Q3 2022 Lulu's Fashion Lounge Holdings Inc Earnings Call
[music].
Good afternoon, and welcome to live in the third 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 lately third quarter 2022 results.
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 leadership transition managements expectations plans and strategies.
With an objective than their implementation our future expectations regarding financial result.
References and outlook for the fourth quarter and year ending January one 'twenty, two 'twenty three market opportunities product launches and other initiatives and our growth.
These statements, which are subject to various risks uncertainties assumptions and other important factors.
And 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 2nd 2022 filed with the SEC on March 31, 2022, all of which can be found on our website at Investor day.
Lulu Dot com.
Any such forward looking statements represent managements estimates as of the date of this call.
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 our call today, our CEO , David Mccreight, our co president and CFO Crystal anthem, and co President and CIO Mark Paul.
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 by my partners and co President Mark and Crystal.
Before I speak about the quarter I wanted to thank the loot crew, who continue to do a tremendous job.
<unk> on our strategy and delighting, our millions of brands here.
First I want to spend a few minutes discussing the leadership transition announcement, we made this afternoon.
As announced effective March six 2023, I'll be transitioning from CEO to executive chairman of the board.
Crystal land them, our current CFO and co president will transition to the CEO role.
We plan to announce Crystal successor as CFO in early 2023.
Mark Voss Who's currently co president and CIO will become president and CIO.
This transition is the result of extensive internal discussion evaluation and planning to ensure a successful handoff to the next generation of leadership.
Several years ago I came out of retirement after a long and fulfilling career in the apparel and home industry to help we lose through their transition to the public market.
What drew me to lose with the potent combination of an emerging and profitable business model early stage growth potential as well with a talented leadership team with crystal and Mark being key components.
Since then together we work closely to position the company for success.
I'm proud of what we've accomplished over the past few years and have conviction the future is bright under the new leadership structure.
With a talented leadership team and long term vision in place as well as a strong balance sheet I feel now is the appropriate time for me to transition into the role of executive Chairman.
In this role I'll be tasked with the duties of board chair.
Providing guidance to the CEO and board during the transition.
Participating in investor relation and advancing our ESG roadmap.
I could not be more excited to see crystal will assume the role of CEO crystal.
Crystal has been a wonderful partner, who has consistently demonstrated that she can successfully lead lulu.
We continue to scale and develop the company.
Thanks, Crystal joined Lulu seven years ago excuse me. Many noteworthy contributions that have helped advance the company from a strategic operational and financial perspective.
Crystal has been instrumental in the development of our unique merchandising model implementing our long term growth strategy and managing numerous operating team.
Our deep understanding of the company the lose Brad and connectivity with the lucrative makes her uniquely qualified to take on this role.
Not only is she a proven executive who has helped shape our business model delivering profitable results.
On the cycle.
The leader, who embodies the luminous core values.
All voices.
All in all ways evolving.
And has the respect of key internal and external stakeholders.
Moving on to the quarter.
Despite this challenging macro economic period, we continue to deliver profitable financial results and records and key customer metrics.
Both of which are a testament to our brand and reinforce confidence in our long term brand trajectory and opportunities.
We generated revenues of $105 million and produced adjusted EBITDA of $5 4 million.
Our LTM active customer count continues to grow as this number increased 29% from last year to $3 2 million.
Average order value increased 6% on a 12 month basis with gains from both new and existing customers.
We believe these positive customer metrics demonstrate that LVL you continues to occupy more space in her closet.
Sure from the broader apparel industry over the past year.
Our fresh fashion assortment is clearly resonating with our millennial and Gen Z brand fans and we're continuing to acquire new ones.
That being said like others in the industry, we witnessed inconsistent consumer behavior during the quarter characterized by volatile traffic trends.
Bert.
Which are most likely due to macro pressures that are negatively impacting her desire to spend.
Similarly, we responded by increasing promotional activity.
Like others in the industry return levels remained elevated during the quarter, which also hurt our top line and had a disproportionately negative impact on adjusted EBITDA.
We continue to actively manage our inventory and discretionary expenses with a more cautious outlook because of the macroeconomic environment.
We view these challenges as part of a temporary economic cycle.
Vixen, and our long term opportunity for continued profitable growth.
As I've highlighted in the past our business model and brand a resilient and adaptable because they're supported by our affordable luxury brand promise.
