Lulu’s Fashion Lounge Holdings, Inc. (NASDAQ:LVLU) Q2 2022 Earnings Conference Call August 17, 2022 5:00 PM ET
Company Representatives
David McCreight – Chief Executive Officer
Crystal Landsem – Co-President, Chief Financial Officer
Mark Vos – Co-President, Chief Information Officer
Naomi Beckman-Straus – General Counsel
Conference Call Participants
Randy Konik – Jefferies
Oliver Chen – Cowen
Dana Telsey – Telsey Advisory Group
Edward Yruma – Piper Sandler
Mark Altschwager – Baird
Noah Zatzkin – KeyBanc
Brooke Roach – Goldman Sachs
Lorraine Hutchinson – Bank of America
Operator
Good afternoon and welcome to Lulu’s Second Quarter 2022 Earnings Conference Call. Today’s call is being recorded and we have allocated one hour for prepared remarks and Q&A.
At this time I’d like to turn the conference over to Naomi Beckman-Straus, General Counsel at Lulu’s. Thank you. You may begin
Naomi Beckman-Straus
Good afternoon, everyone, and thank you for joining us to discuss Lulu’s second quarter 2022 results. Before we begin, we would like to remind you that this conference call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements, including but not limited to statements regarding management’s expectations, plans, strategies, goals and objectives and their implementations, our future expectations regarding financial results, references and outlook for the second half and year ending January 1, 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, performance or achievements to differ materially from results, performance or achievements expressed or implied by these statements. These risks, uncertainties and assumptions are detailed in this afternoon’s press release, as well as our filings with the SEC, including our Annual Report on Form 10-K for the fiscal year ended January 2, 2022 filed with the SEC on March 31, 2022, all of which can be found on our website at www.investors.lulus.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 or update any forward-looking statements or information, except as required by law.
During our call today, we will also reference certain non-GAAP financial information, including adjusted EBITDA, adjusted EBITDA margin and net debt. We use non-GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business.
The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP. Our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliations of GAAP to non-GAAP measures, as well as the description, limitations and rationale for using each measure can be found in this afternoon’s press release and in our SEC filing.
Joining me on the call today are our CEO, David McCreight; our Co-President and CFO, Crystal Landsem; and Co-President and CIO, Mark Vos. Following our prepared remarks, we’ll open the call for your questions.
With that, I’ll turn the call over to David.
David McCreight
Thank you, Naomi and good afternoon everyone. I’m joined today with my partners and Co-Presidents, Mark and Crystal. Before I speak about the quarter, I wanted to thank the LuCrew who continued to do a tremendous job executing on our strategy and delighting our many customers. In this challenging macroeconomic period, we delivered year-over-year revenue growth of 27%, at a healthy adjusted EBITDA margin rate of over 11%, a true testament to the power of our brand and strength of our business.
We feel our broader customer metrics continue to be exceptional and at record levels for LVLU, which reinforce our confidence in our longer term trajectory. Our fresh fashion assortment is clearly resonating with our millennial and Gen Z brands here and we’re continuing to acquire new ones.
Our active customers increased by 53% year-over-year, which included a 22% gain in new customers as we continue to grow awareness. Average order value increased 13% on a 12 month basis, with double digit gains from both new and existing customers. We believe these positive customer metrics demonstrate that LVLU continues to occupy more space in her closet and take share from the broader apparel industry.
That being said, after a very strong start to Q2, in late May after our Q1 earnings call, and like many others, we begin to see volatility and traffic trends and conversion rates, which were likely driven by increasing macro pressures that impacted our customer spending behavior. We saw higher level of returns, as well as shipping surcharges which had a disproportionately negative impact on our EBITDA margins.
As a result of this change in consumer behavior, we are actively managing our inventory and discretionary expenses, with a more cautious outlook because of the macro environment. We view these challenges as temporary and have conviction in our long term opportunity for continued profitable grow.
Our business model is resilient and adaptable. Let me remind you of the unique characteristics which enable us to execute through these uncertain times for the consumer and achieve our goals for long term profitable growth.
First, we have a very loyal and growing customer following. As evidenced by strong trends amongst new and existing customers, supported by our accessible price points and affordable luxury positioning, which spans broad age and income levels across millennial and Gen Z.
Second, we are not a fast fashion brands, and unlike many in the apparel industry, shifting demand does not necessarily mean obsolete inventory and excessive mark downs. The majority of our inventory can be carried from one season to the next. Also our data driven product development reduces risk, so we’re able to respond appropriately from an inventory perspective when preferences do change.
Third, we have a nimble cost structure in the largest components of our operating expenses, specifically in marketing, staffing and product costs for the future, so we’re in a position to adjust our cost structure if needed for the future.
Four, we believe we have amongst the fastest inventory turns in the industry. Fifth, we have a capital light model, with some months approaching negative working capital, which enables us to generate strong free cash flow. Finally, we have a solid balance sheet as a result of our debt reduction and we believe we are well positioned to fund continued growth and navigate through evolving business conditions.
