Revolve Group Inc

Previous wording

REVOLVE is the next-generation fashion retailer for Millennial and Generation Z consumers. As a trusted premium lifestyle brand and a go-to online source for discovery and inspiration, we deliver exceptional service and an engaging customer experience with a vast yet curated offering totaling over 100,000 apparel and footwear styles, as well as beauty, accessories and home products. Our dynamic platform connects a deeply engaged community of millions of consumers, thousands of global fashion influencers and over 1,200 emerging, established and owned brands. Through more than 20 years of continued investment in technology, data analytics and innovative marketing and merchandising strategies, we have built a powerful platform and brand that we believe is connecting with the next generation of consumers and is redefining fashion retail for the 21st century.

Current wording

REVOLVE is the next-generation fashion retailer for Millennial and Generation Z consumers. As a trusted premium lifestyle brand and a go-to online source for discovery and inspiration, we deliver exceptional service and an engaging customer experience with a vast yet curated offering totaling over 110,000 apparel and footwear styles, as well as beauty, accessories and home products. Our dynamic platform connects a deeply engaged community of millions of consumers, thousands of global fashion influencers and over 1,400 emerging, established and owned brands. Through more than 20 years of continued investment in technology, data analytics and innovative marketing and merchandising strategies, we have built a powerful platform and brand that we believe is connecting with the next generation of consumers and is redefining fashion retail for the 21st century.

Previous wording

We use social channels and cultural events designed to deliver authentic and aspirational, yet attainable, experiences to attract and retain next-generation consumers, and these efforts have historically led to higher earned media value than competitors. We complement our social media efforts through a variety of brand marketing campaigns and events, which generate a constant flow of authentic and inspiring content. Our social media and brand marketing strategy is combined with robust and sophisticated digital performance marketing activities and our proprietary brand ambassador program. Once we have attracted potential new customers to our sites, our goal is to convert them into active customers and then encourage repeat purchases. We acquire and retain customers through paid search/product listing ads, affiliate marketing, our brand ambassador program, paid social, retargeting, personalized email marketing and mobile “push” communications through our mobile applications.

Current wording

We use social channels and cultural events designed to deliver authentic and aspirational, yet attainable, experiences to attract and retain next-generation consumers, and these efforts have historically led to higher earned media value than competitors. We complement our social media efforts through a variety of brand marketing campaigns and events, which generate a constant flow of authentic and inspiring content. Our social media and brand marketing strategy is combined with robust and sophisticated digital performance marketing activities and our proprietary brand ambassador program. Once we have attracted potential new customers to our sites, our goal is to convert them into active customers and then encourage repeat purchases. We acquire and retain customers through paid search/product listing ads, affiliate marketing, our brand ambassador program, paid social, retargeting, personalized email and SMS marketing and mobile “push” communications through our mobile applications.

Previous wording

We have developed an efficient logistics infrastructure, which allows us to provide free shipping and returns to our customers in the United States. We support our logistics network with proprietary algorithms to optimize inventory allocation, reduce shipping and fulfillment expenses and deliver merchandise quickly and efficiently to our customers, which allows us to ship over 97% of orders on the same day if placed before 3 p.m. Eastern Time. We continue to modify and expand our fulfillment network to support our growth and the demand for our products.

Current wording

We have developed an efficient logistics infrastructure, which allows us to provide free shipping and returns to our customers in the United States. We support our logistics network with proprietary algorithms to optimize inventory allocation, reduce shipping and fulfillment expenses and deliver merchandise quickly and efficiently to our customers, which allows us to ship over 96% of orders on the same day if placed before 3:00 p.m. Eastern Time. We continue to modify and expand our fulfillment network to support our growth and the demand for our products.

Previous wording

To date, we have successfully expanded internationally with limited investment and physical presence. Our ongoing initiative to elevate the international service levels and customer experience has been a key contributor to our growth, enabling us to offer express shipping and hassle-free returns at no cost (for international orders valued at $100 or more) in most of our major international regions. We also offer REVOLVE products on two large international marketplaces, Tmall Global in China and Nykaa Fashion in India, to expand our distribution reach in these key geographies. For 2023 and 2022, we generated $198.3 million and $187.1 million, respectively, in net sales shipped to customers internationally, or 18.6% and 17.0% of total net sales, respectively. We intend to continue to invest in and develop international markets while maintaining our focus on the core U.S. market.