Our focus on fresh not fast fashion.
Use of data to guide key decision.
Our capital light model.
Solid balance sheet.
Given the macroeconomic uncertainty we believe it is prudent to reduce our revenue and adjusted EBITDA guidance range.
We now expect revenues of $425 million to $440 million versus our prior forecast of 440 to 480 million.
Our new adjusted EBITDA forecast is 20 is in the range of $25 million to $31 million compared to our prior guidance of 35 to 45 million.
Captured in our guidance range, our investments necessary to focus on our larger mission of future brand and company growth Adelphia Yep.
And now I'd like to turn the call over to Mark for our co President and Chief Information Officer, Mark has been an important member of our leadership team and like Crystal has been a major contributor to building the business we have today.
He will provide an update on key operational and marketing efforts.
Further support our continued growth.
I'll, let mark discuss some of these key initiatives in greater detail Mark. Thank you David.
As we have reported previously 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 product replenishment activities to the next to allow for further improvements to our algorithmic and data driven inventory allocation.
Support further reductions who splits ship rates of customer orders and efficiency improvements of our fulfillment centers.
In Q3, we focused on testing fulfillment and returns processing from our southern California facility and we currently plan to go live with these additional activities by the end of Q4 of this year.
The addition of these activities in our southern California facility will enable us to serve our southwestern customers faster.
<unk> had a lower shipping cost.
From an automation perspective, the introduction of robotics into our Northern California fulfillment Center will cross into early next year.
And our eastern Pennsylvania fulfillment Center. We are currently implementing automation of call me back order packing, which in addition to efficiency gains will also reduce poly back material skus and therefore reduce waste.
Switching to the sales and marketing landscape.
During Q3, the apparel space. So further increased promotional activity, which led to lose adding incremental promotions to our calendar to be competitive where needed.
Both our new and repeat customers have responded favorably to the additional news promotions and we have also seen downstream further increases and loose brand equity and brand familiarity across both the GNC and millennial women as measured by our branch monitoring tools.
Our outlook is that the apparel and footwear verticals will remain highly promotional in the near term.
That means we will continue to take appropriate pricing and promotional actions to stimulate customer demands when needed.
And as with everything we do with loose, we will leverage our data analytics to inform our decisions around these promotional activities.
Our cost of customer acquisition through Q3 of 2022 was stable and comparable with previous quarters, and we maintained a healthy first order contribution margin profitability.
In Q3, 2022, looses Influencer driven share of earned media value increased compared to the peers we track.
We were at the end of August we also added additional team members and skills, our ability to connect with more creators talking about those and to continue to drive our earned media value output.
The macro environmental challenges for our customers likely resulting in less discretionary income and increased economic insecurity drove a slight deceleration in Q3, 2022 order frequency and increased return rates compared to Q3 of 2021.
We see similar changes across all household income segments.
We also see that all household income segments responds favorably to our promotions.
For new customers acquired in Q3, our event and cocktail dresses demands as a percent of total revenue slightly outpaced Q3 of 2021 with.
With strong year over year outperformance in our events dressing.
Administrative rules remain successful in attracting new customers with our affordable luxury events and growing out of dressing.
As we have highlighted is interesting as a gateway into the loose brands for many and these connections for with new customers should set us up for future success.
In Q3, the household income distribution of all active customers as well as newly acquired customers with similar to previous quarters and last year, which we see as a confirmation of our successful marketing efforts to generate bronc loose brand appeal across both GNC and its millennial women.
Across a wide income range.
We believe that in general the customer is more careful in what to spend money on and knows that there are good deals to be had across many retailers.
Oops remains a go to for events and going out dressing and our affordable luxury concept continues to resonate with both new and existing customers.
Despite the more volatile macro environment, we maintained good lines of sight on which performance marketing spend is working and for finding incremental value as a result of our robust data capabilities.
Our breadth of content continues to improve and resonates with GNC and millennial women.
We continue to scale up our Influencer marketing efforts reach and earned media value.
Noting an increase loose brands familiarity and equity.
And we'll go upcoming quarters will be tough to come from an active customer count perspective, as large growth quarters will drop off while macro pressures remain.
Loose maintains a strong position to gain share of our customers' closets.
I joined David Am I excited for Crystal assuming the role of Looses CEO in March of next year and I believe that loses future is in her most capable hands.
