Q1 2023 Lulu’s Fashion Lounge Holdings Inc Earnings Call

[music].

Three earnings conference call today.

Today's call is being recorded and we have allocated one hour.

Remarks, thank you and.

At this time I'd like to turn the call sense to me.

Hello, My Name's, Charles General Counsel and corporate Secretary <unk>. Thank you you may begin.

Good afternoon, everyone and thank you for joining us to discuss literally first quarter 2023 result.

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, but do not relate to matters of historical facts should be considered forward looking statements.

Noting but not limited to statements regarding management's expectations plan strategies goals and objectives and their implementation our expectations around the continued impacted the macroeconomic environment on our business our future expectations regarding financial result.

References to the year, ending December 31st 2023 market opportunities product launches and other initiatives and dark brown.

These statements, which are subject to various risks uncertainties assumptions and other important factors could cause our actual results performance or achievements to differ materially from results performance or achievements expressed or implied Betty statements.

Risks uncertainties and assumptions are detailed in this afternoon press release as well as our filings with the S. C C, including our annual report on Form 10-K for the fiscal year ended January 1st 2023 filed with the S. D. C. On March 14th 2023, all of which can be found on our website at investor Thoughtlessness Dot com.

Any such forward looking statements represent management's 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 our update any forward looking statements or information, except as required by law.

During our call today, we will also referenced certain non-GAAP financial information, including adjusted EBITDA.

Jested EBITDA margin net debt and free cash flow.

We use non-GAAP measures and some of our financial discussions as we believe they more accurately represent the true operational performance an underlying results of our business.

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 cats are.

non-GAAP measure may be different from non-GAAP measures used by other companies.

Joining me on the call today are are C. E O Crystal anthem are CFO Tiffany Smith.

Our president and C I O Mark boss and David create our executive Chairman.

Following are prepared remarks will open the call for your questions with that I'll turn the call over to Crystal.

Thank you Naomi and good afternoon, everyone. Thank you for joining us today.

Before I discuss the quarter I'd like to express my gratitude to our team and their relentless dedication to building our brand continuing to create value for our brand fans and our stakeholders.

We continue to make great progress on several key initiatives that we believe will benefit our brand longterm and despite the current macro challenges. We are able to do so given are healthy balance sheet and capital efficient cash flow positive business model.

Like many companies we are managing a diverse range of challenges from external factors. However, we view. These challenges is temporary and continue to the laser focus on our longterm growth initiatives, while managing expenses judiciously.

Jumping until the highlights from Q1.

Revenues amounted to 91 million, representing a 19% decline compared to Q1, 2022, and a 32 per cent increase compared to Q1 2021 and in line with our expectations heading into the corner.

Call, we face tough revenue comparison, as we were up against the 62% gain in Q1 last year due to pent up demand as our customer refresh your wardrobe and returned to her social calendar is COVID-19 related restrictions east, including an anomalous bike and weddings and wedding related events.

Our adjusted EBITDA was a breakeven versus 9.9 million last year.

Like others, we were impacted by the continuation of a challenging macro environment, which required us to be more promotional year over year, but.

But I would highlight the promotions for down sequentially Sims.

Similar to prior quarters, we chose to reallocate marketing spent into promotions as this was a more efficient use of capital.

For historical comparisons markdowns and discounts represented 13.4% of sales compared to Q1 2019 at 15.6% of sales. This underscores the value of our fresh fashion assortment and our data driven buying model and our ability to navigate a challenging and highly promotional macro environment.

Our balance sheet remains strong without any term loan that and we we believe that along with our capital light operating model position to swell to continue investing in longterm growth opportunities and navigate continued macro uncertainty.

Are active customer count increase year over year to 3.2 million up 6% from Q1 last year, demonstrating our customers brand loyalty, even during a challenging macro environment.

We began building out our product costing teams during the quarter to better leverage our buying scale with a few key higher starting over the last few months, which should result in substantial product margin benefits over the long term.

