting events in aspirational locations such as Bermuda, Tulum and the Amalfi Coast. These events stimulated her desire for vacation items through our impactful social media content, contributing to the high level of customer engagement with our online shopper vacation items in Q2.

Continuing the momentum of the increased level of investments in the second quarter to successfully capture consumer demand, we are aggressively gearing up for a much larger marketing playbook in the third quarter that will be headlined by some major brand marketing investments. I'm very excited about what's in store for us in the coming weeks with events and campaigns that will be unlike anything we have ever done, so stay tuned. I'll wrap up with an update on owned brands, another contributor to our strong results for the quarter. Recall that we are now a few quarters into our reinvestment in own brands after a reset in early 2020 following -- with the onset of COVID-19. The early results of our rebuild efforts are very encouraging. Strong consumer demand for our owned brand styles led to a high percentage of sales at full-price and exceptional gross margins for owned brands in the second quarter. Also exciting is the core style-based metrics within owned brands were near record levels in the second quarter. If we continue to execute well and deliver on these core metrics as we scale up the number of styles we offer, the owned brand business has the potential to deliver significant upside to our consolidated gross margin over the long term, especially given the recent strength on our overall gross margin profile on a much lower mix of owned brands when compared to historical periods.

In addition to the strong owned brand metrics and margin profile, we are very excited about the continued expansion of our owned brand capabilities of assortment. In the very near term, we plan to unveil an exciting collection that brings us into an entirely new zones of our offerings. We will continue to invest in our owned brands throughout 2021 and beyond to maximize our long-term opportunity for these exclusive brands that remain core to our strategy. All told, the recent momentum across the business has been incredible. With our position in the market as a trusted premium and lifestyle brand and our deep connection with today's consumer, combined with our strong team centered on data-driven decision making, we have been able to deliver strong results during even the most challenging times. We are primed and ready to drive the next phase of growth.

I'll turn it over to Jesse for a review of the financials.

Jesse Timmermans -- Chief Financial Officer

Thanks, Michael, and hello, everyone. We are very pleased with our results for the second quarter and first half of the year. We believe we are well positioned to capitalize on this reopening opportunity, but more importantly, for continued strong growth over the long term. With that, I'll start by recapping the second quarter. Net sales were $229 million, a year-over-year increase of 60% and reflect a two-year growth rate of 41% compared to the second quarter of 2019. This two-year growth rate is 11 points higher than the 30% two-year growth rate that we reported for the first quarter of 2021. By territory, both the U.S. and international markets contributed to the strong top line results with domestic and international net sales growth of 59% and 63% year-over-year, respectively. By segment, REVOLVE segment net sales increased 49%, and FORWARD segment net sales increased by an incredible 151% year-over-year in the second quarter.

A highlight of Q2 was accelerating growth in active customers, which turned positive year-on-year, increasing to 1,554,000. This is a 5% increase from just the first quarter of 2021. Our customers placed 1.8 million orders in the quarter, an increase of 52% year-over-year, the highest growth rate in more than five years. Importantly, the strong increase in orders was driven by a quarterly record number of new customers and, equally exciting, the reactivation of tens of thousands of customers who had been inactive throughout 2020 during the depths of COVID-19. Average order value, or AOV, was $255, an increase of 25% year-over-year and essentially flat with the first quarter.

Key drivers of the growth in AOV include a higher mix of net sales at full price and shallower markdowns, a shift in mix back to higher price point merchandise such as dresses and a higher mix of FORWARD net sales. These tailwinds to AOV, which is a gross revenue measure prior to any product returns, were partially offset by a decrease in average units per order year-over-year. Moving to gross profit. Consolidated gross margin was 55.6%, an increase of 517 basis points year-over-year. The strong margin expansion reflects healthy inventory and consumer demand dynamics across both of our segments that led to a record percentage of net sales at full price in the second quarter and a significant decrease in the depth of markdown. These positive contributors to gross margin were partially offset by a decrease in the mix of owned brands as a percentage of REVOLVE segment net sales, consistent with the outlook we shared on recent investor conference calls. Moving on to operating expenses.