I will hand, it over to crystal for her to discuss the quarter in greater financial detail.
Thanks, Mark and good afternoon, everyone.
When he started out by saying how thrilled I am to be taking on the CEO role this coming March and having the privilege of holding the head of the Lukoil title. It's been an incredible seven years, so far and I'm very much looking forward to the next chapter and leading such an exceptional and dedicated loose team.
Difficult to describe with words like infection for our teams our customers and the brand. We've all built together, it's truly an honor to be chosen for this role and I look forward to collaborating with David as he steps into the executive chairman role.
Now jumping into the quarterly results, while we were not immune to the macro and industry wide challenges. We were pleased that we continue to post gains across many of our key consumer related metrics and remains profitable.
We continue to be proud of our large and diverse community of loyal customers that are passionate about.
And at the end of Q3, we had $3 2 million active customers compared to $2 5 million active customers at the end of Q3 in 2021 'twenty.
29% increase year over year.
While we benefited in Q3 from a combination of new customers acquired and continued loyalty from our existing customer base or net revenues decreased slightly to $105 3 million, representing a 1% or 1 million decrease over the same period in the prior year.
Total orders fell by 1% and average order value increased 6% to $133. The latter of which was primarily reflective of an increase in units per transaction.
Saw a slight increase in average unit retail net of markdowns and discounts in Q3 compared to the same period in the prior year.
Similar to Q2 this year, we continue to experience higher levels of returns in Q3 compared to the same period in the prior year and above our expectations from earlier in the year.
This is partly the result of the continued shift in sales mix into more formal wear event and special occasion dressing it typically drive higher rates of return.
In addition to the impact of this category mix shifts. We saw continued overall increases in return rates across most product categories compared to the same period in the prior year.
With industry wide trends for product returns behavior.
Gross margins for the third quarter fell about 560 basis points to 42, 1% driven primarily by two key factors.
Higher discounting of merchandize from promotional activities used to drive sales in an increasingly promotional and price sensitive environment.
And continued higher outbound and return shipping costs, both compared to the same period in the prior year.
The impact of higher markdowns and discounts to gross merchandise margin compared to last year with roughly 460 basis points.
As a reminder, in Q3 2021 we were sharing inventory. So quickly that there was very little room or need for promotional activity with our LCM inventory turns around nine times, we view the decline in Q3 merchandise margins compared to last year is partially a normalization back to our pre pandemic promotional activity.
And partially temporary pressure to remain competitive in an increasingly promotional environment.
The impact of markdowns and discounts to net revenue for Q3 of 2022 to Q3 of 2019 2022 compares 120 basis points favorably.
Also worth noting is our gains in the quarter and lose branded product sales as a percent of total unit sales coming in over 90% of our Q3 demand reinforcing our customers' preference for our proprietary lose brand.
Moving down the P&L to give some insights into expense line items.
Q3, selling and marketing expenses were $19 4 million down about 1 million from the same period in the prior year, primarily due to shifting some performance marketing spend up the P&L to support higher promotional levels during the quarter reflected in the increase in discounts captured in that revenue it's.
As Mark alluded to earlier, we remained first order contribution margin profitable during the quarter in spite of elevated promotions shipping and returns cost to us. This reinforces the value of our disciplined marketing approach in spite of the challenging macro factors.
General and administrative expenses amounted to $24 4 million for the quarter, an increase of $3 2 million compared to the prior year.
The increase was primarily due to higher equity based compensation expense of $1 7 million related to equity based awards put in place since our IPO in November of 2021.
And about 800000 in higher employee health benefits costs related to increased health care premiums posture from our carriers. These.
These costs were partially offset by lower variable costs, resulting from warehouse automation investments driving efficiencies with a nearly 50 basis point reduction in variable labor costs as a percent of net revenue compared to Q3 of 2021 as well as lower fixed labor costs due to a reduction in bonus expense this year.
Additionally, there was a 1.2 million increase in liability insurance costs and professional services, primarily driven by an increase in director and officers insurance premiums associated with being a public company expenses, we did not have last year in Q3.
Interest expense fell by $3 3 million or <unk> 91 per cent compared to 300000. This year. The result of paying off our long term debt last year with proceeds from the IPO.
Despite the challenges in the quarter, our business model proved resilient and enabled us to remain profitable.