Current wording

To date, we have successfully expanded internationally with limited investment and physical presence. Our ongoing initiative to elevate the international service levels and customer experience has been a key contributor to our growth. We also offer REVOLVE products on international marketplaces such as Tmall Global, RED and Douyin in China and Nykaa Fashion in India, to expand our distribution reach in these key geographies. For 2024 and 2023, we generated $226.4 million and $198.3 million, respectively, in net sales shipped to customers internationally, or 20.0% and 18.6% of total net sales, respectively. We intend to continue to invest in and develop international markets while maintaining our focus on the core U.S. market.

Previous wording

To provide investors with additional information regarding our financial results, we have disclosed in the table above and elsewhere in this report Adjusted EBITDA, a non-GAAP financial measure that we calculate as net income before other income, net; taxes; and depreciation and amortization; adjusted to exclude the effects of equity-based compensation expense and certain non-routine items. We have provided below a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP financial measure.

Current wording

To provide investors with additional information regarding our financial results, we have disclosed in the table above and elsewhere in this report Adjusted EBITDA, a non-GAAP financial measure that we calculate as net income before other income, net; taxes; and depreciation and amortization; adjusted to exclude the effects of equity-based compensation expense, certain transaction costs and certain non-routine items. We have provided below a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP financial measure. In future periods, we may exclude similar items, may incur income and expenses similar to these excluded items and may include other expenses, costs and non-recurring items.

Previous wording

Non-routine items in 2023 included $7.5 million in legal fees and charges for two separate settled legal matters and $2.8 million related to non-routine import and export fees. Non-routine items in 2022 included $6.3 million in legal fees and charges for a settled legal matter and $0.1 million in other non-routine items.

Current wording

Non-routine items in 2024 included a $2.0 million non-routine loss related to a shipment theft incident, which we expect to recover in full through our insurance in future periods, and a $0.5 million charge for a settled matter related to non-routine import and export fees. Non-routine items in 2023 included $7.5 million in legal fees and charges for two separate settled legal matters and $2.8 million related to non-routine import and export fees. Non-routine items in 2022 included $6.3 million in legal fees and charges for a settled legal matter and $0.1 million in other non-routine items.

Previous wording

To provide investors with additional information regarding our financial results, we have also disclosed in the table above and elsewhere in this report free cash flow, a non-GAAP financial measure that we calculate as net cash provided by operating activities less cash used in purchases of property and equipment. We have provided below a reconciliation of free cash flow to net cash provided by operating activities, the most directly comparable GAAP financial measure.

Current wording

To provide investors with additional information regarding our financial results, we have also disclosed in the table above and elsewhere in this report free cash flow, a non-GAAP financial measure that we calculate as net cash provided by operating activities less cash used in purchases of property and equipment and purchases of rental product. We have provided below a reconciliation of free cash flow to net cash provided by operating activities, the most directly comparable GAAP financial measure.

Previous wording

We define average order value as the sum of the total gross sales from our sites in a given period, prior to product returns, divided by the total orders placed in that period. In 2023, average order value for merchandise sold through the REVOLVE and FWRD segments was approximately $274 and $692, respectively, reflecting the brands sold and typical profile of the shoppers on such sites. We believe our high average order value demonstrates the premium nature of our product assortment. We believe that average order value is a measure that is useful to investors and management in understanding our ongoing operations and in analysis of ongoing operating trends. Average order value varies depending on the site through which we sell merchandise, the percentage of sales at full price, and for sales at less than full price, the level of markdowns on these products, product mix, and the number of units per order.

