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spk10: Good afternoon, and welcome to Lulu's third quarter 2021 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 Alexa Pizak, Associate General Counsel at Lulu's. Thank you. You may begin.
spk07: Good afternoon, everyone, and thanks for joining us to discuss Lulu's third quarter 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, including our plans to invest in a third logistics facility and a mobile app, our future expectations regarding financial results, outlook for the quarter and year ending January 2nd, 2022, market opportunities, product launches and other initiatives, and our growth, including with respect to our customer community. 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 final perspective filed with the SEC pursuant to Rule 424 on November 12, 2021. all of which can be found on our website at 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 and adjusted EBITDA margins. We use non-GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for, or superior to the financial information prepared and presented in accordance with GAAP. Our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliations of GAAP to non-GAAP measures, as well as the description, limitations, and rationale for using each measure can be found in this afternoon's press release and in our SEC filings. Joining me on the call today is our CEO, David McCrate, co-president and CFO, Crystal Lansom, and co-president and CIO, Mark Voss. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn the call over to David.
spk02: Thank you, Alexa, and good afternoon, everyone. Thank you for joining us on our first earnings call as a public company. Our IPO and gaining access to the capital market is an important and exciting milestone for the team. But we recognize it's merely one proud step in our journey to reaching our future potential as a company. And now, we are delighted to share our exceptional third quarter results with you all today in our first earnings call. As a reminder for those who've met us recently on the IPO roadshows, or as an introduction for those who are new to our business model, Lulu's is a customer-driven, digitally native fashion brand primarily serving millennial and Gen Z women. We focus relentlessly on meeting our customers' needs. We do this by using data coupled with human insight to deliver a curated and continuously evolving assortment of on-point affordable luxury fashion. We aim to build authentic personal relationships with our customers and offer them coveted quality products, most of which they cannot purchase elsewhere. We tap into the pulse of the customer by engaging with her where she is online, through digital channels and social media, as well as on our own platforms, through reviews, feedback surveys, one-on-one interactions with our style advisors, fit experts, and bridal concierge team. Our team, the Lou Crew, works to make our customer touch points special, which ultimately leads to strong customer engagement and loyalty with our growing community of brand fans. A key differentiator of our model is our use of data to optimize almost all elements of our business. The use of data and technology guide much of the decision-making throughout the company, from logistics planning to marketing placement. But nowhere is this more pronounced than on a product creation and curation cycle. Traditional merchandising approaches are both risk and capital-intensive, characterized by extended in-house design cycles, seasonal assortment decisions, deep buys made with limited customer feedback, and often high markdowns. Unlike traditional retailers, we leverage our test, learn, and reorder strategy to bring hundreds of new products to market every week. We test products informed by our attribution system in small batches. We use our algorithms to gauge customer demand and then quickly reorder winning products in higher volume to optimize revenue and profitability. This strategy and use of test information enables us to convert new products into profitable sales consistently and with a high degree of accuracy while minimizing fashion and trend risk. Our overarching vision is to be the most beloved women's brand for affordable luxury fashion. through curated, exclusive products at reasonable prices, with superior customer service, and a personalized shopping experience. We want to be the category-defining apparel brand for millennial and Gen Z women. A few key points about Lulu that I'd like to highlight. We remain focused on strengthening and deepening our relationships with customers, aspiring to address them for more occasions and every day of the week. in order to expand our space in their closet and thereby growing wallet share. By increasing Lulu's brand awareness over the next quarters and years, we expect more customers to join the Lulu's community. We launched our first ever brand awareness campaign in late Q3, focused entirely on acquiring new customers, or as we like to say, bringing more new friends to the party. Over the next quarters, we will be laying a stronger foundation for potential international marketing that international customers are already showing their interest by visiting and purchasing at Lulu's, as well as