Lulu's Fashion Lounge Holdings, Inc.

Good afternoon and welcome to Lulu's third quarter 2024 earnings conference call. Today's call is being recorded and we have allocated one hour for the prepared remarks and Q&A. At this time, I'd like to turn the conference over to Lulu's General Counsel and Corporate Secretary, Naomi Beckman-Stross. Thank you. You may begin.

Good afternoon, everyone, and thank you for joining us to discuss Lulu's third quarter 2024 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 expectations around the continued impact of the macroeconomic environment, consumer demand and return rates on our business, our future expectations regarding financial results, our ability to realize the intended impact of cost reduction measures, our ability to pursue alternative debt financing options, references to the fiscal year ending December 29th, 2024, including our financial outlook for the fiscal quarter and year ending December 29th, 2024 as applicable, market opportunities, product launches and other initiatives and our growth. These forward-looking statements are subject to various risks, uncertainties, assumptions and other important factors, which could cause our actual results, performance or achievements to differ materially from results, performance or achievements expressed or implied by these forward-looking statements. These risks, uncertainties and assumptions are detailed in this afternoon's press release, as well as in our filings with the SEC, including our annual report on Form 10K for the fiscal year ended December 31st, 2023, our quarterly report on Form 10Q for the second quarter ended June 30th, 2024 and our quarterly report on Form 10Q for the third quarter ended September 29th, 2024, filed with the SEC this afternoon, all of which can be found on our website at .lulus.com. Any such forward-looking statements represent management's estimates as of the date of this call. While we may elect to update such forward-looking statements at some point in the future, we undertake no obligation to revise or update any forward-looking statements or information except as required by law. During our call today, we will also reference certain non-GAAP financial information, including adjusted EBITDA, adjusted EBITDA margin, net debt and free cash flow. We use non-GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP. Our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliation of GAAP to non-GAAP measures, as well as the description, limitations and rationale for using each measure, can be found in this afternoon's press release and in our SEC filing. Joining me on the call today are our CEO, Crystal Lantham, our CFO, Tiffany Smith, and our President and CIO, Mark Loss. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn the call over to Crystal.

