Lulu's Fashion Lounge Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2023

There are 12 speakers on the call.

Operator

Afternoon, and welcome to Lulu's Second Quarter 2023 Earnings Conference Call. Today's call is being recorded, and we have allocated 1 hour for the prepared remarks and Q and A. At this time, I'd like to turn the conference over to Lulu's General Counsel and with Secretary, Naomi Beckmanstrasse. Thank you. You may begin.

Speaker 1

Good afternoon, everyone, and thank you for joining us will be recorded to discuss Lulu's 2nd quarter 2023 results. Before we begin, we would like to remind you that this conference call will include forward looking statements within the meaning recorded in the Form 10.5 of 1995. All statements made on this call that do not relate to matters of historical facts should be considered forward looking statements, including but not limited to statements regarding management's expectations, will provide our expectations around the continued impact of the macroeconomic environment,

Speaker 2

will be recorded and will be recorded in the

Speaker 1

Q1 of 2019. Our future expectations regarding financial results, references to the year ending December 31, will be recorded

Operator

in the Q1 of 2019,

Speaker 1

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, will be recorded and will be recorded in the Q1 of 2019.

Speaker 3

Will be recorded. These risks, uncertainties

Speaker 1

and assumptions are detailed in this afternoon's press release as well as our filings with the SEC, will be recorded. Filed with the SEC on March 14, 2023, all of which can be found on our website at investors. Lindsay.com. Any such forward looking statements represent management's estimates as of the date of this call. While we may elect will be recorded to update such forward looking statements at some point in the future.

Speaker 1

We undertake no obligation to revise or update any forward looking statements or information, will be recorded except as required by law. During our call today, we will also reference certain non GAAP financial information, will be recorded in the Q1 of 2019, 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 measures may be different from non GAAP measures used by other companies.

Speaker 1

Reconciliation of GAAP to non GAAP measures as well as the description, limitations and rationale for each measure can be found in this afternoon's press release and in our SEC filings. Joining me on the call today are our CEO, Crystal Anson our CFO, Tiffany Smith our President and CIO, Mark Voss and our Executive Chairman, David McCrae. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn the call over to Crystal.

Speaker 4

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 we are building our brand and delivering the best experience to our brand fans. During the Q2, like many others, we experienced continued choppiness in consumer demand, will

Speaker 5

be recorded.

Speaker 4

Expectations and return rates worsened compared to our forecast, leading to the disappointing Q2 results. More specifically, will be recorded. Revenue was $106,000,000 representing a 19% decline compared to Q2 2022. Similar to the Q1 of 2023, with the continuation of a challenging macro environment led to softer consumer demand. We also faced tough comparisons in the first half of 2Q following last year's benefit will now return to events where we saw a 27% year over year net revenue growth in 2Q 2022.

Speaker 4

Our adjusted EBITDA for Q2 2023 was $4,200,000 compared to $15,000,000 in Q2 2022, will be recorded primarily due to lower top line demand and higher returns. We continue to be surgical with promotions and markdowns and are focused on optimizing will be conducting full price sales in spite of the highly promotional environment around us. 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 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.

Speaker 4

Will be recorded. Net cash provided by operating activities was $4,600,000 in the Q2 of 2023 compared to 9.7 $1,000,000 of net cash used by operating activities in the Q2 of 2022, a roughly $14,000,000 improvement year over year, showcasing the flexibility of our business model. Our active customer count was 3,100,000 at the end of Q2 2023, will be recorded down 3% from Q1 2023 and down 5% from Q2 last year. While 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 will provide profitability over the long term. Given the health of our balance sheet, we view this environment as an opportunity to lean in by investing in our brand where others are pulling back, we continue to remain focused on closely managing costs and driving efficiencies across our operations.

