Lulu's Fashion Lounge Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2023

Key Takeaways

  • Q3 net revenue fell 21% year-over-year to $83.1 million and adjusted EBITDA dropped to $1 million (1.2% margin) versus $5.4 million (5.1% margin) in Q3 2022.
  • The business generated $11.6 million of free cash flow in Q3, reduced inventory by 15% year-over-year and moved to a net cash positive position after paying down $4 million of revolver debt.
  • Full-year 2023 guidance was lowered to $350–360 million in net revenues and $4.5–5.5 million in adjusted EBITDA, reflecting continued macro headwinds and seasonal choppiness.
  • Management will implement a tiered initial order quantity strategy to reduce stockouts on high-confidence new products and better capture customer demand.
  • Growth initiatives include opening a flagship Los Angeles store in December to test physical retail and expanding wholesale partnerships to deepen omnichannel reach.
AI Generated. May Contain Errors.
Earnings Conference Call
Lulu's Fashion Lounge Q3 2023
00:00 / 00:00

There are 9 speakers on the call.

Operator

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

Speaker 1

Good afternoon, everyone, and thank you for joining us to discuss Lulu's Q3 2023 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 references to the year ending December 31, 2020 3, including our financial outlook for full year 2023, market opportunities, product launches and other initiatives and our growth. These statements, which are subject to various risks, uncertainties, assumptions and other important factors, could cause our actual results, 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 in our filings with the SEC, including our annual report on Form 10 ks for the fiscal year ended January 1, 2023, filed with the SEC on March 14, 2023, all of which can be found on our website at investors.

Speaker 1

Lulu.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 During our call today, we will Also reference certain non GAAP financial information, including adjusted EBITDA, adjusted EBITDA margin, net cash, 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.

Speaker 1

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 filings. Joining me on the call today are our CEO, Crystal Anson our CFO, Tiffany Smith and our 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 Crystal.

Speaker 2

Thank you, Naomi, and good afternoon, everyone. We appreciate you joining us today. Before we delve into our results, I'd like Thank our team for their steadfast commitment and nurturing our brand and delivering an exceptional experience to Lulu's fans. I'll begin with a recap of our Q3 results followed by highlights of important growth and efficiency initiatives that we believe will strengthen the company's long Financial success and brand expansion. Setting macro headwinds aside for a moment, as we reflect on our performance in the Q3, There are things we did well and things we needed to adjust to position us for sustained long term success.

Speaker 2

Let's jump into the things that we did well in the quarter. Our new product introductions continue to resonate with our customer during the quarter with single to double digit positive net revenue comps Across many product classes, including wedding related apparel, most dress classes, as well as a few other smaller but growing product Resulting in our total new product net revenue for the quarter comping up high single digits compared to Q3 last year, giving us further confidence in our future reorder funnel. Of the previously mentioned growth product classes, we're most proud of reaccelerating growth metrics Across wedding, special occasion and event apparel with new product net revenue growth up high double digits over Q3 last year. New technologies and investments in site experience across the website, mobile app and mobile web resulted in increased engagement metrics across all device platforms. We successfully reduced our revolving line of credit by $4,000,000 as intended and decreased our net debt by approximately $10,900,000 ending the quarter in a net cash positive position.

Speaker 2

Our business continues to generate liquidity And our balance sheet remains strong, enabling us to maintain our investments in strategic initiatives and sustainable long term growth. Free cash flow for the quarter was $11,600,000 compared to prior year Q3 at 4,600,000 Year to date free cash flow is $18,200,000 compared to year to date 2022 $12,600,000 reinforcing the agility of our business model. Inventory balances continue to decline with a balance at quarter end of $41,500,000 down about 7,900,000 15% from the same period last year and down $4,700,000 or 10% on a quarterly sequential basis Due to efficient inventory management. Transitioning to challenges we saw during the quarter were there were key learnings from the team. 1st, As our customers looked more towards newness and novelty, consistent with broader retail trends, we did not capture demand fully in the 3rd quarter Due to our conservative initial test order quantities being too small compared to the demand for many of the products we introduced during the quarter.