Consistent with our prior commentary, marketing expense as a percentage of net sales increased to above our historical trend line in the second quarter as we began to invest in the exciting reopening opportunity. We intend to even more aggressively ramp our marketing investment for the balance of the year for both REVOLVE and FORWARD, capitalize on this opportune moment in time for our brand. Selling and distribution as a percentage of net sales increased year-over-year and on a sequential basis, consistent with our prior commentary to expect deleverage with a normalizing product mix, leading to a year-over-year increase in return rates in the second quarter of 2021. The other two line items, fulfillment and G&A expense, leveraged year-over-year, resulting from automation efficiencies in our fulfillment center as well as capacity utilization and scale efficiencies resulting from our 60% growth in net sales during the quarter.

The strong top line results, gross margin expansion and our operating discipline resulted in record net income of $32 million or $0.42 per diluted share for the quarter, more than doubling the $0.20 of diluted EPS in the prior year. Adjusting for a lower-than-expected tax rate in 2021, our EPS would have increased 65% year-over-year. We reported adjusted EBITDA of $35 million, a record high and a year-over-year increase of 70%. Adjusted EBITDA margin expanded to 15.5% from 14.6% a year ago, an increase of 86 basis points. Moving to the balance sheet and cash flow statement. During the second quarter, we continued to invest in inventory to position our assortment to support very strong consumer demand. As a result, inventory increased by $18 million during the quarter to $119 million. Our average inventory balance for the second quarter of 2021 increased 32% year-over-year, well below the 60% year-over-year increase in net sales, illustrating our increased inventory efficiencies.

Even with the investment in inventory, we generated $33 million in free cash flow in the second quarter and $65 million for the first six months of 2021, an increase of 8% year-over-year for the six-month period, despite a very strong comparison in the prior year. Cash and cash equivalents, net of borrowings at June 30, were $220 million, an increase of $93 million or 73% from $127 million as of June 30, 2020; and our balance sheet remains debt free. Now looking ahead. We remain very cautious as there is still a level of uncertainty out there. With the recent increase in positive COVID cases, varying levels of restrictions and supply chain issues, we are not yet fully through the challenges presented by COVID-19. And while we have successfully managed through similar challenges in the past, we are not immune to these macro headwinds.

That said, with the very strong trends that began in March and April, further accelerating in the second quarter, leading to 41% year-over-year sales growth in the first half of 2021, our net sales growth for the full year 2021 will very likely land well north of our historical target range of 20% growth. Looking beyond 2021, we remain confident that we can continue to deliver net sales growth in excess of our long-term growth target of 20%, just as we were prior to the onset of COVID-19. Now let me update you on some recent trends in the business in the second quarter ended and provide some direction on our cost structure for the balance of the year to help in your modeling of the business for 2021. Starting from the top. The strong top line trends we experienced throughout the second quarter continued through to the month of July, with growth of more than 40% on both a year-over-year and two-year basis compared to July of 2019. We are very excited about the recent top line trends.

But again, we need to acknowledge the uncertain environment related to COVID-19 variants, essentially resulting in increased restrictions like we have recently experienced in Los Angeles, supply chain challenges and other potential headwinds. Shifting to gross margin. We are extremely pleased with our gross margin performance, driven by the record mix of net sales at full price in the second quarter. As we rebuild our inventory, however, we continue to expect the full price mix to begin to move closer to historical norms over time. Nonetheless, given the strong first half results, we now expect gross margin to come in around 54% for the full year of 2021, which is at the high end of the prior gross margin outlook of 53.5% to 54% provided last quarter. This implies a gross margin expansion of 140 basis points versus 2020, an expansion of 40 basis points versus 2019, despite owned brand penetration being significantly lower today than it was in 2019.

This speaks to the longer-term opportunity for gross margin as the owned brand mix returns to year-over-year growth in 2022 and beyond. Fulfillment. With the very efficient fulfillment performance in the second quarter, we now expect fulfillment costs to be approximately 2.5% of net sales for the full year, which is 40 basis points lower than our previous outlook and 70 basis points lower and fulfillment representing 3.2% of net sales in 2019. Really great work by the team in continuing to deliver efficiencies in this area. For the full year of 2021, we now expect selling and distribution costs to be slightly higher than the 14.6% of net sales we achieved for the full year 2019. This implies a sequential increase in the third quarter, driven by increased return rates year-over-year as our product mix normalizes and continued pressure on shipping costs. Moving on to marketing. With our customer coming back stronger than ever to refresh her wardrobe, we are excited to step up our investment in marketing to include new initiatives that we believe offer compelling returns over the long term.