Speaker 4

We are making great progress on several will be recorded in the Q1 of 2019. 1st, last quarter we highlighted that we were starting to build out our product costing teams will be

Speaker 3

recorded to better leverage our

Speaker 4

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 will be recorded through product cost reduction initiatives, which we believe will result in substantial product margin benefits over the long term. 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. 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 and we'll continue to invest in we'll continue to invest in ways to mitigate return costs while preserving customer satisfaction and loyalty.

Speaker 4

3rd, one of the key initiatives we've undertaken over the last several quarters is continued diversification of our global carrier networks. By partnering with multiple carriers, we've been able to leverage a broader range of shipping options, rates and delivery times, will further optimize our costs and continuously seeking ways to improve the customer experience. This approach not only reduces our dependencies on a single carrier, 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 forward new customer engagement strategies. In the Q2, we accelerated efforts will be available to adapt to changing consumer behaviors and meet our customer where and how she shops.

Speaker 4

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 are thrilled with the location which sees 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, will be a very interactive approach to physical retail and the store will not only allow us to showcase our brand, product quality and fantastic customer service in 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.

Speaker 4

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 front, we recently implemented and launched a partnership with an online wholesale B2B 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 omnichannel approach. While only launched weeks ago and still small in volume, we 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 and 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.

Speaker 4

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 reach in a capital efficient way and builds 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 and consumer demand related to ongoing macro pressures like related to the financial results, 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 the changing customer behaviors, closely managing inventory, will provide additional color on our business and continuing to drive brand awareness.

Speaker 4

As sales volumes recover, we expect to see a stabilization of trends and a corresponding improvement in will be showing improvement in profit margins as our fixed costs begin to leverage. Now, I'd like to turn the call over to Mark Voss, our President and Chief Information Officer. You will share an update on key operational, technological and analytical efforts throughout the last quarter and currently underway.

Speaker 6

Mark? Thank you, Crystal. First, I'd like to start by providing an update on our customer and how she interacted 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, will be recorded and will be recorded for Q2 of last year. At the end of Q2 2023, we had 3,100,000 active customers will be recorded as compared to $3,300,000 at the end of Q2 2022 $3,200,000 at the end of Q1 2023, will be recorded, representing a 5% and a 3% decrease, respectively.

Speaker 6

We have redoubled our efforts to capture and retain customers will be

Speaker 3

recorded in

Speaker 6

this more challenging and dynamic macroeconomic environment, leveraging the strength of the Lulus brand, the affordable quality of our products and the effectiveness of the Lulu's Brand Hub. 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. Will be recorded. This strategy allows us to introduce Lulus to more consumers and to improve the overall efficiency of our marketing investments over the long term. Despite the challenges in customer discretionary spending and the year over year increase in the cost of new customer acquisition, we continued our investments in more top of the funnel brand marketing and our influencer and ambassador generated brand reach, will provide an overview of our financial results.

Speaker 6

Based on our social media and brands data tracking, we have seen continued gains in the Lulu share of voice across multiple channels and improved brand familiarity, which provides us with the confidence we're on the right growth path. Kudos to our marketing and creative teams who have successfully attracted many new customers to the Lulus brand will be recorded as witnessed by a higher quarter over quarter new customer acquisition rate in 2023 compared to 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 the test and learn, will be a data driven approach used for everything we do at Lulus. Last quarter, we discussed the launch of our improved international shopping experience 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 over time as we test and iterate on their shopping experience. In the Q2, in particular, we made some adjustments to add a standard shipping option at a lower cost to customers abroad.

Speaker 6

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 is a first step to capitalize on the encouraging demand signals we see from abroad. While it is still early days, we are also exploring more targeted efforts to expose the Lulu's brand huck abroad, will 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 Crystal noted earlier, will be recorded.

Speaker 6

In Q2 year over year, we have seen an increase in our return rate. And in comparison to last year, the majority of this increase can be attributed will be subject to a shift in product mix towards products that inherently have a higher return rate like dresses, which tend to contribute more in Q2 due to seasonality. Increased return rates are not unique to Luxe, and we believe that there are multiple external factors at play leading to a higher propensity will be recorded and will be recorded to

Speaker 3

return products industry wide.