Speaker 2

Given the consumer health and macroeconomic headwinds facing many retailers, we have been more conservative in our initial product buys than warranted, resulting in less than optimal use of our highly effective buying model and leaving potential revenue opportunities untapped in the quarter. 2nd, In response to shifting consumer behavior during the quarter, we reallocated resources from planned performance marketing investments towards markdowns and promotional pricing in order to compete for some of this demand. We attribute pressure from our promotional pricing to the general elevated promotional retail environment and intensified price competition Jen from aggressive fast fashion retailers seeking to expand their presence in the U. S. 3rd, We're experiencing a shift back to pre pandemic levels in the lifespan of our reorder products.

Speaker 2

Over the last few years, catalyzed by the pandemic, We have benefited from extended lifespans of our reorder products with many products maintaining high productivity for 2 to 3 years longer than normal. More recently, we've realized we need to return to the multi year reorder buying strategy that was successful pre pandemic. This reversion was most apparent in the Q3, where we saw softening demand in some of our legacy high volume reorder products. While still productive and selling at healthy volumes, demand for these products are tapering sooner than expected. Our business model is built around testing and prioritizing timeless quality versus being excessively trend driven, which sets us up to Capitalize on the middle of a fashion cycle.

Speaker 2

Consequently, it can take a few quarters to test and optimize for shifting consumer preferences for more enduring and lasting trends, leaving us more exposed at the beginning and the end of a fashion cycle shift. With reorder product life cycles returning to averages more consistent with longer term historical levels we've seen, we're confident about our ability To deliver a recalibrated reorder strategy going forward. 4th, we saw a delay in the demand for fall products Similar to trends we experienced in the spring. Demand for fall products only recently started to gain momentum, leaving our separates and shoes business, which typically drive a larger impact in 3rd Q4 revenue, falling short of our original expectations. While we did not effectively anticipate the seasonal weather shifts, We have reinforced our internal planning and operating procedures to better address these shifts going forward.

Speaker 2

Lastly, we believe shoppers are currently craving more out of home in person experiences than has been the case for the last few years, Causing what we believe to be temporary headwinds for us as a primarily B2C retailer. While this may be temporarily limiting the extent of Customer engagement and acquisition opportunities. We remain confident in our D2C positioning and approach, while remaining opportunistic with our test, Learn and reorder approach to other physical retail channels. The end result was our financial results deviated from our initial projections. Net revenue was $83,100,000 for the Q3 of 2023, representing a 21% decline compared to Q3 2022.

Speaker 2

Our adjusted EBITDA was $1,000,000 for the Q3 2023 compared to $5,400,000 in Q3 2022. Our active customer count was 3,000,000 at the end of Q3 2023, down 4% sequentially from Q2 2023 and down 8% from Q3 last We are actively pursuing strategic initiatives and optimization efforts to drive efficiencies in the near term, while also laying the groundwork and making key investments so that we are well positioned to drive growth for the long term. These are a few of the actions we are taking in response to our Q3 We will be reimplementing a tiered based approach to our initial order quantity purchasing strategy For a subset of our new product tests, where data supports higher confidence and larger initial order quantity. While the increases will remain conservative and consistent with our test and learn We expect to reduce the occurrence of stock outs, capture demand from initial test orders and increase customer satisfaction. We believe a subset of our customers across all income levels have shifted spend to low priced aggressive fast fashion retailers We have recently been gaining traction with U.

Speaker 2

S. Consumers. We will be increasingly focusing our assortment and marketing efforts around an offering that is further differentiated from these fast fashion retailers. Additionally, in anticipation of retiring aging reorder products sooner, We will be increasing our newness and novelty penetration back to pre pandemic levels, where we have already seen encouraging performance from our test and learn orders. Finally, we will be making measured investments in our merchandising leadership, expanding expertise specifically in separates and non event apparel, shoes and Accessories as well as elevating experience and merchandising strategy across multiple customer interaction points.