We will significantly increase our marketing investment in the second half of the year. And as a result, we continue to expect marketing expense as a percentage of net sales for the full year 2021 to be at least 15.8% of net sales, a full point higher than we reported for the full year in 2019. To be clear, with marketing for the first half of the year at 15% of net sales, in order to achieve the full year target of at least 15.8% of net sales, we should expect a significant increase in the level of marketing investment during the second half of the year, and in particular, the third quarter. During the third quarter, we expect to deliver on the very exciting brand-building activities Mike and Michael mentioned, which we expect will increase our marketing as a percentage of net sales to more than 18% in Q3 before coming back down to the 15% level in the fourth quarter.

The bulk of this investment will be in brand marketing activities, which have some level of short-term benefit but are most impactful and important for the long-term building of the brand. General and administrative. In 2021, we are reinvesting in our owned brand platform and other functions to support our next phase of growth and expansion. The quarterly run rate for general and administrative costs have increased by $3.5 million in the first half of 2021, measured by comparing G&A expense in the fourth quarter of 2020 to G&A expense in the second quarter of 2021. We expect a similar sequential growth trajectory in the second half of this year as we continue to add talent to support our growth. Lastly, let me touch on our tax rate.

Our effective tax rate in the second quarter of 2021 reflects tax benefits realized as a result of the exercise of nonqualified stock options. Absent such tax benefits in future quarters, we expect our effective tax rate to be around 24% to 26%. To recap, we are incredibly excited about our recent results, delivering yet another quarter of record net sales, record net income and exceptional free cash flow. And the strong growth is coming from all dimensions of the business, including the U.S. and international markets, REVOLVE and FORWARD. While mindful of continuing uncertainties and potential headwinds in the current environment, we are focused on the long term and investing in the business to capitalize on the incredible growth opportunity ahead.

Now we'll open it up for your questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of Oliver Chen from Cowen.

Oliver Chen -- Cowen -- Analyst

Hi. Thank you. The new customer growth has been very impressive. What are your thoughts on retaining the new customers? And what the new customers are looking for relative to existing, if there's any distinctions? Also, you had a very attractive and shallow markdowns. And did you have enough inventory? And how should we model inventory versus sales? And just finally, FORWARD continues to show great momentum. I would love for you to brief us on where you are on the inventory journey at FORWARD and how you're thinking about depth versus breadth as well as what experiential means at FORWARD. Thank you.

Mike Karanikolas -- Co-Chief Executive Officer and Director

Sure. Thanks, Oliver. Mike Karanikolas here. Yes, we feel great about the trends across the business, particularly on the new customer side seeing really strong acceleration there continuing through Q3. And in terms of the customer profile, we're seeing great things so far in terms of those customers and their propensity to continue to purchase. I think over the past year, we've expanded the appeal of our brand with new categories we've broaden in. But also what's really exciting to us is as the core of what we've always known for has come back in a big way, we see customers gravitating toward those going-out categories in a much bigger way this quarter than they did the previous quarter, really accelerating through the quarter and through early Q2.

And traditionally, some of our most sticky new customers have been those customers that have come to us for those key brand elements. So we feel really great about the momentum that we're seeing there. From an overall inventory perspective, in terms of what we saw during the quarter, there was likely some levels of untapped demand due to our inventory position. We feel like we positioned ourselves really well compared to the broader set, investing heavily in the going-out categories and kind of return to the pre-COVID lifestyle. But even then, we struggled to keep up at times with the demand. So we're continuing to make improvements there. And again, we feel better than ever about our position as we enter Q3 here. And we think there's more to build upon there. And then the final question with regards to FORWARD. Yes, tremendous momentum on the FORWARD side of the business, just all around.

The core FORWARD business itself, we think, is really coming into its own in terms of its position in the marketplace, and that's renowned in the marketplace, it's inventory offering. And then you combine that with really successful kind of cross-exposure efforts on REVOLVE that are still in the early innings. It's less than 5% overlap. Yet, that -- those increases in overlap from the increased exposure we gave FORWARD drove around 30 points of -- more than 30 points of growth for the quarter. So we feel great there. Obviously, to support that growth, we have to continue to invest in inventory. We're continuing to do that in a big way, and we feel great about the trajectory. And then finally, with regards to FORWARD, what we kind of alluded to it in the earlier comments, and it's too early to share anything official, but we have some really strong marketing components coming up on the FORWARD side that we're really excited about and we hope we can continue to drive results there.