For the quarter, we reported a diluted earnings per share of two cents compared to a diluted earnings per share of <unk> 13 cents in the third quarter of 2021.
And finally adjusted EBIT for the third quarter was $5 4 million compared to $11 9 million in the same period in 2021, our COO.
Q3, adjusted EBITDA margin was five 1% compared to 11, 2% in the same period in 2021.
Moving onto the balance sheet and cash flow statement.
We believe 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 the past several quarters, one key change compared to last year worth, noting as we adopted the accounting lease standard under ASC 842 at the beginning of fiscal 2022.
And offsetting assets and liabilities reflected on the balance sheet. This year that were not reported on the 2021 balance sheet.
We ended the quarter with cash of $12 5 million and a balance of $15 million drawn on our revolver for net debt of roughly two and a half million dollars.
Our inventory balance at quarter end was $49 4 million up 26 million from last year's levels and up 842000, or one 7% over Q2 of 2022.
As always we're leveraging our data to manage our inventory receipts with the ultimate goal of responding to customer demand.
As we've 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 customers.
Potentially more vulnerable to supply chain disruption risks at those historical levels and have been working toward slowing inventory turns to derisk, our sourcing exposure to China and ultimately improve the customer experience.
As at the end of Q3, I'll, let approximately 2 million of the $26 million of inventory value growth was intentional to hedge against inflation supply chain issues in an effort to optimize size in stocks and better service our customers.
We remain a very quick inventory turning company with what we believe are industry, leading turns as always we aim to be disciplined in our inventory management approach and we will continue to relentlessly pursue further optimization of inventory levels to optimize the customer experience and minimize markdown risk.
As a reminder, our data driven buying model results in roughly 70% of our buys being proven sellers with lower mark down risk, where he fresh fashion concepts not fast fashion.
Which means our inventory mostly consists of products that are relevant across seasons and in many cases for multiple years. So we're less exposed to 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 to date, we generated over $16 million in cash flow from operations.
Now moving onto guidance.
Inflationary headwinds continue to weigh on consumers and given macroeconomic uncertainties, we feel it's best to reduce our guidance range for the year.
We now expect net revenue to be between 425 million and $440 million, which.
Which represents between 13.1 and 17, 1% growth over 2021 that revenue.
Per our previous guidance range of $440 million and $480 million.
For adjusted EBITDA, we expect to be between 25 million and $31 million compared to our previous guidance range of between 35 million and $45 million.
As a reminder, in contrast to many other retailers Q4 typically represents the lowest revenue quarter of our fiscal year, we are not a gifting destination and typically do not participate proportionately in holiday peak season sales volume like others in the retail space.
As a result of the pay off of our long term debt facility immediately following the IPO, we expect interest expense to be around $1 million for the year dramatically down from $12 8 million in 2021.
Stock based compensation expense for the quarter was up 1.7 million from Q3, 2021 primarily due to employee and director stock grants made since our IPO stock.
Stock based compensation expense is expected to be approximately $3 6 million for Q4 of 2022.
For Q4, 'twenty two we expect our weighted average fully diluted share count of approximately 39 5 million shares.
Moving onto capital expenditures I'd like to reiterate the following investment areas, we were focusing on through the balance of the year and 'twenty 'twenty three to continue driving towards future growth.
Earlier this year, we completed the successful robotics implementation and our East Coast fulfillment Center, which has driven labor efficiencies. We are moving forward with launching robotics in our northern California facility with implementation plan for early 'twenty two 'twenty three.
In Q4, we will have completed the move of our creative studio to a location adjacent to our southern California buying office, which we anticipate will create greater efficiency and collaboration between our studio operations and 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 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 distribution Center.
We have narrowed our capital expenditure guidance range to amount to 5 million to $5 5 million for the full 2022 fiscal year.
This is primarily the result of recent capex projects, such as our studio relocation coming in below budget.
Along with a re prioritization of Q4 capital spend to focus on the areas that we believe will drive the most efficiencies.
In spite of the volatile macroeconomic backdrop and the challenges we will most likely continue to face our balance sheet and unique business model will allow us to continue to invest strategically to continue to recruit new customers and gain further efficiencies as we grow we will be able to benefit from economies of scale in the ordering process as well.
