Q1 2022 Lulu's Fashion Lounge Holdings Inc Earnings Call
Good afternoon, and welcome to lose first quarter 2022 earnings conference call.
Today's call is being recorded and we have allocated one hour for prepared remarks and Q&A.
At this time I'd like to turn the conference over to Naomi Beckman Strauss General counsel at Luiz. Thank you you may begin.
Good afternoon, everyone and thank you for joining us to discuss lose first quarter 2022 result.
Before we begin we would like to remind you that this conference call will include forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
All statements made on this call that do not relate to matters of historical fact should be considered forward looking statements, including but not limited to statements regarding managements expectations plans.
<unk> goals and objectives and their implementation our future expectations regarding financial result.
For the second quarter, ending July 3rd 'twenty, 'twenty, two and outlook for the year ending January one 2023 market opportunities product launches and other initiatives and our growth.
These statements, which are subject to various risks uncertainties assumptions and other important factors could cause our actual results performance or achievements to differ materially from results performance or achievements expressed or implied by these statements.
These risks uncertainties and assumptions are detailed in this afternoon's press release as well as our filings with the SEC.
Including our annual report on Form 10-K for the fiscal year ended January 2022 filed with the SEC on March 31, 2020, Q all of which can be found on our website at investors thought Lulu Dot com.
Any such forward looking statements represent managements estimates as of the date of this call.
While we may elect to update such forward looking statements at some point in the future. 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 net debt.
We use non-GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business.
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 are.
Our non-GAAP measures may be different from non-GAAP measures used by other companies.
Reconciliations of GAAP to non-GAAP measures as well as the description limitations and rationale for using each measure can be found in this afternoons press release and in our SEC filings.
Joining me on the call today is our CEO , David Mccreight, our co president and CFO , Chris build anthem and co President and CIO My car.
Following our prepared remarks, we'll open the call for your questions with that I'll turn the call over to David.
Thank you Naomi and good afternoon, everyone I'm proud to address you today with my partners and co presidents marketing Crystal.
We continue to see significant momentum in our business and we are extremely pleased with the progress we've made in our first two quarters as a public company.
As a reminder, since completing our IPO during the fourth quarter of 2021, we have fully paid off our long term debt and as a result have an exceptionally strong balance sheet combined with our healthy cash flow from operations that we believe positions us well to execute on our growth plans.
Yeah.
Our leu crew has done a tremendous job and delighting, our customers and executing on our strategy and the results from the first quarter are a testament to their impactful work.
During Q1, we generated nearly $112 million of revenue representing growth of 62% year over year.
Even as we Anniversaried last year's stimulus in the quarter.
Our adjusted EBITDA was $9 9 billion versus $5 4 million over the prior year period.
We saw excellent growth in active customers in both new and repeat.
<unk> 3 million in the last 12 months ended April three 2022 compared to one 9 million for the same period last year.
And we are driving this growth with efficient first order contribution margin profitable performance marketing spend and compelling assortments.
We were happy to see growth in both new and repeat customers for the quarter.
Based on customer demand the lose brand seems robust given the broad strength in our customer related metrics for Q1, and our marketing efforts and assortment continue to build loyalty and engagement among our brand fans.
From a merchandising perspective, we were pleased by the Q1 response to our offering and more recently to our none of that offering.
Our event dressing category remains a pivotal segment of our business and we saw a meaningful lift in demand driven by in person events resuming.
And none event categories. Our team continues to evolve our offering planning to increased mind share and occupy more of her closet, which is reflected in our continued double digit revenue growth in these classes.
Data is critical to all our decision, making at <unk> and we use data insights to optimize almost all elements of our business, particularly in our product creation and curation cycle.
Our test learn and reorder approach.
It's lower markdown and decreases fashion risks and we view this as a key differentiator from other companies in the industry.
As a reminder, roughly 70% of our revenue is from algorithmic driven purchasing.
And a leading indicator of future success for our business model is the number of new products that are tested and adopted for future reorder pipelines.
The new product results from Q1 looks strong and our reorder pipeline looks robust, which gives us confidence in achieving our growth targets in 2022 and beyond.
These exceptional first quarter results highlight the massive potential of our affordable fresh fashion model, among millennial and Gen Z women.
We continue to engage her online through digital channels, and social media as well as on our own platforms through reviews feedback surveys and one on one interactions with our incredible customer service team.
Our look through works every day to make our customer touch points special which ultimately leads to stronger customer engagement and loyalty and increases word of mouth introductions to a growing community of lose brand stance.
We believe there are vast pools of untapped customers, who have yet to meet our brand anti mining insights learned from a rigorous performance marketing testing.