We also completed phase one of our international Replatforming initiatives during the quarter laying the groundwork for future investments in international growth or consumer insights indicate increasing international interest in the loose brand and we believe that setting the foundation for international growth now will allow us to continue to benefit from and to build on already.

[noise] strong demand signals.

We continue to realize the benefits of the recent move of our creative studio and location adjacent to our southern California by an office.

As a result of the stronger collaboration we've seen strong new product conversion that gives us confidence in our future reorder product pipeline.

We were particularly pleased with the games, we experienced some of our non occasion categories. These.

These games reinforce our conviction and the potential to occupy more space in her closet beyond the core occasion where categories.

Mm sweaters, outerwear, and where to work or especially strong during the quarter.

Performance on our dress category was consistent with expectations and we saw a particular strength in our non wedding related special occasion categories.

Our wedding related events product classes performed as expected with results in line with our projections that reflected tough comparisons with last year's exceptionally strong and extended wedding season.

For historical comparison, bridal fries needs day events and special occasion dresses net sales in Q1 2023.

Roughly 80 per cent to Q1 of 2021 and up 29% compared to Q1 of 2019.

An indication to us that we are gaining share in these categories and that lose remains the destination for our customers when shopping for these events.

As we look ahead to the rest of the year, we continued to explore new opportunities for growth to meet our customer aware and how she shops focusing on strategies that strengthen our digital channel is a key driver of our future success.

We remain committed to providing our customers with new ways to engage with our brand and our customer insights have shown that they are seeking out additional channels to connect with us.

We are confident that they will help us enhance our brands reputation the lighter customers in further support our digital platform.

Now that the first phase of our international Replatforming is complete we're gonna continue opt to optimize the customer experience. The further close the gap on the international website experience for customers with a goal to be more aligned with our domestic customer's experience. We believe this is a critical step towards expanding our global customer base and establishing ourselves as a.

Trusted brand in the international market.

After taking a break from in person Activations post Covid, we are taking a fresh new look at how to meet our customer where she is exploring additional channels to connect with her in real life through pop ups and other product led in person experiences.

We will continue to be opportunistic with wholesale partnerships that will fuel brand awareness in a profitable way and allow our customers to experience the quality and feel of our products, while leveraging existing infrastructure to expand reach in a capital efficient way and build synergy between digital and physical channels.

Consistent with everything we do it loose will follow a data driven test and learn capital late model in pursuing growth strategies, which is further supported by our strong balance sheet.

We look forward to updating you on our progress over the next several quarters as it relates to our growth initiatives.

We continue to move ahead with key infrastructure improvement as we position ourselves for future growth strategies.

We implemented further automation and or East coast distribution center and are launching robotics and one of our west coast distribution centres. This week driving further operational efficiencies cost savings and increasing employee morale.

We are reiterating our guidance for revenues of 410 millions of $430 million for the year as articulated previously or guidance reflects the need to maintain flexibility and product pricing to meet customer demand in the near term as well as maintaining investment in order to catalyze future growth and expansion of our brand across both digital and physics.

Will distribution channels.

We're also reiterating our guidance for our full year, adjusted EBITDA, which we expect will be between $23.1 million and 25.6 million.

Q2 quarters of date, we have seen sequential improvement in business for both revenue and margin trends and expect to see these transfer continue to improve throughout the quarter and the balance of the year.

So now I'd like to turn the call over to Mark Voss, Our 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 insight and engagement Mark.

Thank you Crystal.

Our customers in Q1 2023 shows similar patterns Q4, 2022, as it relates to year over year, new customer acquisition being strongest and a lower household income brackets.

<unk> customer segments were loses affordable luxury repositioning resonates well with her particularly.

Order frequencies.

<unk> quarter over quarter.

And I'll repeat customers marginally increased units first transactions compared to Q1 2022.

At the end of Q1 2023, we have 3.2 million active customers compared to 3.0 million customers at the end of Q1 2022.

Six per cent increase cure over here.