Operationally there are many low hanging fruit initiatives underway in the areas of shipping cost reduction that should benefit benefit us in the near term and mid term.
And with that I'll pass it back to David for closing remarks. Thank.
Thank you crystal we'd like to take a moment to thank each of you as well.
Look through our brand fans shareholders and board for their continued support as we continue to work towards executing on our strategy and the lighting of many customers.
With that we'll turn it over to questions now.
Thank you ladies and gentlemen at this time, we'll be conducting a question and answer session. If you'd like to ask a question you May press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
We request that you limit yourself to one question and one follow up so we may get to everybody's questions within the time.
Our first question comes from the line of Oliver Chen with Cowen. Please proceed with your question.
Alright, Thanks, and congrats David Crystal and Mark a.
Regarding the promotional environment, and we've really seen the increasingly promotional environment in terms of the industry at large.
It's happening going forward and how does that triangulate with your inventory youre up against the <unk>.
Compare where you didn't have enough inventory previously but.
How are you feeling about the nature of your inventory levels and what you've had to do with discounting there there will be factors outside of your control.
Follow up question is on performance marketing. Unfortunately on what we've been saying is this a higher rates of customer acquisition costs unless effectiveness with I D. S. A in iOS and lots of other changes.
Would love your color on what Youre seeing and how you're adapting to different factors. Thank you.
Hey, Oliver and thank you for the congratulations.
So as a result, we.
Regarding inventory, we had called out the spring summer than we had approximately say $5 million, what we termed as excess inventory.
And crystal and team have done a terrific job of working down that exposure.
Monitoring as we go forward, but I just want to remind the rest of the group is given that 70% of our revenue typically comes from reorder product.
Felt comfortable carrying over this spring summer inventory into next year, rather than sort of rather than flesh. It out for margin because it's not your typical fashion risk. So we think our inventory position continues to get sharper.
And we're seeing some good response to fall styles as well.
Mark I'll take the second part.
Hi, Oliver Yes, I mentioned in the prepared remarks, what we see is that our cost of acquisition remains a stable and so we don't see that upward trends that others have.
At least we don't see it yet and I would like to attribute that to.
Our basically our data driven nation nature of around the things that we do how we spent the money the insight that we have as to where it doesn't work and where does it not work and specifically from them.
Incremental or not a kudos to the marketing teams.
And therefore, our collaborations in order to achieve those so those flat relatively flat.
Cost of acquisition numbers, thus far.
Best regards.
Thank you.
Our next question comes from the line of Gerrick Green Block with Jefferies. Please proceed with your question.
Hi.
For taking my question and congrats to you Crystal.
Thank you.
I guess as we think about the promotional cadence and markdowns how are you thinking about this going into <unk>.
How does that compare to what you saw in <unk>.
Yeah. So there's certainly more promotional in the third quarter, especially compared to last year, just given our inventory positioning in Q3 of last year and how could they be returning there wasn't a lot of opportunity to actually utilize promotions.
Opportunistic about is our customers are responding well to it and we have data that indicates that there's a higher LTV for some of the customers we acquire through promotional activity.
And knowing that we have a lot of staying power with our inventory, we can certainly leverage that to be opportunistic and focused on customer acquisition. We expect Q4, just given the macro to continue to be a promotional environment will certainly participate in that but we wanted to take a more surgical approach and he has.
Optimized as possible as the as we worked through the quarter.
Yeah, I would like to say that's also historically Q4, we have not.
I.
I was going to say, we participate but not to the extreme in the bloodbath of Uh huh.
Our holiday promotions and advertising cost et cetera, we're very surgical in what we do and specifically also what we don't do.
As I called out I think what is important to remember is that once the data is showing us through Q3.
Is that we are and remain the go to for event and going out dressing and that are affordable luxury concept continues to resonate with both new and existing customers I spoke about the various income brackets and that they're all responding well to these promotions.
So in that sense, we feel that we're very well positioned in combination with our brands.
Ernest in their brands content and improvements that we're making there and the further reach to that we're having there. So all in all yes, it will be promotional and yes, we will do what it always does some of that as being a first order possible.
Okay.
Great makes sense I appreciate it.
And then just just looking back at three Q I Wonder if you could give some color on how the topline trends progressed throughout the quarter.
And how return rates trended as well.
