Q2 2023 Lulu’s Fashion Lounge Holdings Inc Earnings Call
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Plans strategies goals and objectives and their implementation.
Our expectations around the continued impact of the macroeconomic environment.
Consumer demand in return rates on our business.
Our future expectations regarding financial results.
References to the year ending December 31, 2023, including our financial outlook for full year 2023 market opportunities product launches and other initiatives and our growth.
These statements, which are subject to various risks uncertainties assumptions and other important factors could cause our actual results performances 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 one 2023 filed with the SEC on March 14th 2023, all of which can be found on our website at.
Investors Dot one 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 net debt and free cash flow.
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 measure may be different from non-GAAP measures used by other companies.
Reconciliation of GAAP to non-GAAP measures as well as the description limitations and rationale for each measure can be found in this afternoons press release.
And in our SEC filings.
Joining me on the call today are CEO christal anthem, our CFO , Tiffany Smith, our president and CIO, Mark boss, and our executive Chairman David Mccreight.
Following our prepared remarks, we'll 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 jump into our results I'd like to thank our team for their tireless efforts and dedication to building our brand and delivering the best experience to our brand fans.
During the second quarter like many others, we experienced continued choppiness in consumer demand.
From the early signs of stabilization, we observed at the beginning of the second quarter.
Topline demand fell short of our expectations and return rates worsened compared to our forecast leading to the disappointing Q2 results.
More specifically.
Revenue was 106 million, representing a 19% decline compared to Q2 'twenty to 'twenty two.
To the first quarter of 'twenty to 'twenty three the continuation of a challenging macro environment led to softer consumer demand.
We also face tough comparisons in the first half of <unk> following last year's benefit from the return to events, where we saw a 27% year over year net revenue growth in <unk> 2022.
Our adjusted EBITDA for Q2, 2023 was $4 2 million compared to 15 million in Q2, 2022 primarily due to lower topline demand and higher returns.
We continue to be surgical with promotions and markdowns and our focus on optimizing full price sales in spite of the highly promotional environment around us we.
We believe a more normalized and balanced approach to promotions is best for the longer term health of the brand and it reinforces our attainable pricing for high quality products.
Despite the shortfall in the quarter, our balance sheet remains strong and aside from our revolver includes no long term debt.
We believe that along with our capital light operating model positions us well to continue investing in long term growth opportunities and weather continued macro uncertainty.
Net cash provided by operating activities was $4 6 million in the second quarter of 2023 compared to $9 7 million of net cash used by operating activities in the second quarter of 2022, a roughly 14 million dollar improvement year over year showcasing the flexibility of our business model.
Our active customer count was $3 1 million at the end of Q2 2023 down 3% from Q1, 'twenty two 'twenty, three and down 5% from Q2 last year.
Well the current macroeconomic conditions present near term challenges, we are confident in our belief that our strong foundation and strategic vision will enable us to weather the storm and ultimately resume our goal of double digit growth and best in class profitability over the long term.
Given the health of our balance sheet, we view this environment as an opportunity to lean and by investing in our brand or others are pulling back which allows us to further reinforce lose as an attainable luxury lifestyle brand.
But the near term volatility we continue to remain focused on closely managing costs and driving efficiencies across our operations.
We're making great progress on several key optimization initiatives that we believe will benefit our brands long term.
First last quarter, we highlighted that we were starting to build out our product costing teams to better leverage our buying scale. We are pleased with our progress towards building out our team and continue to add capabilities to further evaluate and prioritize margin expansion through product cost reduction initiatives, which we believe will result in substantial product margin benefits over the long term.
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Next we continue to realize the benefits of the recent moves of our creative studio to a location adjacent to our southern California buying office.
As a result of the stronger collaboration we've seen new product conversion that gives us confidence in our future reorder product pipeline.
We are encouraged by the new styles that are performing well, where we can build a reorder funnel to further improve on product adoption rates in particular during Q2, we saw strength in new special occasion, new bridesmaids and new separates.
During the quarter, we also made technology investments and added functionality and data insights around product returns.
As we are seeing across many D to C. Retailers. We've also been impacted by increasing product returns and we'll continue to invest in ways to mitigate return cost, while preserving customer satisfaction and loyalty.
Third one of the key initiatives, we've undertaken over the last several quarters is continued diversification of our global carrier networks.