We are reiterating our updated guidance that was issued on July 28. Please note, contained within this guidance range are investments necessary to focus on our larger mission of future brand and company growth at LVLU.
And now I’d like to turn the call over to Mark Vos, our Co-President and Chief Information Officer. He will share with you an update on key operational and analytical efforts to further support our continued growth, as well as increasing customer insight and engagement.
I will let Mark discuss some of these key initiatives in greater detail. Mark.
Mark Vos
Thank you, David. From an operations perspective we have plenty of good news to report. We opened our Southern California facility at the end of last year and finished transitioning our receiving quality control and cross docking activities of vendor inbound products in Q1 of 2022.
In Q2 we added network product replenishment activities to the mix. First, network replenishment will allow for further improvements to our algorithmic and data driven inventory allocation to the Northern California and Eastern Pennsylvania fulfillment centers. Secondly, optimizing inventory allocations supports the reduction of our already low split-ship rates of customer orders. And lately, moving to a more just in time inventory replenishment of our fulfillment centers, also improves the efficiency of those fulfillment centers, as well as postpones the timing of the opening of the next fulfillment center.
We previously shared with you that we went live in early Q2 with robotics in our Eastern Pennsylvania fulfillment center, which is also our largest fulfillment center. I’m happy to report that by the end of Q2 we consistently outperformed our internal efficiency goals at ROI calculations. I’m extending my congratulations to our distribution center teams, as well as our technology partners for a job well done. We are now also planning to introduce robotics into our Northern California fulfillment center, for which CapEx budget has been allocated in our full year 2022 guidance.
Switching now to our beloved customers, we grew our active customers by 53% to 3.2 million for the 12 months ending July 3, 2022, compared to 2.1 million active customers in the 12 months ended July 4, 2021. This record in active customers was boosted by high repeat rates of existing customers and strong new customer acquisition.
Second fiscal quarter 2022 over second fiscal quarter 2021 AOV growth was driven by higher units per order, at higher average unit retails net of discounts and markdowns. Indicative of our customer being impacted by economic uncertainty, average order frequency gains early in the quarter we lost in the latter part of the quarter, resulting in a marginal increase in average order frequency in fiscal Q2, 2022 over fiscal Q2, 2021.
We see continued growth in our Love Rewards loyalty program, both in number counts, as well as in percent of overall transacted revenue by our loyalty members. Members that redeem to their loyalty offers also drove higher revenue with a higher purchase frequency than non-Love Rewards customers. Based on this first full fiscal quarter of our re-launch loyalty program, we look forward to delivering additional value to our Love Rewards members through specific call to actions and perks.
Switching to the marketing landscape, in fiscal Q2 we encountered negative impacts from the May 25 Google Broad Core Algorithm update, due to Google taking a larger percentage of many of the overall search results page real-estate, for example more local results, dictionary definitions and web stories.
Some of our rankings were also negatively impacted by Google giving more preference to content website and in combination with reduced search volume due to the overall macroeconomic environment. At the end of Q2, Lulu’s non-branded keywords traffic was down compared to Q2 of 2021.
Our Search Engine Optimization Team quickly responded to the readings from the core algorithm updates made, and continues to make technical and content adjustments, and to-date we have seen consistent recovery and in many cases improvements in our average position rankings.
During Q2, the apparel space saw increased promotional activity, which related to LuLu’s adding incremental promotions to our calendar to be competitive where needed. Both new and repeat customers have responded favorably to the additional Lulu’s promotions, so seeing downstream increases in brand equity across Gen Z and Millennial Woman, as measured by volume of branded searches and in our brand monitoring tools.
We also added new influencer reporting tooling that provided additional insights with which we were able to increase our influencer driven earned media value over Q1 2022, without increasing our ambassador counts or incremental budget. We plan to expand our influencer marketing team to support growth in influence accounts and to drive continual EMV growth through the remainder of 2022.
Although our cost of customer acquisition through the end of the second fiscal quarter 2022 was slightly higher than the first fiscal half of 2021, we maintained a healthy first quarter contribution margin profitability. Due to the strong repeat rates and purchasing of our existing customers, we also observe further improved higher lifetime values for each of the 2017 through 2021 cohorts, positively impacting all cohorts LTV to CAC ratios.
And with that, I’ll hand you over to Crystal Landsem, Co-President and CFO who will discuss the quarter in greater financial detail.
Crystal Landsem
Thanks Mark and good afternoon everyone. While we were not immune to the macro and industry wide challenges, we were pleased that we continue to post double-digit top line growth, saw strength across many of our key metrics and continue to be profitable.
During Q2 we grew our net revenue by 27% to $131.5 million, a $27.9 million increase over the same period in the prior year and the highest net revenue for any quarter in our history. Our top line growth continues to be driven by the combination of new customers acquired and increasing loyalty from our existing customer base, with an all-time high number of repeat customers engaging with us during the second quarter.
Total orders increased by 29% and average order value increased 13% to $137, reflecting increases in both units per transaction, as well as higher average unit retail net of markdowns and discount.