Yeah, starting with return rates, we saw a similar trend in Q3 as we saw in Q2 part of that is just mix and that increasing demand in our formal and more event driven side of this.
It typically has higher return rates, but across the board we saw consistency across all product classes similar to other retailers in this space is spoken about return rates and it continues to be elevated.
And then the other in terms of.
Oh in terms sorry is it to address your question around how the quarter progressed July we were low single digit positive August a low double digit positive, but we started to see a deceleration into September they continued into October and so that's the rationale for our more conservative outlook for Q4, and just knowing that Q4 is our lowest order it.
Not a big play for us So we're just wanting to be.
As conservative as possible in that regard.
Understood. Thank you very much.
Oh.
Our next question comes from the line of Dana Telsey with Telsey Advisory. Please proceed with your question.
Hi, good afternoon, and congratulations Crystal and Mark and David Best of luck.
Wanted to touch on inventory progression, how youre thinking about inventory as we go through the fourth quarter and then into next year and then also on the robotics piece.
Overall as we think about next year is that going to become a margin enhancement tool going forward and then just lastly, with the September and October deceleration did sell turn negative then or what did you see thank you.
So as it relates to inventory as always it's business as usual, taking more of a data driven and methodical approach to managing our inventory balances and as it relates to Q4 and go forward. We wanted to take a very balanced approach to make sure that we're not overreacting or under reacting to the macro and really just said.
Testing based on our customer demand and where she's putting her money and where she's not and given our lead times were able to be pretty agile and derisking that way. So well, we do have elevated inventory levels, where were right, where we wanted to be from a total dollars in terms of our return calculations that we've spoken about in the past we think six to seven is a good place to be.
It allows for a slower turn it's low risk if the macro gets worse, but it also provides for upside should the macro getting better and our inventory and our positioning within that inventory is again, 70% reorder so lower risk for the long term.
Crystal said excuse me six to seven so you're talking about a complete inventory turns per year.
On an LTM basis, that's right right.
I'll defer to Mark for robotics, yeah, so as it relates to the robotics, thus far we where automation and more in general what we've seen in with Crystal reported two that was indeed.
Reduction in our.
Variable costs are there and so that is the objective.
That's the focus that we have and so with our four Q4 was very poor.
For next year, you were asking as it relates to how do we need to think about that.
Yes.
We continue down that stuff.
That path and we will seek those opportunities to further reduce those those variable cost or cost per units and we believe that we have in our roadmap in front of us which we can.
Realize those.
Small incremental benefits overtime.
Yeah.
Got it.
And then just any more color on the cadence of the quarter and what you saw on the changes.
No not beyond what a crystal had he mentioned.
Thank you.
This is a specific that wasn't.
Addressed yet.
Sorry, Dana do you mean as it relates to automation and robotics are more around our revenues.
On the revenue side itself. It all turned negative in September and October and any leveling out that you're saying.
Yes, certainly leveling out although I want to overlay that with some conservatism or it's been similar.
Similar to Q3, its been very choppy and and the swings up and down it makes for a more conservative outlook. So certainly yes, but again just I think reiterated in Q3, it's a very dynamic environments for wanting to take a cautious approach to how we manage and communicate about it.
And then just lastly, you had mentioned your own private label Lulu spend what are you seeing there in performance or percentage of sales that you expected to achieve thank you.
Yeah, I mean kudos to our merchandising team they've done a really great job growing our lose brand and our customers really connecting with it and we crossed over the 90% threshold this year in Q3.
With more than 90% of our product sales coming from the Luby's brand and actually saw more of a deceleration on the third party brands in favor of our own which is just a testament to the quality of our product and in our customers' appreciation for that quality. So really really proud of the team and what they did there.
Our next question comes from the line of Mark All Swagger with Robert W. Baird. Please proceed with your question.
Good afternoon. Thanks for taking my question. So you've mentioned it a few times that you know Q4 is unique for your business and maybe it's not the best period for us to extrapolate given the seasonality so with that in mind was hoping you could give us some high level thoughts on how youre planning top and bottom line growth.
Into 2023, and how you think about balancing growth versus protecting margins given this choppy and uncertain macro backdrop.
Hey, Mark Thanks for the question, David here or no.
For this back half we focused in on making sure we're not discounting full price great. Good. So we see great value in the spring some companies and brands to enforce a really purge inventories quickly to get into it we're very comfortable with the sort of quality of the inventory went up and what we expect as we exit the year into.