Partnering with multiple carriers, we've been able to leverage a broader range of shipping options rates and delivery times further optimizing our costs and continuously seeking ways to improve the customer experience.
This approach not only reduces our dependency on a single carrier, but also enhances our ability to adapt to swiftly changing market dynamics and enables us to better navigate disruptions that may arise from external factors.
In addition to our optimization initiatives, we are driving for new customer engagement strategies in the second quarter, we accelerated efforts to adapt to changing consumer behaviors and meet our customer where and how she shops.
Looking towards the second half of the year, we continue to explore new opportunities for visibility and growth 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 they are seeking additional channels to connect with us.
After taking a break from in person Activations post Covid. We are so very excited to announce that in July as part of our strategy to explore new brand visibility and growth opportunities. We signed a short term lease for a retail location on Melrose Avenue in Los Angeles to create a space to engage with our customers in person.
We're thrilled with the location with which these good foot traffic and puts us in proximity to other aspirational brands that helps to reinforce our attainable luxury positioning like everything else. We do we are taking a test learn and react approach to physical retail and the store will not only allow us to showcase our brand product quality and fantastic.
Customer service and a more connected and elevated way, but also to test and learn how we can apply our fast turning buying model to a brick and mortar experience. We expect our doors to open in a few months and we look forward to updating you on our progress on our next earnings call.
On the wholesale partnership fronts.
We recently implemented and launched a partnership with an online wholesale b to B platform, which allows us to share a range of products that potential partners can order from us in an effort to expand our presence and reach in brick and mortar and attract new customers through an omni channel approach.
Well only launched weeks ago, it's still small in volume we are very encouraged by the feedback we've received and the enthusiastic interest in carrying our products.
While we've not included any P&L impacts for incremental wholesale sales in our forecast. We are encouraged by the opportunity. This channel will provide next year and onward as an additional channel for our customers to interact with our product in person.
We will continue to be opportunistic around wholesale partnerships that will fuel brand awareness in a profitable and brand accretive way and allow our customers to experience the quality and feel of our products in person, while leveraging existing infrastructure to expand our reach in a capital efficient way and build synergy between digital and physical channels.
We will continue to update you on our progress over the next several quarters as it relates to all our growth initiatives.
In the near term as a result of our expectation of continued choppiness in consumer demand related to ongoing macro pressures like inflation interest rates and student loans as well as elevated return rates, we are reducing our full year 2023 guidance in anticipation of ongoing volatility.
While we are disappointed with our Q2 results and lowered outlook, we remain focused on adapting to changing customer behaviors closely managing inventory discretionary expenses and continuing to drive brand awareness.
Our sales volumes recover we expect to see a stabilization of trends and a corresponding improvement in profit margins as our fixed costs begin to leverage.
Now I'd like to turn the call over to Mark Foss, Our President and Chief Information Officer, He will share an update on key operational technological and analytical efforts throughout the last quarter and currently underway.
Mark.
Thank you Crystal.
First I'd like to start by providing an update on our customer and how she interacts with us during the quarter.
New and repeat customer counts were down Q2 year over year, while units per transaction was up sequentially from Q1 2023.
Decreased compared to Q2 of last year.
At the end of Q2 2023, we have 3.1 million active customers compared to $3 3 million at the end of Q2 2022 and.
And $3 2 million at the end of Q1 2023.
Representing a 5% and a 3% decrease respectively.
We have redoubled, our efforts to capture and retain customers in this more challenging and dynamic macro economic environment.
The strength of <unk> brand, the affordable quality of our products.
Effectiveness of the <unk>.
To that end from a marketing perspective, we are continuing to shift more of our marketing spend from direct response performance marketing to brand awareness marketing, while keeping overall marketing efficacy and spent as a percent of revenue within our targeted ranges to remain first order contribution margin profitable.
This strategy allows us to introduce who's to more consumers and to improve the overall efficiency of our marketing investments over the long term.
Despite the challenges and customer discretionary spending and the year over year increase in the cost of new customer acquisition, we continue with our investments and more top of funnel brand marketing and our Influencer and ambassador generated brand reach impressions and earned media value to support the looseness word of mouth marketing.
Based on our social media and brand with data tracking we have seen continued gains in our little share of force across multiple channels and improved brand familiarity, which provides us with the confidence that we're on the right growth path.
Kudos to our marketing and creative teams, who have successfully attracted many new customers to the loose brand.
