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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-Strauss, General Counsel at Lulu's. Thank you. You may begin.
Lulu
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 implementation, our future expectations regarding financial results, references and outlook for the second half and year ending January 1st, 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 investors.luluz.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 filings. Joining me on the call today are our CEO, David McCrite, our co-president and CFO, Crystal Lanson, 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.
Lulu
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 LOO crew, who continue 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 brand fans, 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 began to see volatility in 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 growth. 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 brand, and unlike many in the apparel industry, shifting demand does not necessarily mean obsolete inventory and excessive markdowns. The majority of our inventory can be carried from one season to the next. Also, our data-driven product development reduces risks, 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 as needed for the future. Fourth, 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 28th. 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 Voss, our co-president and chief information officer. He will share with you an update on key operational and analytical efforts
Naomi
further support our continued growth as well as increasing customer insight and engagement i will let mark discuss some of those key initiatives in greater detail mark 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 lastly, 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 and 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 3rd, 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 and 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 member counts as well as in percent overall transacted revenue by our loyalty members. Members that redeemed 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 relaunched 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 25th Google Broad Core Algorithm update due to Google taking a larger percentage of many of the overall search results page real estate with, 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 websites 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 update, 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 led 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 C and millennial women. 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 influencer counts 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 order contribution margin profitability. Due to the strong repeat rates and purchasing of our existing customers, we also observed further improved higher lifetime values for each of the 2017 through 2021 cohorts, positively impacting all cohorts' LTC to CAC ratios. And with that, I'll hand you over to Crystal Lanson, Co-President and CFO, who will discuss the quarter in greater financial detail.
david
Thanks, Mark, and good afternoon, everyone. While we were not immune to the macro and industry-wide challenges, we were pleased that we continued 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's net of markdowns and discounts. 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 rates, 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 returns. Demand for event apparel continued throughout the quarter, beyond the typical busy season for events, driving return rates up further due to mixed shifts towards higher return rate merchandise. Despite 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 cost associated with elevated returns, and second, high fuel surcharges and excessorial 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. Due to 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 discipline marketing approach in spite of the challenging macro factors. General 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 costs driven by the higher sales volume. Variable labor is 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 15 cents compared to a diluted earnings per share of 28 cents 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 to note on the balance sheet, we adopted accounting lease 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 customer. 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 this 5 million in 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 28th. We continue to expect net revenues of $440 million to $480 million, as well as adjusted EBITDA of $35 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 payoff 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 impacts associated with the completion of the IPO. Stock-based comp is expected to run approximately $3.3 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 teams. 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 in our new southern California DC. We continue to expect capital expenditures to amount to 4.5 to 6 million for the full 2022 fiscal year. And with that, I'll pass it back to David for closing remarks.
Lulu
Thank you, Crystal. We'd like to take a moment to thank each of you, the LUCREU, 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.
Operator
Thank you. At this time, we will be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you'd 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. We ask that you please limit to one question and one follow-up. Our first question comes from the line of Randy Connick with Jefferies. Please proceed with your question.
Randy Connick
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 rates and freight surcharges, et cetera, can you give us a little bit of perspective on that? you know, how you're thinking about, you know, the trend around, you know, 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, you know, the back part of the year in terms of gross margin versus SG&A in terms of getting to the EBITDA margins. Thanks, guys.
david
Sure. Hey, Randy. Hi. So our guidance is contemplating, kind of as we've signaled in previous calls, that we're going to return to more of a normalized promotional lockdown cadence, kind of pre-pandemic levels. We also, again, as I alluded to, have about $5 million of inventory that we think is unnecessary to carry from a balanced perspective that 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. We're expecting that to continue throughout the rest of the year, although as mixed shifts away from event dressing and more into kind of fall, pre-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 and feel pretty good about it.
Randy Connick
Gotcha. And then, you know, one thing that kind of continues to shine through on the income statement is obviously that you guys are profitable. And even with the lowered guide a little bit because of the environment, you know, it's still nicely 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 the market, Lisa mentioned the algorithm changes at Google. I guess that impacting marketing efficacy a little bit. So just wanted to get some color on how you're thinking about marketing going forward combined with nice behavior around repeat purchases and Because it looks like potentially we could be seeing more of a stabilization from here around these lower but still nicely profitable EBITDA margin levels. 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.