2023 is still too early for us.
Forgive any indicators for what we're going to be doing for 2023 still working through our budgeting process watching what goes on in season, I'm meeting with our board and reviewing a number of things. So we're not we're not going to signal right now in 2023.
Okay fair enough and just a follow up with respect to return rates.
They're still elevated relative to I think where you were in 2019, how much of that is structural versus cyclical and are there any actions you are planning with respect to your return policy going forward given the current backdrop for freight surcharges et cetera, and I think you alluded to some efficiency.
Initiatives with respect to returns as well if I heard that correctly can you maybe just expand on that and interest you know what what youre doing more broadly with respect to returns to protect the impact on your margins. Thank you.
Yeah, I would say given the trends over the last seven years as soon as I think it's safe to say that return rates are cyclical and also heavily dependent on which product classes are having their moment within a quarter within a year. It does seem industry why that everyone is struggling with higher return rates and just Lulu culture is seem to constantly look at.
Our process isn't always evolve and of course the returns policy is going to be a part of that rather not say details around what we're doing in looking into there, but I would say, it's certainly top of mind to make sure that our returns policy scales with our business model.
You might see changes in behavior, but we don't want to detail them just yet.
Thank you best of luck.
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 my question. My first question is about gross margins I was hoping that you could give us a little bit more context on how you're planning the fourth quarter split between gross margins and other cost items as you contemplate the pressure to adjusted EBITDA margin for the for the fourth quarter and for the year and then.
As you as you talk through some of those buckets, whether thats promotions returns freight expense or other drivers can you talk to what proportion of some of the pressures that you're seeing in the back half of the year that might persist into next year, and which pressures do you view as one time or transitory. Thank you.
So is it as it relates to gross margins for Q4 would I think our marketing team is really really good any fishing that is determining where the best pay off is between discounts to engage with customers and acquire new customers versus the performance marketing spend and we use them somewhat interchangeably.
You'd see in Q3, where we had lower selling and marketing expenses related to the quarter, but it is slightly negative net revenue was largely from a reallocation from how we're managing that marketing versus discounts then.
Q4, given how competitive the space is I would expect to see more allocations with discounts potentially but again our team is very dynamic and they adjust based on what the customer is asking this floor and what's going to bring to stop asking for a buck with a continued focus on contribution margin profitability and that's fully burdened considering all the incremental cost of that.
Well, it's hard to it's accessorial and all of the headwinds that everyone's been experiencing.
In Q4 margins of course from a comparable perspective, we returning over nine times last year.
Lower promotional activity, we're going to have a negative comparison from a gross margin perspective, especially including all the impact from the pass throughs from our logistics carriers.
Do you mind repeating the other part of me also jumping on that.
First of all and Martin Crystal feel free to jump in here as you asked about which of those factors will carryover versus one time.
I would think that and this is looking out knowing that some of our promotional activity to date has been driven by the competitive nature to get customers' attention right. Now I would think is the macro as other people in the industry right size their inventory at risk inventory I wouldnt be surprised if some of the promotional activity and pressure.
It comes down in the next half as they cycle through by the end of January and cleaner inventories.
Again, we don't have that same level of rescue inventory.
As it relates to some of the rates in SSO real charges, we would expect those to come down also.
So would I expect promotional activity to come down some from a competitive for you.
Fruit and others coming down because of the simple supply and demand consumer return behavior seems to be broad based from the industry and I think the industry will probably pivot some push.
We'll share more of that burden or create a higher hurdle for the customers in 2023.
Great. That's very helpful color one follow up question from it from a high level perspective, as you think about kind of branded customer relationship building them and I think Mark you talked about this in your prepared remarks. He said that you know some of the upcoming quarters you have a much tougher compare on your active customer count can you talk a little bit about how you.
See your growth algorithm long term playing out between advances in your customer count versus a O V and what initiatives you have in place to ensure that you continue to grow that customer count over time and capture market share. Thank you.
Yes sure Great question.
Yes, it takes a S I clarified to you coming off 2021 quarters.
First part of 2022 was high growth quarter. So obviously, it's going to be more tougher.
Tougher to do to compare against that doesn't mean that we cannot grow that but it's just gonna be harder.
And the way, we think about that is really in.
In the context of.