Thank you, Naomi, and good afternoon, everyone. We appreciate you joining us today. In Q3, we achieved record growth in our special occasion and bridesmaid dress categories, boosting overall dress sales, which returned to positive -over-year growth in the quarter, and affirming our market leadership and event attire. Softness in our casual wear segment posed challenges, prompting us to reassess this category to better align with our core strengths and event-focused apparel and take action on right-sizing the cost structure for these categories. Last quarter, we outlined strategic initiatives and cost reduction efforts, which remain in full force. Additionally, we are actively pursuing alternative debt financing options that provide LULU's more flexibility than the current revolving credit facility. This is the top priority, and we will share updates as soon as we are able to do so. Net revenue was $81 million, 3% lower than the prior period, and adjusted EBITDA was a $3.6 million loss, compared to $1 million in the prior year period. This quarter, we proactively managed inventory, leveraging markdowns and promotions to optimize our inventory position for future growth, and achieved a 7% reduction in inventory balances over last year, outpacing our 3% net revenue decline. While higher markdowns affected margins due to weaker performance in our separates and shoe business, we are confident that our strategic and cost reduction efforts will leverage our strengths, address near-term liquidity needs, and set the stage for sustainable growth. As a reminder, our strategic growth initiatives include continued evolution and optimization of our data-driven merchandising model, with customer data and insights to drive value to our brand fans through a robust reorder algorithm and an improved and evolving assortment. Amplifying our unique brand DNA and community-focused culture by leveraging our deep performance marketing insights, elevating brand awareness efforts to grow visibility and brand engagement, and delivering excellent customer service to drive increased -of-mouth introductions. Continued investments in our proprietary technology stack and analytics platforms to improve our customer insights and operations and continually drive better decisioning, higher customer engagement, and increased efficiencies. We are encouraged by the positive momentum from these initiatives and remain committed to leveraging our core strengths to best serve our customers and drive sustainable growth. Turning to some of the positive developments in the third quarter, our special occasion and bridesmaids business categories delivered outstanding results, with net sales growing nearly 40% -over-year, marking another record quarter. These strong results reaffirm Lulu's brand position as the go-to destination for attainable luxury and event apparel for all of life's occasions. Total dress sales for the quarter increased by 6% over Q3 2023, reinforcing our position in the market as a dress destination. New and novelty also continue to perform well, increasing reorder revenue for same-year styles by 55% compared to last year's Q3. Our merchandising team's fresh vision is resonating with our customers. The stronger new product funnel, driven by newly introduced styles, colors, and in-season adjustments, helps narrow the -over-year decline in reorder sales from 12% in Q2 to 4% in Q3. Based on these trends, we expect that reorder sales will comp to positive by the end of the first quarter 2025, with reorders typically making up 60 to 70% of total sales. Inventory levels were well managed in the third quarter, down 7% from the prior year, and outperforming the -over-year net revenue decline of 3%. Return rates also showed improvement in the quarter compared to last year, a positive inflection point after eight consecutive quarters of -over-year increases in return rates, highlighting a positive impact from our updated return policy, and more importantly, improvements in fit and quality. Net revenue comps improved for the fourth quarter, with negative single-digit comps expected in the fourth quarter. Regarding our strategic brand initiatives, we launched impactful third-party brand and influencer collaborations in the third quarter, highlighting our commitment to brand building and customer engagement, which Mark will discuss in more detail shortly. The success of these partnerships and strategy is reflected in increased engagement, social traffic, media interest, and purchase intent. Interestingly, in Q3 we saw positive -over-year reacquisition of lapped customers across all full price and markdown segments, an early but clear sign our brand initiatives are gaining traction. Finally, in the third quarter, we expanded