Revolve Group's Q3 2025 Earnings Call: Contradictions on Tariff Mitigation, Return Rates, and Markdown Strategies

Date of Call: November 4, 2025

Financials Results

• Revenue: $296.0M, up 4% year-over-year
• EPS: $0.29 per diluted share, compared to $0.15 in Q3 2024 (includes $0.05 per share insurance recovery)
• Gross Margin: 54.6%, up 347 basis points year-over-year
• Operating Margin: Adjusted EBITDA margin 8.6%, up 239 basis points year-over-year; GAAP income from operations increased 47% year-over-year

Guidance:

• Q4 2025 gross margin expected 53.1%–53.6% (midpoint ≈ +80 bps YOY); FY2025 gross margin ≈ 53.5% (≈ +100 bps YOY)
• Q4 fulfillment ≈ 3.3% of net sales; FY2025 fulfillment ≈ 3.2%
• Q4 selling & distribution ≈ 17.6% of net sales; FY2025 ≈ 17.3%
• Marketing ~15.0% of net sales in Q4; ~14.6% for FY2025
• Q4 G&A ≈ $38.7M; FY2025 G&A ≈ $153.5M; effective tax rate Q4 25%–26%, FY 27%–28%

Business Commentary:

• Strong Financial Performance:
• Revolve Group reported a 45% increase year-over-year in adjusted EBITDA to $25 million for Q3, the highest ever for a third quarter.

• This growth was driven by a 350 basis point increase in gross margin and strategic cost management, despite tariff pressures.

• Gross Margin Expansion:

• Gross margin expanded by 3.5 points year-over-year, reaching 54.6% for Q3.

• The improvement was attributed to data-driven markdown algorithm optimization, reduced promotional activities, and increased owned brand penetration.

• International Sales Growth:

• International net sales increased by 6% year-over-year in Q3, contributing significantly to overall growth.
• Key markets such as the Middle East, Europe, and Mainland China showed strong performance, with China sales increasing over 50% year-over-year.

• Owned Brand Expansion:
• The owned brand penetration of REVOLVE segment net sales increased year-over-year for the third consecutive quarter, contributing to higher gross margins.
• The launch of new collaborations and expansion in product categories like beauty, men's, and home products drove this increase.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management highlighted record Q3 adjusted EBITDA of $25M (up 45% YOY), consolidated gross margin of 54.6% (+347 bps YOY), net sales of $296M (+4% YOY), and cash up $63M (25% YOY), citing strong tariff mitigation, owned-brand mix gains and markdown optimization.

Q&A:

• Question from Rakesh Patel (Raymond James & Associates, Inc., Research Division): Can you size the benefit from the markdown algorithm, how it accelerated in Q3 and how durable it is?
  Response: The markdown-algorithm optimization was the largest driver of margin expansion across REVOLVE and FWRD (accelerated in Q3); combined with reduced promotions and higher owned-brand mix, management expects durability given healthy inventory and more owned-brand launches.

• Question from Rakesh Patel (Raymond James & Associates, Inc., Research Division): October was up mid-single-digits — are the drivers consistent with Q3 and could growth accelerate into the holiday season?
  Response: October up mid-single-digits on tougher comps (near a ~20% two-year stack); encouraging but holiday quarter is volatile and comps will be tougher, so outlook remains cautious.

• Question from Oliver Chen (TD Cowen, Research Division): Thoughts on AOV trends, October price points/categories, and how digital A/B/testing capabilities translate to physical retail?
  Response: AOV should edge up modestly from recent price increases (new-product price increases mid‑to‑high single digits, rising into Q4) though category and REVOLVE/FWRD mix may offset; physical retail is early-stage but promising—Aspen results encouraging and the company will experiment iteratively.

• Question from Matt Koranda (ROTH Capital Partners, LLC, Research Division): Why didn't FWRD show stronger revenue given competitors' stress; where are benefits/headwinds and when will you capture share?
  Response: FWRD intentionally prioritized margin recovery over short-term sales, delivering large gross-profit gains; management expects to convert that margin strength into stronger revenue growth over time.