Witnessed by a higher quarter over quarter, new customer acquisition rate in 2023 compares with 2022.
We see much growth potential ahead of us and plan to continue to be on the offense and build out these programs consistent with a test and learn data driven approach used for everything we do have loose.
Last quarter, we discussed the launch of our improved international shopping experience, where our international customers can shop in their local currency and local preferred payment method in over 30 languages.
Since its launch in mid February our data indicates that removing friction for our international customers. In many countries has improved conversion rates and we expect this to continue to improve overtime as we test and iterate on their shopping experience.
In the second quarter in particular, we made some adjustments to add a standard shipping option at a lower cost to customers abroad.
With the introduction of standard shipping, we also lowered various free shipping thresholds to provide our international customers opportunities for more cost savings.
Bringing the international shopping experience more in line with our domestic Lulu shopping experience as a first step to capitalize when the encouraging demand signals, we see from abroad.
While it is still early days, we are also exploring more targeted efforts to expose to lose brand HOKA abroad improve search rankings and prudently test into Influencer and other paid activations in select regions.
We look forward to keeping you updated on our progress there.
Moving on to product return behavior.
As Christal noted earlier Q2 year over year, we have seen an increase in our return rates and in comparison to last year. The majority of this increase can be attributed to a shift in product mix towards products that inherently has a higher return rates like dresses, which tend to contribute more in Q2 due to seasonality.
Increased return rates are not unique to lose and we believe that there are multiple external factors at play leading to a higher propensity to return products industry wide.
Customers appear to have a higher level of comfort around being less selective in their purchases and using the home as the fitting room.
Furthermore, customers within our target demographics are under more macroeconomic pressure and have become more discerning in their decision of which items to keep.
We have and will continue to embrace returns for product selection and we see it as an opportunity to showcase more of google's quality and value.
Understands our customers' style and taste better and generally consider it an integral part of the online shopping experience.
That said there are also actions we are taking and improvements we are making to counter the increases in returns and the related costs.
We will continue to focus on improving the customer experience and providing more relevant products and fifth information so that our customers can make the best product selections for themselves.
Also continue to monitor our return policy for further improvements while keeping the barriers to get introduced to the Lewis Brent low.
Additionally, where possible we are working to increase the flexibility of it and working to optimize our fit expression across various product classes, which we believe could impact return rates and customer satisfaction in a positive way.
And so those rent makes up to 90% of ourselves depending on the product category. We are in a good position to effect. These changes across the vast majority of our sales.
From an operational perspective, we have continued working to improve our operational efficiency and performance.
In May we went live with robotics in our Northern California distribution center and since launch we have seen their variable fulfillment labor productivity improve and we are on track to achieve our productivity improvement goals.
In Q2, we also further diversified our outbound shipping carrier network, which allows us to offset some of the increases in outbound shipping costs by other carriers.
We are also actively working to reduce returns shipping costs across our network to optimize margin.
Given the excitement around AI I would be remiss not to speak about how loose uses AI to support and drive our business.
For many years boost has been successfully using AI across various aspects of our business and we believe it has been a critical contributor to our competitive advantage.
For example, predictive AI has been core to our data model surrounds customer lifetime value.
Products and fifth recommendations, a reorder model as well as our inventory allocation and replenishment optimizations.
With the rapid evolution of generative AI capabilities, we see opportunities ahead of us to further improve the customer experience.
For example by offering our customers creative outfitting inspiration during the product discovery and enhancing our customer support interactions.
We also see opportunities for productivity enhancements ranging from improving efficiencies in our product development process summarizing customer feedback and generating marketing campaigns.
We also follow the ever evolving legal landscape surrounding generative AI, specifically as it relates to intellectual property to both avoid issues as well as super Tect our own IP.
Several of the examples I gave for areas, where we are testing and learning to see how our customers our employees and our investors can benefit and where we can we will keep you informed as we explore these exciting new opportunities.
Our operations customer support data and the engineering teams remain laser focused on delivering superior customer experiences and a relentless in finding ways to drive down our unit costs.
I am proud of our intelligent passionate Lou crew or all in all voices and always evolving thank you and well done.
And now I'll hand, it over to Tiffany Smith, Lewis Chief Financial officer to deep dive into our financials.
Thanks, Mark and good afternoon, everyone.
While we saw signs of stabilizing consumer trends in early Q2 and observed sequential monthly improvement in our net revenue year over year comparisons as the quarter progressed net revenue fell short of our expectations with a double digit year over year decline in Q2, mostly attributed to lower topline demand and high.