Operator

Your next question comes from the line of Mark Altschwager from Baird.

Mark Altschwager -- Baird -- Analyst

Great. Good afternoon. Thanks for taking my question. Maybe just a quick follow-up on FORWARD. Just given all the momentum there, any quantification you can provide on how you're thinking about the magnitude of that revenue opportunity over the next couple of years? I guess, where do you think it can get in terms of mix of the business medium to longer term? And then separately, I just wanted to ask if you could give us a little bit more clarity on the sourcing side. It sounds like you're managing through it, and I think that's embedded in the selling and distribution guidance in the back half perhaps. But just any more clarity on what you're expecting from a product flow perspective and how that might impact top line. Thank you.

Mike Karanikolas -- Co-Chief Executive Officer and Director

Definitely. So with regards to FORWARD, we're not guiding to any specific numbers in terms of share of the business. But obviously with the momentum it has, we think there's the potential for substantially greater share. And as you know, the luxury market and the online luxury market is absolutely huge. And FORWARD is still a relatively small player in the market, but with really more momentum than at least this quarter than most of the others, if not all of the others, out there from a trajectory standpoint. So it has a lot of potential. And then you've got the really low overlap on REVOLVE that we think we can continue to grow over time. So we're really excited about the future there. With regards to REVOLVE inventory, yes, so supply chain, it's difficult across the board, I think, for every company. I feel great about how we've managed it. Certainly, we're seeing more delays than we have historically in the supply chain. And unfortunately, those delays have continued to increase over time as Q2 progressed and as Q3 progressed. But I also feel like the team and the systems have reacted really well. And despite those delays, we've been improving our inventory position and we're continuing to position it better and better as the weeks and months pass.

Mark Altschwager -- Baird -- Analyst

Thank you.

Operator

Next question comes from the line of Erinn Murphy from Piper Sandler.

Erinn Murphy -- Piper Sandler -- Analyst

Great. Thanks. Good afternoon. Two questions for me as well. First, you've had a lot more in-person events this quarter. Could you share a little bit more about what that drove to the brand? And then with the Delta variant, does that change how you're thinking? Or have you had to make any adjustments to in-person events as you look into the fall season? And then just one other follow-up on FORWARD. As you look at your influencer network, what percent of your influencers feature both REVOLVE and FORWARD? I think you said it was only a 5% of your customer overlap, but would love to hear more how you're kind of positioning it with your influencer community. Thank you.

Michael Mente -- Co-Chief Executive Officer and Director

Hi. Nice to chat with you, guys. I guess first question was in-person events. And I think for us, it was really important to have those in-person events to really refresh and kind of remind the customers that it's time to go out, and that's REVOLVE time. And a lot of people are on vacation as we speak. And I think that prep up for vacation is very much a REVOLVE shopping experience. I think people are going out. People are hanging out with their friends again and whatnot. So having those events is really to reinforce our core brand message, and it really does show in the type of merchandise that we have been selling.

It's been a dramatic shift from only a few months ago from what we were versus what we announced. So those events are very, very important. We are definitely, definitely following Delta very closely. I think we -- it's been on our mind for well over a month at this point, maybe six weeks or so as we're tying it to Q3. We've seen a lot of things going on with -- thankfully, we've seen other parts of the world kind of go through Delta spikes prior to us. So we're not completely in uncharted territory, but we have contingency plans for future events with regard -- every event basically has to have a contingency plan in terms I'll be wide open and losing comfortable. Are there various tiers of kind of restrictions and changing measures that we have to have in place? But we feel good with what we have had. I think that our current assumption is that things could get worse but it will not be as restrictive as times past. But of course, these things change very, very quickly.

So when it comes to FORWARD, this is something that we're in the early stages working with influencers. I think the FORWARD kind of offering and the FORWARD is known for is quite different than REVOLVE. So we really have to build the playbook from a fresh perspective. Some of the things that we do for the REVOLVE playbook aren't directly applicable. FORWARD also has things that we can't do that for the REVOLVE side. So there's a huge amount of overlap, and we'll see over time how we can completely integrate. But we're very, very early, extremely happy with the very successful transitioning of the REVOLVE customer base over to FORWARD. And we will look to vary that with our marketing activities as we've been given the green light from our customers that they want more.

Operator

Your next question comes from the line of Michael Binetti from Credit Suisse.

Michael Binetti -- Credit Suisse -- Analyst

Sorry I was on mute there. Can you hear me OK?