Current wording

We define average order value as the sum of the total gross sales from our sites in a given period, prior to product returns, divided by the total orders placed in that period. In 2024, average order value for merchandise sold through the REVOLVE and FWRD segments was approximately $281 and $666, respectively, reflecting the brands sold and typical profile of the shoppers on such sites. We believe our high average order value demonstrates the premium nature of our product assortment. We believe that average order value is a measure that is useful to investors and management in understanding our ongoing operations and in analysis of ongoing operating trends. Average order value varies depending on the site through which we sell merchandise, the percentage of sales at full price, and for sales at less than full price, the level of markdowns on these products, product mix, and the number of units per order.

Previous wording

If our marketing efforts do not connect with our customer or fail to cost-effectively promote our brand or convert impressions into new customers, our net sales growth and profitability will be adversely affected. Competition for social media and influencer-based marketing channels continues to increase, making it more difficult to differentiate ourselves and cost-effectively acquire customers. Furthermore, changes in the user experience on social media platforms, including a shift towards video and the level of recommended content as well as changes in privacy practices by third parties, may make it more difficult to gain customer awareness and cost effectively acquire and retain customers. Apple Inc. has imposed requirements for consumer disclosures regarding privacy practices, and has implemented an application tracking transparency framework that requires opt-in consent for certain types of tracking. This transparency framework was launched in April 2021 and has made it more difficult and costly to acquire and retain customers. Additionally, in June 2023, Apple announced new software development kit, or SDK, privacy controls that it has integrated into iOS 17, which was released in September 2023, including new protections designed to limit tracking or identification of user devices. In February 2022, Google announced its Privacy Sandbox initiative for Android, a multi-year effort expected to restrict tracking activity and limit advertisers’ ability to collect app and user data across Android devices.

Current wording

If our marketing efforts do not connect with our customer or fail to cost-effectively promote our brands or convert impressions into new customers, our net sales growth and profitability will be adversely affected. Competition for social media and influencer-based marketing channels continues to increase, making it more difficult to differentiate ourselves and cost-effectively acquire customers. Furthermore, changes in the user experience on social media platforms, including a shift towards video and the level of recommended content as well as changes in privacy practices by third parties, may make it more difficult to gain customer awareness and cost effectively acquire and retain customers. Apple Inc. has imposed requirements for consumer disclosures regarding privacy practices, and has implemented an application tracking transparency framework that requires opt-in consent for certain types of tracking. This transparency framework was launched in April 2021 and has made it more difficult and costly to acquire and retain customers. Additionally, in June 2023, Apple announced new software development kit, or SDK, privacy controls that it has integrated into iOS 17, which was released in September 2023, including new protections designed to limit tracking or identification of user devices. In February 2022, Google announced its Privacy Sandbox initiative for Android, a multi-year effort expected to restrict tracking activity and limit advertisers’ ability to collect app and user data across Android devices, and in July 2024, announced its change from a previously-announced plan to stop supporting third-party cookies in its Google Chrome browser as a part of this initiative.

Previous wording

We seek to engage with our customers and build awareness of our brands through delivering unique events and experiences, as well as short-term pop-up retail experiences. We plan to continue to conduct in-person events at varying levels of scale in the future and make opportunistic investments in marketing initiatives that could increase marketing as a percentage of net sales to levels in excess of historical levels for certain quarters or periods of time in the future. This incremental investment may not deliver a meaningful return in the short term and may adversely impact our operating income in the short term.

Current wording

We seek to engage with our customers and build awareness of our brands through delivering unique events and experiences, as well as select retail experiences. We plan to continue to conduct events at varying levels of scale in the future and make opportunistic investments in marketing initiatives that could increase marketing as a percentage of net sales to levels in excess of historical levels for certain quarters or periods of time in the future. This incremental investment may not deliver a meaningful return in the short term and may adversely impact our operating income in the short term.

Previous wording

Our success is impacted not only by efficient and effective customer acquisition and growth in brand awareness, but also by our ability to retain customers, engage with our community and encourage repeat purchases. Existing customers, whom we define as customers in a year who have purchased from us in any prior year, account for a greater and greater share of active customers over time. Existing customers as a percentage of total active customers were 52%, 50%, 49% and 49% for 2023, 2022, 2021 and 2020, respectively.