We continue to be proud of our large and diverse community of loyal customers that are passionate about the Lulu’s brand. At the end of Q2 we had 3.2 million active customers, compared to 2.1 million active customers at the end of Q2, 2021, a 53% increase year-over-year. This was up 250,000 active customers compared to our 2022 first quarter ending active customer count of 3 million.
Year-to-date we’ve added nearly 500,000 brand fans to our active customer file compared to our year ending 2021 active customer file. Offsetting these positives, were higher than expected return rate above our expectations from earlier in the year. In addition Q2 typically has a higher penetration of event dresses and this merchandise category normally produces a higher level of return. Demand for event apparel continues throughout the quarter, beyond the typical busy season for events, driving return rate up further due to mixed shift toward this higher return rate merchandise.
Besides the challenges in the quarter, our business model proved resilient and enabled us to continue generating profitability. Gross margins for the second quarter fell about 380 basis points to 45.8%, driven primarily by two key factors, the costs associated with elevated returns, and second, high fuel surcharges and accessorial fees imposed by our carrier partners. In aggregate, we estimate that these two variables hurt gross margins by roughly 300 basis points.
Moving down the P&L to give some insights into expense line items, Q2 selling and marketing expenses were $25.9 million, up $10.8 million from the same period in the prior year as we increased our online marketing expenses to acquire new customers and retain existing customers. We remain first order contribution margin profitable during the quarter in spite of elevated shipping and returns costs. To us this reinforces the value of our disciplined marketing approach, in spite of the challenging macro factors.
General and administrative expenses amounted to $23.4 million for the quarter, an increase of $2.2 million compared to the prior year. The increase was primarily due to $1.3 million higher variable labor cost driven by the higher sales volume. Variable labor as a percentage of net revenue leveraged about 30 basis points over last year as a result of the investments in our distribution network.
Moving on to equity based compensation, compared to Q2 of 2021 when we were still a private company, we recognized an additional $1.2 million in expense in Q2, 2022 related to equity based awards put in place since our IPO. The increase in G&A expenses also reflects the $1.4 million in incremental public company costs, which we did not have last year in Q2. Partially offsetting these increases were lower fixed labor costs driven by lower bonus expenses this year.
Interest expense fell by $3.5 million to $157,000, the result of paying off our long term debt last year with proceeds from the IPO. Our income tax provision increased by $1.5 million or 46% from Q2, 2021. This increase is primarily driven by a higher effective tax rate of 44% compared to last year.
For the quarter we reported a diluted earnings per share of $0.15 compared to a diluted earnings per share of $0.28 in the second quarter of 2021. And finally, adjusted EBITDA for the second quarter was $14.8 million compared to $17.8 million in the same period in 2021. Our Q2 adjusted EBITDA margin was 11.2% compared to 17.2% in the same period in 2021.
Moving on to the balance sheet and cash flow statement, our balance sheet remains strong and positions us well to execute our long term growth plans and manage through near term macro uncertainty. Similar to last quarter, one key change compared to last year can note on the balance sheet, we adopted accounting standards under ASC 842 at the beginning of fiscal 2022. We ended the quarter with cash of $8.3 million and a balance of $15 million on our revolver.
Our inventory at quarter end amounted to about $48.6 million, up $27.4 million from last year’s levels. As always, we are leveraging our data to manage our inventory receipts with the ultimate goal of responding to customer demand. As we had mentioned on previous calls, we were turning inventory too quickly last year and knew we needed to improve the customer experience with higher inventory levels, so that we could continue to delight our customers. We are also potentially more vulnerable to supply chain disruption risks at those levels.
As of the end of Q2, all but approximately $5 million of the $27.4 million inventory growth was intentional to hedge against inflation, supply chain issues and to optimize size and stock to better service our customers. We expect to be able to move through the $5 million and excess inventory efficiently and with targeted promotions. We remain a very quick inventory turning company with industry leading turns.
As a reminder, our data-driven buying model results in roughly 70% of our buys being proven sellers with lower markdown risk. We are a fresh fashion concept, not fast fashion, which means our inventory mostly consists of products that are relevant over many seasons, so we are less concerned with inventory obsolescence and ensuing markdown risk.
We continue to operate a highly capital efficient business that positions us to generate significant positive cash flow. Year-to-date we generated over $10.5 million in cash flow from operations.
Moving on to guidance, we are reiterating the 2022 guidance we issued on July 28. We continue to expect net revenues of $440 million to $480 million, as well as adjusted EBITDA of $35 million to $45 million. Our adjusted EBITDA margin rate guidance continues to capture roughly $4.5 million of expected incremental expenses related to being a public company for the 2022 fiscal year, compared to the less than two months of public company expenses recognized in Q4 of 2021.
Our guidance targets are for the full 2022 year. That said, to set expectations for modeling purposes, in a normalized year our net revenue is typically highest in the second and third quarters due to demand seasonality for event dressing, with our lowest revenue coming from the first and fourth quarters.