Mike Karanikolas -- Co-Chief Executive Officer and Director

Yes.

Michael Mente -- Co-Chief Executive Officer and Director

Yes.

Michael Binetti -- Credit Suisse -- Analyst

Hi guys. How are you? So I just wanted to -- thanks for all the help with the questions here. So given the comments you just made on Delta related to the events, what are you seeing in the data right now on the consumer side, the orders or the web hits in the areas where you've seen the flare-ups lately? Any changes to behavior, traffic conversion or the composition of the categories just going in the basket? And then maybe for Jesse, the REVOLVE brand, I think the gross margin on the REVOLVE brand is still down on a two-year basis. And I know that there's big changes going by in the mix relative to where we were two years ago. And you said owned brands will start to ramp here. Maybe you can help us bridge that to two years ago and then maybe the puts and takes we should think about as we model FORWARD and REVOLVE brand over the next two quarters.

Jesse Timmermans -- Chief Financial Officer

Yes. Thanks, Michael. This is Jesse. So I think first, in terms of Delta and kind of regional state performance, traffic and conversion, we've put up some record traffic numbers, and that continued into a strong July. Conversion was also really good and improved significantly year-over-year. So I think we're very optimistic. We had a great quarter both in terms of traffic and conversion. That said, there were some pockets of weakness throughout the quarter in those areas that had Delta spike, but it was very volatile. So we saw a short -- kind of a short lapse in Australia in certain regions. We saw, for example, Florida and Texas take a little dip, but then come back. So certainly, it's really volatile when you look kind of state by state, region by region. But I think overall, we're seeing the customer come back for those really core categories like dresses.

And that continued again through to the month of July when Delta really first kind of came -- became part of the conversation. So I think nothing significant to call out there yet. And then maybe the other point there is that those COVID categories that really checked last year, like beauty and active, continue to grow through the second quarter and into July. So again, back to that kind of product and assortment diversification, we feel really good going forward. And then the second question on gross margin. It was a tick below that Q2 peak of 2019. I think just keeping in mind that Q2 of 2019 was a record quarter for full price at the time. We had REVOLVE Festival. Dresses were selling at an all-time high. Owned brands was in the mid-30% mix of the REVOLVE segment, so that added a lot to the gross margin profile. And you compare that to this year, we're at a new record for full price, but owned brands is at a significantly lower mix of that REVOLVE segment, so I think showing the -- I think the longer-term opportunity that we have in gross margin as we continue to build up that owned brand platform.

Michael Binetti -- Credit Suisse -- Analyst

Great. Thanks for the help, Jesse.

Operator

Your next question comes from the line of Edward Yruma from KeyBanc Capital Markets.

Edward Yruma -- KeyBanc Capital Markets -- Analyst

Hi guys. Thanks for taking the question. I guess, first, you kind of disclosed that you were starting to see some of the expected difficulties of the iOS transition. I guess any kind of color you can drive into that? And has it driven a significant falloff in performance from those devices? And then I think you guys also indicated that units were down. Just kind of curious what underpinned that given the overall strength of the business. And then finally, we noticed that your -- there's a higher number of preorder on the site. I guess kind of how should we frame that in context of the overall assortment? And is there any risk to breakage on preorders? Thank you.

Mike Karanikolas -- Co-Chief Executive Officer and Director

Sure. So I'll take the first part of that question, and then pass it off to Jesse. So with regards to iOS advertising, we started to see the impact toward the end of the quarter. We didn't really see the impact initially when the transition first happened, and there was a very definite impact. I think the good news is the overall strength of the business more than offset that impact. And also, we saw within the iOS channel, the impact was very big in, call it, subsegments of the channel that are more kind of targeting dependent. And then we actually saw the losses there offset by some of the areas that's relied a little bit less on the unique targeting. So I think it's still an evolving situation, and we'll have to see how it plays out over the long run. I think the net is that it had some impact, likely less -- I mean it was a whole kind of awash or maybe slightly positive, but I think there's some risk that it trends a little bit negative over time. But I think we're happy with what we've seen that it wasn't necessarily as big an overall impact as we were thinking perhaps it could be.

Michael Mente -- Co-Chief Executive Officer and Director

Yes. And then Ed, you cut out there for a second. Can you repeat that second part of your question?