following and engaging with us on social media, even while we're not actively marketing to them. As a digitally native brand, we continue to accelerate our competitive advantages and data-driven merchandising, profitable marketing, and operational efficiency. leading us down the path of future market share gains. Turning to a few of our third quarter highlights, we had another excellent quarter delivering growth in net sales and profitability, achieving record results for any third quarter in our history. Comparable net sales increased 95% year over year, and adjusted EBITDA increased 126% year over year. Crystal will walk you through the finer points shortly. We are also thrilled by our growth in active customers with sequential year-on-year and double-LY growth in both new and repeat customers, with appreciably more efficient performance marketing spend as a percentage of gross sales versus last year and double-LY. Clearly, our affordable luxury brand experience, combined with the reach of our marketing efforts, is bringing new fans to the brand. From a merchandising perspective, we are encouraged by the broad-based response to our product offerings with both event and non-event categories, delivering double-digit demand growth as compared to 2019. We saw maintained momentum addresses and even faster growth in separate sales as compared to 2019. Our operating results reflect our disciplined approach to spend and efficiency. It's a testament to our model and team that we're able to achieve meaningful revenue growth with inventory turnover at a rate north of eight times. And Mark's team's been busy implementing plans to not only expand our logistical capabilities to facilitate our fast growth, but also to find new ways to optimize an already efficient logistics system. Finally, before Crystal walks you through our financial performance for the quarter, I wanted to provide commentary on COVID and supply chain issues. We all can bear witness to how our daily lives have been disrupted, and our product supply chain endured some delays, but it was not to the degree you read about daily in the business headlines. Where we have been affected mostly is our reduced ability to chase in season, not being able to maximize the upside in periods of exceptional demand. And while few can confidently speculate on how variance might impact the economy, what we can say is Lulu's is better prepared for disruption. Our balance sheet is now healthy. Our product offering is increasingly balanced with fastest revenue growth coming from our non-event segment. And with approximately 70% of our revenue from algorithmic-driven purchasing, we're able to confidently take positions in future orders with low risk. Again, thank you for your time. We are thrilled about our future prospects and look forward to executing on our vision. I'd like to take a moment to thank the Lew crew for finding new ways daily to efficiently delight our brand fans. Without you all, none of this would be possible. And now let me introduce my colleague, Crystal Lanson, co-president and CFO.
spk06: Thanks, David. And good afternoon, everyone. Before we dive into our results, I would just like to say how grateful I am to be part of such an amazing company and team that continues to execute on a daily basis. As David mentioned, we delivered a very strong quarter highlighted by growth on all fronts, including net revenue, gross margins, profitability, and cash flows. We had a record number for third quarter active customers engaging with us as our customer returned to their social calendars and continued to come back to us for their everyday fashion needs. With that said, we're very pleased with our third quarter financial results, so let's dive right in. During Q3, we grew our net revenue by 95% to $106.3 million, a $51.8 million increase over the same period in the prior year. And Q3 year-to-date net revenues were up 43.6%, an $84.7 million increase over the same period in the prior year. 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 third quarter. We're very proud of our large, diverse community of loyal customers. In the 12 months ended October 3rd, 2021, we served 2.5 million active customers compared to 2.3 million active customers in the 12 months ended September 27th, 2020. In spite of the industry-wide supply chain challenges, our business model has enabled us to continue our path of strong growth and profitability, as you can see from our successes in Q3. Growth margins for the third quarter increased 290 basis points to 47.7%, driven by lower markdowns and discounts compared to last year, as well as a shift in sales mix to higher growth margin products. Strong customer demand drove fast inventory turns and a high level of net sales at full price. The re-acceleration of event dressing demand coupled with accelerated demand and non-events dressing drove year-on-year improvements in gross product margins across nearly all product classes. Our AOV reached an all-time high of $125, driven by increased items per cart, as well as lower discounts and markdowns due to lower promotional activity, with AOV increasing 22% over 2020 and 12% over 2019. Moving down the P&L to give some insights into our expense line items, Selling and marketing expenses consist