Q2 2022 Lulu's Fashion Lounge Holdings Inc Earnings Call
Good afternoon, and welcome to lose the second 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 Lewis. Thank you you may begin.
Good afternoon, everyone and thank you for joining us to discuss limited second quarter 2022 result before.
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 facts should be considered forward looking statements, including but not limited to statements regarding managements expectations plans.
Oh, jeez goals and objectives and their implementation our future expectations regarding financial results referenced as an outlook for the second half and year ending January one 'twenty two 'twenty three.
Market opportunity 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.
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 2nd 2022.
Filed with the SEC on March 31, 2022, all of which can be found on our website at investors that 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.
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 afternoon's press release and in our SEC filings.
Joining me on the call today are CEO , David Mccreight, our co president and CFO Crystal Lansing, and co President and CIO Marc Bloch.
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 joined today with my partners and co presidents marketing Crystal.
Before I speak about the quarter I wanted to thank the loop crew, who continue to do a tremendous job executing on our strategy and delighting our customers.
In this challenging macroeconomic period, we delivered year over year revenue growth of 27%.
At a healthy adjusted EBITDA margin rate of over 11%.
A true Testament to the power of our brand and strength of our business.
We feel our broader customer metrics continue to be exceptional at record levels for LDL.
Which reinforce our confidence in our longer term trajectory.
Our fresh fashion assortment is clearly resonating with our millennial and Gen Z brand.
And we're continuing to acquire new ones.
Our active customers increased by 53% year over year, which included a 22% gain in new customers as we continue to grow awareness.
Average order value increased 13% on a 12 month basis with double digit gains from both new and existing customers.
We believe these positive customer metrics demonstrate that L. P. L. U continues to occupy more space in her closet and take share from the broader apparel industry.
That being said after a very strong start to Q2 in.
In late May after our Q1 earnings call.
And like many others, we began to see volatility in traffic trends and conversion rates, which were likely driven by increasing macro pressures that impacted our customer spending behavior.
We saw a higher level of returns as well as shipping surcharges, which had a disproportionately negative impact on our EBITDA margins.
As a result of this change in consumer behavior, we are actively managing our inventory and discretionary expenses with a more cautious outlook because of the macro environment.
We view these challenges are temporary and have conviction in our long term opportunity for <unk>.
Can you be profitable growth.
Our business model is resilient and adaptable.
Let me remind you of the unique characteristics, which enable us to execute through these uncertain times for their consumer and achieve our goals for long term profitable growth.
First we have a very loyal and growing customer following.
Evidenced by strong trends amongst new and existing customers supported by our accessible price points and affordable luxury positioning which spans broad age and income levels across millennial and Gen Z.
Second we are not a fast fashion brand and unlike many in the apparel industry shifting demand does not necessarily mean obsolete inventory and excessive markdowns.
The majority of our inventory can be carried from one season to the next.
Also our data driven product development reduces risks so we're able to respond appropriately from an inventory perspective, when preferences do change.
Third we are a nimble cost structure and the largest components of our operating expenses specifically at marketing.
Tapping and product cost for the future.
So we're in a position to adjust our cost structure as needed for the future.
Four we believe we have amongst the fastest inventory turns in the industry.
Yeah, we have a capital light model with some months approaching negative working capital, which enables us to generate strong free cash flow.
Finally, we have a solid balance sheet as a result of our debt reduction and we believe we are well positioned to fund continued growth and navigate through evolving business conditions.
We are reiterating our updated guidance that was issued on July 28.
Please note contained within this guidance range, our investments necessary to focus on our larger mission future brand and company growth Adelphia I'll yeah.
And 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 key operational and analytical efforts to further support our continued growth as well as increasing customer insights and engagement.
I'll, let mark discuss some of those key initiatives in greater detail Mark.
Thank you David.
From an operations perspective, we have plenty of good news to report.
We opened our southern California facility at the end of last year and finished transitioning our receiving quality control and cross docking activities offender inbounds products in Q1 of 2022.
In Q2, we added network products replenishment activities to the mix.
First network replenishment will allow for further improvements to our algorithmic and data driven inventory allocation to the northern California in eastern Pennsylvania fulfillment centers.
Secondly, optimizing inventory allocations supports the reduction of our already low splits ship rates of customer orders.
And lastly, moving to a more just in time inventory replenishment of our fulfillment centers also improves the efficiency of those fulfillment centers as well as postpones the timing of the opening of the next fulfillment center.
We previously shared with you that we went live in early Q2 with robotics in our Eastern Pennsylvania Fulfillment Center, which is also our largest fulfillment center.
I'm happy to report that by the end of Q2, we consistently outperformed our internal efficiency goals at ROI calculations.