Naomi
Sure. Thanks for that question. We saw, in Q2, very strong repeat rates of our customers, existing customers, as well as new customer acquisition. Both of the cohorts, from a basket perspective, their UPTs as well as their average pricing AOVs were higher. So that was good. But I mentioned that during the quarter, we saw the order frequency increase. taper off a little bit towards the end. But in of itself, it was a, I would say, healthy quarter as it relates to those customer metrics. What we did see is indeed at the end of May with the Google algorithm update, which happens multiple times per year, and we've been obviously dealing with that for multiple years. So in of itself, nothing other than that this one, and sometimes it's positive and sometimes it's negative, right? So this time around it's negative for us initially. It requires us then to basically take a reading on what has been trending down, what has been trending up, what is being published, what do we see across other industries, and what are some of the experts publishing around that. And from there on, we started then adjusting our technical SEO, on-page SEO, 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. So I see that more as a sort of a 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 Fortunately, this is a position that having been in e-comm for so long, we are very strong and we have a very strong position also in our free and organic traffic. And so in that sense, it is important to the traffic mix. But when you have the negative impacts of the traffic temporarily, that indeed has an impact on our marketing efficiency overall. And so we have certainly seen that effect. And so coming forward, like I said, these algorithm changes, whether they're 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 profitability that we are very keen to maintain.
david
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're 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're 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.
Lulu
Just following on the comments of the team, yeah, we're really proud of how the loop crew pulled together and responded to the Google algorithm. As Mark said, it's because we're so proficient at it that we initially felt it more severely than others might who aren't as necessarily advanced in those metrics and really retained a nice spot at the end of the quarter. Back to the sort of margins, even the margins you referred to. Yeah, absolutely. We are, our roots are being entrepreneurial as a company. It's always about growing profitably, as you called out, and everything in our plan is continuing to do that. That being said, remember, we do have some quarterly and seasonality 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
david
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 invest from that perspective in margin-losing propositions.
spk13
Great. Thanks, guys.
Operator
Thank you. Our next question comes from the line of Oliver Chen with Cowan. Please proceed with your question.
Oliver Chen
Hi, thank you very much. On the second half, as we think about gross margin, 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'd just love your take on if you're seeing that kind of volatility and any read-throughs. And then, Mark, on the Google BroadCore update, some of the changes seem to be around video as well. As you think about your 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.
david
Hey, Oliver. From a margins 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 headlines for us. As it relates to overall gross margin from a merchandise perspective, we're typically higher in our separate or 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 normal course of business for us in terms of Q3 and Q4. As it relates to July and so far in the quarter, We're 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, things are good, but we expect it to continue to be choppy for at least the near term. I'd have to defer to Mark on the Google question.
Naomi
Yeah, as it relates to the Google, I think you were referring to the video, the TikTok indexing, as well as web stories that Google introduced. We are indeed playing with that and seeing how we can benefit from that and that is par for the course. That's what we do after each of these changes to figure out what works and how does it contribute and how can we optimize that and whether that even is something that plays longer term because Google might also change these again going forward.
Lulu
Right, Oliver, as you may recall even from the pre-IPO discussions, We know and believe and quite confident that we're a very high performer in performance marketing 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 resolve to make sure that that happens quickly. And we're really happy with the near-term progress the team has made. We just want to continue this effort.
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-inventory in the industry. Thanks a lot.
david
Hey, Oliver. Just given 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 homecoming event and all the events related to sorority rushes and that sort of thing.
Lulu
Less so on the back to school from a high school or younger demographic perspective.
david
So it's not a big month for us, but it doesn't mean we don't participate in it. It's just in kind of a different fashion with our more college age demo.