primarily of online performance marketing, payment processing fees, and other advertising. Q3 selling and marketing expenses were $20.5 million, up $11 million from the same period in the prior year due to the return of online performance marketing spend to a more normalized state. Spend was suppressed in 2020 in response to lower customer demand due to the pandemic and an increased focus towards liquidity and cash flows. Towards the end of Q3 this year, we also launched our first-ever brand awareness campaign. Our free, organic, and low-cost initiatives coupled with profitable performance media drive traffic to our platform, which is custom-built to allow for continuous updating and personalization for each customer. And our unified cross-platform strategy consistently reinforces the same brand values, with our marketing approach resulting in an attractive customer acquisition and strong retention. General and administrative expenses amounted to $21.2 million for the quarter, an increase of $10.3 million compared to 2020. It reflects increases in payroll and benefits in line with higher sales volumes, higher bonus expenses due to improved business results, and higher fixed headcount costs as the previous year's costs were suppressed due to furloughs related to the pandemic. It also includes a $1.7 million increase in equity-based compensation related to stock options and special awards. We reported earnings per share of 13 cents up from one cent in the third quarter of 2020, which is the result of our top line growth combined with efficiently managed costs and operations. And finally, adjusted EBITDA for the third quarter was 11.9 million up from 5.2 million in the same period in 2020. Our Q3 adjusted EBITDA margin was 11.2% up from 9.6% in the same period in 2020. We believe these non-GAAP metrics are important supplemental measures for understanding our results. We refer you to our 10Q and earnings release issued earlier today for the required disclosures and reconciliations. Moving to the balance sheet, our cash and equivalents amounted to $40.9 million as of October 3rd. For inventory, we ended the quarter with $23.4 million, an increase of $9.9 million and 73% higher compared to $13.5 million at the end of Q3 2020. We completed our IPO on November 15 2021 with net proceeds of 85.6 million we repay the long term debt balance and borrow 25 million against the new revolving facility. Just as a reminder, we operate a highly capital efficient business that positions us to generate positive free cash flow and the third quarter we generated 12.7 million in cash flow from operations. As it relates to guidance, since this is our first earnings call as a public company, I wanted to provide a framework for our key performance metrics and how we will evaluate the business. Outside of the core financial statements, we will provide annual guidance to be updated quarterly on revenue, adjusted EBITDA, average order value, and active customers. We will also provide annual updates on CapEx. And just as a quick reminder, we're not a Q4 dependent business, and Q4 typically represents a smaller quarter compared to the rest of the year. Historically, our net revenue is highest in our second and third quarters due to higher demand for event apparel in spring and summer fashion. Our guidance range for 2021 is net revenues between $370 and $372 million, which represents growth of 49% and 50%. Adjusted EBITDA is expected to be between $38 million and $39 million, which represents growth of 101% and 106% over 2020. This equates to an adjusted EBITDA margin of 10.3% and 10.5% compared to 7.6% in 2020. As a result of paying down our long-term debt following the IPO, we expect interest expense of $4 million in Q4. which includes the amortization and write-off of loan fees related to the term loan payoff versus $4.1 million in last year's Q4. On an as-adjusted basis for the paydown of the debt, interest expense would amount to approximately $1.5 million versus $3.5 million in Q4 of 2020. We expect that the impact of non-recurring amortization and write-off of loan fees captured in interest expense for Q4 2021 will be $2.5 million. Moving on to capital expenditures, I'd like to highlight the following investment areas for us going forward. Firstly, we're planning on continuing to invest in our logistics capabilities, so we're prepared to continue to serve our customers as we grow and scale. These initiatives include plans to invest in a third logistics facility starting in Q4 2021. We are also planning on continuing to improve our platforms to ensure that we maintain our customer-centric shopping experience Our near-term initiatives on this front include the launch of a new mobile app in Q4 2021. With the rollout of these initiatives, we expect capital expenditures of roughly $3.5 million for the full 2021 fiscal year. We believe that this guidance that we're sharing today should provide a strong sense of where we're aiming as a brand, and we will share more information, including 2022 guidance, when we report on Q4 earnings. Thank you. We're looking forward to hearing your questions.
spk10: At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from the line of Brooke Roach at Goldman Sachs. You may proceed with your question.