Edward Yruma -- KeyBanc Capital Markets -- Analyst

Yes. I was asking, you had some commentary about units being down. I was kind of curious what drove that. And then finally, on preorder, it seems like it's increasing in terms of its prominence on the site. Is there a risk to breakage of some of those preorders? Thank you.

Michael Mente -- Co-Chief Executive Officer and Director

Yes. Okay. Great. And those two are really related. The preorders is largely what is causing that decline in the units per order. So if somebody, for example, put two dresses in their basket and they are both available, those two units would go into one order. With the preorders, those two units are broken up into separate orders. So you're seeing a decline in the units per order in the current quarter given the higher level of preorders than we've had in the past. So there is, to some extent, some pent-up demand there as the availability comes through and those preorders get filled. But to your point, there's also some breakage depending on how long those goods take to get to our facility. And that -- we had some good receipts late in the quarter, so that really helped. But -- and we continue to invest in inventory, so we expect that to get better. But there is some risk of breakage, partially offset by that, call it, pent-up demand with units waiting to be received and shipped.

Operator

Your next question comes from the line of Matt Koranda from ROTH Capital.

Matt Koranda -- ROTH Capital -- Analyst

Hi guys. Thanks. And appreciate the color on the July results, up 40%. Wanted to see if you could maybe disentangle some of the trends you're seeing in July at REVOLVE versus FORWARD. And then just any help on sort of AOVs, transaction growth that's sort of driving the net sales growth of 40%. Disentangling those would be helpful.

Jesse Timmermans -- Chief Financial Officer

Yes, yes, sure. So for July, as we mentioned, we saw that 40% two-year growth continued from Q2 into July. I think it's a similar theme to what we experienced in Q2 where we saw strength across the board. It was coming from domestic, from international from both REVOLVE and FORWARD. We saw that dress mix continued to increase as she started going out again. I think you won't see that in the quarter on a blended basis because it did progressively increase throughout the quarter. So you'll still see dresses meaningfully lower than our historical kind of, you call it, that 30% range, but that's ticked up through the quarter and into July.

On an order AOV kind of unit basis, orders were up 52%. AOV was up 25%. And then that was offset in part by the higher return rates. So we saw return rate go up close to 50% for the quarter. So that offsets some of those growth measures that are pushing gross sales to net out to that plus 60% year-over-year net sales and then the plus 40% two-year net sales. And then again, back to that units per order comment that we just made. The lower units per order are putting some pressure on that AOV, and that's why you didn't see AOV increase sequentially from Q1 to Q2, but we do expect that to continue to increase as the mix shift to those higher price points and with the tremendous strength on the FORWARD segment that carries a significantly higher AOV than REVOLVE.

Operator

Your next question comes from the line of Kimberly Greenberger from Morgan Stanley.

Kimberly Greenberger -- Morgan Stanley -- Analyst

Okay, great. Thank you so much. Michael, I wanted to start with you on owned brands. 2020 sounds like it will be a year of growth for the owned brand business. Can you just remind us where do you expect owned brands as a percentage of sales to sit this year? And then how -- what are some of the strategies to grow the owned brand business that you're planning to tackle next year? Thank you so much.

Jesse Timmermans -- Chief Financial Officer

Yes. Kimberly, this is Jesse. I'll take that -- sorry I'll take the second one first and then kick it over to Michael for the longer-term strategy component. We expect to be meaningfully lower as a percentage of the REVOLVE segment for owned brands this year. Again, we started cutting back in the -- right when COVID started last year, and that takes some time to flow through. So we expect to return to year-on-year growth in that mix toward the back end of this year, but you really won't see it come through until 2022. So for '21, expect it to be meaningfully lower than the -- I think we're at 27% in 2020, then I'll kick it over to Michael.

Michael Mente -- Co-Chief Executive Officer and Director

Yes. As we ramp up, I think it would be important to note that styles that we'll be bringing in will be much more diverse in -- multidimensionally diverse from a price point perspective, from a category perspective, from a categorization perspective as well as kind of an esthetic perspective. So I think that diversity will be really, really important for us. And I was going to come to marketing. I think we're continuing to learn and just continue to get better at the way we're working with influencers with owned brands. The collections that we have with influencers are performing extremely well. I think after having, I guess, two years -- a choppy year and a full year with these influencer collections that we launched in the middle of '19, I think we've learned quite a bit that we do have some additional kind of influencer-type brands coming as well that we think will be very, very powerful as well. So on the macro level, things will be quite similar. On the nuance level, things will be dramatically evolved as we just continue to get better and better at what we're doing.