Building awareness capability and encouraging more word of mouth introductions, we are optimistic about our growth for years ahead.
Analytics data shows that while millennials remain our largest cohorts spend the rate of adoption by Gen Z gives us confidence in our long runway.
We attribute the apparent embrace of Gen Z to the appeal of our product offer and our evolving ability to interact with them in ways and platforms that they find appealing.
On supply chain, we are continuing to monitor developments in China, the new Corona virus strains as well as other supply chain risks.
As we've highlighted in prior earnings call. We now place orders about four to six weeks earlier than we did during pre pandemic times to continue meeting our customers' needs as well as to mitigate pressure and avoid scrambling for costly airfreight.
As a reminder, this slightly longer lead time does not significantly impact our brand because the vast majority of our orders are for previously tested product.
Also we are not a fast fashion brand. So we have less product trend risk and are therefore are less sensitive to a slightly longer lead time.
That being said, we have not yet notice nor been informed of any major changes in our product lead times from prior quarters.
As a new company, we've been sharing with you much of the L. D. L. Your growth story, our beginnings our roots in digital and analytics, our passion for our customers, but one of the perhaps underappreciated elements of our business model is the resilience.
Thought at a good time to highlight today, what gives us structural resilience compared to others in our industry.
We have a loyal and growing customer following supported by our accessible price points and affordable luxury positioning spreading broad range of ages and income levels across millennials and Gen Z.
The durable appeal of our product styling.
We are not a fast fashion brand and half of that.
Driven product development approach, which reduces risks so shifting demand does not always mean massive inventory obsolescence or obsessive excessive markdowns.
We are a very nimble cost structure and the largest components of our overhead specifically in marketing in staffing and in the future product costs will be further rationalized.
We believe we have amongst the fastest inventory turns of the industry, which enables the ability to flex our position more quickly than most.
We are a capital light model with some periods approaching negative working capital.
And as a result of the recent debt reduction we now have a strong balance sheet and are well positioned to fund continued growth due to our strong free cash flow generation ability.
Of course, we are not immune to industry wide cost pressures in the areas of inflation labor materials shipping and digital marketing costs throughout all of 2022.
The guidance, we're providing today incurred incorporate some of those anticipated cost pressures.
Our frequent testing indicates we continue to have product pricing power, which we believe provides us with strong gross margin cushion, even with increased inflationary pressures and.
Disinflationary pressures, where can move beyond transitory structural we still have ample room and our future business model to reduce product costs in 'twenty, two 'twenty, three and beyond to offset much of any structural increases.
In closing we are quite pleased with our Q1 results and how Q2, historically, our largest and most profitable quarter is unfolding.
Christopher will provide more context in a few minutes.
But based on the trends we've seen thus far we have updated our guidance. We are now raising net revenue growth expectations to 30% to 33% growth for FY 'twenty two.
And adjusted EBITDA to reach 50% to $51 million each.
Even while continuing to invest for future growth and incurring the incremental cost of being a public company.
So now I'd like to turn the call over to Mark Foss, Our co President and Chief Information Officer. He will share with you an update on our key operational and analytical efforts to further support our continued growth as well as increasing customer insight and engagement.
I'll, let mark to discuss some of those key initiatives with you now in greater detail Mark.
Thank you David and thank you everyone for joining us today.
Starting with our customers we are very proud of the record engagement of our repeat customers in Q1.
That repeat engagements together with healthy number of new customers acquired in 2021.
In Q1 of 2022.
Sets us up for continued momentum for the year and beyond.
In the 12 months ended.
April 2022, we serve 3 million active customers compared to $1 9 million active customers in the 12 months ended April four 2021.
Record <unk> for the quarter fueled by more items per basket as well as lower discounts and markdowns showed our customers growing desire to loose assortment.
We are very proud of our customer support team that is always 100% focused on providing our customers with the best possible experience, where do we are responding to shipments related questions or providing style and fit fit their price.
We continue to enjoy strong CCI or customer satisfaction scores and have improved our already high C. Sats course, you're over here.
<unk> of course are not only a wonderful measurement of the loose brand how can we provide our customers, but they are also a leading indicator for high net promoter scores and continued customer word of mouth advertising.
We are also expanding resource allocation for further to further improve our customer insights.
<unk> is a company that is built on customer feedback and customer feedback already drives much of our product assortment and our shopping experience.
We are in conversations in many channels with our customers every day and we've seen more opportunities to share continuous customer insights throughout our organization.
By broadening the channels through which we engage with our customers and applying technology to large amounts of conversational structure.