Speaker 6

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 will continue to embrace returns for product selection and we see it as an opportunity will be recorded to showcase more of the Lulu's quality and value, understand our customers' style and taste better and generally consider it an integral part will be

Speaker 7

recorded and will be recorded in the future.

Speaker 6

That said, there are also actions we are taking and improvements we are making will be recorded to counter the increases in returns and the related costs. We will continue to focus on improving the customer experience and providing more relevant product and fit information so that our customers can make the best product selections for themselves. We also continue to monitor our return policy for further improvements, while keeping the barriers to get introduced to the Loulas brand low. Will be available for the Q1 of 2019. Additionally, where possible, we are working to increase the flexibility of fit and working to optimize our fit expression across various product sizes, will be recorded, which we believe could impact return rates and customer satisfaction in a positive way.

Speaker 6

Instoolittle's brand makes up to 90% 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, will be recorded. Given the excitement around AI, I would be remiss not to speak about how LULUZ uses will provide to support and drive our business. For many years, Blue's has been successfully using AI across various aspects of our business, and we believe it has been a critical contributor to our competitive advantage.

Speaker 6

For example, predictive AI has been core to our data models around customer will be recorded in the quarter. We will now begin the presentation of our Q1 2019 guidance. With the rapid evolution of generative AI capabilities, we see opportunities ahead of us to further improve the customer experience. Will be recorded. We also see opportunities for productivity enhancements ranging from we also see opportunities for productivity enhancements ranging from improving efficiencies in our product development process, summarizing customer feedback and generating marketing campaigns.

Speaker 6

We also follow the ever evolving legal landscape surrounding generative AI, will be recorded specifically as it relates to intellectual property to both avoid issues as well as to protect our own IP. Several of the examples I gave are 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, will drive down our unit costs. I am proud of our talented and passionate new crew who are all in, all voices and always evolving.

Speaker 6

Thank you and well done. And now I'll hand it over to Tiffany Smith, Lulus' Chief Financial Officer will be

Speaker 5

recorded to deep dive into our financials.

Speaker 2

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, will be mostly attributed to lower top line demand and higher than 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 Q2 results, our net revenue of $106,000,000 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 value to $135 higher markdowns and discounts and product returns.

Speaker 2

While our overall return rate in the 2nd 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 shift during the quarter. Gross margins for the 2nd 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% recorded to 44.7 percent and was in line with Q2 2019, a more normalized pre pandemic period. Will be recorded. Compared to the same period last year, gross margin declined as a result of several factors: increased markdowns and discounts, with higher return shipping costs and slightly higher depreciation and applied materials burden related to our distribution facilities.

Speaker 2

This was partially offset by favorability in outbound and inbound freight costs. For historical comparisons to a more normalized pre pandemic period, markdowns and discounts in the 2nd quarter represented 11.3% of sales compared to Q2 2019 will be recorded at 12.5 percent of sales, reinforcing the agility of our buying model and our ability to navigate a challenging and highly promotional will be recorded in the quarter. Markdowns and discounts for Q222, twenty twenty two represented 8.6% of sales, when our mix of net sales at full price were unusually high. Moving down the P and L to give some insights into expense line items.

Speaker 3

Will be recorded. Q2 2023

Speaker 2

selling and marketing expenses were $24,700,000 down about $1,200,000 recorded 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. Will be recorded. General and administrative expenses increased by about $1,000,000 to $24,400,000 relative to Q2 2022. The increase was primarily due to $1,500,000 related to equity based awards issued through the end of Q2 and $1,000,000 in higher fixed payroll costs for hiring in key strategic areas. This was offset by variable will be recorded and will be recorded in the quarter

Speaker 3

and cost optimization initiatives across our

Speaker 2

distribution center and customer support departments. Interest expense for the quarter amounted to 4 and recorded for the quarter. For the quarter, we reported a diluted will be recorded in the Q2 of 2019. We expect a loss per share of $0.07 to the decrease of $0.22 compared to diluted earnings per share of $0.15 in the Q2 of 2022. And finally, adjusted EBITDA for the 2nd quarter was $4,200,000 compared to Q2 of 2020 we will now turn the call over to our Q2 adjusted EBITDA of $14,800,000 Our Q2 adjusted EBITDA margin was 4% compared to 11% in the same period last year.