I'm extending my congratulations to our distribution center teams as well as our technology partners for a job well done.
We are now also planning to introduce robotics into our northern California fulfillment center for which Capex, but capex budget has been allocated in our full year 2022 guidance.
Switching now to our beloved customers.
We grew our active customers by 53% to $3.2 million for the 12 months ending July 32022.
Compared to $2 1 million active customers in the 12 months and it's July 4th 2021.
This record of inactive customers was boosted by high repeat rates of existing customers and strong new customer acquisition.
Yeah.
Second fiscal quarter of 2022 over a second fiscal quarter of 2021, a O V growth was driven by higher units per order at higher average unit retails net of discounts and markdowns.
Indicative of our customer being impacted by economic uncertainty average order frequency games early in the quarter, how we lost in the latter part of the quarter, resulting in a marginal increase in average order frequency in fiscal Q2 2022 over fiscal Q2 2021.
We see continued growth in our love rewards loyalty program, both in member counts as well as a percent of overall transacted revenue by our loyalty members.
Remember Seth redeem their loyalty offers also drove higher revenue with a higher purchase frequency than non life rewards customers.
Based on this first full fiscal quarter of our relaunch loyalty program, we look forward to delivering additional value to unlock rewards members through specific culture actions and perks.
Switching to the marketing landscape in fiscal Q2, we encountered negative impacts from the May 25th Google brought core algorithm update.
Due to critical taking a larger percentage of many of the overall search results page real estate with for example, more local results dictionary definitions and web stories.
Some of our rankings were also negatively impacted by Google, giving more preference to content websites and in combination with reduced search volume due to the overall macroeconomic environment at the end of Q2 loose in non branded keywords traffic was down compared to Q2 of 2000.
'twenty one.
Our search engine optimization team quickly responded to the readings from the core algorithm update.
<unk> and continues to make technical and contents adjustments and to date, we have seen consistent recovery and in many cases improvements in our average position rankings.
During Q2, the apparel space saw increased promotional activity.
Which leads to lose adding incremental promotions to our calendar to be competitive where needed.
Both new and repeat customers have responded favorably to the additional loose promotions.
So seeing downstream increases in brand equity across Genesee, hence millennial women as measured by volume of a branded searches and in our brands monitoring tools.
We also added new Influencer reporting tooling that provided additional insights with which we were able to increase our influencer driven earned media value over Q1, 2022, without increasing our ambassador counts or incremental budgets.
We plan to expand our influencer marketing team to support growth and Influencer counts and to drive continual ANV growth through the remainder of 2022.
Although our cost of customer acquisition through the end of the second fiscal quarter 2022 was slightly higher than the first fiscal half of 2021, we maintained a healthy first order contribution margin profitability.
Due to the strong repeat rates and purchasing of our existing customers. We also observed further improved higher lifetime values for each of the 2017 through 2021 cohorts positively impacting all cohorts LTV to CAC ratios.
And with that I'll hand, you over to Crystal Lamson co President and CFO , who will discuss the quarter in greater financial detail.
Thanks, Mark and good afternoon, everyone.
Well, we are not immune to the macro and industry wide challenges. We were pleased that we continue to post double digit topline growth saw strength across many of our key metrics and continue to be profitable.
During Q2, we grew our net revenue by 27% to 131 5 million or 27 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 second quarter.
Total orders increased by 29% and average order value increased 13% to $137, reflecting increases in both units per transaction as well as higher average unit retail net of markdowns and discounts.
We continue to be proud of our large and diverse community of loyal customers that are passionate about the loose brand at the end of Q2, we had $3 2 million active customers compared to 2.1 million active customers at the end of Q2, 2021 or 53% increase year over year.
This was up 250000 active customers compared to a 2022 first quarter ending active customer count of 3 million.
Year to date, we've added nearly 500000 brand fans to our active customer file compared to our year ending 2021 active customer file.
Offsetting these positives were higher than expected return rates above our expectations from earlier in the year.
In addition, Q2 typically has a higher penetration of event dresses and this merchandize category normally produces a higher level of returns.
Demand for event apparel continued throughout the quarter beyond the typical busy season for events driving return rates up further due to mix shifts towards higher return rate merchandise.
Despite the challenges in the quarter, our business model proved resilient and enabled us to continue generating profitability.
Margins for the second quarter fell about 380 basis points to 45, 8% driven primarily by two key factors the costs associated with elevated returns and second high fuel surcharges in excess of royalties imposed by our carrier partners and.
In aggregate, we estimate that these two variables hurt gross margins by roughly 300 basis points.
Moving down the P&L to give some insight into the expense line items.