spk12: Good afternoon, and thank you so much for taking our question. David, Crystal, I was wondering if you could talk a little bit to the sequential trends that you've seen in customer engagement and purchase activity throughout the third quarter and into the holiday period. How are your newly acquired customers engaging with the brand today? And have you seen any impact from these results as COVID trends have started to shift nationwide?
spk02: Crystal, why don't you take the COVID trends portion and Mark, maybe you could talk about the customer sequential.
spk06: Yeah, sure. It's a good question, Brooke. So from a COVID impact perspective, I would say that we've not really experienced any noticeable changes. And just to highlight, you know, our performance through Q2 and even into Q3, we had 69% and 95% growth respectively. So What's really great about our buying model and our business model in general is that we've been able to mitigate some of those risks and still put up some really strong numbers. And that's been largely driven by new and repeat customer engagement where we've seen an acceleration sequentially for both.
spk12: Great, that's really helpful. And as we think about the initial learnings that you've had so far from your brand awareness campaign, And I think I heard in the prepared remarks plans for maybe some new international marketing. Can you talk to us a little bit about how you're thinking about marketing going forward and engaging that new customer? Thank you.
spk15: Sure. Mark, do you want to start with international?
spk02: And then I'll address the general marketing questions.
spk00: Sure.
spk05: So in the near-term revenue outlook, we did not contemplate any material increases in revenue from international sources. Based on our platform traffic and social following data, we do see interest in movements from international customers. And so therefore, in the near term, we are focusing on improving the international visitor experience to bring this up to par with our domestic brand experience. And then from there on, we will look into possibly expanding marketing activities in select territories and or possible international partnerships in order to increase our ability to test and learn what works for us in the international markets.
spk02: Right. And following on Mark's comments internationally, that'll then set us up to, as we discussed during the roadshows, to explore that our potential in foreign markets with Potentially, most likely, initially some third-party partnerships using their platforms and traffic to learn and test our product, test our product appeal, test pricing, a number of things before we consider whether we're going to do it our own and build real infrastructure in the country. As it relates to the brand awareness campaign, as we've talked about in the past, we really are a culture built on testing and learning, whether it's our test, learn, and reorder model, or how we approach marketing. And it goes on. We're very, very good at advanced with performance marketing. And we know, like we've talked about earlier, that we have this large addressable market, and we're always looking for new ways to introduce new people to the brand and make new brand fans. And so brand awareness is a different discipline, and some of it's different. We've been doing and been working with social awareness platforms, social media for quite a while. But we think we're going to be learning quite a bit from this, and we'll continue to test it in the near future, the best way to bring our message to new audiences.
spk12: Thank you very much. I'll pass it on.
spk10: Our next question comes from the line of Lorraine Hutchinson with Bank of America. You may proceed with your question.
spk09: Thanks. Good evening. I wanted to follow up on your comments around the success In the non-events, outpacing success in event dressing, can you talk about what categories have been working and then how that informs your buying decision on a go-forward basis?
spk02: Crystal, did you want to speak to the product performance and category performance?
spk06: Sure. So we won't drill into specific product classes, but what we can say is that not only did we see a re-acceleration in our events business, but there's definitely been continued momentum in our non-events business, especially in the separate classes. And while our buying model is driven such that we're buying and investing into what our customer tells us that she wants, our assortment is going to continue to evolve to support that. And we are seeing this nice acceleration and even outperformance of our dress classes in our non-events product categories. even more so pronounced in Q3.
spk17: Thank you.
spk16: Our next question comes from the line of Randy Connick with Jefferies.
spk10: You may proceed with your question.
spk11: Yeah, thanks a lot. I wanted to kind of unpack AOV growth. It's been growing nicely. Can you just give some perspective on drivers of that, perhaps, you know, mix, UPT, et cetera, and how you think about AOV opportunity over the next few years and drivers of that? Thanks.
spk14: Sure, David, do you want me to take that one?
spk15: Sure thing.