We are encouraged by our ability to retain customers in a more difficult macro economic environment, which confirms the strengths lose brands.

The affordable quality of our products.

And the effectiveness of the rules Brown dog.

From a marketing perspective, we continue to worth of strategy to shift a more of a marketing expense from direct response performance marketing to brand awareness marketing Wow.

While keeping overall marketing efficacy.

<unk> of a percent of revenue within our target is Rangers to remain first order contribution margin profitable.

This strategy reached to hire an unaided brand awareness, resulting in improved ability to introduce lose two more consumers.

Proof the efficiency of our marketing investments overall.

We have continued to expand investments and to improve efficiency Oh, four influencer Ambassador generated branch reach impressions, that's earned media value to support foolish as word of mouth marketing.

Based on our social media data, we have seen meaningful games and the rules share of force across multiple channels, which provide us with the confidence that we are on the rise gross baths.

Benefit loose in the future.

Kudos to our creative content brands and it's Mark new teams for delivering in unison. This forward breath momentum.

We see much growth potential ahead of us and we will continue to build out these programs.

Since with the tests and learn data driven approach use for everything you do.

With our ability to increase investments and topless a funnel and brand awareness marketing we've seen an increase in our Q1 2023 cost of new customer acquisition.

I believe that these investments.

Either non direct response nature will pay off over the next several quarters.

Through our branch tracking tools, we see confirmation of increases and lose this branch that familiarity and brand equity.

We are looking forward to continue investing and lose brand awareness it stimulates valuable word of mouth marketing.

Proof or overall marketing efficiency further.

To broaden the number of classes with loose products.

Fifth February we rent a life with a technology partner, who vastly improved the shopping experience for our international customers.

Or international customers can now shop in their local currency with in many cases import duties tariffs F taxes included in the pricing.

Or otherwise clearly communicated in their cars.

Accounts process.

Shoppers can pay with their local preferred payment method.

Our supporters and the checkout process and over 30 languages.

Early data indicates that removing friction for our international customers ask the potential to meaningfully improve conversion rates and the overall international opportunity.

Bringing that experience more in line with our domestic Lou shopping experience is the first step to <unk>.

Capitalized on the encouraging demand signals received from abroad.

We will continue to test and it arrived on improving be international shopping experience through exposed to lose brand hug abroad.

To improve search rankings.

Prudently tests due to influence or other paid occupations.

[noise] regions.

Myth March we rolled out an update through our returns policy.

Which was aimed at the counseling excessive and abusive return behavior, while continuing to support our free returns within a 10 day window for non abusive customers.

Relaunched the updated policy Q1, and thus far we have not seen a negative impacts from the returns policy change.

From an operational perspective, we have continued our drive to improve our operational efficiency and performance.

Eastern Pennsylvania distribution Center, we successfully introduced and launched outbound shipments packaging automation.

This packaging automation, not only increased efficiency and higher units throughput, but also reduce packaging material usage, which is beneficial for both waste reduction as well as cost reduction.

We will add it expands packaging automation within our other facilities.

This week, we also went life with robotics, and our Northern California distribution Center.

As I mentioned on the previous call, we have seen variable fulfill month's labor productivity gains of over 20 per cent in our eastern Pennsylvania facility and we aim to accomplish similar results in our Northern California distribution Center.

Thank you one we've also further diversifies, our outbound shipping carrier network, which allowed us to immediately offset some of your increases in all gung shipping costs by other carriers.

We believe this carrier diversification will also put us in a better position to mitigate the delivery reliability issues in the carrier networks as well as strengthen our position.

I would like to express my gratitude and complements to our operations data and engineering teams. We Q1 2023 as compared to Q1 2022 meaningfully reduce our costs per inbound and outbound to unit.

Through continuous improvement processes, better predictive modeling reduce cycle times.

Successful automation implementations well done.

So now I'll hand, it over to Tiffany Smith, who was as chief financial officer to deep dive into our financials.

Thanks, Mark and good afternoon, everyone.