our wholesale business by strengthening partnerships with several major retailers. In Q3, wholesale gross revenue increased 28% compared to Q3 last year. Notably, in September we announced a strategic collaboration with Dillards, one of the nation's largest fashion retailers, to bring Lulu's latest special occasion and event collections to more than 30 Dillard stores nationwide. This partnership strengthens our presence in key markets, reaching new audiences, and showcasing our product quality in person, strategically timed with key shopping moments like homecoming and the holiday season. We anticipate strong wholesale growth continuing through year end and into 2025. Turning to the less favorable aspects about the quarter, our separates in shoe business remains challenged, driving the majority of the -over-year declines and net sales. While shoes improved sequentially in Q3, demand was impacted by underperforming summer styles and seasonal programs turning on late for fall. In response, we are re-evaluating our strategy to better align with our strengths in special occasion and event wear by shifting our assortment towards dressier separates in shoes, options for date nights, social events, vacations, and work wear, key areas where our customers already seek us out for. We have strong conviction that leaning towards a more focused, curated assortment centered on our dressier aesthetic that we are already loved for will meaningfully improve the customer shopping journey. To that end, as part of our merchandising optimization initiatives, we are reducing and refining SKU count to improve profitability through lower product onboarding costs. We are excited to implement this refined vision going forward and are confident our strong position in occasion wear will drive demand and support bottom line expansion in both shoes and separates. Growth margin decreased 220 basis points in the third quarter versus prior year due to higher markdown sales resulting from our efforts to reset inventory in underperforming categories and accelerate a reset in our product assortment vision in shoes and separates. Damages are up compared to Q3 2023 due to abusive customer behavior, also contributing to the gross margin compression during the quarter. Profitability was also pressured due to the higher markdowns in the quarter to maintain our healthy inventory position combined with deleveraging fixed costs on a smaller net revenue base. As we discussed last quarter, we implemented cost reduction measures alongside our strategic initiatives to improve profitability and better position the company for growth. In the third quarter, the following actions were taken. As part of our commitment to attend a 15% reduction in operating expenses for the second half of 2024, we undertook a reduction in headcount and implemented executive and management pay cuts, which reduced our fixed payroll costs to better align with our slower than anticipated sales recovery. We further reduced costs by renegotiating or canceling select vendor contracts and service agreements. And lastly, we made targeted reductions in our top of funnel marketing spend. Additionally, we reduced the size of our board from 11 to six members to further reduce costs and enable more agile decision making to support an accelerated turnaround. We further reduced our capital expenditure expectations for the year from 3.5 million to 3.2 million. We began realizing savings from these actions in the third quarter, which will continue through year end and into early 2025. And we will continue to execute on other cost saving initiatives in Q4 into 2025 to streamline operations and optimize the business for a return to profitability. We believe these measures will allow us to achieve our growth and profitability goals more efficiently while still maintaining a robust operating model that supports our strategic objectives, generates positive cash flow, protects the brand, and paves the way for long term sustainable growth. Our path forward is clear. Prudently manage liquidity in Q4, the smallest quarter of our year, through disciplined inventory and expense control. For 2025, we're prioritizing our strength in dresses and event wear to attract more new customers, reengage existing brand fans, and drive sales. By taking the same approach to separates as we do with our event wear and optimizing costs, we are positioning the company for near term profitability and long term growth. As we approach year end, we have confidence in our business improvements and ability to return to growth. With that, I'd like to turn the call over to Mark Voss, our President and Chief Information Officer. He will share some updates on our progress against 2024 priorities. Mark?