Kimberly Greenberger -- Morgan Stanley -- Analyst

Okay. That's great color. Can I just ask Mike a follow-up on the Apple iOS changes? I think you indicated that the -- you just started seeing the impacts late in the second quarter. Any -- are you able to discern any impact on your business? It didn't sound like it really affected you in July. Just any kind of early learnings from those Apple iOS changes would be great.

Mike Karanikolas -- Co-Chief Executive Officer and Director

Yes, definitely. As a whole, it's a relatively minor component, I think, of our overall business picture, but it's not to say it can't and doesn't and won't have some impact. But we've just been seeing really strong strength in general, really improving throughout Q2 and then feel really good about the trends so far in July. But there's a lot of positive momentum in the business. And so even if there's some offsets on the iOS side, I think it's small in the grand scheme of things. The other thing also, the advertising market is very dynamic. And so you can see changes sometimes and you really need a long period of time to say for sure what is it related to. We did see, again, in those kind of very targeted advertising subsegments a clear enough trend that we can say, yes, it had a substantial impact there. But then we saw a lot of growth in other areas of iOS advertising at the same time. And then you have the backdrop of the general strength of the business. It's kind of awash as far as what you can conclude. I think overall, it is a net negative, but I think it's also a manageable one.

Operator

Your next question comes from the line of Lorraine Hutchinson from Bank of America.

Lorraine Hutchinson -- Bank of America -- Analyst

Thank you. Jesse, with the strong results, the cash is starting to build on your balance sheet, can you just talk about priorities on how you plan to use the cash?

Jesse Timmermans -- Chief Financial Officer

Yes, sure. Yes, very pleased with the cash flow generation over the last year and the cash balance that we have now and really strong balance sheet. Number one is investing back in the business. We're less than 3% penetrated in this target demographic that we're going after. So still a long road ahead of us on that target. So number one, invest back in the business, and you'll see that in Q3 with the significant marketing investment. You're starting to see that with inventory. You're also seeing it in the G&A with the investment in owned brands and the other areas to support the future growth. And then number two, behind that, we'll look at, call it, opportunistic, disciplined M&A. We think there are probably pockets of opportunity out there, but we're going to be patient and careful as we look at things.

Operator

Your next question comes from the line of Bob Drbul from Guggenheim Securities.

Bob Drbul -- Guggenheim Securities -- Analyst

Thank you. Good afternoon. A couple of questions for me. The first one is in terms of the -- I mean, I guess, the normalization on return rates, can you give us any numbers around sort of where you are today and your expectations in the back half of the year on the resumption of more normalized returns? And then the second question is can you give us a little more color, I don't know, country by country, but on the international performance as well would be helpful on what you're seeing there and even -- especially in July as well. Thanks.

Michael Mente -- Co-Chief Executive Officer and Director

Yes, sure. I'll take the -- maybe the return rate one, and then kick it over to Mike for international. So return rate has ticked up as we've seen the mix shift back toward those higher AOV, higher return rate categories like dresses and tops and the apparel for going out. To put it in perspective, pre-COVID back in the peak of kind of going out in 2019, we were running at around a 55% return rate. It went down to 40% this time last year as the mix shifted to beauty and, again, the lower AOV lower return rate categories. It slowly ticked up to this quarter where we sat just below 50%. So still not at that peak 55% that we're at. And we do expect it to continue to go up slightly as that mix continues to shift. And like I said, we saw dresses continue to perform, especially in the back half of this quarter and then into July. So we should expect the return rate to tick up. We're optimistic that we don't get back to that peak 55% as we've broadened the assortment and she sees this now for more than just that dress and going out, but for beauty, active, lounge and some of the other categories that really checked during COVID.

Mike Karanikolas -- Co-Chief Executive Officer and Director

Yes. And with regards to the international regions, so in general, I'll just start by saying across the board in all of our major international regions, we saw pretty robust growth. Kind of region by region in terms of highlights, I'd say Canada, probably the biggest highlight with triple-digit growth in Canada on both the REVOLVE and FORWARD segments and overall as a whole. We saw some nice acceleration in the United Kingdom. China continues to be strong. So in general, really good results. Australia, we had strong results as well, although, as Jesse noted, we did see some impact toward the end of the quarter. Briefly on a regional level, where Australia was implementing lockdowns, we saw a very clear impact to the trajectory there. But as a whole, we're seeing robust results across the board.