We’d also like to remind you that our quarterly adjusted EBITDA margin rates have similar seasonality fluctuations of our net revenues and will likely fluctuate above and below our full year guidance rate depending on the quarter. Additionally, we expect adjusted EBITDA margins to be lower in the third quarter of this year compared to the second and third quarters of last year, primarily related to higher public company expenses, incremental marketing investments, as well as timing of expenses for infrastructure investment initiatives, which will require some redundant operations.
As a result of the pay-off of our long term debt facility immediately following the IPO, we expect interest expense to be around $700,000 for the year, dramatically down from $12.8 million in 2021. Stock based compensation for the quarter was down nearly $3 million from Q1, 2022, primarily due to any remaining stock compensation impact associated with the completion of the IPO.
Stock based comp is expected to run approximately $3.3 million to $3.6 million for the quarter, for remaining quarters of fiscal year 2022. For 2022 we expect a weighted average, fully diluted share count of 39.5 million shares. This year’s share count includes a full year of higher post IPO share count weighted across all four quarters.
Moving on to capital expenditures, I’d like to reiterate the following investment areas we are focusing on through the balance of the year to continue driving towards future growth. Now that we’ve completed a successful robotics implementation in our East Coast fulfillment center, we are moving forward with launching robotics in our Northern California facility set to kick off in Q4 this year.
We’re moving our photo studio to our Southern California headquarters to get studio operations in the same location as our merchandising team. We also plan to continue improving our internal custom platforms to ensure that we maintain and improve our customer centric shopping experience and marketing personalization, with investments in our customer experience, data platforms and furthering customer insights.
Lastly, we plan to further invest in internal and external software and technology to enhance our operational efficiencies, including expanding fulfillment and other distribution capabilities and our new Southern California DC. We continue to expect capital expenditures to amount to $4.5 million to $6 million for the full 2022 fiscal year.
And with that, I’ll pass it back to David for closing remarks.
David McCreight
Thank you, Crystal. We’d like to take a moment to thank each of you, the LuCrew, our Brand fans, Shareholders and Board for their continued support as we continue down our path for future potential.
With that we’ll turn it over to questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions]. Our first question comes from a line of Randy Konik with Jefferies. Please proceed with your question.
Randy Konik
Hey guys! Good afternoon, good evening. I guess this question might be first for Crystal. Crystal, just thinking about the full year outlook and some of the trends you talked about impacting the gross margin in the second quarter around return rate and freight surcharges, etc., can you give us a little bit of perspective on how you’re thinking about – you know the trend around these items impacting gross margin and then trends impacting SG&A, so we can get a little more thought on how we should be thinking through trend lines in the back part of the year in terms of gross margin versus SG&A in terms of getting to the EBITDA margins. Thanks guys.
Crystal Landsem
Sure. Hey Randy! So our guidance is contemplating, kind of as we’ve singled in the previous calls that we’re going to return to more of a normalized promotional markdown cadence in pre-pandemic levels. We also again, as I alluded to have about $5 million of inventory that we think is unnecessary to carry it from a balanced perspective and may have a little bit of margin compression as we work through that, also contemplated in the guidance.
But as it relates to return rates, we’ve experienced some elevated return rates I think like others in our space and we are expecting that to continue throughout the rest of the year. Although as mix shift away from event dressing and more into kind of fall, free fall, there may be some upside in guidance around potentially lower return rates as well. But the margin flow through or impact of margin flow through, some of those effects are contemplated in our guidance already and we reiterate about it.
Randy Konik
Got you. And then you know one thing that kind of continues to shine through on the income statement is obsolete, that you guys are profitable. Even with the lower guide a little bit because of the environment, you know it’s still nice and profitable. So I guess thinking through, some of the other things that were talked about, can you just elaborate a little bit more on some of the metrics around repeat rate, repeat purchase behavior that you were seeing, and then maybe a little bit more elaboration on some of the – I think you mentioned – via market reset mentioned the algorithm changes at Google, I guess that impacting marketing efficacy a little bit.
So just want to get some color on you know how you’re thinking about marketing going forward, you know combined with nice behavior around repeat purchases, because you know it looks like potentially we could be seeing a more of a stabilization from here around these lower but still nice and profitable EBITDA margin level. So I’m just trying to get a kind of handle on where we are in that kind of margin cycle based on these repeat purchases that are happening, combined with some of the costs that are going up on marketing as it relates to marketing efficacy. Thanks guys.
Mark Vos
Sure. Thanks for the question. We saw in Q2 very strong repeat rates of our customers, existing customers, as well as new customer acquisition. Both of the cohorts behave you know from a market [ph] perspective. There are PPTs as well as their average pricing AOV’s where we are higher, so that was good. But I mention that during the quarter we saw the order frequency taper off a little bit towards the end, but in and of itself it was a, I would say healthy quarter as it relates to those customer metrics.
What we did see is indeed the – at the end of May with the Google algorithm update, which just happens multiple times per year, and we’ve been obviously dealing with that for multiple years, so it’s in and of itself nothing, nothing new, other than this one – sometimes it’s positive and sometime its negative, right. So this time around negative for us initially.