Thank you, Crystal. I'll start by providing an update on our customer and how she interacted with us during the quarter. We are encouraged by signs of stabilization as active customer counts remain flat quarter over quarter despite a year over year decline. New customer acquisition rose by 2% over last year, and loyalty adoption rates are showing strong momentum. Our LoveRewards membership saw double digit growth in new entrants and an overall increase in total membership, marking notable progress from the previous year. We believe these trends reflect the impact of our strategic focus on brand, assortment, and customer engagement, and remain optimistic about sustaining this positive trajectory. Q3's growth in new customer acquisition centered mostly around full price segments, marketing and improvement over last year. Additionally, we were successful in reactivating lapsed customers at a higher rate than Q3 2023. Lapsed customers are those customers that hadn't purchased from Lulu's in the last 12 months, and they returned to Lulu's, gravitating toward high performing segments like Brightmate, special occasion, and day event dresses. Year over year growth in our international sales continued and achieved its third consecutive quarter of year over year high double digit growth in sales across our top 15 countries outside the US. We continue to see potential to further enhance our US-based international shipping model and strategically build brand awareness in select key global markets. I'll now share some progress updates around our strategic initiatives during the quarter. Starting with our product assortment optimization and related margin expansion efforts. In the third quarter, the impact of our merchandising team's assortment optimization efforts became evident with Q3 receipts reflecting newer and novelty styles and colors, supported by a significant improvement in reorder comps from Q2. As Crystal mentioned previously, reorder revenue for same year styles increased by 55% over last year. We are optimistic that this momentum will continue as our refined assortment reaches consumers. Our work on using AI to improve our demand predictions has been integrated into our buying recommendation systems, and we are seeing success with enhanced forecasting in several segments, and we will continue to further refine and broaden the scope of these AI generated predictions to enhance our data driven buying model. Our continued focus on reducing FIT-related returns by taking a holistic approach to FIT while also optimizing our bottom line is starting to pay off. In Q3, we saw the positive impact of these efforts, especially in return rate improvements of newly introduced products across several product categories, and where we have focused on improved FIT flexibility and consistency in general. We remain focused on reducing FIT-related product returns through product design that increases FIT flexibility and provides FIT consistency across the Luluz brand. The introduction of size XXL is progressing as planned, and initial reads show that returns across sizes XL and XXL combined have improved. Additionally, we also see an encouraging start of new customer acquisition based on size XXL and expect that the addition of this size, over time, will contribute to a broadening of our customer base. Regarding potential increases in import tariffs from China, we have made progress in diversifying our sourcing beyond China to different countries of origin where possible over the past year. However, reliance on China remains, especially for product categories requiring specialized sewing details where Chinese manufacturing excels. Should higher import tariffs arise, we plan to manage the impact as we have done successfully before, distributing the impact across vendors, customers, and our own margins. In the near term, we believe the value and quality of our Luluz products allow for sufficient price elasticity to share the impact with our customers. In the medium to long term, our sourcing and cost strategies, including country of origin diversification, improved costing, and supply chain efficiencies are positioned to offset potential tariffs impacts meaningfully. In Q2, we launched our successful Friends for Life campaign, and in Q3, we built on the Luluz brand hug by exploring new ways to invest in our brand, increasing engagement across all channels, and reinforcing our commitment to meeting our customer where she is. In the third quarter and quarter to date, we continued to build on our third-party partnerships, expanded our social media presence, and enhanced influencer engagement. We continue to invest in third-party partnerships that drive strong engagement and visibility for Luluz across channels. As mentioned on our last earnings call, we launched our collaboration with D'Amelio Footwear in July, which elevated social engagement, reached earned media value, and strengthened our presence among Gen Z customers, and increased Luluz brand familiarity and equity. The social posts with D'Amelio resulted in some of our most successful posts of the quarter. Collaborations with relevant brands and influencers, including influencer product edits, continue to deliver attractive returns, with TikTok providing particularly effective for engaging new, younger audiences. We expanded our second quarter -of-home campaign into the fall, with a Times Square billboard and additional activations in select markets such as Nashville and Los Angeles. And in these areas, we have seen increases in Luluz brand awareness. We also launched major campaigns in the quarter, the Girl Who Project and the Boho campaign, both of which generated significant earned media value and millions of impressions. The introduction of new, independent brands is designed to complement our own brand, reinforcing our unapologetically feminine aesthetic and elevating our unique product offering to new audiences. Our third initiative focuses on driving technology enablement that supports customer engagement and customer experience across channels. The Luluz app continues to experience solid growth in users and improved conversion rates during the third quarter, with our ongoing investments in paid traffic yielding strong results. Alongside our app efforts, we are constantly looking for ways to enhance our website experience. During the quarter, we introduced product videos across product listing pages and also launched the tapped sub-site, all focused on improving our customers' product discovery journey and have shown positive contributions to improved engagement and conversion rates. We continued to feature more body diversity and video on the site, which has resonated with customers, contributing to lower return rate and higher conversion. Beyond these recent rollouts, we are testing additional optimization tools, including an AI merchandising solution to boost customer engagement. We're excited about these opportunities and their potential to improve the shopping experience and product discovery for our customers. In summary, the third quarter brought several promising developments and we are pleased with the positive momentum across our strategic initiatives. We remain focused on executing thoughtfully to deliver the best products to our customers in a cost-efficient manner. And now I'll hand you over to Tiffany Smith, Luluz's Chief Financial Officer, to provide more color on our financials.