Unstructured data that is collected we aim to ensure that our customers voice is and remains central to all moves conversations and decisions.
In March of 2022, we relaunched our luxury rewards loyalty program.
Whereas our previous reward program wasn't coupon discount program.
New life rewards program is focused on rewarding customers for their engagement with Louis.
Customers can earn points through purchases from <unk>.
Fighting us with first party data and following loose on various social media channels.
Points earned counts towards for customer loyalty levels and each level has increased customer engagement benefits like priority back in stock notifications and exclusive deals.
The flexibility of a points program offers us more ways to deepen the relationship with our customers to.
To increase our customer's lifetime value.
To occupy a larger share of her closet.
Our early reads indicate that the program is off to a strong start with favorable customer engagement trends right off the bat and we.
We're looking forward to further enhancing our loyalty program in 2022.
Yeah.
From a marketing perspective.
Minder.
Lewis has been and continues to be first order contribution margin profitable.
In other words, our cost of acquiring a new customer is below the first order contribution margin after selling and fulfillment expenses.
Despite the changes and challenges that iOS is tracking limitations and privacy regulations in general that's introduced.
It remains effective and efficient and attracting new customers and re engaging existing customers.
Our proprietary datasets tooling and analytics have continued to provide us with effective lines of sight on what spend in which channel for each audience is incremental incrementally beneficial.
And as a result, our selling and marketing expenses as a percentage of net revenue remains in line with recent years, and we will continue to iterate and adapt to try to keep it that way.
Switching to our operations a key enabler of our affordable luxury positioning and customers alike is continuous improvement in our service levels and efficiency across our supply chain.
In Q1, 2022, we successfully and seamlessly transfer.
Transitions are vendor inbound inventory, receiving and product quality control activities from our free P O partner back in house.
We also improved our shipping deficiency from southern California to our northern California, and Eastern Pennsylvania fulfillment centers.
We have already observed higher units per trailer ship to our fulfillment centers, which reduces the transportation cost per unit.
We also have observed shorter dock to available for sale cycle times, which further improves our in season selling window and ultimately lower seasonal markdowns.
In the coming quarters, we expect to add additional logistics capabilities to our southern California facility to further optimize inventory across our entire network.
As well as a quarter fulfillment to the California, Arizona and Nevada regions.
Thereby improving our service levels, while also reducing shipping expenses.
In March of 2022, we started our implementation of robotics, and our eastern Pennsylvania fulfillment Center.
I'm very pleased with our operations teams ability to implement the new robotic system, while ramping up into our important spring peak season.
To do so without the negative impact to our customers.
Robotics is already driving productivity gains and is helping us better attract and retain warehouse associates.
Reasonably we improved our warehouse associate retention rates significantly compared to the same period last year.
Which also reduces training expenses and loss of new associate productivity.
And it also enables us to provide our customers with the high level of surface. They have come to appreciate from us.
With these early successes, we will consider a robotics rollout in our northern California logistics centers as well.
For which we have allocated a capex budget, that's reflected in our full year 2022.
And now let me introduce my colleague Crystal Langsam co President and CFO , who will discuss the quarter in greater detail Crystal.
Thanks, Mark and good afternoon, everyone.
The first quarter of 2022 has been a strong indicator of the real momentum in our business and unexpected we're pleased to be reporting continued strong financial result.
David mentioned, we delivered an outstanding quarter highlighted by year over year growth across key financial metrics, including net revenue gross margins profitability and cash flows.
We also saw record performance across our customer health metrics as we saw many active customers engaging with us in the first quarter.
Customers continue to engage with us at increasing levels, if they return to their busy social calendars and continue to come back to us for their everyday fashion needs as reflected by the increases and average units per order average order value and average spend per customer.
During Q1, we grew our net revenue by 62% to $111 9 million or $42 9 million increase over the same period in the prior year and the highest net revenue for any quarter in our history.
Our topline growth continues to be driven by the combination of new customers acquired and increasing loyalty from our existing customer base with an all time high number of repeat customers engaging with us during the first quarter.
Total orders increased by 51% and average order value increased by 20% to $133 in part, reflecting fewer markdowns and lower discounting.
We are very proud of our large diverse community of loyal customers and the 12 months ended April 32022, we serve 3 million active customers compared to $1 9 million active customers in the 12 months ended April 4th 2021, representing growth of 58% and up 200000 active customers compared to our 2020 one year end.
Active customer count of $2 8 million.
Despite industry wide supply chain challenges our business model has enabled us to continue our path of strong growth and profitability.