Then expected return rates.
In spite of lower net revenue we are encouraged by sequential improvement in our gross margin rate as well as an improving spread in our quarterly rate compared to Q2 of 2022.
With respect to the second quarter results, our net revenue of $106 million was down 19% year over year, which fell short of our expectations for the quarter. The decline was primarily driven by a decrease in total orders of 16% compared to the prior year, a modest 1% decrease in average order.
Their value to $135 higher markdowns and discounts and product returns.
While our overall return rate in the second quarter was higher than the prior year, we observed an improving year over year spread and our monthly return rates as the quarter progressed, primarily explained by product mix shifts during the quarter.
Gross margins for the second quarter declined by 110 basis points from the same period last year to 44.7%, while gross margin was still below expectations. It improved sequentially by 300 basis points from 41, 7% to 44, 7% and was in la.
With Q2, 2019, a more normalized pre pandemic period.
Compared to the same period last year gross margin declined as a result of several factors increased markdowns and discounts higher return shipping costs and slightly higher depreciation at applied materials burden related to our distribution facilities.
This was partially offset by favorability in outbound and inbound freight costs.
Our historical comparisons to a more normalized pre pandemic period markdowns and discounts in the second quarter represented 11, 3% of sales compared to Q2 2019 at 12.5% of sales reinforcing the agility of our buying model and our ability to navigate a challenging and highly promotional.
Macro environment.
Arc Downs and discounts for Q2, 2022 represented eight 6% of sales what our mix of net sales at full price were unusually high.
Moving down the P&L to give them insights into expense line items.
Q2, 2023, selling and marketing expenses were $24 $7 million.
About 1.2 million from Q2, 2022, due to lower performance marketing spend and favorability in merchant processing fees, partially offset by higher brand marketing spend as we continue to focus on increasing brand awareness.
General administrative expenses increased by about $1 million to $24 4 million relative to Q2 2020 to be.
The increase was primarily due to one and a half million dollars related to equity based awards issued through the end of Q2 and $1 million in higher fixed payroll costs for hiring in key strategic areas. This.
This was offset by variable expense favorability, including a $1.6 million reduction in variable labor and benefits, resulting from lower sales volumes and cost optimization initiatives across our distribution center and customer support departments.
Interest expense for the quarter amounted to $426000 versus $157000 in Q2 2022.
For the quarter, we reported a diluted loss per share of seven.
Does a decrease of 22 cents compared to diluted earnings per share of 15 cents in the second quarter of 2022, and finally adjusted EBITDA for the second quarter was $4 $2 million compared to Q2 of 2022, adjusted EBITDA of $14 $8 million, our Q2 adjusted EBITDA margin.
Was 4% compared to 11% in the same period last year.
Our balance sheet remains strong and positions us well to execute our long term growth plans and manage through near term macro uncertainty.
We ended the quarter with cash of about $6 million and our balance of $15 million drawn on our revolver.
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We repaid $5 million of the revolver during the second quarter and will continue to pay it down we expect to end the year with net debt of less than $5 million.
Our inventory balance at quarter end was $46 $2 million down about $2 3 million from the same period last year and down $5 6 million on a quarterly sequential basis.
During the second quarter, we saw our sales growth to inventory growth spread improved by approximately 30 basis points from Q2, 2022, indicating that our inventories are becoming better aligned with our sales.
While we are comfortable with our current inventory position, we do want to note that it includes approximately $3 million of residual spring summer inventory, who sell through at lower realized margins is contemplated within our guidance range, we bought into a larger spring selling season that did not materialize to our expectations and we have a couch.
For more aggressive markdowns for the balance remaining of new test product that has not sold by the end of the season.
As we've highlighted before we are a quick turning brand with what we believe are industry, leading turns while that remains true we do anticipate our L. T. M inventory turns this year to be a little slower than our ideal range of sales and improved inventory trends continued to normalize while still prioritizing improving.
Margin results.
As a reminder, we are not a fast fashion company, but instead, a fresh fashion concept approximately half of our inventory assortment is Susan Lewis and can carry from one season to the next and be sold year round and the remainder is multi season, many of which can be brought back year after year.
This gives us confidence in our ability to move through the current inventory levels in a way that minimizes markdowns further reduces gross margin risk and ultimately preserves brand integrity.