As we've previously shared we face difficult comparisons to last year or net revenue in Q1, 22 inquiries, 62% as our customer refresh her wardrobe and fully returned to your social calendar.

In addition to the tough comps do you want twenty-three soften further in mid to late March, which we attribute to macro economic pressures five weeks into Q2 twenty-three we've observed improving demand trends was sequentially improving weekly year over year gross revenue comparisons.

During Q1 23, we noted a better than normal spelling season for fall and winter related products well through March coupled with a slower than normal start to our spring and summer related product sales that typically begin to build during Q1.

As a result of these factors, we decided to shift spending into promotions of discounts from marketing during Q1.

Combination of these factors impacted both our top line and margin results for coupons get the strength of our casual generative business enabled us to continue paying down our revolver and generate that cash provided by operating activities of $3.7 million in free cash flow of $2.6 million for.

The quarter.

With respect to the first quarter results are.

Net revenue of $91 million was down 19% year over year in line with our expectations of year over year comparisons and the negative mid to high teens.

Compared to the first quarter of 2021 that revenue grew by approximately 32 per cent.

Compared to the prior year period total orders decreased by 14 per cent, an average order value decreased 3% to $129.

Gross margin for the first quarter declined by about 560 basis points from Q1, 22 to 41.7 per cent, but improved sequentially by 440 basis points <unk>.

Compared to Q1 twenty-two gross margin declined primarily as a result of several factors.

Higher markdowns and discounts product costs as well as continued higher shipping costs.

The impact of higher Mark down to discounts to gross merchandise margin compared to last year was roughly 310 basis points.

The impact of higher shipping costs compared to last year was roughly 190 basis points, which included the impact of fuel surcharges that were less elevated in Q1, 20th of 2022, and finally 60 basis points of depreciation cost allocations related to our distribution centers.

On a positive note we have already seen a sequential improvement as a result of our carrier diversification actions implemented mid corner.

Which we expect to drive meaningful seven figures savings and is contemplated in our guidance for the year.

Moving down the Pee it out to give some insights into an expense line items.

Given that Q1 22 was a remarkable quarter with unusually high pent up demand related to weddings and wedding related events. The following comparisons will include stomach expense ratio comparisons against Q1 21 is a more normalized period.

Do you want twenty-three selling and marketing expenses were $19.5 million <unk> about $2.4 million from Q1 22. This was partially due to shifting some performance marketing spend into discounts Ah component of <unk> net revenue as we have done in the past.

That impact of our discounts and selling and marketing expenses and combination as a percentage of that revenue was approximately 120 basis points above the Q1 21 level, which we believe is reasonable given the current macroeconomic pressures in Q1 23.

General administrative expenses fell by about $3.5 million to $24.3 million relative to Q1, 22, driven by lower variable labor costs and lower stock based compensation expenses.

We are pleased with the resilience that are highly variable cost structure offers us our general and administrative expenses for the quarter adjusted for stock based compensation and public company costs as a percentage of net revenue, where approximately 100 basis points above Q1, 21 levels driven primarily by parts of our cost struck.

Sure that are characterized by higher fixed headcount and payroll costs that do not decline commensurately with declines of net revenue.

Interest expense for the quarter amounted to $500000 versus $208000 in Q1 of 22.

For the quarter, we reported a loss per share a 14 cents, which is a decrease of 19 cents compared to earnings per share of five cents in the first quarter of 2022.

And finally, adjusted EBITDA for the first quarter with breakeven compared to positive adjusted EBITDA of $9.9 million in the same period in 2022.

R. Q, an adjusted EBITDA margin was zero percent compared to a positive 8.9% in the same period of 22.

Our ability to generate $3.7 million in cash from operations in 2.6 million and free cash flow is indicative of the cash flow generation opportunities inherent in our business model.

We believe our balance sheet remains strong and positions as well to execute our longterm growth plans and managed through near term macro uncertainty.

We ended the quarter with cash of about $8 million and a balance of $20 million drawn on our revolver, resulting in that that are roughly $12 million we.