spk06: So our AOV growth has been a combination of an increase in units per transaction, just as well, less markdowns and discounts in promotional activity over time. And I would say on a go-forward basis, we expect that to be a balance of increasing units over time, of course, pricing related to inflation, but only as our price value generates that. It would be more so driven from her increasing her cart size, especially as we grow in our non-events classes in the separate categories as well.
spk11: Understood. And then I want to ask a follow-up around systems and technology and talk to kind of where the company may have been a few years ago, where you kind of got to today, and how that's improved your productivity and efficiency in the business, and kind of any kind of systems and technology items you're working on over the next year or so to kind of continue to enhance those productivity measures and efficiencies within the organization. Thanks. Thanks.
spk15: Mark, do you want to jump in there?
spk05: That's a broad question. I would say that in all aspects, especially if you look over the last couple of years, I think in all aspects of our business, whether that is from a, we talk about our data-driven decision-making and making sure that we empower and inform ourselves with all insights that we need in order to make the right decisions. We have been continuously invested in that over the last several years. We have optimized from a logistics perspective, specifically in the fulfillment centers, how do we essentially allocate our orders over the multiple fulfillment centers, both from an inventory balancing perspective as well as from reducing shipping zones and shipping costs. Then on our product creation cycle, I think we have talked about that in several ways, but really, again, it's that particular aspect as it relates to those insights as to how can we derive, how can we reduce that fashion risk and make sure that we get the products in on time. Um, then obviously purely from a tech stack perspective, as it relates to our website, a mobile app was mentioned. We switched, uh, uh, platforms there so that we're on a better, uh, more advanced, uh, technical platform to basically, uh, you know, be able to continue to build off there, to engage with our customers, to increase conversions, uh, and increase, uh, part to part sizes. And that is essentially always ongoing, of course, and we have teams dedicated to that. And then lastly, I think what I can speak to is that we have started robotics in our fulfillment centers. We are currently in the process of implementing that, which is also with the purpose of increasing future units per hour efficiencies.
spk11: Super helpful. Thanks, guys.
spk10: Our next question comes from the line of Mark Altschwager with Baird. You may proceed with your question.
spk03: Thanks for taking my question. You sound very pleased with a lot of the marketing initiatives. I'm curious, are you seeing any impact from some of the iOS changes? And more generally, what are you seeing in terms of customer acquisition cost trends as we head into the holiday periods? Mark, you want to jump in?
spk05: Yeah, I'll take that. As it relates, there have been various iOS changes. Obviously, iOS 14 changes, we have been able to recalibrate essentially the impacts on how things are being viewed, and so we feel that together with the platforms, we have been able to continue are finding that efficiency, as it also shows in our numbers. The more recent changes as it relates to email impact, the machine-assisted opens, that obviously has impacted certain segments of our email as it relates to having reliable open data. And we are currently assessing that impact and triangulating, essentially, the performance of our email in various ways. And even though the open rates, again, for a subset of the email have impacted other key metrics like traffic of emails or clicks or revenue per email are still visible and it still allows us, combined with continuous content testing, to continue to optimize our email program. So in that sense, it's adapting to the new realities and continue to find ways to optimize and we feel that as of today that we have what we need in order to be successful.
spk03: Okay, thank you. And then separately here, could you give us a brief history on how stimulus affected the business earlier this year and just your thoughts on some puts and takes of lapping stimulus as we look into early 2022. Thank you.
spk06: I think it's safe to say that we experienced rapid reacceleration earlier on in 2021 related to the stimulus, but we also were turning inventory so quickly that it's difficult to say how much of that affected our business versus having further upside and just a natural return to normal business and normal growth rates so I think our internal view is that we certainly had a benefit early on from a stimulus perspective but when those money stopped coming our business still continued to grow and in some cases accelerating so it's difficult to say what the actual impact was but I think we're optimistic we could have had further upside had we had more inventory and the stimulus is maybe less impactful or noticeable within our financials
spk02: We could say that upside in not only Q1, Q2, and Q3. Best of luck.
spk14: Thank you.
spk10: Our next question comes from the line of Oliver Chen with Cowan. You may proceed with your question.