Gross margins for the first quarter increased 220 basis points to 47, 3% driven primarily by two key factors first fewer markdowns and discounts compared to last year driving more sales at full price and second the reacceleration of higher margin event dressing demand coupled with demand in non event everyday dressing.
Category, along with strong customer demand, our agile merchandising process facilitated inventory turn rate at an annualized rate of over eight times.
Moving down the P&L to give some insights into expense line items Q1, selling and marketing expenses were $21 9 million up $8 5 million from the same period in the prior year due to the return of online performance marketing spend to a more normalized state modestly ahead of the increase in that revenue as well as some increased spend in top of funnel.
Brand awareness marketing.
General and administrative expenses amounted to $27 8 million for the quarter, an increase of $12 7 million compared to the prior year.
The increase reflects higher fixed head count costs and associated payroll and benefit costs to support business growth and our obligations as a public company.
Recall, we did not have any public company expenses last year in Q1.
We continue to drive efficient results and operations in spite of inflation pressures labor shortages, including for distribution center labor, increasing pressure on logistics costs and rising return eight investments in our distribution network and offset some of these headwinds and enabled us to drive favorable year over year operating margin.
Interest expense fell by $3 6 million to 200000, a result of paying off our long term debt last year with proceeds from the IPO.
For the quarter, we reported a diluted earnings per share of <unk> compared to a diluted loss per share of eight cents in the first quarter of 2021.
And finally <unk>.
EBITA for the first quarter with $9 9 million compared to $5 4 million in the same period in 2021.
Our Q1, adjusted EBITDA margin was eight 9% compared to seven 8% in the same period in 2021.
Moving onto the balance sheet and cash flow statement.
Our balance sheet remains strong and positions us well to execute on our long term growth plan.
One key change over last year to note on the balance sheet, we adopted accounting standards under ASC 842 at the beginning of fiscal 2022, resulting in the recognition of operating lease liabilities recorded on the balance sheet offset by a corresponding lease right of use asset.
The resulting impact to the balance sheet is roughly 29 million, an offsetting long term lease liabilities and right of use assets.
Our strong cash flow model enabled us to pay down our revolver by $10 million, leaving a balance of $15 million at quarter end with quarter, ending cash balances of $19 4 million.
For inventory.
While we continue to turn quickly it over an eight times on an annualized basis. We ended the quarter with $42 1 million on hand, an increase of $19 3 million compared to $22 8 million at the end of Q1, 2021 setting us up well to meet our customer demand in Q2.
We continue to maintain or faster inventory turns reflecting strong customer demand as long as our data driven approach to buying for both new and reorder products.
In Q1, we once again believe our inventory turns were industry, leading however, as we've said in the past overtime well incrementally test our way into flow returns in order to better keep up with our customer demand trends and look for loose products, while still keeping laser focused on the macro environment and making sure we hold firm to our lean inventory management principles will continue.
Renewing to pursue profitable growth.
We continue to operate a highly capital efficient business that positions us to generate significant positive cash flow for the quarter, we generated $20 2 million in cash flow from operation.
Moving onto guidance based on the strong results in the first quarter early reads on the second quarter and our confidence in the future we're raising our expectations for the full year. We continue to have deep conviction in our product merchandising model and remain confident in our ability to navigate the current macro environment. Therefore, we're raising our 2022.
Full year net revenue expectations to a range of 490 to 500 million, which represents a year over year growth rate of 30% to 33%.
From our previous guidance of $480 million to $490 million.
Adjusted EBITDA is now expected to be between 50 million and $51 million, which represents growth of 21% to 23% over 2021 and an increase from our prior range of $48 $5 million to $15 million.
We continue to expect product gross margin expansion in 2022 as we benefit from our data driven model and continued high levels of full price selling as well as pricing leverage on a high volume volume reorder products. We do expect increased oil prices to continue to be a headwind to gross margins and increasing shipping and logistics costs for the balance of the year.
We plan to reinvest some of our outside into marketing and continuing to build customer awareness, which typically generate strong returns longer term. These expenses are expected to occur primarily in the second and third quarters of 2022.
Our adjusted EBITDA margin rate guidance continues to capture roughly four and a half million unexpected incremental expenses related to being a public company for the 2022 fiscal year compared to the less than two months of public company expenses recognized in 2021.
Our updated guidance also accounts for the potential for increasing return rates, which we've already experienced in Q1 as well as a higher mix of event based dressing as our customer returns to her social calendar and we continue to meet pent up demand for weddings and wedding related events.
While not reflected in our Q1 results. Our guidance also reflects our expectation for a normalization of markdowns and discounts to pre pandemic levels for the remainder of the year likely more apparent in the second half of the year.