Current wording

Our success is impacted not only by efficient and effective customer acquisition and growth in brand awareness, but also by our ability to retain customers, engage with our community and encourage repeat purchases. Existing customers, whom we define as customers in a year who have purchased from us in any prior year, account for a greater and greater share of active customers over time. Existing customers as a percentage of total active customers were 54%, 52%, 50% and 49% for 2024, 2023, 2022 and 2021, respectively.

Previous wording

Existing customers typically place more orders annually than new customers and at higher average order values, resulting in existing customers representing approximately 79% of orders and approximately 80% of net sales in 2023, up from 77% of orders and 79% of net sales in 2022, and 57% of orders and 58% of net sales in 2014, again having increased in each year since 2014. We believe these increases are reflective of our ability to engage and retain our customers through our differentiated marketing and compelling merchandise offering and shopping experience. The increasing share of our net sales from existing customers reflects our customer loyalty and the net sales retention behavior we see in our customer cohorts.

Current wording

Existing customers typically place more orders annually than new customers and at higher average order values, resulting in existing customers representing approximately 80% of orders and approximately 81% of net sales in 2024, up from 79% of orders and 80% of net sales in 2023, and 77% of orders and 79% of net sales in 2022. Orders placed by existing customers and net sales from existing customers have each increased each year since 2014. We believe these increases are reflective of our ability to engage and retain our customers through our differentiated marketing and compelling merchandise offering and shopping experience. The increasing share of our net sales from existing customers reflects our customer loyalty and the net sales retention behavior we see in our customer cohorts.

Previous wording

The following chart illustrates the spending behavior of our customer cohorts over time, as reflected in customer purchases of our products annually. Cohort net sales retention rate is calculated as net sales attributable to a given customer cohort divided by the total net sales attributable to the same customer cohort from one year prior. Cohort net sales retention rate was 77% in 2023 compared to 97% in 2022, 120% in 2021 and 74% in 2020. If we are unable to maintain our historically strong retention rates, our operating results could be adversely impacted.

Current wording

The following chart illustrates the spending behavior of our customer cohorts over time, as reflected in customer purchases of our products annually. Cohort net sales retention rate is calculated as net sales attributable to a given customer cohort divided by the total net sales attributable to the same customer cohort from one year prior. Cohort net sales retention rate was 85% in 2024 compared to 77% in 2023, 97% in 2022, 120% in 2021 and 74% in 2020. If we are unable to maintain our historically strong retention rates, our operating results could be adversely impacted.

Previous wording

The variability in our cohort net sales retention rates in 2020 to 2023 is a departure from our consistent retention rates in prior years, which we attribute primarily to external economic factors. In 2020, our cohort net sales retention rate was negatively impacted by COVID-19 headwinds before recovering very strongly in 2021 and, to a lesser extent, in 2022. We believe the 2023 cohort net sales retention rate reflects a normalization following the resurgence of consumer spending on fashion apparel in 2021 and 2022, coupled with a more challenging macroeconomic environment in 2023. Due to the variability in our retention rates in recent years, which was primarily driven by external economic factors, we believe the average of our cohort net sales retention rates from 2020 to 2023 is a relevant measure for benchmarking our performance in retaining customers. The average cohort net sales retention rate for 2020-2023 was 92%, which is higher than the 89% net sales retention rate reported in 2019.

Current wording

The variability in our cohort net sales retention rates in 2020 to 2024 is a departure from our consistent retention rates in prior years, which we attribute primarily to external economic factors. In 2020, our cohort net sales retention rate was negatively impacted by COVID-19 headwinds before recovering very strongly in 2021 and, to a lesser extent, in 2022. We believe our cohort net sales retention rate in 2024 began to normalize following the resurgence of consumer spending on fashion apparel in 2021 and 2022, coupled with a more challenging macroeconomic environment in 2023. Due to the variability in our retention rates in recent years, which was primarily driven by external economic factors, we believe the average of our cohort net sales retention rates from 2020 to 2024 is a relevant measure for benchmarking our performance in retaining customers. The average cohort net sales retention rate for 2020-2024 was 89%, consistent with the 89% net sales retention rate reported in 2019.