Speaker 2

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 $6,000,000 and a balance of $15,000,000 drawn on our revolver, resulting in net debt of roughly $9,000,000 We repaid $5,000,000 of the revolver during the Q2 and will continue to pay it down. We expect to end the year with net debt of less than $5,000,000 Our inventory balance at quarter end was $46,200,000 down about $2,300,000 from the same period last year and down $5,600,000 on a quarterly sequential basis. During the Q2, we saw our sales growth to inventory growth spread improve by approximately 30 basis points will be recorded 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 $3,000,000 of residual springsummer inventory we saw through at lower realized margins is contemplated within our guidance range.

Speaker 2

We bought into a larger spring selling season that did not realized to our expectations and we have accounted 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 LTM inventory turns this year to be a little slower than our ideal range will be recorded as sales and inventory trends continue 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 seasonless 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.

Speaker 2

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 we'll continue to relentlessly pursue further optimization of inventory levels that balances the customer experience and minimizes markdown risk.

Speaker 3

Will be available on

Speaker 2

the call. Moving on to guidance. While we have taken actions to manage costs, 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 3rd quarter, with notable improvement in gross margins. The continuing promotional environment in the industry as well as mounting pressure on will be recorded from a series of macroeconomic factors, including pockets of continued inflation, higher interest rates and risks related to resuming student loan interest and payments, combined with less predictable consumer purchasing behavior, have made it increasingly difficult to forecast near term trends.

Speaker 2

As a result of the continued volatility, we are reducing our full year 2023 guidance. We now expect 2023 full year net revenues between will be $355,000,000 $375,000,000 which represents a 19% will be recorded to 15% decline compared to 2022. We expect 2023 full year adjusted EBITDA will be between $5,000,000 $10,000,000 which represents an 83% to 66% decline compared to 2022. This equates to an adjusted EBITDA margin rate of between 1.4% and 2.7%. Our revised adjusted EBITDA guidance captures incremental investments in support of longer term initiatives, including broadening distribution channels and expanding in person activations.

Speaker 2

We expect to see continued improvement in our gross margin rate year over year comparisons will be recorded in the second half of the year, attributed to higher merchandise margins and continued outbound shipping cost favorability, partially offset by higher return shipping costs. To set expectations for modeling purposes, our quarterly adjusted EBITDA margin rates will 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 as 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 will be more in line with Q4 than 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.

Speaker 2

We anticipate interest expense for full year 2023 to be approximately $1,600,000 an increase compared to 2022 levels, which reflects the impact of higher interest rates offsetting lower average revolver balances. As of today, we we have $20,000,000 drawn on our $50,000,000 revolver. We plan to continue paying down our revolver and anticipate ending 2023 with a net debt balance of less than $5,000,000 we anticipate that we will be able to maintain positive free cash flow in 2023 despite the macroeconomic challenges. With the company's stock based compensation for the quarter was up $1,600,000 from Q2 2022. We continue to forecast stock based compensation will provide an update on our financial results and financial results.

Speaker 2

We expect a weighted will leverage fully diluted share count of approximately 40,000,000 shares. Moving on to capital expenditures, our plan remains to invest between $5,000,000 $6,000,000 for the year, which includes capital expenditures for our 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.

Speaker 4

Thank you, Tiffany. We'd like to take a moment to thank each of you, the Lou Crew, our brand fans, with that, I'll turn it over to questions now.

Operator

Thank you. We will now be conducting a question and answer session. Thank you. And our first question comes from the line of Brooke Roche with Goldman Sachs. Please proceed with your question.