Lulu
And regarding the promotional environment, so for us, fortunately, much of our product is seasonless or seasonal, and so 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 cleaning their brick and mortar locations and cycling through it out of that. So we fully expect to leverage that and pursue a path of highest cost recovery on purchases. That being said, seeing they spend less outside of the lux market so we have um reintroduced as crystal indicated several calls ago re-entry planned to reintroduce small light consistent promotional messaging just to make sure our call to action is there and we expect to see that continue for the balance of the year um interestingly for us that certainly engages um certain sub segments of the customer quite nicely um and also has an interesting impact on the needs of our 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 end. So there's some nice good puts and takes there.
david
Positive trade-off.
Lulu
We expect that environment to continue. And we expect it to continue because the larger industry is over-inventory. And so we think our brand's perceived value will be under a little more pressure. And so we'll be doing that to sort play in the game versus as a big clearance effort. Expect that to continue through probably end of the year, certainly.
Dana
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 open at the end of last year, and inventory levels with the completed vendor 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 are selling best or not performing as well? Thank you.
david
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 for 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's 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 are going to be going forward. So I would say I would expect a stable, if not slightly positive, slightly negative inventory balance for the next several quarters ahead, absent any massive changes up or down in consumer demand. So I think we're in a really good spot from an inventory level perspective. And Mark's 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 go forward?
david
We always take a pretty surgical approach to pricing. And 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 a skew level to optimize 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?
david
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 demand set. That said, we've seen double-digit growth across events, non-events, cocktail, all of our non-events classes specifically. We've done a really good job of still getting more share of her closet in that regard. We flex, though, within every quarter and whatever our customer is telling us that 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 long-term where that's going to be.
Lulu
Yeah, and Dana, as we continue to, like we talked about earlier strategically about our path to grow the brand and become a truly a lifestyle brand, we're going to continue to work on more purchase occasions and see the assortment continue to broaden. And we're really pleased to see the performance both event and non-event. That being said, there certainly will be macro trends where events dressing the peak from a macro perspective, some, and that'll tilt and skew our selling. And then there'll be other moments in the fashion cycle where non-events will take off and start to, what we love is that diversification we're building so that we're, while we're certainly, we certainly know and are very happy to be thought of as an events brand and be the sort of share of mine and the customer, Several years from now, we want to be able to look at us and then not be able to pick one specific, but really count on us as that sort of lifestyle for all occasions. And as we make that headway, that'll be the true measure of our progress there, not just the units we're selling.
Dana
Thank you.
Operator
Thank you. Our next question comes from the line of Edward Iruma with Piper Sandler. Please proceed with your question.
Edward Iruma
Hey guys, thanks for taking the question. Two from 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 correlated do you think gas prices are to your consumer's behavior? And would you attribute some of the strengths, I guess, that you 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 seeing kind of higher efficacy over terms from TikTok. You know, just as you see more eyeballs move to that channel, How do you think your analytics and platform are positioned to take advantage of content on there? Thank you.
david
So from a gas prices perspective, I think for a subset of our customers at the lower household income level, there's 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. Mark on the TikTok question.
Naomi
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 tooling side in order to further optimize that channel for us. We are very happy with what we're seeing and the progress that we're making. The content that we're making, we see that based on the engagement is better resonating with our customers. And we are also continuing to, like I said, 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 as a result, for example, we have been able to to increase our earned media value. This is one of the KPIs that we're tracking that we were able to increase, you know, without necessarily spending more and just becoming better at it, better content, and more efficiency.
Lulu
And we could probably do a half a day on that platform, on that platform line at the time. And the data we get from our performance side, and as we continue to develop in this space, we'll see and learn how the creative lines up with our customers' 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 is something that's still evolving.
Edward Iruma
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 mixed shift towards dresses and the expenses associated with that makes sense, but that still sounds like a very highly engaged consumer. So I'm trying to It's better to square that with the fairly significant change in your growth outlook for the back half of the year that you gave us with the prenup.
david
I think it's more a shift that we are potentially anticipating around that everyday wear that she's using to build out her closet, where the demand for that may be 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 has been so choppy. And there's these other factors like filter targets that we spoke about that are just causing flow through issues. But event continues to be a really great source of growth for us. But most of our tempered guidance is really around that less necessary, less event-driven product class, at least in the short term.