Q2, selling and marketing expenses were $25 9 million up.
Up $10 8 million from the same period in the prior year as we increased our online marketing expenses to acquire new customers and retain existing customers.
We remain first order contribution margin profitable during the quarter in spite of elevated shipping and returns cost to.
This reinforces the value of our disciplined marketing approach in spite of the challenging macro factors.
General and administrative expenses amounted to $23 4 million for the quarter, an increase of $2 2 million compared to the prior year.
The increase was primarily due to 1.3 million higher variable labor costs, driven by the higher sales volume.
Variable labor as a percentage of net revenue leveraged about 30 basis points over last year as a result of the investments in our distribution network.
Moving on to equity based compensation compared to Q2 of 'twenty 'twenty. One when we were still a private company. We recognized an additional $1.2 million in expense in Q2, 2022 related to equity based awards put in place since our IPO.
The increase in G&A expenses also reflects a 1.4 million in incremental public company costs, which we did not have last year in Q2.
Partially offsetting these increases were lower fixed labor costs, driven by lower bonus expenses this year.
Interest expense fell by 3.5 million to $157000. The result of paying off our long term debt last year with proceeds from the IPO.
Our income tax provision increased by $1 5 million or 46% from Q2 2021.
This increase was primarily driven by a higher effective tax rate of 44% compared to last year.
For the quarter, we reported a diluted earnings per share of 15 cents compared to a diluted earnings per share of 28 tons in the second quarter of 2021.
And finally adjusted EBITDA for the second quarter was $14 8 million compared to $17 8 million in the same period in 2021.
Our Q2 adjusted EBITA margin was 11, 2% compared to 17, 2% in the same period in 2020 one.
Moving on to the balance sheet and cash flow statement.
Our balance sheet remains strong and positions us well to execute our long term growth plans and manage through near term macro uncertainty.
Similar to last quarter, one key change compared to last year to note on the balance sheet, we adopted accounting lease standard under ASC 842 at the beginning of fiscal 2022.
We ended the quarter with cash of $8 3 million and a balance of 15 million on our revolver.
Our inventory at quarter end amounted to about $48 6 million up 27 4 million from last year's levels.
As always we are leveraging our data to manage our inventory receipts with the ultimate goal of responding to customer demand.
As we have mentioned on previous calls we returning inventory to quickly last year and knew we needed to improve the customer experience with higher inventory levels. So that we could continue to delight our customer.
We are also potentially more vulnerable to supply chain disruption risks at those levels.
As of the end of Q2, all but approximately $5 million of the $27 4 million inventory growth was intentional to hedge against inflation and supply chain issues and to optimize size in stock to better service our customers.
We expect to be able to move through this $5 million in excess inventory efficiently and with targeted promotions.
We remain a very quick inventory turning company with industry leading turns.
As a reminder, our data driven buying model results in roughly 70% of our buys being proven sellers with lower markdown risk, where a fresh fashion concept not fast fashion, which means our inventory mostly consists of products that are relevant over many seasons. So we are less concerned with inventory obsolescence and ensuing markdown risk.
We continue to operate a highly capital efficient business that positions us to generate significant positive cash flow year.
Year to date, we generated over $10 5 million in cash flow from operations.
Moving onto guidance, we are reiterating the 2022 guidance, we issued on July 28.
We continue to expect net revenues of 440 million to $480 million as long as adjusted EBITDA of $35 million to $45 million.
Our adjusted EBITDA margin rate guidance continues to capture roughly $4 5 million of expected 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 Q4 of 2021.
Our guidance targets are for the full 2022 year that said to set expectations for modeling purposes in a normalized year. Our net revenue is typically highest in the second and third quarters due to the NAND seasonality for event dressing with our lowest revenue coming from the first and fourth quarters.
We'd also like to remind you that our quarterly adjusted EBITA margin rates have similar seasonality fluctuations of our net revenues 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 third quarter of this year compared to the second and third quarters of last year, primarily related to higher public company expenses incremental marketing investments 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 around 700000 for the year dramatically down from $12 8 million in 2020 one.
Stock based compensation for the quarter was down nearly 3 million from Q1, 2022 primarily due to any remaining stock compensation impacts associated with the completion of the IPO.
Stock based comp is expected to run approximately three three to $3 6 million for the quarter for remaining quarters of fiscal year 2022.
For 2022 we expect our weighted average fully diluted share count of $39 5 million shares.
This year's share count includes a full year of higher post IPO share count weighted across all four quarters.
Moving onto capital expenditures I'd like to reiterate the following investment areas. We are focusing on through the balance of the year to continue driving towards future growth.