We repeat $5 million of the revolver during the first quarter and our plan remains to pay the remaining outstanding balance on a revolver by year end.

In light of recent disruptions in the banking industry. We wanted to again highlight that we maintain our corporate banking relationship with bank of America.

Our inventory balance at quarter end with $52 million up about $10 million from the same period last year and up $9 million on a sequential basis. Much of this growth was planned an intentional to better support our fast turning model.

Also our inventory balances are typically at their highest levels in Q1 in preparation for our peak spring and summer selling season.

With respect to the year over year growth in inventory. We had previously indicated that Q1 22 inventory was turning over eight times on an L. T M basis, and that we needed to chase more inventory better serve our customers and to help insulate us from supply chain risk specifically from China.

During the first quarter, we saw our sales growth to inventory grilled spread improved by approximately 60 basis points from Q4, 22, indicating that our inventories are becoming better align with our sales.

We expect <unk> to be the last quarter with both positive inventory growth and negative sales comparisons.

With the improved sales trends observed in the first five weeks of Q2, we have already seen a 2 million dollar decline in inventory levels. Since the end of Q1, which gives us confidence that we'll be able to align our inventories in a productive brand appropriate and margin accretive manner.

We expect our inventory levels to declines sequentially as well as your over here by the end of Q2 with further normalization of sales and inventory trends extending into the back half of the year.

On an annual basis, we feel a target ear and inventory balance in the mid 30 million dollar range is reasonable and achievable dependent on our continued sales trajectory.

As we've highlighted before we are a quick inventory attorney brand with what we believe our industry leading turns.

While that remains true, we do anticipate or L. T. M inventory turns this year to be slower than our ideal range of six to seven turns per ears as sales and inventory trends continue to normalize while still prioritizing improving margin results.

We are not a fast fashion company, but instead, a fresh fashion concept <unk>.

Proximately half of our inventory assortment of season list and can carry from one season to two next and be sold year round and the remainder is multi season, which can be brought back year after year.

This gives us confidence in our ability to move through current inventory levels in a way that minimizes markdowns further gross margin risks and ultimately preserves friend integrity.

As always we aim to be disciplined in our inventory management approach and will continue to relentlessly pursue further optimization of inventory levels the balances the customer experience and Minimises markdown risk.

The final point about inventory is that our data driven by model results in roughly 70% of our buys being proven sellers with lower mark down risk.

We were encouraged to see our new styles during the quarter, resonate, particularly well, which fuels and strengthen our future reorder pipeline.

Moving onto guidance, we continue to expect 2023 full year net revenues between 410 million and 430 million, we observed positive signals five weeks into Q2 with sequentially improving year over year gross revenue comparison.

Note that April 2022 year over year net revenue was up 43%, which was a high mark and Q2 22, so comparisons should improve.

We are further encouraged that demand has improved in the first five weeks of the quarter without the assistance of significant promotions are discounting yielding higher merchandise margins.

While we remain confident in our net revenue guidance range for the year are full year net revenue is pacing to the lower end of the guidance range given the softness observed and cute one sales any slower start to our peak spring selling season.

And do you think about modeling revenue for our business in a normalised year. Our net revenue is typically highest in our second and third fiscal quarters due to demand seasonality for event dressing too.

Q for typically represents our lowest net revenue and profit quarter of the fiscal year as we are not a gifting destination and typically do not participate proportionately in holiday peak season sales volume like other retailers in our space.

This year, we expect Q for net revenue to be moderately higher than coupon.

As it relates to 2023 first half comparisons. Please keep in mind that Q1, and Q2 last year reflected 62 per cent and 27% year over year that revenue growth respectively. As those quarters benefited from pent up demand as our customer refresh your wardrobe and returned to her social calendar.

<unk> our guidance contemplates that we expect a second quarter to continue with negative that revenue comps moving into flat to positive comps in the second half of 2023 and.