spk04: Hi, thank you. The merchandise margins and the momentum there was also very impressive. What do you see ahead in terms of maintaining the merchandise margins? And also, you have low levels of clearance and markdown, so wondering about that. Also, the mobile app innovations sound quite positive. Would love your take on what are some of the key changes you'll make there, especially as you pursue more context and personalization. And then lastly, on the net promoter score frontier, You have a high net promoter score relative to competitors, but there could be opportunity for upside here. What would you articulate as key drivers to improve your net promoter score? Thank you.
spk02: Hey, Oliver. We'll unpack those three questions. Mark, do you want to start with app, and then Crystal, you can talk about the margins?
spk05: Yes. As mentioned, relaunched our app on a new platform and the primary reason to do so is that the old platform that we were on, we had some limitations as it relates to what we could do from a brand experience perspective as well as from a personalization perspective. I would say where we are today is that step one was essentially a lift and shift so that did not lose functionality, so to say, but make the switch so that we can now on this new foundation work towards improving that brand experience, get that real feel of the Lulu's, just like when you're on the website, that we can also have that in our app, as well as have a better more real-time personalization going forward. So that is, I think, to answer your question, that is absolutely the reason why we made that switch.
spk02: Oliver, I'll jump in on the net per meter score then. I'm sorry, Mark, were you continuing? No, please, Scott. I wanted to jump in on that too, so go ahead. Jumping in on the net per meter score before we get to Crystal addressing some of your margin questions. Yeah, so as you highlighted, yeah, we've had terrific net promoter scores, particularly as we compare ourselves to the core market set, and we look at it, and we score very well for value, style, a number of things, wonderful customer service. We do know there's opportunities that we can look to improve, and the call-outs we tend to hear from are primarily the largest, hands down, outside of some requests for additional free shipping opportunities. is to be in stock. The second would be size range offering. And when you're growing to the pace Lulis is growing and with these kind of turns, we know we have an opportunity to increase our service levels with inventory. But we're both thrilled with the pace and the sell-through. And like you said, it's not leaving a much hangover for clearance. But at the same time, we're going to have to balance that in the future with capturing and making sure the on-site shopping experience or engagement with a customer in that space, that we don't risk losing any customer engagement through that because that has been the largest area of complaint by far. And so we're planning to look at that and find ways to do that in 2022.
spk14: And as it relates to margin and the sustainability, sorry, David, were you going to ask this?
spk15: No, I'm good.
spk06: Okay. As it relates to margins and just our overall sustainability of the margins that we've been experienced, I would say that our affordable luxury price points, our fast inventory turns, as well as our buying model approach really allows us to be more methodical and intentional with our inventory purchases and our ability to drive consistent margins over time. The only caveat to that I would say is that as we're expanding into other less mature businesses and trying to invest in growth and scale and prioritizing that versus trying to get every last margin dollars, there could be some fluctuation in that, but it would be small and immaterial changes there. So I would say we're fairly optimistic about our ability to drive some consistent margins over time.
spk04: That's all very helpful. On the interplay between inflation and pricing, what are you seeing in terms of your product cost inflation and in labor materials and overall and then how does that interplay with how you're thinking about pricing just to make sure you continue to offer your customer a clear value etc thank you so we take a pretty surgical approach to pricing across all of our products and we find that there is quite a bit of elasticity there and we've been
spk06: Slightly less impacted, I would say, than others in the space have talked about. And I think that really comes from our already affordable luxury price point. So where we've experienced price pressures, we've been able to flex and adjust our pricing with minimal, if not any impact to our customer or her perceived value of our products. That said, I wouldn't want to give the impression that we're going to be increasing prices across the board. So it's really more of a skew by skew demand and price value question. And we're evaluating it on a real time basis.
spk04: Thank you. Best regards.
spk15: Happy holidays.
spk14: Thanks, Oliver.
spk15: Thank you. Thank you.
spk10: Our next question comes from the line of Ed Iruma with KeyBank. You may proceed with your question.