Our guidance targets are for the full 2022 year that fed to set expectations for modeling purposes in a normalized year. Our net revenue is typically highest in our second and third quarters. He sent me on seasonality for event dressing with our lowest revenue coming from the first and fourth quarters.
I also like to remind you that our quarterly adjusted EBITDA margin rates have similar seasonality fluctuations, if theyre not rapidly and will likely fluctuate above and below our full year guidance rate depending on the quarter. Additionally, we expect adjusted EBITDA margins to be lower in the second and third quarters. This year compared to the second and third quarters of last year primarily related to.
The higher public company expenses incremental marketing investment as well as timing of expenses for infrastructure investment initiatives, which will require some redundant operations.
As a result of the pay off of our long term debt facility immediately following the IPO, we expect interest expense to be roughly 700000 for the year dramatically down from $12 8 million in 2021.
For 2022, we expect a weighted average fully diluted share count of 40 million shares. This year share count includes a full year of higher post IPO share count weighted across all four quarters.
Moving onto capital expenditure I'd like to reiterate the following investment areas, we are focusing on throughout the balance of the year.
Once we've completed a successful robotics implementation and our east Coast fulfillment Center will evaluate the return on investment and consider launching robotics in our northern California facility.
We plan to continue improving our platforms to ensure that we maintain and improve our customer centric shopping experience and marketing personalization with investments in our customer data platform and customer insights.
Lastly, we plan to further invest in internal and external software and technology to enhance our operational efficiency.
With the rollout of these initiatives, we continue to expect capital expenditures of between five and 7 million for the full 2022 fiscal year.
And with that I'll pass it back to David for closing remarks.
We would like to thank the Lou crew brand fans board and of course, our shareholders for helping US deliver these outstanding results in the first quarter. We continue to believe that Lulu as high growth capital light business combined with fast inventory turns and a strong balance sheet and unique merchandising.
It'll clearly differentiates us from the apparel and fast fashion companies, we see competing in the ecommerce space.
Moreover, we think the customer experience, we provide is unmatched and positions us well to benefit from long term growth trends in our industry.
We are very pleased with the start of the year and look forward to executing on our strategy and continuing to deliver on our targets in 2022.
Thank you for your time, and we look forward to hearing your questions.
Thank you and ladies and gentlemen at this time, we will conduct a question and answer session.
We would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the question queue.
Please limit yourself to one question and one follow up per each time that your Q. Please queue up again for additional questions.
Additionally, you May press Star two if you would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
Our first question comes from Randy <unk> with Jefferies. Please state your question.
Yeah. Thanks, guys.
I wanted to explore the the event and non event.
Product categories that you spoke of the strike and so because it appears that the.
Your business is getting or the brand is getting more and more recognition as a destination for events like Youre also talking about that added strength in non event categories. So can you talk about some of the wins you're seeing in the amount of that area and maybe some of the purchase.
And if you buy the consumer as she.
Getting in the transaction are you seeing kind of U P T drive where she's buying event plus non event stuff at the same time, just just kind of curious of what kind of behaviors, you're seeing from the consumer there. Thanks guys.
Hey, Randy Yeah, so from an events versus non event versus say for instance, as fast as we've seen double digit comps across all of the above.
Because we're so well known for our event and we were able to chase into it to capitalize on a lot of pent up demand, we did see an even larger reacceleration on the event side.
But we're still very impressed with what our team has been able to do on an on demand side with a double digit comps last year. So we're making good headway there still testing and learning what she's interested in and I'm really impressed with the team.
And across all product classes.
I'm a customer behavior perspective, Mark I think you can add more color there.
Like when you witness the also last quarter for example.
C U E.
So if we can.
Some of our customers and that's over time.
From a customer.
Parts with loose you've inside that she certainly migrates into the other categories over time and so that's all so lucky.
The observed in Q1 of this.
Randy we love it because what cristal and Mark just outlined sort of indicates.
The great bones from being an excellent lifestyle brand the idea that we have sort of gateway products and let those gateway products.
Lead to other exploration across the brand, but that also speaks to future lifetime value customer stickiness. So all very good signs.
Great and just last question is just your thoughts.
On the general health of the consumer how does how does she feel to you guys. These days. Thanks.
Thanks, guys.
I'd say, we're pretty pleased with with all of the metrics around our customer and it's a R. O V and reduction in markdowns and discounts are a testimony to that you said a lot of value in our products anymore in your shopping cart engaging with us more often so across the board. We thank our consumer is very healthy.