How do you how do you see that growth. It is in essence, it's about increasing that order frequency that is what our focus has and when it comes to our existing customers wherever we attract a new customer when can we get the customer to repeat and repeat again and so forth.
Not necessarily although we were not averse to increasing or the basket size of course, but I think overall the the order frequency as the key component there and you know and eastern women's where we've focused on where we are focused on and we'll be focused on or continues to be focused on.
Or for example is our loyalty program that will expand overtime.
Our app, which has a different relationship with our customers as well.
So to really make them.
The experience with our customers.
Rich that is.
And such that the customer is.
Once they come back and wants to be whether that is for the additional surface components where the.
The benefits that Theyre getting oh.
It's a well rounded portfolio of what we're focusing on.
Thank you very much I'll pass it on.
Our next question comes from the line of Noah <unk> with Keybanc capital markets. Please proceed with your question.
Hi, Thanks for taking my question I'm, just wondering if you could provide any color around any differences in COVID-19.
Tumor behavior you saw during the quarter have you seen any differences across income levels or geographies or trends largely moved in lockstep.
So what we've seen is that as essentially moved in lockstep.
Any differences that were feasible.
Queen household income tiers for example, so some tiers.
I'd say more more items per order those type of trends continued through Q3.
What we see what we've seen the changes. So for example from a from a we have a slight very slight.
Reduction in order frequency, we saw that across all the income Oh, you can bracket. So they're all moving essentially either change rates that is comparable what we actually when we think about that is we see that as a sign of that you know what we are doing is really.
Where we're at.
Attracting and are relevant for all customer income brackets. There is not one that jumps out where we don't see a shift to let's say a higher income breakfast with lower income brackets, it's really stable and in that sense. Our formula is.
It's working and it's successful.
Thank you.
Our next question comes from the line of Edward Your Roma with Piper Sandler. Please proceed with your question.
Hey, good evening guys. Thanks for taking the question Congrats David and Crystal. So I guess two quick ones for me.
First did you see a difference in performance between kind of special occasion, and I know, it's kind of a blurry line, but kind of more everyday clothing, and then as a follow up I know you had some pretty targeted comments on performance marketing any interesting anecdotes you can provide on tick tock. It seems like people are moving to that platform.
And kind of how are you performing there. Thank you.
Yeah. That's a good question. So we continue to be a destination for events and events.
The positive comps last year third quarter, and all of our events business, where we did struggle a little bit was more so on the everyday wherever she pulled doctors and some of them in that regard and so but what makes us feel good about the quarter in dense dresses are typically our gateway into trying new product I mean do you have to pull back on them every day in a separate it's a more casual.
Passion temporary just given the macro backdrop and she's really protecting her spend on those events. The life's moments that we are able to beautiful.
And then Ed on a couple of when once Vectoring and how youre doing with the generation you have to look at a number of different data points and Mark's team thought through a Harris poll that we've had the largest gain in <unk>.
And the authority ever bus.
We will search counsel are also supporting really good very high brand search volume for US This combination of <unk>.
Promotional activity in the.
And his team that works there.
It's more art.
And then on them.
We're looking for.
Watching searching.
Thank you.
Great. Thanks, so much.
Our next question comes from the line.
Whereas for our next question comes from Lorraine Hutchinson with Bank of America.
Please proceed with your question.
Thank you and good afternoon.
It's been a tough macro environment and if we assume that the choppiness continues over the next several quarters or are there any larger cost buckets or levers you can pull to continue to protect profitability.
Oh, absolutely yeah, we actually have a fairly high variable cost structure and I would say outside of our.
Fixed expenses around being a public company, we have a very highly variable cost structure and I want to point, everybody to 2020 and he'll reactionary. The team was with even need a 34% less than revenue, we still managed to pull through pretty comparable EBITDA. So in that sense. Our team is very very well conditioned to manage expenses, but where for US. We wanted to continue to be opportunistic and make sure that we're in.
Reserving growth and and not pulling back too far and just being realistic about expectation.
Yeah.
Well, we have a very clean balance sheet very nice compared to where we were a year ago. We're in a pretty good spot to continue to push for growth.
Thank you.
Thanks, Alright.
There are no further questions in the queue. This does conclude today's teleconference. Thank you for your participation you may disconnect. Your lines at this time and have a wonderful day.