It requires us then to basically take a reading on what has been trending down, what has been trending up, you know what has been published, what do we see across other industries, and what are some of the experts of publishing around that, and from there on we started then adjusting our technical SCO, on base SCO, as well as our content to basically work our way back right, and that’s what we’ve been doing since, and like I mentioned, we are – in many cases we have recovered or even improved basically.
And so I see that more as a sort of temporary dip in that traffic, and it’s something that we’re used to and specialized in to work with, because we are, and we also should not forget that, we are in the fortunate position that having been in e-com for so long, we are very strong and we have a very strong position also in our free and organic traffic. So in that sense it is important to the traffic mix. But when you have that negative impacts of the traffic temporarily that indeed has an impact on our marketing efficiently overall, and so we are certainly seeing that effect.
So going forward, like I said, these four algorithm changes, whether a positive or negative, they can have an impact going forward, but in the end I think it will all even out and that is also what our marketing approach is about, is to manage this, not just on an individual channel or even campaign level, but also on an aggregate level to make sure that we maintain that first order of profit that we are very keen to maintain.
Crystal Landsem
And Randy, from a modeling perspective, I just want to make it clear, we’re still going after growth. We don’t have any reason to try to pull back on our longer term initiatives. Of course we are watching all expenses. It’s a choppy macro environment, but from an overall marketing spend perspective, we don’t intend to try to cut there. We are still looking to grow that customer file. So I would expect consistency with what we’ve demonstrated in the past from a marketing spend perspective for the back half of the year.
David McCreight
Randy, its David here. Just following on the comments of the team, yeah we are really proud of how the LuCrew pulled together and responded to the Google algorithm. As Mark said, it’s because we are so proficient at it, than we initially felt it more severely than others might, through markets that’s really advanced in the metrics, and really retained a nice spot at the end of the quarter.
Back to the sort of margins, EBITDA margins you referred to, yes absolutely! We are – our root to being entrepreneurial as a company, both about growing profitably as you called it out and everything, our plan is continuing to do that. That being said, remember we do have some quarterly and seasonally differences in our business and you’ll find that unlike most in the industry Q4 is our smallest quarter, so we end up with quite a few – you know our fixed overhead impacts for each of our EBITDA margin rate that’s just a bit lower in Q4 than in Q2.
Crystal Landsem
Yes. We typically don’t participate in the digital marketing bloodbath that’s out there in Q4 either. So we try to be as efficient as possible. It’s just not a big season for us, so it’s not as necessary for us to impact from that perspective, in that margin losing proposition.
Randy Konik
Great! Thanks guys.
Operator
Thank you. Our next question comes from the line of Oliver Chen with Cowen.
Please proceed with our questions.
Oliver Chen
Hi! Thank you very much. On the second half as we think about gross margins, will that continue to be impacted negatively by surcharges from freight and higher returns. We’re also curious about July. July has been a tougher month for many versus June. However, towards the end of July things may have improved. We just love your take on if you’re seeing that kind of volatility and any read through.
And then Mark, on the Google Broad Co update, some of the changes seem to be around video as well. As you think about ear marketing techniques and plans and your artificial intelligence, are there new capabilities that you’re working on in terms of broader changes you’re making, and what’s your hypothesis for why it disadvantaged you. Thank you.
Crystal Landsem
Hey Oliver! From a margin perspective, as it relates to fuel surcharges and some of the other kind of external factors that have been affecting the business, I think if I had a crystal ball, I’d be one of the wealthiest people on the planet. But we are contemplating in our guidance that we continue to see pressure, specifically around holiday surcharges that may or may not be passed through from our carrier partners. It’s difficult to say, but our guidance is contemplated that that continues to be some headwind for us.
As it relates to overall gross margins, from a merchandise perspective, we’re typically higher in our separate though non-events business in the second half, which is a less mature part of our business and so I’d expect lower margins than our run rate, but that’s the normal course of business for us in terms of Q3 and Q4.
As it relates to July and so far in the quarter, we are taking a cautious approach. I think things are looking up, but we want to be very careful about how we give guidance until the macro environment stabilizes. So that said, thing are good, but we expect it to continue to be choppy for at least the near term.
I’d have to differ to Mark on the Google question.
Mark Vos
Yes, as it relates to Google, I think you are referring to the video, the TikTok in that saying, as well as web stores that Google introduced. We are indeed playing with that and seeing how we can benefit from that, and that is apart for the course, that’s what we do after we issued these changes, to figure out what works, how does it contribute and how can we optimize that. And whether that even is something that plays longer term, because Google might also have changed these again going forward.
David McCreight
Right Oliver, as you may recall from the – given from the pre-IPO discussions, we know it and believe – quite confident that we’re a very high performer in the performance marking side and based on resources we had opportunity to grow sort of other muscles and build other neural pathways in the marketing side of the business. And these kinds of changes from Google or Facebook do nothing but actually accelerate and stiffen our result to make sure that that happens quickly, and we’re really happy with the near term progress the team has made, and you can start to see that. We were headed this way anyway, but it certainly did nothing, but we just want to continue those efforts.