• Question from Matt Koranda (ROTH Capital Partners, LLC, Research Division): Why does guidance embed a slight step-down in gross margin for Q4 sequentially?
  Response: Q4 guide is slightly below Q3 due to mix and because Q3 captured outsized benefits from promotional shifts and markdown optimization; full-year still guided ~100 bps higher YOY.

• Question from Michael Binetti (Evercore Inc.): Why was marketing spend lower than expected while sales decelerated, what of Q4 spend is already deployed, and how should we think about AOV/mix?
  Response: Marketing was reallocated—more to performance and some brand spend timing shifted, producing lower Q3 brand spend; some Q4 activations are upcoming; AOV should rise modestly but will depend on category and REVOLVE/FWRD mix.

• Question from Michael Binetti (Evercore Inc.): On international margins — is the contribution margin gap vs U.S. closing and can it improve?
  Response: Contribution margins internationally are fairly tight versus U.S.—higher shipping is offset by lower return rates and localization opportunities; team continues to optimize last-mile and local production (e.g., China) to improve margins.

• Question from Janine Hoffman Stichter (BTIG, LLC, Research Division): Can you contextualize owned-brand penetration growth in Q3 vs Q2 and where penetration sits historically/future?
  Response: Owned-brand mix has increased from roughly ~20% last year and has risen in recent quarters; management expects further penetration gains, with SRG and upcoming launches accelerating mix into next year.

• Question from Anna Andreeva (Piper Sandler & Co., Research Division): What's driving higher returns (categories/channels) and the slowdown in handbags/shoes/accessories — will it rebound in Q4?
  Response: Return-rate increase driven by mix shift, higher AURs on new product and certain marketing channels showing higher returns; handbag/shoe/accessory weakness tied to FWRD/promotional shifts and is expected to rebound in coming quarters.

• Question from Anna Andreeva (Piper Sandler & Co., Research Division): How will markdown optimization manifest through next year—is there upside?
  Response: Markdown optimization creates a higher-margin baseline; massive YOY step-ups in 2025 will normalize as the tool seasons, but sustained margin improvement and a steady baseline are expected, with FWRD targeting mid‑40s margins.

• Question from Kavya Narayanan (Morgan Stanley, Research Division): Given Q3 tariff mitigation, do you expect tariffs to be an incremental headwind in Q4 or 2026?
  Response: Management reports effective mitigation and does not expect incremental headwinds; notes tariff reductions (China) could further ease pressure and some mitigation actions may increase long-term margins.

• Question from Jay Sole (UBS Investment Bank, Research Division): Did REVOLVE also tilt to margin over sales this quarter and why?
  Response: Yes—both REVOLVE and FWRD were managed to prioritize margin over sales this quarter, producing strong gross-margin gains with some trade-off to top-line growth.

• Question from Jay Sole (UBS Investment Bank, Research Division): Is the FWRD margin reset sustainable or will it hurt sales long-term?
  Response: Management expects the FWRD margin reset to be a sustainable mid‑to‑long‑term outcome on average, though quarter-to-quarter volatility may persist.

• Question from Jay Sole (UBS Investment Bank, Research Division): What advantages do owned brands provide versus third-party brands?
  Response: Owned brands fill assortment gaps third parties don't provide and combine in-house design/manufacturing with Revolve's marketing to drive strong short-term sales, LTV and higher gross margins.

• Question from Peter McGoldrick (Stifel, Nicolaus & Company, Incorporated, Research Division): How is the core consumer behaving in the U.S. and any international market notes?
  Response: Core consumer remains generally healthy with strength among higher‑income segments; international standouts include Europe and MEA, and Mainland China REVOLVE sales grew >50% YOY.

• Question from Peter McGoldrick (Stifel, Nicolaus & Company, Incorporated, Research Division): Is the quarter's margin-first approach a permanent strategy shift?
  Response: No—management says it's an opportunistic, quarter-to-quarter decision; long-term objective remains double-digit-plus top-line growth while improving margins and returning to double-digit EBITDA.

• Question from Mary Sport (BofA Securities, Research Division): Update on beauty category performance and expected new vs existing customer mix?
  Response: Beauty is growing at double-digit rates, still early-stage with investments in selection and marketing; management expects it to become a materially larger business over time.

Contradiction Point 1

Tariff Mitigation and Pricing Strategy

It involves the company's approach to mitigating tariff impacts and pricing strategies, which directly affect cost management and revenue projections.