Operator

Good afternoon and thank you

Speaker 2

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 your own idiosyncratic initiatives that you have in place to drive sales. Thank you very much.

Speaker 4

Hey, Brett. 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 competition, especially for those looking to compete in more of an entry price point, albeit at a lower quality than Lulu's. That said, we're not really looking to compete in that fast fashion or disposable fashion race to the bottom. And are we really willing candidly to change our business model to accommodate we'll be conducting any business practices that would enable that type of business.

Speaker 4

What we're really focused on now and hyper focused, I would say, is continuing to build we're seeing a lot of awareness and brand awareness for our attainable luxury products and reinstating that positioning for our customers. And we see it every day in our exit surveys from our customer where they can't 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.

Speaker 8

Brooke, hi, 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 the guidance 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 interest resumption starting in September is something that we think we needed to wait a little more heavily in our guidance given that our customer is a Gen Z, millennial, largely college educated. We do think that they're we're going to feel that in terms of their discretionary spend. And so we've assumed that will be an impact for us we're going to continue to focus towards the latter part of Q3 and into Q4. So that's certainly factored in with regard to just lower demand overall.

Speaker 8

Given what we saw in the Q2 with regards to higher return rates, we do attribute that partly to product mix that we saw with a higher dress mix in the second quarter, but to be extra conservative there, we did also layer in

Speaker 2

Thank you very much. I will pass it on.

Operator

Thank you. And our next question is from Janine Stichter with BTIG. Please proceed with your question.

Speaker 9

Hi. Thanks for taking my and I want to ask a question for Tiffany. I want to hear more about how you're thinking about the back half gross margin. Are we still looking for 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 or you pull back on the we're going to continue to ramp up the marketing spend a bit to compensate.

Speaker 9

So how to just think about the balance of marketing versus pulling the promotional lever into the back half

Speaker 2

of the year? Thank you.

Speaker 8

Sure. Thanks, Janine. Good question. So for the back half of the year, we are we continue to be already 5 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 and Q4, we expect to see some continued gains in regards to the shipping costs, 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.

Speaker 8

With regards to promotions and discounts, as always sort of lean into our data driven model in order to determine the right mix of those. So I'm not going to provide an To react to what's going on in the market, historically, Q4 has been a more expensive we're going to be conducting a marketing quarter, and that's been a time when we've 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 somewhat nimble in terms of being able to flex on that as needed.

Speaker 9

Great. And then just one more on gross margin. You alluded earlier related to some of the costing initiatives that you're working on. Just where are we in that? And when will we start to really feel the impact in gross margin?

Speaker 3

I we'll

Speaker 2

take a look

Speaker 4

at the expectations that we'll be more pronounced into next year. It's not something that we want to swing too hard overnight and it's going to be incremental we can 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 and our current business model, we want to be cautious.

Speaker 4

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.

Operator

And our next question comes from the line of Garrett Greenblatt with Jefferies. Please proceed with your question.

Speaker 10

Hi. Thanks for taking my question, guys.

Speaker 7

I really

Speaker 3

want to

Speaker 10

get some more color on the wholesale partnership you mentioned. I'm kind of curious about the longer term and we'll continue to see the opportunity for that

Speaker 3

and just how you're thinking

Speaker 10

about that strategy overall?

Speaker 4

In the near term, we look at it as a profitable brand awareness channel and an opportunity will be available for our customers to engage with our product in person. I don't want to share the specifics or the details because it's still very new and recent for us. But I will say we're pleased with the we'll continue to update you guys as this matures a little bit. Again, it's been a fairly positive, very exciting initiative for us internally.

Speaker 10

Okay. Thank you.

Operator

Thank you. And our next question comes from the line of Janna Kim with TD Cowen. Please proceed with your question.

Speaker 2

Thanks for taking my question. Just curious about I know you talked about it a little bit about month to And I know 2Q is seasonally heavy dress season, but just curious how the non dress performed during the quarter? Thank you very much.