Oliver Chen
Thank you very much. One quick follow-up; you have that student special in terms of getting 10% off. What about back-to-school for Lulu’s? Is that a catalyst and how are you seeing the promotional environment manifest in terms of those around you, because certainly some categories of apparel are over inventoried in the industry. Thanks a lot.
Crystal Landsem
Hey Oliver! Just give our customer demographic, I would say back-to-school is more so an opportunity for us from a college perspective and more specifically from a home coming event and all the events related to sorority rushes and that sort of thing and less so on the back-to-school from a high school, you know a younger demographic perspective. So it’s not a big month for us, but it doesn’t mean we don’t participate and it’s just in kind of a different passion with our more collage aged demo.
David McCreight
And regarding the promotional environment, so for us fortunately, much of our product is seasonless or seasonal and so it doesn’t – it isn’t as seasonal. So we’re not under the same kind of pressures that other apparel brands in the industry would be in terms of pleading their brick and motor location by going through and on with that. So we fully expect to leverage that and pursue a path of highest recovery on purchases.
That being said, with inflationary pressure, we think many, many sectors are watching what they are spending or seeing they spend less outside of the lux market. So we have reintroduced as Crystal indicated several calls ago, reentered plans to reintroduce small, light, consistent, commercial messaging. Just to make sure our call to action in there, and we expect to see that continue through the balance of the year.
Interestingly for us, that certainly engages certainly certain sub segments with the customer quite nicely, and also has an interesting impact on the need for marketing expense, because as you know light promotional activity not deep discounting, but light promotional activity spurs conversion, which then means we don’t necessarily spend as much on the other hand, so there’s some nice good positive takes there.
Crystal Landsem
Positive trade on.
David McCreight
We expect that environment to continue and we expect it to continue, because our larger industry is our inventory and so we think our brands perceive value under a little more pressure and so we’ll be doing that just for the play in the game versus the big clearance effort. We expect that to continue through probably – into the year certainly.
Oliver Chen
Thank you. Very helpful. Best regards.
Operator
Thank you. Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.
Dana Telsey
Good afternoon, everyone. As you think about the Southern California distribution center that was opened at the end of last year and inventory levels with the completed tender inbound product, how should we be thinking about inventory levels going forward from the position where it is now? And then as we approach the holiday season, how are you thinking about inflation and pricing on your merchandise? And just lastly, any difference in terms of current trends of what categories you’re selling best or not performing as well. Thank you.
Crystal Landsem
So from an inventory levels perspective we’ve been working as you guys know, working really hard to get our inventory levels up to better meet customer demand and optimize the size and stock ratios and all of that. So we’re finally at a place where we feel like we have enough inventory. A little bit to work through, but generally we feel pretty good about our inventory levels where they are now.
That going to flex up and down from where we are, depending on which season we’re leading into and what our estimated quarterly revenue targets we going to be going forward. So I would say I would expect a stable if not slightly positively, slightly negative inventory balance for the next several quarters ahead, absent any massive changes up or down in consumer demand, so – but I think we’re in a really good spot from an inventory level perspective and Mark and team has done a great job of expanding the distribution centers to handle the flexes up and down.
Dana Telsey
Got it. And then on pricing, how are you thinking about pricing going forward?
Crystal Landsem
We really think a pretty surgical approach to pricing. From an inflation perspective we’re in kind of a high single digit impact so far from an overall costing. So we’re looking at pricing on a daily basis at askew levels. It’s optimized for what sells through and what resonates with our customer and so in that sense it’s sort of business as usual for us.
Dana Telsey
And then categories what you’ve been experiencing?
Crystal Landsem
We’ve always been really well known for our event dressing and we’ve been really pleased with how the team has performed in meeting demand and meeting our customer, where she is for that particular demands set. That said, we’ve seen double digit growth across events, non-event, cocktail, all of our non-event classes. Specifically we’ve done a really good job of still getting more share per closet in that regard.
So we flex though within every quarter and whenever our customer is telling us what she wants and so that inventory is going to flex up or down depending on the season and what we’re resonating with our customers, so it’s difficult to predict longer term with us.
David McCreight
That, and Dana as we continue to – like we talked about earlier strategically about our past grow brands and become a, you know truly a lifestyle brand, we’re going to continue to work on more purchase occasions and see the assortment contingent to brand [ph] and we’re really pleased to see the performance across both of that. And all of that being said, there certainly will be macro trends where events dressing may peak from a macro perspective some and then it’ll tilt with skewer selling and then there’ll be other moments in the fashion cycle where none of them will take off and search it.
What we love is that diversification we’re building, so that we’re – while we certainly know and are very happy to be thought of as you know an events brands, and (b) just put share of line in the customer. Several years from now we want to be able to look at us and then not be able to do one specific, but really count on us as that sort of lifestyle for all occasions. And as we make that headway, you know that’ll be the true measure of our progress there, not just being as a [inaudible].
Dana Telsey
Thank you.
Operator
Thank you. Our next question comes from the line of Edward Yruma with Piper Sandler. Please proceed with your question.