Michael Mente -- Co-Chief Executive Officer and Director

And then, Bob, if I can add one more on that, that ties the return rate and international together. As we've added on the localization of these international regions, we have seen the international return rate go up. But that's a very positive indicator both in demand, net sales and customer experience. So as we continue to localize these international regions, which has really, really driven some phenomenal growth, especially in Canada, most recently, we'd expect some impact on the return rate there, but a net positive to the ending net sales.

Operator

Your next question comes from the line of Camilo Lyon from BTIG.

Camilo Lyon -- BTIG -- Analyst

Thank you. Going back to the marketing and the step-up in investments that you're talking about, how -- what's the best way that we should think about the returns that you're seeing on that marketing investment? I think in the prepared remarks, you talked about vacation categories responding to the REVOLVE summer marketing event that you hosted. Is it an immediate return in the quarter that we should be thinking about when you set out this marketing? Or is there a little bit of a lag to it?

Mike Karanikolas -- Co-Chief Executive Officer and Director

Sure, definitely. So the step-up in marketing that we're planning specifically for Q3 relates to brand marketing investments, which we always view as much longer payback time investments. And it's an area that we have gone later on in the past twelve to eighteen months really just starting to ramp back up in Q2. So we have some really exciting opportunities we want to leverage, but they are longer-term investments, meaning you're not going to see that immediate impact in Q2. At least from kind of a full ROI perspective, we believe the payback period is much, much longer, but these are the right investments to make. But certainly, it's not like there's no impact either, right? And so we think in Q2, in particular, those brand marketing events alongside our inventory selection we're signaling to our consumer that there are ways to go out and have fun again and live her own lifestyle. It was important to the success of that quarter and will be important to Q3 as well.

Camilo Lyon -- BTIG -- Analyst

Alright. Thank you so much.

Operator

And we'll take our last question from the line of Susan Anderson from B. Riley.

Alec Edward Legg -- Analyst

It's Alec Legg on for Susan. Just a question on the beauty category. How big is that compared to your overall business? And what is the customer profile for that category? Is it new customers to REVOLVE? Or is it existing customers moving into that category? Any details on that?

Michael Mente -- Co-Chief Executive Officer and Director

Yes. Beauty, again, going back to the depths of COVID, beauty checks really well. So it went from running at about, call it, 1.5%, 2% of the business pre-COVID up to 6% of the business, again, in the depths of COVID last year. It has come back down as a percentage of the business to, call it, 3%, plus or minus, this most recent quarter, but still growing, and that's growing on top of triple-digit growth last year. So we think there's a really great long-term opportunity there for the beauty category. And the customer is coming there. It's been a really great new customer add driver. So customers coming in at that lower AOV, we're seeing them then come back and purchase at higher AOVs over time. It's a great add-on item. So from that perspective, there is some repeat or existing customer activity there as well, but we do see it is a really good customer acquisition tool.

Operator

There are no questions over the phone line at this time. I would now like to turn the call back to the management for their closing remarks.

Mike Karanikolas -- Co-Chief Executive Officer and Director

Thanks, everyone. I'm really proud of our results and momentum and even more so for continuing to pursue and capture the huge long-term opportunity that lies ahead for us. Thank you all for your continued support through these turbulent and challenging times, and thank you to our team for executing incredibly well to deliver these record results. And we look forward to meeting with investors and reporting our progress in the weeks and months ahead.

Operator

[Operator Closing Remarks]

Duration: 59 minutes

Call participants:

Erik Randerson -- Vice President of Investor Relations

Mike Karanikolas -- Co-Chief Executive Officer and Director

Michael Mente -- Co-Chief Executive Officer and Director

Jesse Timmermans -- Chief Financial Officer

Oliver Chen -- Cowen -- Analyst

Mark Altschwager -- Baird -- Analyst

Erinn Murphy -- Piper Sandler -- Analyst

Michael Binetti -- Credit Suisse -- Analyst

Edward Yruma -- KeyBanc Capital Markets -- Analyst

Matt Koranda -- ROTH Capital -- Analyst

Kimberly Greenberger -- Morgan Stanley -- Analyst

Lorraine Hutchinson -- Bank of America -- Analyst

Bob Drbul -- Guggenheim Securities -- Analyst

Camilo Lyon -- BTIG -- Analyst

Alec Edward Legg -- Analyst

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