In addition to easing comparisons our confidence in our guidance is supported by the strong performance of new products that have tested well in recent months. As a reminder are data driven by model means that roughly 70 per cent of our buys are proven sellers.

We continue to forecast full year, adjusted EBITDA between $23.1 million and $25.6 million. This equates to an adjusted EBITDA margin of between 5.6 per cent and six per cent are adjusted EBITDA guidance captures incremental investments in support of longer term initiatives.

Including broadening distribution and expanding in person activations.

Upsetting these investments are expectations of moderating transportation related costs as a result of easier fuel surcharge comparisons and the latter part of the year, coupled with our proactive carrier diversification actions.

Is that expectations for modeling purposes, or quarterly adjusted EBITDA margin rates have similar seasonality fluctuations as our net revenues and will likely fluctuate above or below our full year guidance right depending on the corner.

As a result of paying down our longterm that following the I P. O. We continue to expect modest levels of interest for 2023, approximately $1.1 million in line with 20 twenty-two driven by a lower outstanding balance on our revolving line of credit partially offset by higher interest rates.

As of today, we have $50 million drawn on our 50 billion dollar revolver, we plan to pay off our revolver by the end of 2023.

Stock based compensation expense for the quarter was down $1 million from Q1 of 2022, we continue to forecast stock based compensation expense of approximately $16 million to $19 million and 2023 or 20.

2023, we expect a weighted average fully diluted share count of approximately 40 million shares.

Moving onto capital expenditures are plan remains invested between 5 million and $6 million for the year or.

We're focused on setting the stage for future growth opportunities enhancing the customer experience and driving further operating efficiencies for 2023, we will continue to invest in distribution center automation and robotics capabilities, which are expected to drive further labor efficiencies.

And with that I'll pass it back to Crystal for closing remarks.

Thank you Tiffany you'd like to take a moment to thank each of you. The Loo crew are brand fans shareholders and our board for their continued support as we continue to work towards executing our longterm strategy and the lighting our customers.

With that I'll turn it over to questions now.

Thank you.

Give me a question and answer session to ask a question you May press star one on your Touchtone phone.

If you're using a speaker phone please pick up your handset before pressing the keys.

To withdraw your question. Please press Star then too.

We ask that you please limit yourself to one question one follow up.

At this time that we would pause momentarily to assemble our roster.

And the first question that will be from you.

<unk> from Piper Sandler. Please go ahead.

[noise] Hey, guys. Thanks, very much for taking my question I guess first on the improvement in the <unk> today, you know it it seems like a fairly sharp V. I'm trying to understand you know as you look at I was at the backup perfectly well documented in March but kind of what what's maybe changed have you seen a difference in kind of what.

The consumers buying and then I guess, there's you kind of think about the back half of the year you assume that when you talked about kind of someone's cochran's or second you assume that macro improved from here are kind of what assumptions are embedded in that guide. Thank you.

Hi, <unk>. This is Tiffany I'll take your question. So the I would just maybe caveat that what we've seen so far trend wise and Q2 is not necessarily a sharp V improvement more of the soft upward turn of the curve I would say, but it has been noticeable week over week <unk>.

<unk> and demand and you know I think we've.

Chalked up some of the things that we saw in Q1, two a slower turn on of our spring and summer.

Merchandise sales and really a longer more pronounced selling period for our fall winter product and so you know, we're not meteorologist or or anything of that nature. So not pointing the finger at weather, but just it it was a more pronounce fall winter selling season that went longer through.

Q1 than what we've ever seen him in so that definitely picked up as we moved into the second quarter Uhm. So that's been an encouraging sign that we've seen continued to improve our normal peak season is you know is is this time of year and so we're we're sort of riding riding this wave here through through the second <unk>.

Order, we have not seen worsening trends in back they're improving week over a week. The other part of that that all day aside from the man, we've actually seen we were able to.

Scale back the level of promotions in the second quarter compared to where we were pacing uhm toward a lot of couponing and much of March we were highly promotional so we pulled back and that hasn't had a negative detriment on demand and in fact has had a positive outcome on margins uhm so far.