Edward Yruma
Hey guys! Thanks for taking the question; two for me. I guess first, not to draw too fine of a point on a couple of weeks, but you know as you look at your data, how far do you think gas prices are to your consumers behavior and would you attribute some of the strength I guess that got observed in the end of July due to lower gas prices.
And then as a broader question, we’ve heard some of your peers talk about being kind of higher efficacy returns from TikTok. You know just you see more eyeballs move to that channel, you know how do you think your analytics and fact in our position take advantage of content on there. Thank you.
Crystal Landsem
So from a gas prices perspective, I think for a subset of our customers at the lower household income level, that is – there is absolutely a direct relationship between how and when they engage with us and the price of gas. So if that comes down, we can expect that particular cohort of our customers to spend more with us and engage more with us and we’re already seeing early indications of that.
Our higher household income customers seem to be so far less affected by that, that’s not to say they wouldn’t be, but so far so good in terms of that customer group.
I’ll defer to Mark on the TikTok question.
Mark Vos
Yeah, TikTok is an increasingly important channel. As we’ve seen over the last several quarters and we have certainly invested on the content side, but also on the cooling side in order to further optimize that channel for us, and we’re very happy with what we’re seeing and the progress that we’re making.
The content that we’re making, we see that you know based upon the engagement is better resonating with our customers and we are also continuing to expand in that content, as well as tooling to better understand the landscape across all social channels, as well as what our peers are doing, and you know as a result for example we have been able to increase our – our earned media value is one of the KPIs that we’re tracking, that were able to increase without necessarily spending more and just becoming better at it, better content and more efficiency there.
David McCreight
And we could probably do – we could probably do like half a day in that platform, but just on the consumer there is some growth in analytics and the data we get from our performance side, and as we continue to develop in this space we’ll see and learn other creative lines off of our customer’s purchase behavior, and those are some of the elements that you know everyone’s focusing on how to resonate more, but then how that ties back to direct purchasing assumption and so on.
Edward Yruma
Thanks so much.
Operator
Thank you. Our next question comes from the line of Mark Altschwager with Baird. Please proceed with your question.
Mark Altschwager
Hi! Thanks for taking my question. I was hoping you could just give a little bit more color on the shift that you are seeing in the macro or the shift you’re seeing in the demand backdrop. I guess the mix shift towards dressed and the expenses associated with that makes sense, but that still sounds like a very highly engaged consumers, so I’m trying to better square that with the fairly significant change in your growth outlook for the back half of the year that you gave us with the pre-announcement.
Crystal Landsem
Yeah, I think it’s more a shift that we are potentially anticipating around that every day wear that she’s using to build out her closet and where the demand for that maybe lower, especially in that lower household income customer group that we have, and really our guidance is more around just caution, because the macro backdrop is still so choppy and these are the factors like – those are the targets that we are concerned about that are just having flow through issues.
But event continues to be a really great force of growth for us, but our, most of our temporary guidance is really around that less necessary, less event driven product, but we finished…
David McCreight
Yeah, thinking of the consumer, they are going to make that a tough choice of protect their event dressing or their instagrammable moments, unless it was [inaudible]. Again, we’ll see how it plays out, but that obviously as Crystal said in terms of the near term feels good, but we want to be cautious.
Crystal Landsem
And we view that as temporary.
Mark Altschwager
And to that point, I guess maybe following there, if you look at the back half, it kind of implies revenue down a little bit at the low end, kind of up I think in the mid-teens at the upper end. Some temporary factors obviously weighing on trend, but just any updated thoughts on how you’re thinking about the medium term growth targets, growth algorithm, just relative to the previous goals of over 20% on the top line.
David McCreight
Yeah Mark, just you know based on the timing of when we had to give guidance, this time of the year isn’t a huge time, but from an analogy to sort of like turning the course of the sailboard, you know watching the wind, is it blowing strong or not, you get a clear sense of direction. And so we want to make sure that we’re doing – as we continue to update you all as we see and again more confidence in the outlook, but that’s why we have a bigger bandwidth, as the time, we saw a broader range of outcomes. And so you’ll see us gain – as we gain more conviction, we’ll share more to give you a better sense of how that ranges in that.
Mark Altschwager
Great! Thank you.
Operator
Thank you. Our next question comes from the line of Noah Zatzkin with KeyBanc. Please proceed with our questions.
Noah Zatzkin
Thanks for taking my question. First I was hoping if you could give any color on just, you know kind of the behavior you’ve seen from the consumer and how that may differ from the end of May to the end of July to currently different income levels, geography, any different behaviors there. And then second, as we model out the rest of the year, how should we think about AOVs as well as return rate. Thank you.
Crystal Landsem
So from an AOV perspective, I would say build-in we built across the quarters are fairly consistent, but at a higher base line. So if you were to look at previous years, I think you can engage how we are modeling out from an AOV perspective and that really just captures the mix shift. We’ve seen our customers adding more to cart and without of course higher returns obviously, and we are taking a conservative approach to our return rate model assuming that the elevated revenues, assuming for the year.