Thanks Mark and good afternoon everyone. Our net revenue for the third quarter was approximately $81 million, a 3% decrease year over year, driven by a 3% decrease in total orders placed and a 2% decrease in average order volume, partially offset by reduced return rates. While Markdown sales declined approximately 8% compared to the third quarter of 2023, they represented a more significant mix of our sales when compared to the first two quarters of 2024. This is in part driven by efforts to swiftly reset our inventory in underperforming categories, particularly shoes and separates, while also generating additional liquidity for the business. These actions negatively impacted gross margins year over year. However, our special occasion of bridesmaid categories showed resilience with -to-date sales up 38%. Following last quarter's implementation of our updated return policy, we've seen continued improvements in customer return behavior, with return rates lower by 70 basis points year over year, supporting improved sales trends and higher inventory turnover this quarter. Gross margin ended the quarter at 38.1%, a decrease of 220 basis points compared to the same period last year, driven by higher rates of Markdowns and discounts as we addressed ongoing softness in our casual wear business. Moving on to our expense line items, our Q3 2024 selling and marketing expenses were $17.6 million, up about $800,000 from Q3 2023, due to higher overall online marketing costs per visit. General and administrative expenses decreased by about $1.7 million to $18.9 million, an 8% decline from Q3 2023. This decrease was primarily driven by a decrease in stock-based compensation expenses, as well as reductions in labor costs due to headcount and executive and management pay reductions enacted during the third quarter. The cost savings measures were implemented throughout the quarter and therefore did not benefit the entire period. Our net loss is $6.9 million, increased by $3 million year over year, primarily due to lower net revenue, a $1 million impact, reduced gross margin rates, a $1.9 million impact, and a $1 million increase in our income tax provision alongside higher selling and marketing costs. These were partially offset by $1.7 million in savings from general and administrative expenses. Adjusted EBITDA loss for the third quarter was approximately $3.6 million compared to Q3 2023's adjusted EBITDA gain of $1 million, due to fixed cost deleveraging amidst reduced revenue. Our Q3 adjusted EBITDA margin was negative .4% compared to .2% in the same period last year. Interest expense for the quarter was $305,000 compared to $442,000 in Q3 2023. For the quarter, we reported a diluted loss per share of $0.16, which is a decrease of $0.06 compared to a diluted loss per share of $0.10 in the third quarter of 2023. In the third quarter 2024, net cash used by operating activities was $5.5 million, a decrease of $18.3 million year over year. This reflects the impact of prior year inventory carryover sales, which boosted last year's results but did not recur this year, combined with frontloaded inventory receipts this year in late Q3 to support Q4 sales, which will normalize throughout Q4. We saw a decrease of $6.3 million of free cash flow for the quarter, representing a $17.9 million decrease on a year over year basis. Our -to-date cash provided by operations was $5.1 million, and our -to-date free cash flow was positive $2.7 million. We ended the quarter in a net debt position of $5.2 million, an increase of $7 million compared to the same period last year. As announced in the first quarter of this year, our board of directors authorized a stock repurchase program to repurchase up to $2.5 million of our common stock. In the third quarter, we repurchased approximately $188,000 worth, or about 130,000 shares of stock. A total of $276,000 and 178,000 shares have been repurchased to date under this program. We will continue to take a holistic view to allocate capital on a quarterly basis, striving for the highest return on our investments while balancing that with anticipated cash flow. Our inventory balance at quarter end was $38.5 million, down about $3 million from the same period last year. The 7% inventory decrease -over-year outpaces our 3% -over-year net revenue decline as we continue to see strength in inventory turnover throughout the quarter. To provide further context on our liquidity and credit facility, as of the end of Q3, we had $11.5 million borrowed under our $15 million revolving line. After quarter end, we drew an additional $1.5 million under the facility's terms, but are unable to access further borrowings at this time. As outlined in further detail in our 10Q disclosures, we've entered into an amendment to our credit agreement, allowing us until December 16, 2024, to report to the lenders on our financial covenant compliance. This affords us time to continue the active pursuit of more flexible alternative financing options that more adequately support the growth needs of the business. Moving on to guidance, we would like to provide some insight into our sales expectations for the fourth quarter. Preliminary results for the month of October reflect a net revenue decline in the mid-single digits -over-year, reflecting modest sequential improvement in net revenue comps from September. Our net revenue outlook for the balance of Q4 considers the softer revenue comps we observed leading up to and following the election, along with caution around the potential impacts of a shorter holiday shopping season. For the fourth quarter, we anticipate net revenue to be between approximately $67.5 million and $70 million, a -over-year decline of between 7 and 10 percent, compared to $75 million in the same period last year. As noted last quarter, we began to implement cost reduction measures in Q3 to improve our profitability and better align our current business needs with sales growth trends. We still expect an approximate 10 to 15 percent reduction in total operating expenses for the second half of 2024, compared to the first half. Actions executed in the third quarter included reductions in fixed payroll costs resulting from reduced fixed headcount combined with pay reductions for our executives and certain members of the management team, as well as targeted reductions in our -of-funnel marketing spend and renegotiation and rationalization of certain vendor contracts and services. Our focus through Q4 is on generating liquidity, maintaining healthy inventory turns, and accelerating a reset of our shoes and separates assortments. To maintain flexibility for these goals and potential further cost reductions in an uncertain macroeconomic environment, we refrain from providing guidance on adjusted EBITDA for Q4. Lastly, as part of our continued cost reduction efforts, we are reducing our capital expenditure plan for the year to approximately $3.2 million, a $300,000 decrease from our previous expectation of $3.5 million. And with that, I will pass it back to Crystal for closing remarks.