Previous wording

We offer merchandise across a variety of product types, brands and price points. The brands we sell on our platform consist of a mix of emerging third-party, established third-party (including iconic luxury brands) and owned brands. Our product mix consists primarily of apparel, footwear, beauty and accessories products.

Current wording

We offer merchandise across a variety of product types, brands and price points. The brands we sell on our platform consist of a mix of emerging third-party, established third-party (including iconic luxury brands) and owned brands. Our product mix consists primarily of apparel, footwear, beauty, accessories and home products.

Previous wording

The REVOLVE segment contributes to a majority of our net sales, representing 84.6% and 83.7% of our net sales for 2023 and 2022, respectively. During 2023 and 2022, REVOLVE generated $904.5 million and $921.7 million in net sales, respectively, representing a decrease of 1.9%. The net sales decrease in 2023 compared to 2022 was primarily due to a higher proportion of returned merchandise, partially offset by an increase in the number of orders placed.

Current wording

The REVOLVE segment contributes to a majority of our net sales, representing 85.9% and 84.6% of our net sales for 2024 and 2023, respectively. During 2024 and 2023, REVOLVE generated $970.5 million and $904.5 million in net sales, respectively, representing an increase of 7.3%. The net sales increase in 2024 compared to 2023 was primarily due to an increase in average order value combined with a lower proportion of returned purchases and an increase in the number of orders shipped.

Previous wording

The FWRD segment contributes to a smaller portion of our overall net sales, representing 15.4% and 16.3% of our net sales for 2023 and 2022, respectively. During 2023 and 2022, FWRD generated $164.2 million and $179.7 million in net sales, respectively, representing a decrease of 8.6%. The net sales decrease in 2023 compared to 2022 was primarily due to a decrease in the number of orders shipped.

Current wording

The FWRD segment contributes to a smaller portion of our overall net sales, representing 14.1% and 15.4% of our net sales for 2024 and 2023, respectively. During 2024 and 2023, FWRD generated $159.4 million and $164.2 million in net sales, respectively, representing a decrease of 2.9%. The net sales decrease in 2024 compared to 2023 was primarily due to a decrease in the number of orders shipped.

Previous wording

Net sales to customers outside of the United States contributed to 18.6% and 17.0% of our net sales for 2023 and 2022, respectively. During 2023 and 2022, net sales to customers outside of the United States were $198.3 million and $187.1 million, respectively, representing an increase of 6.0%.

Current wording

Net sales to customers outside of the United States contributed to 20.0% and 18.6% of our net sales for 2024 and 2023, respectively. During 2024 and 2023, net sales to customers outside of the United States were $226.4 million and $198.3 million, respectively, representing an increase of 14.2%.

Previous wording

Net sales consist primarily of sales of women’s apparel, footwear, beauty, accessories and home products. We recognize product sales at the time control is transferred to the customer, which is when the product is shipped. Net sales represent the sales of these items and shipping revenue when applicable, net of estimated returns and promotional discounts. Net sales are primarily driven by growth in the number of our customers, the frequency with which customers purchase and average order value.

Current wording

Net sales consist primarily of sales of women’s apparel, footwear, beauty, accessories and home products. We recognize product sales at the time control is transferred to the customer, which is when the product is shipped. Net sales represent the sales of these items and shipping revenue when applicable, net of estimated returns and promotional discounts. Net sales are primarily driven by growth in the number of our customers, the frequency with which customers purchase, the proportion of returned merchandise and average order value.

Previous wording

Fulfillment expenses represent those costs incurred in operating and staffing our fulfillment centers, including costs attributed to inspecting and warehousing inventories and picking, packaging and preparing customer orders for shipment. Fulfillment expenses also include the cost of warehousing facilities. We expect fulfillment expenses to fluctuate as a percentage of net sales due to pressure from increased costs such as wages and other input cost pressure, expansion of our fulfillment network footprint and capacity, and our customers’ propensity to return merchandise, to be partially offset by operating efficiencies from increased scale as well as automation of the fulfillment center workflow.