Both new and it's Super helpful. Thanks, guys. Thanks, guys.
Yep.
Thank you. Our next question comes from Oliver Chen with Cowen. Please go ahead.
Hi, the inventory turns continue to be really impressive how are you balancing that against markdown normalization that you're seeing as well as maintaining the right in stock levels to ensure that the net promoter score is optimized.
And the follow up.
You think about marketing spend you mentioned top of funnel.
What's in your strategy in terms of thinking about performance marketing in an attribution analysis top of funnel relative.
Relative to them first and third party and what you're seeing in the marketplace. Thank you.
Oliver I'll take the inventory turns questions and generally speaking we've been really focused on improving our size in stock ratio, then and maybe less so on what we were speaking previously about flowing turned it's more about optimizing that sizing that stock availability are you could tease I think their testimony that we've made dramatic improvements.
Doubled our size in stock across our reorder products this quarter, which has allowed us to continue turning quickly, but still meeting that customer are getting closer to meeting our customers' demands. It's another thing we don't have room to improve and continue to optimize precise completion, but we've done a really great job again, just definitely not Pfizer stock ratio.
Our reorder from an NPS perspective, I think that always remains an opportunity, but I'll defer to market.
Yes, as it relates to the NPS.
Pointed out in the past that one of the areas of improvement is indeed, that's product availability and specifically the size of availability.
You know what we've observed in the in the data.
Yesterday.
He is noticing a better position for us. So there. So that is so that's good but I can still.
Opportunities does it further expenses on that.
And then as it relates to your question around the top of the funnel marketing.
Last time spoke about are.
Basically our increased efforts on the brand's awareness side and so we are and continue to be testing and learning.
As it relates to the top of funnel marketing, how we you know.
I guess it's.
Different from from performance is a direct response marketing is how are the metrics there shaping up and how can we correlate that to a further downstream down the line revenues and.
That is it remains in progress we have some interesting approaches there that'd be our currently.
And are.
Proceeding with and so we feel overall that as well.
We were confident in switching.
More and more of them.
Basically if our marketing expense to sports that brand's awareness in order to accelerate that word of mouth marketing that.
We have grown historically with as well as to further improve the efficiency of our direct response.
Right.
Okay, and lastly, the gross margin and revenue comparisons from a modeling perspective get more challenging.
Just some thoughts around what gives you conviction that it sounds like you expect more markdowns given your commentary of Crystal.
Yeah. So we didn't experience that in Q1, where our markdowns and discounts were still kind of a historic low but just given the current macro backdrop are wanting to be conservative in terms of the balance of the year, we haven't experienced it yet, but that's not to say that we wouldn't.
But I don't want to add any color to that.
Yes, we just wont be overall, just cautious about it as Crystal said, where we're halfway through our largest quarter of the year things look good, but we want it to be.
Yeah, a little more cautious as other initiatives that are driving a good part of the back half.
I would also say that as our base of revenue growth gets bigger and that's reasonable to expect that the percentage overall will get smaller, but we still plan to put up some impressive comps for the balance of the year.
So that's regards.
Thanks Oliver.
Our next question comes from Brooke Roach with Goldman Sachs. Please go ahead.
Good afternoon, and thank you so much for taking our question.
And I was wondering if you could discuss the costing and inflationary pressures that youre seeing in a little bit more detail relative to what we were talking to a few months ago and then on pricing. It sounds like that's an opportunity for you can you discuss your plans to raise price. This year as a result of those inflationary cost pressures and how much is that pricing contributing to your topline.
With plan for the year. Thank you.
Thanks for them. So we think a pretty surgical approach to our pricing and I am your targets in general So as there has been cost increases we can and have taken prices up but on the flip side. We've also taking prices down and it's all driven based off of sell through an optimization with our customer and in areas, where we're trying to grow more strategically and take it more of a.
Our competitive position, we're not being as aggressive with those margins all of that factored into our guidance and what our expectations are as follows experienced so far year to date.
Thank you Andy inflationary.
I'm sorry.
Some color.
On the inflationary side its still in the single digit range.
Single digits.
The increases we're seeing but we also I would like to talk about the just costing we are facing but also we have opportunities.
Throughout our system to continue to optimize and so it's not like we have to turn around and say where do we find this.
These increases Crystal said, we'd go sort of surgically across the organization.
To.
To become more efficient to offset some of that and then what I was alluding to in the future is as you know we've talked about that the company hasn't necessarily rationalized.
Product purchases either.
Lots of opportunities for us.
In the coming years the back half.
Yeah.