Thank you, Tiffany. We are turning a corner and are confident that our strategic focus on enhancing brand awareness, customer engagement, and discipline cost reduction efforts positions us for sustainable growth and improved profitability in the coming year. We still have work to do to reset our shoes and separates businesses, but remain encouraged by our growth addresses and wholesale businesses. By optimizing our business model and refocusing our casual segment towards dressy separates, we believe our commitment to operational excellence will continue to support us through the dynamic consumer landscape and ensure lasting success. Thank you, as always, to our loyal brand fans, dedicated Lube crew, valued shareholders for your steadfast support as we continue to work towards delivering attainable luxury to more customers and becoming the go-to destination for event apparel for all of life's occasions. We look forward to updating you on our next earnings call. With that, I'll turn it over to questions now.

Thank you. Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question, please press star and 1 on the telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star and 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 answer before pressing the star keys. Ladies and gentlemen, we will wait for a moment while we poll

for questions. The first question comes from Brooke

Roach

with

Goldman Sachs. Please go ahead.

Good afternoon, and thank you for taking our question. I was hoping you could talk a little bit more about the reevaluation of the strategy to focus more on event wear versus casual wear. What does that mean in practice? What percent cut in skew count should we be expecting? How long does this change take to implement? And what impact should we expect to see both in terms of profitability and margins overall?

Hey, Brooke, thanks for the question. I would look at it as more of a narrowing of our assortment to bring a more curated offering specifically in separates and in shoes. And it's more from learnings that we've been testing into over the last several quarters where we've been really successful with more dressier separates that align better with the aesthetic that we have on the dresser side of the business. I'd be hesitant to guide to specifics from a skew count reduction, though I'd be comfortable in saying anywhere from 10 to 25 percent depending on the season. And what that's going to result in is a much more profitable product onboarding process and more curation into fewer skews and just creating a less overwhelming assortment for our customers within those businesses. So not only will it be more profitable, but I think from a customer experience perspective, she'll learn to know us more for what we sell in dresses across all of our categories. So it's intended to be a more refined assortment for our customer. In terms of how long we would expect it to take place, I think we're going to have some work to do in resetting the assortment in Q4, going into Q1 by Q2 and into the back half of next year. We should be extremely efficient and having a much more curated and much more profitable assortment across those businesses. So I expect to see a little bit more pressure offset, though, by the success we've had on our special occasion, our bridesmaids and just overall our dress business returning back to positive comps.

Great. And then just one follow up for Tiffany. Can you expand on the levers in your control to generate additional liquidity as you look ahead? What additional cost optimization efforts do you see as opportunities to improve cash balances and liquidity overall?

Thanks, Brooke. Yeah, so we obviously enacted on some of that already in Q3 as we outlined on the call. So there were a variety of things that were outlined around headcount reduction and some of the pay adjustments that we've done for the executive management team, reducing our board size, pulling back on some of the more top of funnel marketing spend. We're going to continue and we will be continuing to evaluate that going through the balance of Q4 and into next year as to whether we can go deeper on any of those elements. I think generally speaking, we're doing some internal just sort of process review and trying to one thing we just rolled out a couple of weeks ago was how we refund our customers and having basically sales, certain sales product being refunded to store credit rather than to cash. So just looking at sort of internal processing opportunities like that where we can create liquidity for ourselves by changing an internal process. So those will continue to be on the table and evaluated as we as we progress. And then the other part that we outlined on the call, which is really a top priority for all of us right now is really around the renegotiation of our revolver and essentially looking for alternative credit financing options to afford us a bit more flexibility there after the original credit facility we had that was reduced back in August. So we're focused on that as well, just as another source of liquidity.