Current wording

Fulfillment expenses represent those costs incurred in operating and staffing our fulfillment centers, including costs attributed to inspecting and warehousing inventories and picking, packaging and preparing customer orders for shipment. Fulfillment expenses also include the cost of warehousing facilities. We expect fulfillment expenses to fluctuate as a percentage of net sales due to pressure from increased costs such as wages and other input cost pressure, expansion of our fulfillment network footprint and capacity, and our customers’ propensity to return merchandise. Longer term, we expect operating efficiencies from increased scale as well as automation of the fulfillment center workflow.

Previous wording

Selling and distribution expenses consist primarily of shipping and other transportation costs incurred delivering merchandise to customers and from customers returning merchandise, merchant processing fees, and customer service. We expect selling and distribution expenses to fluctuate as a percentage of net sales reflecting input cost pressures, particularly freight charges and fuel surcharges, from elevated return rates due to consumer behavior, investments in international markets to offer hassle-free returns, partially offset by efficiencies realized from optimized shipping methods.

Current wording

Selling and distribution expenses consist primarily of shipping and other transportation costs incurred delivering merchandise to customers and from customers returning merchandise, merchant processing fees, and customer service. We expect selling and distribution expenses to fluctuate as a percentage of net sales reflecting changes to input costs, particularly freight charges and fuel surcharges, from changes in our return rates, investments in international markets to offer hassle-free returns and efficiencies realized from optimized shipping methods.

Previous wording

Marketing expenses consist primarily of targeted online performance marketing costs, such as paid search/product listing ads, affiliate marketing, paid social, retargeting, search engine optimization, personalized email marketing and mobile “push” communications through our mobile applications. Marketing expenses also consist of investment in brand marketing channels, including events, payments to influencers and other forms of online and offline marketing. Marketing expenses are primarily related to growing and retaining our customer base and building the REVOLVE and FWRD brands. Over the long term, we expect marketing expenses to increase in absolute dollars as we continue to scale our business, and may fluctuate as a percentage of sales depending on net sales volume, the level of marketing investment in a particular period and the competitive environment. We may make opportunistic investments in marketing initiatives that may increase marketing as a percentage of net sales to levels in excess of historical levels for certain quarters or periods of time in the future.

Current wording

Marketing expenses consist primarily of targeted online performance marketing costs, such as paid search/product listing ads, affiliate marketing, paid social, retargeting, search engine optimization, personalized email and SMS marketing and mobile “push” communications through our mobile applications. Marketing expenses also consist of investment in brand marketing channels, including events, payments to influencers and other forms of online and offline marketing. Marketing expenses are primarily related to growing and retaining our customer base and building the REVOLVE and FWRD brands. Over the long term, we expect marketing expenses to increase in absolute dollars as we continue to scale our business, and may fluctuate as a percentage of sales depending on net sales volume, the level of marketing investment in a particular period and the competitive environment. We may make opportunistic investments in marketing initiatives that may increase marketing as a percentage of net sales to levels in excess of historical levels for certain quarters or periods of time in the future.

Previous wording

Other (income) expense, net consists primarily of interest income on our money market funds, interest expense and other fees associated with our line of credit and foreign exchange (gains) losses. For 2023, other (income) expense, net also includes $5.1 million of insurance proceeds related to a settled legal matter.

Current wording

Other income, net consists primarily of interest income on our money market funds, partially offset by foreign currency exchange gains and losses and fees associated with our line of credit. For 2024 and 2023, other income, net also includes $2.8 million and $5.1 million of insurance proceeds related to settled legal matters, respectively.

Previous wording

Net sales in the REVOLVE segment decreased 1.9% to $904.5 million in 2023 compared to net sales of $921.7 million in 2022. Net sales generated from our FWRD segment decreased 8.6% to $164.2 million in 2023 as compared to net sales of $179.7 million in 2022.

Current wording

Net sales in the REVOLVE segment increased 7.3% to $970.5 million in 2024 compared to net sales of $904.5 million in 2023. Net sales generated from our FWRD segment decreased 2.9% to $159.4 million in 2024 as compared to net sales of $164.2 million in 2023.