As always we aim to be disciplined in our inventory management approach and we'll continue to relentlessly pursue further optimization of inventory levels that balances the customer experience and minimizes markdown risk.
Moving on to guidance.
While we have taken actions to manage costs and drive operational efficiencies and make targeted investments to adapt to changing consumer behaviors. We continue to see choppiness in consumer traffic and demand early in the third quarter, though with notable improvement in gross margins.
The continuing promotional environment in the industry as well as mounting pressure on consumers from a series of macroeconomic factors, including pockets of continued inflation higher interest rates and risks related to resuming student loan interest in payments combined with less predictable consumer purchasing behavior I've made.
It increasingly difficult to forecast near term trends.
As a result of the continued volatility we are reducing our full year 2023 guidance.
We now expect 2023 full year net revenues between $355 million and $375 million, which represents a 19% to 15% decline compared to 2022.
We expect 2023 full year, adjusted EBITDA to be between $5 million and $10 million, which represents an 83% to 66% decline compared to 2022.
This equates to an adjusted EBITDA margin rate of between one 4% and 2.7% IRA.
Our revised adjusted EBITDA guidance captures incremental investments in support of longer term initiatives, including broadening distribution channels and expanding in person activations.
We expect to see continued improvement in our gross margin rate year over year comparisons in the second half of the year attributed to higher merchandize margins and continued outbound shipping cost favorability, partially offset by higher return shipping costs.
Is that expectations for modeling purposes, our quarterly adjusted EBITDA margin rates have similar seasonal fluctuations as our net revenues and will likely fluctuate above or below our full year guidance rate depending on the quarter in the past. We have explained that Q4 is typically our smallest net revenue quarter.
We are not a holiday gifting destination and we don't expect this year to be an exception. However, unlike prior years, we anticipate net revenues and adjusted EBITDA margins in Q3 to be more in line with Q4, then with Q2.
As a result of paying down our long term debt following the IPO, we incur modest levels of interest expense associated with our revolver and equipment leases for our distribution facilities we.
We anticipate interest expense for full year 2023 to be approximately $1.6 million, an increase compared to 2022 levels, which reflects the impact of higher interest rates offsetting lower average revolver balances.
As of today, we have $20 million drawn on our $50 million revolver.
We plan to continue paying down our revolver and anticipate ending 2023 with a net debt balance of less than $5 million. We anticipate that we will be able to maintain positive free cash flow in 2023, despite the macroeconomic challenges.
Stock based compensation for the quarter was up $1.6 million from Q2 2022, we continue to forecast stock based compensation expense of approximately $16 million to $19 million in 2023.
2023 we expect a weighted average fully diluted share count of approximately 40 million shares.
Moving on to capital expenditures, our plan remains to invest between 5 million and $6 million for the year, which includes capital expenditures for a new retail store as well as other investments we remain focused on setting the stage for future growth opportunities enhancing the customer experience and driving further operating efficiencies.
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 we'd like to take a moment to thank each of you. The loot crew our brand fans shareholders and the board for their continued support as we continue to work towards executing on our long term strategy and delighting our customers.
With that I'll turn it over to questions now.
Thank you we will now be conducting a question and answer session.
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So that we may address questions from as many participants as possible. We ask that you limit yourself to one question and to one follow up if you have additional questions. You may re queue and time permitting those questions will be addressed one moment. Please while we poll for questions.
Thank you and our first 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 Crystal I was wondering if you could update us on what you're seeing in the competitive environment broadly and how that's influenced the trends that you've seen both quarter to date.
And your view of consumer engagement with the brand and then secondly for Tiffany I was hoping you could provide a little bit more detail regarding the assumptions that you've made in the second half sales guide regarding the macro and your own idiosyncratic initiatives that you have in place to drive sales. Thank you very much.
Hey, Brad Thanks for the question.
I think the competitive environment has certainly changed even just from a few years ago, and we are seeing more competition or attentive competition, especially for those looking to compete in more of an entry price point, albeit at a lower quality than Lulu.
That said, we're not really looking to compete in that fast fashion, our disposable fashion race to the bottom and where we really willing candidly to change our business model to accommodate any business processes that will enable that type of business, but we're really focused on now and hyper focus I would say is continuing to build awareness and brand awareness for our attainable luxury products and reinstating.