Great. Thanks for the color. I'll pass it on.

Thanks, Doug.

Thank you. The next question is from the line of Janine Sticher with BTIG. Please go ahead.

Hi, thank you. A follow up on liquidity. Historically, you haven't been in a particularly promotional business, but it sounds like you're leaning a bit more into the markdowns and promotions now. How much is that dictated by product assortment and the need to clear through underperforming categories versus liquidity needs? And is that something we should think about continuing into Q4 just to help us out with the dynamics of Q4 gross margins to the extent possible? Thank you.

Yeah, thanks, Janine. Good question. I think for Q3, it was a little bit of both. I mean, we definitely saw the opportunity to start this reset process around our separate and shoe business, really our more casual business reset that Chris Chris will outlined in the previous question. And I think that was a key element that we wanted to make sure that we were keeping our inventory metrics in check and keeping our inventory in a comfortable position while at the same time generating liquidity. I think that is a key thing that we're focused on. So I think the two things kind of went hand in hand. I would expect through the balance of Q4 and as Crystal alluded to with us trying to reset our separate assortment and our casual or assortment more quickly, I would expect that to continue through Q4 and into early next year as well.

Okay, great. And then sorry if I missed it. Any update on physical retail or how that's performing?

Wholesale has been working great for us. It's been accelerating over the last several quarters and like we alluded to in the call, we've got double digit comps that we're putting up. So that's been great, giving our customers a chance to experience product in person. And from a store perspective, Melrose continues to progress and it's been a great brand and activation center where we can engage with influencers, interact with our customers in real time and get data straight from our customers' mouths. So in that sense, it's been great. No near-term future plans for extra stores at this point, but we'll update you more on that

as it progresses. Thanks so much.

Thank you. The next question is from the line of Dana Telsey with Telsey Group. Please go ahead.

Hi, good afternoon everyone. As you think about the health of your consumer and the competitive landscape given what you've seen more recently, what are you seeing in terms of anything regional, with the categories that you mentioned in terms of the continued softness and casual wear? How do you see the reset of the assortment and SKUs along with pricing? And then lastly, in terms of China, any more explicit is that all of your goods come from China? What did you do last time when there are tariffs? How should we be thinking about it? Thank you.

Thank you. Let me start with the last one as it relates to imports from China. No, not all our products come from China, but there is obviously a clear dependency on that. And as I alluded to, what we did the last time that the tariffs were increased, what we did is essentially look at and work with our vendors and their manufacturers as well as with what can we do from a consumer pricing perspective in order to basically share the burden across that. And that has been successful. And what really helps there is that from our products and the quality that we provide, we have so much to offer there that a few dollars could be added to pricing without disrupting demand, so to say. And so we feel that that is in the short term, partly a response. Obviously, we continue to diversify out of China where we can and where we can't. Then it's about the costing as well as the overall supply chain and rethinking or looking at how we can reduce that cost by either, you know, we've spoken about vendor consolidation, for example, so higher volumes. And that's a way to lower pricing or, you know, take certain portions out of the supply chain in order to obtain products at a lower cost. As it relates to your question around the competitive landscape, you know, if you look at promotion trackers, etc., it is very competitive out there. Part of our process has been to start working on our inventory reset and using that specifically from a promotion perspective, which Tiffany alluded to. We will continue to do so throughout Q4 and probably a portion of Q1. Time to think what the other thoughts are. As it relates

to the reset of the assortment, as far as SKUs go in terms of pricing, we're going to continue to leverage our GBBs and there's not likely to be material changes across pricing for each of the classes that we're working to reset, but there will be a reduction across the board. And it'll be dynamic as we look at what our customer reaction responds to. So still in that entry price point all the way up to halo price point, I'd expect that mix to stay fairly similar to what we have currently. No

material changes there. Thank you.

Thank you. Ladies and gentlemen, that was the last question. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.