Previous wording

The increase in cost of sales in 2023, as compared to 2022, was primarily due to a higher mix of third-party brand sales, which generally carry higher cost of sales than that of owned brand goods, partially offset by a higher proportion of returned purchases. The increase in cost of sales as a percentage of net sales was primarily due to a lower percentage of full price sales combined with a higher mix of third party brand sales.

Current wording

The increase in cost of sales in 2024, as compared to 2023, was primarily due to an increase in net sales and an increase in inbound shipping expenses to receive product merchandise from vendors. The decrease in cost of sales as a percentage of net sales was primarily due to a higher percentage of full price sales, partially offset by increased inbound shipping rates and a higher mix of third-party brand sales.

Previous wording

Fulfillment expenses in 2023 were higher as compared to 2022, primarily due to an increase in the number of units processed and increased rent cost for existing facilities. The increase in fulfillment expenses as a percentage of net sales was primarily due to customers returning a higher proportion of their purchases, higher wages for fulfillment staff and the expansion of our fulfillment network footprint and capacity.

Current wording

Fulfillment expenses in 2024 were higher as compared to 2023, primarily due to increased occupancy costs, partially offset by efficiencies gained from successful expansion and optimization of our fulfillment network. The decrease in fulfillment expenses as a percentage of net sales was primarily due to an increase in average order value and a lower proportion of returned purchases.

Previous wording

The decrease in marketing expenses in 2023, as compared to 2022, was primarily due to reduced investment in performance marketing campaigns driven by efficiencies in marketing investments. As a result, we experienced a decrease of $12.3 million in performance marketing expense, partially offset by a $2.4 million increase in brand marketing expense.

Current wording

The decrease in marketing expenses in 2024, as compared to 2023, was primarily due to a $8.7 million decrease in brand marketing expense, partially offset by a $4.1 million increase in performance marketing expense. The decrease in marketing expenses as a percentage of net sales was due to efficiencies in our brand marketing and performance marketing investments.

Previous wording

The increase in general and administrative expenses in 2023, as compared to 2022, was primarily due to a $1.7 million increase in salaries and related benefits and equity-based compensation expense related to an increase in our headcount, a $1.7 million increase related to professional services and other occupancy costs, and a $7.9 million increase in other operating expenses. During 2023, we recorded $7.5 million in legal fees and charges for two separate settled legal matters and $2.8 million in non-routine import and export fees. During 2022, we recorded a $6.3 million accrual for a separate legal matter that has since been settled. The increase in general and administrative expenses as a percentage of net sales was primarily driven by the increase in general and administrative costs as well as a slight decline in net sales.

Current wording

The increase in general and administrative expenses in 2024, as compared to 2023, was due to a $7.9 million increase in salaries and related benefits, a $6.0 million increase related to professional services and other occupancy costs, a $4.2 million increase in equity-based compensation expense, a $1.1 million increase in studio and design costs and a $4.2 million increase in other operating expenses and transaction costs, partially offset by a $7.9 million decrease in non-routine expenses. The increase in general and administrative expenses as a percentage of net sales was driven by growth in general and administrative expenses outpacing growth in net sales.

Previous wording

The increase in the effective tax rate for 2023 compared to 2022 was primarily due to an increase in state income taxes and non-deductible expenses combined with a decrease in excess tax benefits related to the exercise of non-qualified stock options, partially offset by a higher proportion of foreign-derived intangible income.

Current wording

The decrease in the effective tax rate for 2024 compared to 2023 was primarily due to an increase in excess tax benefits related to the exercise of non-qualified stock options, partially offset by a lower proportion of foreign-derived intangible income and an increase in disallowed expenses related to Section 162(m) of the Internal Revenue Code for covered employee's compensation.

Previous wording

We generated $43.3 million of operating cash flow in 2023 compared to $23.4 million in 2022. The increase in our operating cash flow was primarily due to a $55.6 million net increase due to reduced investments in inventory, partially offset by a $28.7 million decrease in net income adjusted for non-cash items and a $7.0 million decrease from changes in other working capital.

Current wording

We generated $26.7 million of operating cash flow in 2024 compared to $43.3 million in 2023. The decrease in our operating cash flow was primarily due to negative impact from changes in working capital, partially offset by higher net income adjusted for certain non-cash items.