That positioning for our customers and we see it everyday in our exit surveys from our customer base, where they cant believe the quality for the price and I think that's really where we're going to win in the long term. So in the near term, that's where our focus will be in reinforcing that value proposition for our customer.
Brook High it's Tiffany with regard to your question about the.
Revenue guidance for the balance of the year.
The biggest I would say change that we contemplated and factored in relative to where we were prior to lowering lowering the guidance is.
Is taking into account the current softer macro environment and factoring in the impact that we're expecting.
With regard to the student loan payments and.
And interest resumption starting in September .
Something that we think.
We needed to wait a little more heavily in our guidance given that our customer is the gen Z and millennial larger.
Largely college educated we do think that they're going to feel that in terms of their discretionary spend and so we've.
Assume that will be an impact for us toward the latter part of Q3 and into Q4, so that certainly factored in.
With regard to just lower demand overall, given what we saw in the second quarter with regards to higher return rate, we do attribute that partly to product mix.
That we saw with a higher dress nice and in the second quarter.
But to be extra conservative there we did also layer in.
Higher than originally estimated return rate.
For the balance of the year as well.
Yeah.
Thank you very much I'll pass it on.
Thank you and our next question is from Janine Stichter with B T. I G. Please proceed with your question.
Hi, Thanks for taking my question a question for Tiffany want to hear more about how youre thinking about the back half gross margin are we still looking for the gross margin to be roughly flat for the back half of the year and then philosophically I know, sometimes you when you're a little bit more cautious on the promotions that you pulled back on promotions you ramp up the marketing spend at that the carbon.
So how to just think about the balance of marketing versus I'm pulling the promotional lever into the back half of the year. Thank you.
Sure. Thanks, Janine and good question so for the back half of the year, we are we.
We continue to be already you know five weeks into Q3 pleased with our overall gross margin performance. We did see good sequential improvement from Q1 into Q2 as noted on the call and we expect the back half gross margin to improve on a year over year basis for each of Q3.
In Q4, we expect to see some continued gains in regards to the shipping cost.
Rationalization that we've done this year that definitely affected us positively in Q2 that will continue to affect us in Q3 Q4.
Since those initiatives were not in effect last year with regards to promotions and discounts and the balances that we make and the tradeoffs with marketing spend.
We do expect as always lean into our data driven model in order to determine the right mix of those so you.
I'm not going to provide an explicit breakout or percentage between those the mix of those but we do continue to.
Two to react to what's going on in the market. Historically Q4 has been a more expensive marketing quarter and that's been in a time when we have in the past leaned a little more heavily into promotions and discounting.
Which may be the case this year as well, but generally we try to keep that are somewhat nimble in terms of being able to flex on that as needed.
Great and then just one more on gross margin you alluded earlier to some of the cost initiatives that you're working on just where are we in that I'm always are to really philly impacting gross margin.
I think the expectation should be that will be more pronounced into next year, it's not something that we want to swing too hard overnight and that's going to be incremental as we kind of test and learn our way into optimizations. There we have a great team in place. We're really excited about the progress we've made so far but given our buying cycles in our current business model, we want to be cautious so I would say.
Q2 and into Q3 and Q4 next year, we'll start to see some real benefits there, but in the near term it will be small and gradual.
Great Thanks, and best of luck.
Thank you Lee.
Yeah.
Thank you. Our next question comes from the line of Garrett Green Black with Jefferies. Please proceed with your question.
Hi, Thanks for taking my question guys.
Okay.
Just some more color on the whole.
So partnership you mentioned I'm kind of curious about the longer term opportunity for that and just how you're thinking about that strategy overall.
In the near term, we look at it as a profitable brand awareness channel and an opportunity for our customers to engage with our product in person I don't want to share the specifics of the details because it's still very new and recent for us, but I will say, we're pleased with the acceptance and <unk>.
Fitments that we've received from partners that are looking to carry our products and we'll continue to update you guys. As this matures a little bit but again, it's been a fairly positive very exciting initiative for us internally.
Great. Thank you.
Okay.
Thank you and our next question comes from the line of John Kim with P. D. Cowen. Please proceed with your question.
Thanks for taking my question just curious about I know you talked about it a little bit but month to month trends that you saw during the quarter and did you see any outsized slowed down in one customer group versus other and I know two Qs seasonally heavy dress season, but just curious how the non dress performed during the quarter. Thank you very much.
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Hey, John This is Tiffany I'll, just speak to with regard to the progression that we saw throughout Q2, but on a monthly basis.