As it relates to the consumer behavior from May to July, we did see higher returns that started coming in, which typically follows and of course paid is the right word, but negativity in the press can typically drive a higher return rate at least anecdotally where our customers are feeling pressure from a macro environment perspective and maybe returning later and returning more. It’s difficult to say where we are currently in the quarter, how that trend is going to continue, but the elevated return rates from May to July, as well as softer demand, especially from that lower household income customer.
Noah Zatzkin
Thank you.
Operator
Thank you. Our next question comes from the line of Brooke Roach with Goldman Sachs. Please proceed with your question.
Brooke Roach
Good afternoon. And thank you so much for taking our questions. David, perhaps we can start off with a few comments on how you perceive the competitive environment against this choppier macro. Have you seen any strategic shift with any of your competitors and any actions that you think need to necessitate a change in Lulu’s actions?
David McCreight
Hi Brooke! Thank you for the question. So what we’re – we’re seeing a couple of things near term and then we expect some other things in sort of the mid-term. Near term you could definitely see a change in the spending environment online, where some people who are digital resonance core look like they started to pull back spending on the performance side. But this is just, that’s anecdotal, still looking and checking in on that.
What we expect in the near is we do, and I alluded to this little earlier, we expect it to be a promotional environment near term, driven by the omni-players or severe vaster fashion people who may have been out over their skis a little bit, but that’s an abrupt change in consumer purchase behavior.
Where that impacts LVLU is two things. One, we don’t have to react that way, because the vast majority of our merchandise is not fashion forward; more seasonless where we can carry from one to the next. Two, it will probably cause us to reintroduce as we had indicated earlier, a little more targeted software promotions to make sure that, our perceived value of affordable luxury response to everyone else’s marking pressure. So we think it’s a good time to continue to gain customers and have a, probably a superior brand experience, while the rest of the folks are focusing on getting inventory levels in line.
Brooke Roach
Thank you and then just maybe a follow up. You know there has been a couple of references to the lower household income consumer reacting a little bit differently to different market stimuli. Can you level set us on the importance of the lower household income consumer versus maybe the middle or higher household income consumer to your business and how are you adjusting your marketing strategies to each of those demographics as those demographic groups customer behavior has changed. Thank you.
David McCreight
We enjoy customers from a broad range of the income, household incomes and I would say that there are multiple segments there that are important. And so there is not a single one that say dominates and so in that sense when the lower household incomes in lower segments our showing – earlier on were showing some behavioral changes in the sense of their order frequency started to slow down before other household income; that’s one of the things that we were observing there.
That in and of itself doesn’t change our marketing approach or it hasn’t thus far, because we believe that what we have seen that with, for example, a combination with the additional strategic promotions that we added to our calendar, is that we are still able to engage also those segments in an ineffective manner.
Brooke Roach
Thanks so much. I’ll pass it on.
Operator
Thank you. Our next question comes from the line of Lorraine Hutchinson with Bank of America. Please proceed with your question.
Lorraine Hutchinson
Thank you, good afternoon. Just wanted to get a sense of your strategy, if your consumer continues to struggle, do you want sales decline to protect margins or would you consider more aggressively ramping promotions or marketing to maintain the whole sales growth?
Crystal Landsem
Sorry Lorraine, do you mind repeating your question, it was a little bit hard to hear.
Lorraine Hutchinson
Oh! Sure. Sorry about that. I just wanted to get a sense of your strategy if the consumer continues to struggle. Would you let sales decline to protect margins or would you consider ramping promotions or marketing more quickly to maintain that higher sales growth. Thank you.
Crystal Landsem
I’m not sure actually there a point where we would have to decide between the two, but I think a lot of that is solved through our pricing strategy and just how we’re able to connect sell-through with pricing sort of from that perspective, and we have a pretty broad assortment that can attract both ends of the household income spectrum if you will. And so I don’t that we are in a position where we really need to choose between net growth or profitability at this point. We’ve got so value proposition in that product, that I’m not sure of it yet.
David McCreight
You know one of the key – let me add on to that. One of our key premises of our business is all about profitable growth, profitable customer acquisition and profitable growth and our forecasts have continued to go down that path. So we would toggle that sort of range within that as we have always in the past and we’ll continue to do so. As Crystal said, we don’t foresee any issues as it relates to having to drive that. So we don’t have to discount beyond profit – to not achieve profitability down that path. And again, given our product mix, we wanted to stay fresh and current, but you’re not going to see us intend to have massive, blowouts to raise cash or to try to hit in our official sales target.
We are still early in our venture. We believe we have lots of untapped market potential, yeah that sort of late May customer sort of air pocket that came through. We adjust and then get back, but we think it’s an adjustment, a tweak. It gives us sort of like small dials on the radio to turn versus big dials on the radio to turn at this stage for us.
So because of our business model, a really quick turn and as you can see with the customer loyalty we are getting in the traction. We are just going to continue down that path, turn small nobs in the dials, add in a few proms here and there where necessary, and kind of contribute to advocate ability in marketing, storytelling that we talked about.
Lorraine Hutchinson
Thank you.
Operator
Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. This does conclude today’s conference and you may disconnect your lines at this time. Thank you for your participation and have a wonderful day!
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