Lulu
Thanking the consumer, they're going to make a tough choice. They'll protect. their event dressing, or their Instagrammable moments, unless of this sort of data. Again, we'll see how it plays out. But that, obviously, and as Crystal said, in terms of the near term feels good, but we want to be cautious.
david
And we view that as temporary.
Mark Altschwager
And to that point, I guess maybe following up there, look at the back half, 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 trends, 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?
Lulu
Yeah, Mark, based on the timing of when we had to give guidance, This time of the year isn't a huge time. I've drawn an analogy to charting a course with a sailboat, 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 this. We'll continue to update you all as we see and gain more confidence in the outlook, but that's why we have a bigger bandwidth because at the time, we saw a broader range of outcomes. And so you'll see us gain confidence As we gain more conviction, we'll share more to give you a better sense of how that range ends up.
Mark Altschwager
Great. Thank you.
Operator
Thank you. Our next question comes from the line of Noah Zaskin with KeyBank. Please proceed with your question.
Noah Zaskin
Thanks for taking my question. First, I was hoping if you could give any color on just kind of the behavior you've seen from the consumer and how that may differ you know from the end of may to the end of july uh to currently um you know 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 so from an aov perspective i would say um
david
Builds and debills across the quarters are fairly consistent, but at a higher baseline. So if you were to look at previous years, I think you can gauge how we're modeling out from an AOV perspective. And that really just captures the mix shift. We've seen our customers adding more to cart. And with that, of course, higher returns, obviously. And we are taking a conservative approach to our return rate model, assuming that the elevated returns continue for the balance of 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 – I don't know if clickbait is the right word, but negativity in the press can typically drive a higher return rate, at least anecdotally, where customers are feeling pressure from a macro environment perspective. They may be 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 – They elevated return rates from May to July, as well as softer demand, especially from that lower household income customer.
Dana
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 question. 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 shifts with any of your competitors and any actions that you think need to necessitate a change in Lulu's actions?
Lulu
Hi, Brooke. Thank you for the question. So we're seeing a couple of things near term, and then we expect some other things in sort of the midterm. Near term, you could definitely see a change in the spending environment online, where some people to where digital wasn't as core, looked like they started to pull back from spending on the performance side. That's anecdotal, still looking and checking in on that. What we expect in the near term is we do, and I alluded to this a little earlier, we expect it to be a pretty promotional environment near term, driven by the omni players or severe faster fashion people who may have been caught over their skis a little bit with this 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. It's more seasonless, or we can carry from one to the next. Two, it'll 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 responds to everyone else's marketing pressure. So we think it's a good time to continue to gain customers and have 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 maybe to follow up, there's 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.
Naomi
We enjoy customers from a broad range of income, household incomes. And I would say that there are multiple segments there that are important. And so there's not a single one that, let's say, dominates. And so in that sense, when the lower household incomes in the lower segments are showing, earlier on were showing some behavioral changes in the sense of, you know, they're order frequency started to slow down before other household incomes that's one of the one of the things that we were observing there that in 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 in 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 effective manner.
spk13
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. Thank you.
Lorraine Hutchinson
Good afternoon. I just wanted to get a sense of your strategy if your consumer continues to struggle Would you let sales decline to protect margins, or would you consider more aggressively ramping promotions or marketing to maintain the highest sales growth?
spk13
Sorry, Lorraine. Do you mind repeating your question?
Lorraine Hutchinson
That was a little bit hard to hear. Oh, sure. Sorry. 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 and marketing more quickly to maintain that higher sales growth? Thank you.
david
I'm not sure we're actually at a point yet 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 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 know that we're in a position where we would really need to choose between sales growth or profitability at this point. We've got so much value proposition in our product that I'm not sure we're there yet.
Lulu
Yeah, 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 forecast would continue 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 early as 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 want it 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 an artificial sales target. We're still early in our venture. We believe we have lots of untapped market potential. Yeah, the 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. These are 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're getting an attraction. We're just going to continue down that path, turn small knobs and dial, add in a few promos here and there where necessary, and then continue to add the capabilities in marketing, storytelling that we've 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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