While overall, our Q2 net Rev comps were down about 19% year over year, we did see monthly year over year comps.
Improve very gradually as we progressed through the quarter. So April for example, we were down 20.
25% May we were down just under 19% in June we were down about 17, 5% on a year over year basis. So some improvement there as the quarter progressed and Mark if you have any specific customer additions.
Conditions.
When we look at that from the perspective of what their household income than we did not see any hickman stand out in that it was more across the board.
Similar similar changes in behavior.
There was nothing to report there.
That has been called out.
From a product assortment perspective sub brands more specifically, our more casual and use in our more basic and essential underperformed to our expectations, where our customers were really looking for newness and novelty. There are a couple of months that underperformed that we had expected from a suffers in casual and use though as we pivoted our assortment towards more novelty.
More newness, especially in the more recent weeks if not months, we're actually very encouraged by the team's ability to pivot more towards what our customers seeking right now that's not to say those other products aren't performing they just aren't performing up to our expectations for the quarter. So we're happy about the progress we've made in Q3 towards pivoting more of the assortment towards what she's looking for.
Got it thank you.
Thank you. Our next question comes from the line of Alice shall with Bank of America. Please proceed with your question.
Hi, Thanks for taking my question I think international seems to be an interesting opportunity can you talk about what conversion rates look like right now internationally versus domestically.
Is there a structural margin difference between international and domestic sales and also how big do you think international can get over time.
Okay.
Great questions so reduce.
So international as a percent of revenue for US right now is still a very small and that's what we've spoken about really about removing the barriers.
<unk>.
So we feel that we are now in a good place that we can start to building that that revenue.
As it relates to the experience.
The data that we see thus far then yes.
Between international and domestic there is certainly a difference in conversion rates.
<unk> at this point being lower than the domestic and that's also where the opportunity for US lies to focus and iterate because we have not spent a lot of time over the last several years on that international component. So we look forward to growing that.
And build out overtime.
Revenue opportunity skew as you pointed out.
Got it and then overtime.
Hi.
Okay.
Yeah.
In terms of just the overall size of the opportunity.
Right right.
That is at this point, we have not boots any any any.
Mistakes or communicated that.
Externally, we are assessing what that opportunity is and then to look at how do we best capture that and we feel that.
We needed to get first to a position that we could look at that holistically without all the friction that was in place.
From there on we will assess the opportunity.
Feel comfortable.
How that could look like we will we'll communicate them.
Got it thank you.
Thank you and our next question comes from Dana Telsey with Telsey Group. Please proceed with your question.
Hi, good afternoon, everyone and we look at the a O be high which is D. A L V, which was down around 1% I think that's a slight improvement from the down 3% in the first quarter. What are you seeing in a L V. How you're planning it and balancing the level of Mark Downs with return rate. Thank you.
You.
Hi, Dana this is Tiffany. Thank you for the question, yes. So we were pretty pleased with where they were a O V ended.
During the quarter, we would typically expect to see it come down a bit as we progress through the balance of the year.
Largely as we move.
<unk> into Q4, we start to be a bit more promotional and typically the ltvs are lower based on the product mix as well of that quarter. So we've planned it accordingly, similar to what we've seen in prior years.
In terms of the cadence there and I may have missed your other question wasn't around return rate.
Yeah exactly.
Return rates generally speaking.
Picked up a bit in Q2, we have been such padded the return rate for the balance of the year, but we still expect.
It is to be still very dependent on product mix. So what product mix was more heavier in terms of dress categories in Q2.
That fluctuate during the year. So Q4 for example, we would expect to see return rates come back down, but we're still forecasting them to be a bit more elevated than what they were in the back half of last year.
Got it and then as you plan for the back half of the year basically to drive conversion anything we should be watching for what its product introductions, Mark as you've mentioned brand awareness marketing campaigns that youre doing how do you think of parsing out third quarter and fourth quarter on what the what may be the same or different is <unk>.
Paired to last year's execution.
Yeah.
I would say, it's going to be more of the same but potentially a reallocation of monies from a performance side towards awareness specifically to support the store and some of the other initiatives that we have but similar to what we've always done it will be in a very test and iterate kind of way.
Not model out meaningful increases in our overall marketing spend when compared to the first half of the year.
Thank you.
Thank you.
We have reached the end of our question and answer session and with that this concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
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