Pleased with what we've seen but if not maybe not a dramatic upturn, but it certainly noticeable for US and then I think was there one more question there okay Oh.

Zero.

<unk> yeah in terms of guidance, we still view. This is a very choppy macroeconomic environment or guidance contemplate that we don't we don't view, what we're going through right now in terms of.

Uhm improvement in in trying to is necessarily the macro effect is is done and and not affecting us for the rest of the year. We're expecting you know there could still be ups and downs throughout the year, our guidance contemplate that for the full year and and that's it.

Where is still very much viewing it as a choppy environment.

Yeah, and then the <unk>.

One more one more point as as we've talked about before the cops do he's up for us as we move through the back half of May in in towards the end of Q2 and into the rest of the year.

Got it thank you.

Okay.

And the next question will be from Brooke wrote from Goldman Sachs. Please go ahead.

Hi, good afternoon. Thank you for taking a question.

I was wondering if you could provide some additional context on the and quantification of the increase in customer acquisition costs that you saw in the quarter and your outlook for that for the rest of the year and then perhaps secondly can you help us understand the confidence and conviction you have any sequential margin improvement that's embedded in the full your outlook.

And help us understand what's getting better what's getting worse and how does this look relative to last quarter. When you. When you spoke to US last thank you.

I broke this is mark I'm all good.

Talk about the customer customer acquisition costs.

We have not given specific numbers.

Recently, but I have always spoken about how are these cost training and basically in Q1 of his here because we were essentially focusing more.

On that and I hope your ability as well to to to invest more on the brand awareness suicides, coupled with a funnel marketing then of course by nature of that type of investment.

The cost of the customer acquisition will also go up but at the same time that because what we've seen in the market in general and how things were trembling and I'll lose is a physician there specifically from a share of voice and how will we see our engagement matrix as well that gives us also.

The believes that the past that we are on is solid and that we are continuing got shifts.

That's what I've spoken about in the past right that'd be Wanna move more dollars from the performance marketing Spence into that brand awareness for the longer term play the longer term increase whose brand awareness.

And growing the amount of <unk> products are are present, so from that perspective.

<unk> happy, but I didn't want to call out that the you know the cost of obviously I went upgraded in comparison to.

<unk> Q1 2022.

And Uhm broke I'll cover the margin question for you. We we do have some confidence in in the margin improvement through the rest of the year really three main factors. There. One is as we've already seen heading into Q2, we've seen our customer be responsive to full price.

And being less promotional in general the word so that trend continue that one is certainly be a <unk> a positive margin factor for.

There's also areas, where we expect them to proactively improve margin component product costing us one that we've talked about on prior called we started to make investments there in terms of staffing a team towards the end of two one and into Q2 to really support.

Ah Ah Ah stare with with taking sharper pencils to our product costing and working closely with our vendors to develop that now that's something that will likely not pan out til probably later in the year. So I wouldn't necessarily anticipate that to have immediate impact, but that's an area, where we're investing uhm and.

It's a big focus for US and then lastly, we do include shipping costs in our gross margin. So shipping cost is one where there'll be a little bit of moderating year over year impact we start to uhm calm be escalated fuel surcharges that were implemented.

Last year.

You know kind of following the the Ukraine War and everything the surcharges bumped up uhm. So we'll start to calm the surcharges at the higher rate here, you know pretty much in Q2, and then we're also taking proactive measures ourselves around carrier diversification, we spoke to that that we started to uhm.

Move forward on some of that during the first quarter already seeing some benefits there additional actions there will will continue to benefit our margin throughout the year.

Thank you I'll pass it on.

And the next question is from Jonah Kim from T V. Cowan. Please go ahead.

Thank you for taking my question I'm, just curious on the at the customer behavior across different income brackets are you seeing any more pullback or softness during the quarter from certain income.