spk01: Hey, guys. Thanks for taking the questions. I guess first on the product delays, you guys obviously navigate a difficult environment pretty well. I guess what are the knock-on effects? Are you having to change temporarily test and react? Are you seeing certain classifications where you're seeing lighter than expected inventory that gets for the next quarter or two? And then just as a housekeeping question, how should we think about share count for the fourth quarter? Thank you.
spk06: David, I can jump in on the timeliness. And just as a reminder to everybody, for the first half of 2021, we actually saw our best on-time delivery rates that we've had as a company. So in that sense, it's been a bit of a unique year for us compared to others in the space. And we saw some modest impacts in the timelines and deliveries in Q3, mostly driven by smaller product classes where the impacts to revenue would be smaller and less noticeable from a P&L impact. Just given the data-driven nature of how we manage our buying, we've been able to mostly navigate through a lot of these delivery timeliness issues just by padding our in-house dates with our vendors, who've been great partners for us and have always worked with us to optimize our inventory flows. And really, we've been able to consistently receive most of our product during desired selling windows. So in that sense, we've contemplated in the model that there would be more delays than we've been experiencing. But, you know, crossing our fingers that that's not going to be the case for us.
spk17: And then your account.
spk16: Our next question comes from the line of Dana Telsey with the Telsey Advisory Group.
spk10: You may proceed with your question.
spk08: Good afternoon. Nice to see the progress. Just touching on pricing again, have you taken price before? How much price have you taken? How do you think about price, and does it differ by category and the percentage you would take? And then also, you mentioned in the opening remarks that you're not as affected by supply chains. Can you expand on that a little bit and how you're thinking about supply chain for the first half of the new calendar year? Thank you.
spk06: From a pricing perspective, it certainly does differ by product class, and it's difficult to say how much we've done in total or to provide guidance on that. I will say we've taken prices up on products, we've taken prices down on products, and we're really evaluating every single product based on sell-through. And overall margin targets are really driven by the maturity of the business. So dresses where we've been, you know, the key leader in that space for a while might have higher markup than maybe a newer category that we're trying to expand in and we're more focused on growth. So it's a difficult question to answer because we're looking at pricing on a real-time basis. Outside of COVID, normal business environment, we're looking at it pretty regularly across each individual SKU. And do you mind repeating your other question?
spk14: Sorry about that.
spk16: Our next question comes from the line of Oliver Chen with Cowan.
spk10: You may proceed with your question.
spk04: Hi. Thanks again. On your inventory composition, as you think about international and also non-event, what are your thoughts on breadth versus depth of the assortment and how it should manifest to generate consistent, attractive growth? And then second, your comments earlier on categories that you're unable to chase, Could you be more specific about which categories or was that broad-based? Thank you.
spk02: Sure. Thank you, Oliver. So regarding the assortments internationally, like we talked about, it will be a completely test environment. And as Crystal has articulated nicely in the past, we look for our customers to sort of dictate the assortment to us. We'll start off with our edit that's shaped based on attributes and learnings. from other customers and will not take a deep positions. Um, because in my experience internationally, uh, the assortments and the responses by country can vary, um, by season as well. So it is optimal environment really for Lulu's to enter and our test, learn and reorder models. Perfect. Um, in some ways versus many countries when they try, whether they're coming to the United States or United States going to Asia or going, um, to Europe often stub their toe or actually stumble quite severely by trying to project what those markets want and desire. So our model is perfect for that. As we look at the non-event dressing, the whole flywheel to the test, learn, and reorder model works by finding new styles that we buy in small batches and learn from them and quickly chase and reorder into them. And so we will continue to do that with our non-event categories. And the goal there is getting new products that are adopted. That is the leading indicator for us. So if you were to watch our business model, that success is the best predictor of future growth for those categories. So when we actually are reporting progress and growth in many ways, it's a lagging indicator of success we've seen earlier. And then remind me of the other part of your question.
spk04: Sorry. Thanks, David. It was just regarding the inability to chase upside.