Now that we've completed a successful robotics implementation and our east Coast fulfillment Center, we are moving forward with launching robotics in our northern California facility set to kick off in Q4 this year.
We're moving our photo studio to our southern California headquarters to get studio operations in the same location as our merchandising teams.
We also plan to continue improving our internal custom platforms to ensure that we maintain and improve our customer centric shopping experience and marketing personalization with investments in our customer experience data platforms and furthering customer insights.
Lastly, we plan to further invest in internal and external software and technology to enhance our operational efficiencies, including expanding fulfillment and other distribution capabilities and our new Southern California D C.
We continue to expect capital expenditures to amount to 4.5 to 6 million for the full 2022 fiscal year.
And with that I'll pass it back to David for closing remarks.
[laughter].
Thank you chrystal, we'd like to take a moment to thank each of you to look through our brand fans shareholders and board for their continued support as we continue down our path for future potential.
Now I'll turn it over to questions.
Thank you.
At this time well be conducting a question and answer session.
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We ask that you please limit to one question and one follow up.
Our first question comes from the line of Randy Connick with Jefferies. Please proceed with your question.
Hey, guys. Good afternoon. Good evening I just wanted this question might be first for crystal.
Crystal just thinking about the full year outlook and some of the trends you talked about are impacting the gross margin in the second quarter are around return rates and freight surcharges et cetera can you give us a little bit of perspective on how you're thinking about.
The trend around these items impacting gross margin and then trends impacting SG&A. So you can get a little more thought on how we should be thinking through trend lines in the you know the.
The back part of the year in terms of gross margin versus SG&A in terms of getting to the EBITDA margins. Thanks guys.
Sure.
So our guidance is contemplating kind of as we signaled in our previous calls that we're going to return to more of a normalized promotional markdown cadence kind of pre pandemic levels.
We also again as I alluded to have about $5 million of inventory that we think it's unnecessary security from a balanced perspective that may have a little bit of margin compression as we work through that also contemplated in the guidance, but as it relates to return rates. We've experienced some elevated return rates I think like others in our space and we are.
We're expecting that to continue throughout the rest of the year, although as mix shifts away from even dressing and more into kind of fall pre fall. We there may be some upside in guidance around essentially lower return rates as well, but the margin flow through or impact the margins closer to some of those effects are contemplated in our guidance already and even better.
Reiterating about it.
Yeah.
Gotcha, and then you know one thing that kind of continues to shine through on the income statement is obviously that you guys are profitable on even with the lower guide a little bit because the environment still nicely profitable. So I guess thinking through some of the other things that were talked about can you just elaborate a little bit more on some of the metrics around repeat rate.
Ah repeat purchase behavior that you were seeing and then maybe a little bit more elaboration on some of the I think you'd mentioned that the market Lisa mentioned the algorithm changes at Google I guess that impacting our marketing efficacy a little bit. So just wanted to get some color on you know how youre thinking about your marketing going for.
Or do you know combined with you know nice behavior around repeat purchase behavior repeat purchases because you know it looks like you know potentially we could be seeing a more of a stabilization from here around these even these look lower but still nicely profitable EBITDA margin level. So I'm just trying to get a kind of handle on where we are in.
That kind of margin cycle based on these.
These repeat purchases that are happening combined with some of the costs are going up on.
Marketing as it relates to marketing efficacy thanks, guys.
Sure. Thanks.
Thanks for that question.
We saw.
In Q2, very strong repeat rates of our customers existing customers as well as new customer acquisition.
Both cohorts.
For me.
Baskets in perspective.
You could use as well as their average pricing.
Where were higher.
That's what's good about it I mentioned that during the quarter, we saw the order frequency.
We're off a little bit so towards the end.
But in of itself it was a I would say healthy.
The quarter as it relates to those customer metrics. What we did see is indeed the at the end of May with the Google algorithm update which is happens you know multiple times per year.
Obviously dealing with that for multiple years. So it's yeah. So nothing nothing new other than this one sometimes it's positive sometimes.
So this time around negative for us initially require assistance who.
Let me take a reading on what is has been trending down what has been trending up.
It's been published.
Most other industries.
Some of the experts in publishing around that and from there on we started then adjusting our technical ico on patients as well as our content to basically work our way back.
Right.
That's what we've been doing since and.
Like I mentioned, we are in many cases, we have recovered or even.
The proofs basically.
See that more as a sort of a temporary dip in that.
Traffic.
And it's something that we're used to and specialized into to work with because we are in and we also should not forget that we are in the.
Fortunately the position that he.
Having been E comm for so long.
We are very strong and we have a very strong position also in heart.
Three our organic traffic.