Will tariffs be an incremental headwind in Q4 or 2026? - Kavya Narayanan (Morgan Stanley, Research Division)

2025Q3: I wouldn't say we're expecting any incremental headwinds with all the mitigation efforts... If anything, hopefully, and potentially a net benefit from where we stand today. - Jesse Timmermans(CFO)

What is the current status of tariff mitigation efforts and the potential benefits' magnitude? How should we assess the pricing strategy related to tariffs, and when will price increases be implemented for owned brands and partner products? - Nathaniel Jay Feather (Morgan Stanley)

2025Q2: The pressure of tariffs has opened up opportunities for deeper partnerships, yielding long-term benefits. Tariff increases are expected to flow through prices over time, normalizing base margins. - Michael Karanikolas(Co-Founder, Co-CEO & Chairman of the Board)

Contradiction Point 2

Return Rate Improvements and Mix Shifts

It pertains to the company's performance in managing return rates and the impact of mix shifts on these rates, which are crucial for inventory and cost management.

What drove the higher returns in Q3 and Q4? Is there room for improvement next year? - Anna Andreeva (Piper Sandler & Co., Research Division)

2025Q3: There are a couple of factors. There's a little bit of mix shift, and you mentioned some negative mix shift in what typically are lower return rate categories. We also started to see some of the higher AURs with Q3 new product flow. - Michael Karanikolas(Co-Founder, Co-CEO & Chairman of the Board)

How can AI improve return rates in the future? - Jay Daniel Sole (UBS Investment Bank)

2025Q2: Return rate improvements are strong, with tougher comparables coming up. - Michael Karanikolas(Co-Founder, Co-CEO & Chairman of the Board)

Contradiction Point 3

Markdown Strategy and Impact on Financials

It involves changes in financial forecasts, specifically regarding the impact of markdown strategies on financial performance, which are critical indicators for investors.

How can you quantify the benefit from the improved markdown algorithm? Notably, did the benefit accelerate in Q3 compared to Q2? - Rakesh Patel (Raymond James & Associates, Inc., Research Division)

2025Q3: The largest impact was that markdown margin optimization to our optimizing that markdown algorithm. That was by far and away the biggest driver. - Jesse Timmermans(CFO)

Will you use promotional tactics to boost demand amid increased Q1 markdowns? - Anna Andreeva (Piper Sandler)

2025Q1: We did not see any meaningful customer behavior shift in response to the tariff news that would require us to pull-forward in demand or shift any marketing strategies. - Jesse Timmermans(CFO)

Contradiction Point 4

Gross Margin and Full-Price Strategy

It involves changes in financial strategy and execution, particularly regarding gross margin and full-price strategy, which are critical for financial performance and investor expectations.

Can you quantify the benefit from the improved markdown algorithm? - Rakesh Patel (Raymond James & Associates, Inc., Research Division)

2025Q3: We did improve gross margins by 60 basis points to 65.5%. We benefited from markdown margin optimization to our optimizing that markdown algorithm across both FWRD and REVOLVE and also had that shift in promotional strategy. - Jesse Timmermans(CFO)

What are the key factors driving the 40-basis-point increase versus the 10-basis-point decrease in the gross margin outlook? - Randal Konik (Jefferies)

2024Q4: The puts and takes on gross margin relate to successful full-price mix and tariff impacts. We're confident in our full-price strategy. - Jesse Timmermans(CFO)

Contradiction Point 5

Impact of Economic Uncertainty and Tariffs on Consumer Behavior

It involves the impact of economic uncertainty and tariffs on consumer behavior, which can influence revenue expectations and strategic decision-making.

Why the step down in fourth-quarter gross margin guidance despite recent owned brand launches and the markdown algorithm benefit? - Matt Koranda (ROTH Capital Partners, LLC, Research Division)

2025Q3: We were quite optimistic that we will accelerate and gain share as the lack of refresh in our competitors is quite obvious and more customers coming to us. - Michael Karanikolas(CEO)

Are tariffs and weaker sentiment affecting customer traffic and conversion trends? - Mark Altschwager (Baird)

2025Q1: Yes, customers are shifting to more accessible price points, impacting AOV. - Jesse Timmermans(CFO)