The other piece to remember too is the 70% roughly 70% of our revenue is coming from reorder products, where our order volumes are growing and we're able to negotiate more aggressively from a price.
Its another beautiful part about our model.
Leverage as we grow.
Great. Thank you and then just a follow up on the brand them on time and the awareness that you have today, where do you see the biggest opportunity to move the needle on unaided brand awareness over the course of the next year and what customer cohort are you seeing the most of momentum among.
Among right now thank you.
We see momentum in both of the millennial as well as Gen C cohorts.
You also called out the last time, we spoke.
For example, it puts a lot of that.
Pennsylvania, just last year and that type of.
Messaging.
Really resonated very well with <unk> as well and so I would say that the focus.
So to say.
In.
In that sense from a runway perspective, I feel that we can have that.
Double.
Double benefit of increasing brand awareness, both of millennial as well as the Tennessee.
Yeah.
Brooklyn Me add some color to what Mark was saying so as you know we began to test.
As a company that was very strong very sophisticated even beyond our scale in performance marketing.
As we came closer to the I P O and knew that wasn't going to be an issue about new we have strategic opportunities to learn that bring our message out.
Mark and team started to work on ways to explore.
Building, our awareness to other vehicles beyond marketing, we have the sort of smaller tests, we did in Q3 and that combined with a number of things has given the team a lot more conviction to move in that space and that's gone from considering platforms.
Media approaches as well as restructuring the company and restructuring the organization around in April and that should be more powerful. So it's really we're still in very early innings with the effort, where we're really enthused by what we're seeing.
Great. Thank you I'll pass it on.
Thank you and just a reminder to ask a question press star one on your telephone keypad.
To remove yourself from the queue press star two.
Our next question comes from Dana Telsey with Telsey Advisory Group. Please go ahead hi.
Good afternoon, everyone. As you think about the consumer and the health of the consumer and what you're seeing in returns or markdowns. How does it differ from last year, and then with the manufacturing and product optimization are you, bringing goods into manufacturer closer to the U S. How does that change and how long how long would you say.
That takes you noticed to get where you want it to be kind of one follow up.
I would say from a consumer health perspective, it seems quite a lot of games, especially when you compare against last year.
Both new and repeat customers are engaging frequently they're spending more money with us and overall, we haven't seen any spread compression, but the opposite it's all up into the right and very positive for us so in that sense. This year compared to last year, we see.
Quite a lot of improvements across all of our customers.
From a production of good shifting from one location to another I would say that that's more in our vendors control of our systems our people.
And it's been fairly consistent and we haven't really seen any disruptions or delays and have been steady as she goes.
It's not over previous years so.
And that sensors, there's nothing new or interesting really to report on that side got it and then the a O V. At $133 is very impressive in terms of the increase.
Are you seeing that come from an increase in the play it from the price of the item are people buying more items, what's the change that you noticed there and what do you expect go forward.
But she is going to be balanced between pricing and lower markdowns and discounts of its not been heavily weighted one way or the other.
We would expect that trend to continuously.
Not seen any reactions, where we have taken prices, there's been little to no reaction from our customers.
No reason to believe that.
And we have seen an increase in our units.
Right. So when you think about big macro move.
Would they start to rebalance over time.
And then also with the growth.
The non events business.
What's different.
Yes.
Do something substantial news.
Paul.
Thank you.
Thank you. Our next question comes from Mark <unk> with Robert W. Baird. Please go ahead.
Thanks, Good afternoon, everyone I guess first crystal just to follow up on the EBITDA margin guidance.
I think you called out that you expect to see pressure in Q2 and Q3 year over year.
Given several factors.
Can we take away from that that you expect EBITDA margin to be up year over year in Q4.
Just trying to get a better sense of the seasonality, you're pointing us to with that commentary. Thanks, and then I have a follow up.
And so around Q2, and Q3 I wouldn't say pressure is how I would describe it it's more about us being opportunistic from a marketing investment perspective, there could be some operational inefficiencies as we're expanding our southern California facility, but it's more so around being opportunistic around taking our upside too.
More awareness marketing and driving more top of funnel as well as public company costs being you know fully burdened this year versus last year, which is.
I've got to be over four and a half million dollars. So it's more of those things versus anything operational.
Or.
Yeah.
Okay. That's helpful. Thanks and.
And then kind of a bigger picture question you know current momentum clearly excellent a lot of opportunity ahead, but curious if you could talk about your approach to the business in the scenario, where the macro consumer backdrop were to slow a bit.
How flexible can you be on costs, how do you think about it.
Managing costs versus investing behind the market share opportunity and just overall kind of the durability of a 10% EBITDA margin in a less robust sales environment. Thank you.