So in that sense. It is important to the traffic mix, but when you have that.
The negative impacts of the traffic temporarily.
It has an impact on our marketing efficiency overall.
And so we certainly see that effect so going forwards.
Like I said.
Over in changes.
Positive or negative.
They can have an impact going forward, but yes.
Even out and that is also what our marketing approach is about is to assume.
To manage this not just on an individual channel or even campaign level, but also on an aggregate level make sure that we maintain that first order profitability.
During Q2.
Thanks.
And Randy from a modeling perspective, I just wanted to make it clear we're still going after growth. We don't have any reason to try to pull back on our longer term initiatives of course are watching all expenses as the choppy macro environment, but from an overall marketing spend perspective, we don't intend to try to cut there we're still looking to grow that that customer file. So I would expect consistency with what.
We've demonstrated.
From a marketing spend perspective or the back half of the year.
And.
Randy.
David here.
And following on on their comments the team.
Yes, we're really proud of how the look through altogether responded to the Google algorithm as Mark said.
Because we are so.
I should add that we initially felt it.
This is Mike.
That's really the dance.
Patrick.
The nice part is in the quarter back to the sort of margins EBITDA margins you referred to.
Yeah, absolutely we are our roots of being up scenario.
You talked about growing profitably as you called out and everything in our plan.
That being said remember, we do have some quarterly seasonality differences in our business.
You'll find that unlike most in the industry Q4 is our smallest quarter. So we ended up with quite a few of them.
Our fixed overhead and Patrick.
Our EBITDA margin registered.
Yeah, we typically don't participate in the digital marketing blood Bath, that's out there in Q4, either so we try that is efficient as possible. It's just not a big season for us. So it's not as necessary for I think that from that perspective, and then Martin losing proposition.
Great. Thanks, guys.
Okay.
Thank you. Our next question comes from the line of Oliver Chen with Cowen. Please proceed with your question.
Alright. Thank you very much on the second half as we think about gross margin will that continue to be impacted negatively by surcharges from freight and higher returns were also curious about July July has been a tougher month for many versus June .
However, you know towards the end of July things May have improved but just love your take on if you're seeing that kind of volatility and any read throughs.
And then mark on the Google broad core update some of the changes seem to be around video as well as you think about your marketing techniques and plans in your artificial intelligence are there new capabilities that you're working on in terms of broader changes you're making in what's your hypothesis for why.
Disadvantage deal. Thank you.
Hey, Oliver.
From a margins perspective as it relates to fuel surcharges in some of the other kind of external factors that have been affecting the business I think.
Our Crystal ball is one of the wealthiest people on the planet, but what we are contemplating in our guidance that we continue to see pressure specifically around holiday surcharges that may or may not be pass through from our carrier partners.
Volt to stay but our guidance is contemplated that that continues to be a headwind for us as it relates to overall gross margins from a merchandise perspective, we are typically higher in our surface or non events business in the second huh.
She is a less mature part of our business and so I'd expect lower margins than our run rates, but that's normal course, the breadth in terms of Q.
Q3 Q4.
As it relates to July and so far in the quarter.
We're taking a cautious approach I I think things are looking up but we wont be very careful about how we give guidance until the macro environment stabilizes. So that bad things are good but we expect it to continue to be choppy or at least the near term and have to defer to mark on the the Google question.
Yeah as it relates to the group.
Oh.
I think you were referring to the video of the six hour.
And next thing as well as web stories.
The juice we are.
Playing with that and seeing how we can benefit from that and that is.
Par for the course and that's what we'll do after each of these changes.
Her out what works and how does it contribute and how can we optimize that and whether that even is something that place longer term because.
Google might also change these are again.
Right Oliver as you may recall from the even from the pre IPO discussions.
We know and believe I'm quite confident that were very high performer and performance marketing side and based on resources, we had opportunity to grow.
Other muscles.
Built other neural pathways in the marketing side of the business and these kinds of changes from Google and Facebook do nothing but actually accelerate.
Stiffen, our resolve to make sure that that happens quickly and we're really happy with near term progress. The team has made and you can start to see that we were headed this way anyway, but it certainly did nothing but I just want to continue those efforts.
Thank you very much one quick follow up you have that students special in terms of getting 10% off what about back to school for Lulu is that a catalyst and how are you seeing the promotional environment manifest in terms of those around you because certainly some categories of apparel our over inventory.
And the industry. Thanks, a lot.
Hey, Oliver I'm, just just given our customer demographic I would say back to school is more so an opportunity for us from a college perspective, and more specifically from a home coming events and all the events related to severity rushes and that sort of thing and less so on the back or from high school.
And the graphic perspective, so it's it's not a big month.