Speaker 8

Hi, Joanna. This is Tiffany. I'll just speak just with regard to the progression that we saw throughout Q2 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 will improve very gradually as we progress through the quarter. So April, for example, we were down 20.5% May, we were Just under 19%.

Speaker 8

In June, we were down about 17.5% on a year over year basis. So some improvement there as the quarter progressed. I don't know, Mark, if you have any specific customer additions.

Speaker 6

So when we look at that from the perspective of, let's say, household incomes, then we did not see any specific segments Incomes, then we did not see any specific segments stand out and that it was more across the board, Similar changes in behavior and so there was nothing to report there that has been called out.

Speaker 4

From a product assortment perspective, separates more specifically are more casual end use and are more basics and essentials underperformed to our expectations were our customers were really looking for newness and novelty. There are a couple of months that underperformed what we had expected we're going to continue to see a little bit of a slowdown in the Q1. So as we pivoted our assortment towards more novelty and more newness, especially in the more recent weeks, if not month, we're we're very encouraged by the team's ability to pivot more towards what our customer is seeking right now. That's not to say those other products aren't performing, they performing up to our expectations for the quarter. So we're happy about the progress we've made in Q3 towards pivoting more of

Speaker 1

the assortment towards what you're looking for.

Speaker 2

Got it. Thank you.

Operator

Thank you. Our next question comes from the line of Alice Hsieh with with Bank of America. Please proceed with your question.

Speaker 11

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 Is there a structural margin difference between international and domestic sales? And also how big do you think international can get over time?

Speaker 6

Great questions. So we do so international as a percent of we'll continue to see the revenue for us right now is still very small. And as we've spoken about, we're really about removing the barriers and the friction that we had. And so we feel that we're now in a good place that we can start building that revenue. As it relates to the experiences and And the data that we see thus far then, yes, between international and domestic, there is certainly a difference in conversion rates with international 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 we spent a lot of time over the last several years on that international component.

Speaker 6

So we look forward to growing that And build out over time that the revenue opportunity as you pointed out.

Speaker 8

Got it. And then over time,

Speaker 1

yes. In terms of

Speaker 4

just the overall size of the opportunity?

Speaker 2

Right, right.

Speaker 10

Yes. That is a To the

Speaker 6

point, we have not put any targets or stakes or communicated that externally. We are assessing what that opportunity is we will be able 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 we will be able to make sure that we are in place. And from there on, we will assess the opportunity. And if we feel comfortable how that could look like, we will communicate that.

Operator

Thank you.

Speaker 5

We will be conducting a question.

Operator

Thank you. And our next question comes from Dana Telsey with Telsey Group. Please proceed with your question.

Speaker 7

Hi, good afternoon everyone. As we look at the AOV, which was down around 1%, I think that's a slight improvement will be recorded from the down 3% in the Q1. What are you seeing in AOV? How are you planning it and balancing the level of markdowns with return rates? Thank you.

Speaker 8

Hi, Dana. This is Tiffany. Thank you for the question. Yes, so we were pretty pleased with where and answers in terms of the cadence there. And I may have missed your other question, was it around return rate?

Speaker 7

Yes, exactly.

Speaker 8

Yes. Return rates, generally speaking, picked up a bit in Q2. We have then It to be still very dependent on product mix. So what product mix was more heavier with terms of dress categories in Q2, That fluctuates during the year. So Q4, for example, we would expect to see return rates come back down, but we're still we're forecasting them to be a bit more elevated than what they were in the back half of last year.

Speaker 7

Got it. And then as you plan for the back half of the year, and we'll continue to see some of the potential brand awareness marketing campaigns that you're doing. How do you think of parsing out Q3 and Q4 and what may be the same or different as compared to last

Speaker 4

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 will be in a very test and iterate kind of way. I'd not model out will provide meaningful increases in our overall marketing spend compared to the first half of the year.

Speaker 7

Thank you.

Operator

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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Earnings Conference Call
Lulu's Fashion Lounge Q2 2023
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