<unk> group than others and just if you can give any color on the new customers acquired during the quarter wasn't more through promotions or full price and you know sort of how do you plan to retain those customers. Thank you very much.

Hi, Jonah Thank you for for your questions.

So as it relates to from an income bracket perspective, <unk> are affordable luxury repositioning offers and serves essentially a very broad group of for over income brackets.

And from what we've seen in the first quarter was similar to last quarter to 224, 2022 is where we were actually very delighted to see that the let's say the middle to lower income brackets were from a new customer acquisition prospective for doing doing <unk>.

Comparatively speaking to the their quarter.

A year over year as well and so that really <unk> you know it would be for us as it relates to our affordable luxury concepts and how that is resonating and then S. As it relates to the new customers. We were you know we we offer offered a variety of promotions in Q1 I would not <unk>.

To characterize that it was truly the promotions that works with driving new customer acquisition that is always a mix San Jose. So there are certainly those February three by lose or try this out for the first time as a result of the promotion, but I would also say that you know in general our collective <unk>.

Marketing and also our performance marketing or driving a dot Gov customer acquisition and don't forget that word of mouth is one of the strongest.

<unk> for for loose the family in France.

Is is a critical components and that's as well as what we do what we see ofer Yeah I.

That hasn't changed is that oftentimes.

New customers to a drawing to lose a family with you know <unk>.

<unk> for you is and where or or dressers and from there on we we build out that relationship with our customer I'm not just through our loyalty program, but also just by exposing in introducing the other categories, but the offer.

Respect if no <unk> <unk> and also give her more opportunities are more yeah opportunities to do survivor was products.

Got it thank you so much.

Again, if you have a question please press star one.

The next question is from <unk> from Bank of America. Please go ahead.

Hi, Thanks for taking my question I'm following up on the gross margin details can you give more quantifications of what you expect for each component just as we go through the year and whether it's mark down levels lapping of higher freight surcharges and higher return rates offset by.

The carrier diversification efforts, you know what what could be a tailwind what might still be in incremental headwind you know how big can each piece be in any other components I may have missed thank you.

Sure Hi, Alice So I would say the.

They're shipping related item the the fuel surcharges should start to ease up here soon in in the second quarter, we should start to at least lab, what we what we saw last your increased wise I do think during my prepared remarks.

The good comment on the interior diversification action as being in the in the seven figure ballpark on an annualized basis.

We did implement I would say a good portion of those towards the end of the mid to late two one so we didn't get a full benefit of that during the first quarter and so that will be in place for the rest of the year. We also have some other diversification action underway in the second quarter. So.

Those are going to kind of back and and I think increase throughout the year as we go but with most of most of the implementation done in the first half of the year benefiting us for the whole second half in terms of mark down rape and considering how that impacts Martin.

And generally speaking I would say normally for us a second third quarter being are are kind of peak season would typically leaning less heavily into discounting during that period. So I would expect those 22223 to be later in terms of discounts.

In General and then we pick it back up generally in queue for just because marketing tends to be very marketing performance marketing areas tend to be more expensive at the end of the year. So that that's just sort of a little bit of how the the markdowns discounts will lay out in terms of return rate.

Those are again somewhat follow a seasonal low for us and we've modeled those out uhm fairly consistent with how they were in 2022 as as we've talked about before we had all time low return rate during 2020th 21.

They ratcheted up during 22, and we're modeling them pretty consistent with 22 and those will also follow along with our level of promotional discounts because typically the more price sensitive people are if they're painful price there there are tendencies.

To return so we generally expect to have higher return rate in our queue. Two to three period and then lower return rate during the quarters, one quarter four will be more promotional and and there's a higher mix a final sale. So hopefully that gives you some sense on timing.

That's super helpful. Thank you.

Alright, thank you.

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Ladies and gentlemen, this concludes our question and answer session I would like to turn the conference back over the crystal lamps them for any closing remarks.

Just wanted to thank everyone for your time today and your continued support and we're looking forward to updating you on all of our progress on our next call have a great evening.

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