spk02: Oh, right, right. Yep, yep, absolutely. So that was more based. When you're turning as quickly, so one of the things we can often do and that the team has worked on has had the ability in seasons, let's say beginning in spring, getting a read, chasing into summer, or seeing something that's tracking in summer and quickly chasing and adjusting sleeve length, hem length. the shape of the product into getting some early fall performance from it. And so with what's gone in the marketplace, we can't be as nimble right now with that, and we can't necessarily get that additional upside. Now, still with a 95% year-over-year growth, we're getting some quite strong performance there. As it looks at the Chinese New Year, the team, as Crystal talked about, had placed orders and tried to anticipate potential slides with the dating and delivery dating going on our product. And plus, if we're able to actually buy into deeper quantities, then we should have an extra week supply of product, which could also provide some upside. But that's what we're still working through as we forecast in the near term. So it was broad-based inability necessarily to get that last little bit of incremental upside.
spk15: Thank you very much.
spk10: Our next question comes from the line of Erin Murphy with Piper Sandler. You may proceed with your question.
spk13: Great. Thank you. Good afternoon. A couple still for me. First, I was curious if you could speak to what you're seeing in terms of return rates now versus pre-COVID levels. And then secondly, just on the promotional backdrop, as we kind of head into the final stages of the holiday season, what are you seeing from your competition out there versus kind of the lower markdown levels that you've talked about within your own business? Thanks so much.
spk15: I can jump in really quick. Go ahead. No, go after you.
spk06: Just quickly on the returns front, I would say we've seen return rates normalized back to rates consistent with where we were pre-COVID. So nothing interesting to report there really up or down.
spk13: And then on the promotional landscape and just what you're seeing out of your competition here?
spk02: Yeah, so Aaron, thank you for the question. So what we saw, interestingly, was particularly as we went to, let's say, Black Friday, Cyber Monday, going into it, we saw people still continue to pull promotions forward. As you know, Lulu's actually was reducing the number of promotional days during that time period compared to last year and the year before that. So it was interesting to see how much people sort of fought to pull it forward. Don't know if that was driven based on concern to grab promotions Share early or whether that was concerned about Logistics from UPS FedEx and other certain challenges, but it's probably similar to in certain areas You can see some people who are actually a little more promotional even with the scarcity of goods out there Weeks were we expected some of the stronger players to actually have less less promotions than last year. So Overall, when we look at within at our own, we were able to be much less, have many fewer promotional days than we did the prior year.
spk13: Great, thank you. And then just last question for me is just on, can you just share what you saw during the third quarter from a traffic perspective versus last year and then conversion as well? Would love to hear those metrics. Thanks so much.
spk17: I can speak to that in general terms.
spk05: I don't have the actual numbers up hand, but certainly our traffic was significantly. By the way, are you specifically talking about Black Friday, Cyber Monday, or are you talking about Q3?
spk13: Sorry, just for the third quarter.
spk05: Just for the third quarter in totality. Yes. So both traffic and conversion rates were up compared to last year.
spk17: Thank you.
spk10: Our next question comes from the line of Dana Telsey with the Telsey Advisory Group. You may proceed with your question.
spk08: I just wanted to follow up on the supply chain. It sounds like you don't have as many headwinds as others from what you said in the opening remarks. Can you expand on that, please? Thank you.
spk06: It's really not that we don't have the headwinds. It's that our buying model and the way we approach merchandising is different in the sense it's very data-driven and meticulously calculated. So we're able to strategically pull inventory forward or put some buffer around on-time delivery so that we can get product on the site in the optimal selling season. So I would say that there certainly are delays. Everyone is experiencing it. But for us, we've been able to get ahead of it and just mitigate it. so that we're not as affected in our ability to meet our plan.
spk17: Thank you.
spk10: At this time, we have reached the end of the question and answer session, and I will now turn the call back over to David for any closing remarks.
spk02: Well, thank you all for joining us on our first quarterly call. I know many of you will be spending time with follow-up questions. in the coming hours and look forward to presenting our Q4 results in the next few months and also giving insight into our goals and strategies for FY22. Have a great holiday season. Thank you.
spk10: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a great day.
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