Previous wording

Our primary investing activities have consisted of purchases of property and equipment to support our fulfillment centers and our overall business growth and internally developed software for the continued development of our proprietary technology infrastructure. Purchases of property and equipment may vary from period-to-period due to the timing and extent of the expansion of our operations.

Current wording

Our primary investing activities have consisted of purchases of property and equipment to support our fulfillment centers and our overall business growth and internally developed software for the continued development of our proprietary technology infrastructure. In addition, for 2024, our investing activities included purchases of rental product and cash paid for an acquisition. Purchases of property and equipment may vary from period-to-period depending on the timing and extent of the expansion of our operations

Previous wording

Our financing activities primarily consist of proceeds from the exercise of stock options, borrowings and repayments related to the existing line of credit, when applicable and repurchases of our Class A common stock.

Current wording

Our financing activities primarily consist of repurchases of our Class A common stock and proceeds from the exercise of stock options, when applicable.

Previous wording

Net cash used in financing activities was $30.4 million in 2023 and was primarily attributable to repurchases of shares of our Class A common stock under our stock repurchase program. Net cash provided by financing activities was $0.9 million in 2022 and was attributable to cash proceeds from the exercise of stock options.

Current wording

Net cash used in financing activities was $5.4 million in 2024 and was primarily attributable to repurchases of shares of our Class A common stock under our stock repurchase program, partially offset by cash proceeds from the exercise of stock options. Net cash used in financing activities was $30.4 million in 2023 and was primarily attributable to repurchases of shares of our Class A common stock under our stock repurchase program.

Previous wording

In accordance with our policy on returns and exchanges, merchandise returns are generally accepted for full refund if returned within 60 days of the original purchase date and merchandise may be exchanged up to 90 days from the original purchase date. At the time of sale, we establish a reserve for merchandise returns, based on historical experience, merchandise mix and expected future returns, which is recorded as a reduction of sales. Accordingly, cost of sales is also reduced and an offsetting asset is recorded within prepaid expenses and other current assets for expected merchandise to be returned. Our returns reserve as of December 31, 2023 and 2022 was $63.8 million and $63.4 million, respectively, and the provisions recorded for returns were $1,505.9 million and $1,410.5 million, during 2023 and 2022, respectively. Actual levels of returns may vary from our estimates as of period ends and would be recorded in future periods.

Current wording

In accordance with our policy on returns and exchanges, merchandise returns are generally accepted for full refund if returned within 30 days of the original purchase date and merchandise may be exchanged up to 60 days from the original purchase date. At the time of sale, we establish a reserve for merchandise returns, based on historical experience, merchandise mix and expected future returns, which is recorded as a reduction of sales. Accordingly, cost of sales is also reduced and an offsetting asset is recorded within prepaid expenses and other current assets for expected merchandise to be returned. Our returns reserve as of December 31, 2024 and 2023 was $69.7 million and $63.8 million, respectively, and the provisions recorded for returns were $1,544.1 million and $1,505.9 million, during 2024 and 2023, respectively. Actual levels of returns may vary from our estimates as of period ends and would be recorded in future periods.

Previous wording

We may also issue store credit in lieu of cash refunds or exchanges and sell gift cards without expiration dates to our customers. Store credits issued and proceeds from the issuance of gift cards are recorded as deferred revenue and recognized as revenue when the store credit or gift cards are redeemed or upon inclusion in our store credit and gift card breakage estimates. Revenue recognized in net sales on breakage on store credit and gift cards was $2.6 million and $1.7 million for 2023 and 2022, respectively.

Current wording

We may also issue store credit in lieu of cash refunds or exchanges and sell gift cards without expiration dates to our customers. Store credits issued and proceeds from the issuance of gift cards are recorded as deferred revenue and recognized as revenue when the store credit or gift cards are redeemed or upon inclusion in our store credit and gift card breakage estimates. Revenue recognized in net sales on breakage on store credit and gift cards was $3.3 million and $2.6 million for 2024 and 2023, respectively.