Month for us, but it does it doesn't mean, we don't participate in it just some kind of a different fashion with our more college age demo.
And regarding the promotional environment.
So for us Fortunately.
Much of our product is season less are seasonal and so it doesn't it isn't a seasonal so we're not under the same kind of pressures.
But other apparel brands in the industry would be in terms of their brick and.
Mortar location cycling.
We're fully expect to leverage that and pursue a path of highest cost recovery on purchases that being said with inflation pressure. We think many many sectors are watching what theyre spending are seeing they spend less outside of the London market.
So we have reintroduced as crystal indicated several calls ago reentry plan to reintroduce small light consistent promotional messaging just to make sure our call to action is there and we expect to see that continue for the balance of the year.
Interesting.
For us, it's certainly engages certain subset goods for the customer quite nicely.
It also has an interesting impact on the need for marketing.
Because as you know like a promote.
Promotional activity not deep discounting, but life restaurant activity. Its first conversion, which then means we don't necessarily spend as much on the so theres, Mexico puts and takes there.
We expect that environment to continue.
And we expect it to be continued because our larger industry.
And so we think they.
Our brands perceived value will be under a little pressure.
And so we'll be doing that to sort of play in the game versus as a big clearance.
We expect that to continue through probably.
Ended the year certainly.
Thank you very helpful Best regards.
Thank you. Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.
Good afternoon, everyone. As you think about the southern California distribution Center that was opened at the end of last year and inventory levels with the completed the tender inbound product how should we be thinking about inventory levels going forward just in a position where it is now and then.
As we approach the holiday season, how are you thinking about inflation and pricing.
Merchandise and just lastly, any difference in terms of current trends of what categories are selling best are not performing as well. Thank you.
Okay.
So from an inventory level perspective, and we've been working as you guys know I'm working really hard to get our inventory levels up to better meet customer demand and optimize the size of the stock ratios and all of that to where we're finally at a place where we feel like we have enough inventory little bit to work through but generally we feel pretty good about our inventory levels, where they are now.
All.
That's going to flex up and down from where we are depending on which season, we're leading into and what are our estimated quarterly revenue targets are going to be going.
So I would say I would expect a stable if not slightly positive slightly negative inventory balance for the next several quarters had absent any not to change it up or down in consumer demand. So, but I think we're in a really good spot.
My name is pretty level perspective, and in Mark's team has done a great job of expanding the distribution centers to handle the flexes up and down.
Got it and then on pricing how are you thinking about price and go forward.
We don't think are pretty surgical approach to pricing and from an inflation perspective, where we're in kind of high single digit impact so far from an overall costing and so where we're looking at pricing on a daily basis at a SKU level set to optimize for what else doing what resonates with our customer and so in that sense, it's sort of business as usual.
Right.
And then categories that you've been experiencing.
So we've always been really well known for our event dressing in and we've been really pleased with how the team has performed in meeting demand and meeting our customer where she is for that particular demand, but that said, we've seen double digit growth across events non event uphill olive garden non event classes, specifically you've done a really good job of still getting.
What share of her closet in that regard so we flex, though within every quarter and whenever our customers telling us that she wants and so that inventory is going to flex up or down depending on the season and what are resonating with our customers, but it's difficult to predict one concern with that.
Dana as we continue to like we talked about earlier strategically about our path to grow the brand.
Truly a lifestyle brand, we're going to continue to work on more purchase occasions and see the assortment continues abroad rod.
And we're really pleased to see the performance across both events and none of that that being said, there certainly will be macro trends.
Events dressing the peak from a macro perspective salmonella.
You are selling and then there'll be other moments.
And the fashion cycle, where.
None of it will take off it starts with what we love is that diversification we're building.
So that's where while we're certainly certainly know and are very happy to be part of it.
The Vince brand and B sort of share of mine and the customer several years from now we want to be able to look at us and then not be able to one specific really count on this is that sort of lifestyle.
And as we make that headway and that'll be the true measure of our progress not just.
Yes.
Thank you.
Thank you. Our next question comes from the line of Edward <unk> with Piper Sandler. Please proceed with your question.
Hey, guys. Thanks for taking the questions. Two from me I guess first not to draw too fine a point on a couple of weeks, but you know as you look at your data how far they can different gas prices arent chicken fingers behavior and would you attribute some of the strength I guess you observed at the end of July due to lower gas prices and then as a broader question. We've heard some of your peers talk about.
<unk> being kind of higher efficacy overtime. Some tech talk you just said.
You see more eyeballs move to that channel you know how do you think your analytics and plasma positioned to take advantage of.
Thank you.
Yeah.
Yeah.