Yeah, I think that's the beauty of our merchandising model or we can say that really quickly and because we're such a deal.
You can find pretty early on I mean, we're in it every day and so there is.
If you look at our performance to code that you can see if you back out some of that noise from stock based comp adjustments and all that we actually have.
Relatively flat EBITDA dollars with a 33% lower revenue, we're just a highly variable cost driven business. So if we needed to flex up or down we thought a lot of ability to sell.
So we're certainly watching it we haven't experienced that are where we're keeping a close eye on it but.
Again, the way, we manage our inventory and allows us to be very very flexible.
And it's interesting for us Mark because we have the right now also all kinds of Crystal said up into the right. So we want to be smart about it.
Nimble, but this team rehearsed it in a very dramatic way during 2020.
Those are some things with them.
Good.
Thanks again.
Thank you. Our next question comes from Lorraine Hutchinson with Bank of America. Please go ahead. Thanks.
Thanks, Good afternoon.
I wanted to follow up on your comments around gross margin for the year Crystal you talked about some product gross margin expansion, but then also highlighted the risk of increased shipping and logistics higher return rates and then maybe introduce the potential resumption of some promotional activity in the second half. So I was just hoping.
As you step back your outlook for gross margin for the rest of the year.
Help you could give us on how all of these puts and takes combine.
That would be appreciated.
Yeah, So our guidance contemplates pressure from logistical costs, but from a margin perspective.
The level, we're not anticipating any sort of pressure there that would cause us to be.
Maybe it's less well regaining product margins.
That's from a logistical cost perspective, it's mostly being driven currently by fuel surcharges and you can see that in Q1 as well.
But that is comprehended in the us that is comprehended in the year.
Okay. Thank you very much.
Hey, Brian .
Thank you. Our next question comes from Oliver Chen with Cowen. Please go ahead.
Hi, Thanks, again, the loyalty program sounded quite powerful and flexible what should we know about the impact that may have to the to the financials and timing and implementation and then second on the.
Robotics and your D C.
Just would love some understanding of the impact that will have I imagine it will mean I'm getting packages faster and also rationalizing our labor as well. Thank you.
Yeah.
Thanks, Oliver as it relates to loyalty as I mentioned started in March so everything is still very fresh and we're looking at you know the first the first insight into our customers' behavior around this as we see positive.
So we have not specifically or the rest of 2022.
Escalated.
Extra benefits of that loyalty program and so from a.
From a process perspective, if you will and growing that throughout our program out it's really test and learn going forward.
Types of content.
Types of calls.
Yeah.
So if you really look at how we can build up the broken out is going.
As it relates to robotics.
There, we are fully up and running and from that perspective.
Line of sight as it relates to the productivity gains that we anticipated what we anticipate is that also came to fruition so in that sense.
Uh huh.
I would say checkmark.
So as usual there's always likes to.
So that is obviously contemplated in our guidance.
Yes.
It was really impressive to see how the team executed because as you know this time period is one of our big peaks.
See us installed new technology operational processes with those deadlines right in front of US. It was really terrific example of how the company executes.
Thanks for that and lastly, a product question weddings have been a key theme for a lot a lot of people.
What are your thoughts on what's ahead for that in terms of the trends that you're seeing and in the back orders indoor about longevity of that momentum.
And also as you think about that category are there any inventory characteristics. We should know about in terms of how you can test read and react.
So that category in particular, thank you.
I think given our current momentum there appears to be quite a lot of upside to continue chasing into that area. I think there are a lot of events that were postponed from the last couple of years that would that we are definitely capitalizing on.
Those are also products that tend to be less seasonal and lower risk from an inventory perspective was pretty healthy sell through rates. So in that sense I think there's opportunity that's fairly low risk to continue capitalizing on that is again the.
The dynamics of that business, it's high ticket for us, but also higher return.
In terms of the processing and handling of a D C.
That's sort of a natural loved in the air loved loose a lot of similarities we can play out.
Thank you very much.
Thank you there are no further questions at this time I'll turn it back to David Mccreight for closing remarks.
Well again, thank you all for your time. This evening as you can tell where we're thrilled with the direction of the business. When you think about us being just two quarters into being a public company. There are a lot of really good signs about the fundamental aspects of the strategy and the way. The team is executing and we were aware of what we read about in the press in terms of.
What's going on in the rest of the market and the general concerns and are keeping those behind us as we reissued guidance for the year. So look forward to talking to answer your questions for thank you.
Thank you. This concludes today's conference all parties may disconnect have a great day.