So from a gas prices perspective, I think for a subset of our customers at the lower household income level that is there's absolutely a direct relationship between how and when they engage with us and the price of gas. So as that comes down we can expect that particular cohort of our customers to spend more with us and engage more with us and we're already seeing early indications that are higher.
Household income customers seem to be so far less affected by that that's not to say they wouldn't be but so far so good in terms of that customer group.
Mark I'll take that question.
It takes off as a as an increasingly important to the channel as we've seen over the last several quarters and we have certainly invested.
On the content side, but also on the tooling side in order to further optimize that channel for us and we're very happy with what we're seeing and the progress that we're making the content that we're making we see that based upon the engagement.
It's better resonating with our customers.
Sure.
We're also continuing to expand in that context as well as tooling.
Tooling to better understand the landscape across all social channels as well as what our peers are doing and you know.
As a result for example, we have been able to.
So to increase our our earned media value. This is one of one of the Kpis that we're tracking.
Able to and we were able to increase.
Without necessarily spending more just becoming better at it better content.
And more efficient.
Yeah.
And we can give we could probably do.
We do a half a day on that platform.
Excellent.
Okay.
Chris.
Davidson.
Analytics.
Data, we get from a performance side and as we continue to develop in this space, we will see and learn other creative lines up with our customers' purchase behavior I noticed that some of the elements that everyone's focusing on how to resonate more and how that ties back to direct purchasing.
Thanks, so much.
Thank you. Our next question comes from the line of Mark All Swogger with Baird. Please proceed with your question.
Hi, Thanks for taking my question.
Was hoping you could just give a little bit more color on the shift that you are seeing in the macro or the shift you're seeing in the demand backdrop I guess, the the mix shift towards dresses and the expenses associated with that makes sense, but that's still sounds like a very highly engaged consumers. So I'm trying to I guess better square that with the fairly significant change in your <unk>.
Growth outlook for your for the back half of the year that you gave us with the pre announcement.
Yeah, I think it's more of a shift that we are potentially anticipating around that everyday wear than that she's using to build out or was it where the demand for that and maybe lower especially in that lower household income customer group that we have and really our guidance is more around just caution because the macro backdrop has been.
So choppy and there's there's these other factors like fuel surcharges.
I think supposed to issue, but you then continues to be a really great source of growth for us, but or most of our temporary guidance, it's really around that lessen the necessary less event driven product.
In the short term and thank you for the consumer they're going to make a tough choice of protection there.
Their event dressing, whether instagram or a moment unless it.
But again, we'll see how it plays out but that obviously.
Obviously, it's crystal said.
In terms of in the near term feels feels good.
I mean do you that as temporary.
And to that point I guess, maybe all of it.
Look at the back half kind of implies revenue down a little bit at the low end kind of up I think in the mid teens at the at the upper end some temporary factors, obviously weighing on trends, but just any updated thoughts on how you're thinking about kind of the medium term growth targets growth algorithm.
Just you know relative to the previous schools of over 20% on the top line.
Yeah.
Yeah Mark.
Based on the timing of when we had to give guidance.
At this time of the year isn't a huge time on an analogy.
Charter and of course watching the wind isn't blowing strong or not you get a clear sense of direction.
And so we want to make sure that we're doing as we continue to update you all as we gain more confidence in the outlook, but that's why we have a bigger bandwidth.
Yeah, we saw a broader range of outcomes.
And so you'll see us gain as we gain more conviction will share more and give you a better sense of how that region.
Yeah.
Great. Thank you.
Thank you. Our next question comes from the line of Noah was asking with Keybanc. Please proceed with your question.
Thanks for taking my question I was first I was hoping if you could give any color on just kind of the behavior you've seen from the consumer and how that may differ from the end of may to the end of July to.
Currently different income levels geography, any different behaviors, there and then second as we model out the rest of the year.
How should we think about <unk> as well as return rate. Thank you.
So from an LTV perspective, I would say building D builds across the quarters are fairly consistent but at a higher baseline. So if you were to look at in previous years I think.
That's how we're how we're modeling out from an <unk> perspective, and that really just captures the mix shift we've seen our customers are adding more heart and without of course higher returns, obviously and we are taking a conservative approach to our return rate model assuming that the elevated returns continue for the balance of the year.
And as it relates to the consumer behavior from May to July we did see higher returns that started coming in which typically follows.
And then quickly it is the right word, but negativity in the press and typically drive a higher return rate at least anecdotally where customers are feeling pressure from the macro environment. The fact that they may be returning later and returning more and it's difficult to say, where we are currently in the quarter, how that trend is going to continue but.
The elevated return rates for me into July as well as softer demand, especially from that lower household income customer.
Thank you.
Thank you. Our next question comes from the line of Brooke Roach with Goldman Sachs. Please proceed with your question.
Good afternoon, and thank you so much for taking our question David perhaps we can start off.
With a few comments on how you perceive the competitive environment against this choppy or macro have you seen any strategic strategic shifts with any of your competitors and any actions that you think need to necessitate a change in in lula's actions.
Hi, Brooks.
For the question.
So what we what we have.
A couple of things near term and then we expect some other things in sort of the mid term.
Near term you could definitely see a change in the spending environment online.
There are some people who are digital wasn't as core looked like they started to pull back from some spending on the performance side.
So that's just that's it's anecdotal as to looking and checking in on that we expect in the near term as we do and I alluded to this a little earlier, we expect it to be.
Social environment near term driven by the omni players or severe Astra fashion people, who may have been caught over their skis, a little bit with this abrupt change.
Tumor purchase behavior, so that where that impacts LVL. You is two things one we don't have to wrap up that way because the vast majority of our merchandise is not fashion forward.
These excuse them less or we can carry from one to the next two it'll probably caused us to reintroduce as we'd indicated earlier a little more targeted.
Targeted software promotions to make sure that.
Our perceived value of affordable luxury.
Bonds to everyone else's.
Getting pressure. So we think it's a good time to continue to gain customers.
I would have a probably a superior brand experience while the rest of the folks are focusing on getting inventory levels.
Yeah.
Thank you and then just maybe to follow up yeah. There was there's been a couple of references to the lower household income consumer reacting a little bit differently to different market stimuli.
Can you level set us on the importance of the lower household income consumer versus maybe the middle or higher household income consumer to your business and how are you adjusting your marketing strategies to each of those demographics as those demographic groups customer behavior has changed thank you.
We enjoy.
Customers from a broad range of income.
I was hoping it comes.
And I would say that there are.
Multiples.
Segments, there that'll Hartford that are important and so there's not a single one that's let's say dominates and so in that sense. When the lower household incomes into lower segment are showing earlier on we're showing some behavioral changes in the sense of.
Their order frequency started students is it.
Slowed down before other household income that's one of the.
One of the things that we were observing there studying of itself doesn't change our marketing approach where it hasn't thus far.
Because we believe that what we have seen that.
With for example in combination with the additional.
Strategic promotions that we added to our calendar is that we are still able to engage both of those segments are in an effective.
Yeah.
Thanks, So much I'll pass it on.
Thank you. Our next question comes from the line of Lorraine Hutchinson with Bank of America. Please proceed with your question.
Thank you good afternoon, I just wanted to get a sense of your strategy, if you're a consumer continues to struggle and chemo.
Chemo kills declined to protect margins or would you consider more aggressively ramping promotions and marketing to maintain the wholesale club.
[noise], sorry, Lorraine could you mind repeating your question, there's a little bit hard to hear.
Oh sure.
Sorry.
I just wanted to get a sense of your strategy. If the consumer continues to struggle would you bet sales declined to protect margins or would you consider ramping promotions and marketing more quickly to maintain that higher sales growth. Thank you.
I'm not sure if it actually at a point, yet where we would have to decide between the two but I think a lot of that is solved through our pricing strategy and just how we're able to connect sell through with pricing on something else.
Perspective, and we have a pretty broad assortment that can attract both oh offensive as a household income.
And so I don't know that we're in a position, where we really need to choose between elfa or profitability. At this point, we've got so much value proposition and our product I'm not I'm not sure if you know.
One of the key let me add on to that one of our key premises of our business.
Is all about profitable growth profitable customer acquisition and profitable growth and our forecast with kids, who need to go down that path. So we would toggle that sort of range with them on them as we have always in the past and we'll continue to do so it was crystal side, we don't foresee any issues there.
Really starting to drive that.
We don't have to discount beyond Crawford to not achieve profitability again.
And again, given our product mix, we wanted to stay fresh and current but you're not going to see us and tend to have massive.
Else to raise cash or to try to hit an artificial target. We're still early in our venture we believe me lots of untapped.
Potential.
Yeah that sort of late may customer sort of air pocket that came through came through we adjusted and get back, but we think it's a it's an adjustment to tweak these are sort of like.
Small dials on the radio to turn versus big dial.
At this stage for us so.
Because of our business model are really quick turn and as you can see what the customer loyalty, we're getting an attraction.
To do that in the past turn small knobs and dials, adding a few from us here and there where necessary.
To add the capabilities and marketing storytelling that we've talked about.
Thank you.
Thank you ladies and gentlemen, we have reached the end of our question and answer session. This does conclude today's conference and you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
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