Speaker 2

Alongside our optimization initiatives, our focus extends to new customer acquisition and engagement strategies that unlock fresh opportunities for visibility and growth and further support our core B2C business. As we approach 2024, we remain committed to offering innovative means for customers to interact with our brand, which is driven by customer insights indicating their desire for additional channels to connect with us. To that end, we are excited To our new retail location on Melrose Avenue in Los Angeles this December, where they will be greeted with an immersive brand experience That we believe showcases Lulu's exceptional product quality and unparalleled customer service. Brand opening is scheduled for December 1st With brand activations planned in the week leading up to the opening. The launch timing positions us well for holiday events with particular emphasis on dress and special occasion products For holiday and New Year's parties.

Speaker 2

Consistent with all our endeavors, we believe the test, learn and reorder approach also applies to physical retail As this store will allow us to experiment with various brand engagement strategies in 2024, while we evaluate how to apply our fast Turning buying model to a brick and mortar experience. On the wholesale partnership front, as highlighted on our Q2 call, Our partnership with an online wholesale B2B platform broadened our product offerings for potential partners, deepening our reach into brick and mortar retail And attracting new customers through a multi channel strategy. We're confident in our ability to facilitate wholesale growth with select retailers Following our nearly 7 years of wholesale partnerships with retailers such as Nordstrom and Stitch Fix, we believe wholesale relationships Provide a brand and customer halo effect that will deepen our relationships with our existing customers and introduce our brand to new customers, which will ultimately be accretive to our online presence. We will continue to be optimistic about brand enhancing wholesale partnership To profitably boost awareness and in person product experiences, while leveraging existing infrastructure to maximize cost efficiency and build synergies between digital and physical We will continue to update you on our progress over the next several quarters as it relates to our growth initiatives.

Speaker 2

In response to the temporary macro headwinds impacting our business and our softer year to date performance, we are adjusting our full year 2023 guidance to be more in line with our latest expectations. We are laser focused on adapting to the dynamic market changes, building the Lulus brand, Optimizing inventory turnover and driving cost efficiencies to meet our near term targets and position ourselves for a return to positive growth trends in creating shareholder value.

Speaker 3

As noted last quarter, as

Speaker 2

we see our sales volumes recover, we expect to see reciprocal improvement in profit margins as our fixed We are confident that the investments and actions we have taken and are taking now will position us well to emerge on a strong path to our goal of double digit growth and profitability over the long term. We believe we are well equipped to reinforce our business with a healthy balance sheet, Strong foundation and strategic vision for our future. We remain optimistic about our calculated growth levers and believe our long term investment thesis is still intact. We believe that increasing brand awareness and attracting new customers, retaining and enhancing existing customer relationships, Continuing category expansion and expanding into new and existing channels to engage with our customer where she is, Turn us to a path of double digit revenue growth and EBITDA margins. Now, I'd like to turn the call over to Mark Voss, our President and Chief Information Officer.

Speaker 2

He will share an update on key operational, technological and analytical efforts throughout the last quarter and currently underway. Mark?

Speaker 4

Thank you, Crystal. First, I'd like to start by providing an update on our customer

Speaker 1

and

Speaker 4

how she interacted with us during the quarter. New and repeat customer counts were down Q3 year over year with new customers coming in lighter than repeat customers during the quarter. Units per transaction on the other hand was up sequentially from Q2 2023 and decreased only marginally compared to Q3 of last year. This was primarily the result of the shift From performance marketing spend towards markdowns and promotional pricing in response to the customer's bias towards promotional pricing during the quarter. Despite increased promotions and markdowns, we saw slightly improved average unit tail at slightly lower units per transaction compared to Q3 2022, resulting in a near identical $133 Average order value compared to Q3 2022.

Speaker 4

Although the active customer accounts The client year over year, the decline was less than our net revenue, meaning that at a comparable Q3 $133 Average order value year over year, we were able to retain customers, but with a slightly lower purchase frequency driven by we believe primarily discretionary income pressure experienced by our customers leading to more discerning purchase decision making. In reviewing the various customer household income segments, purchasing behavior across various price tiers, We did not see clear trading up or down. From a marketing perspective, we redirected a Part of our performance marketing dollars towards markdowns and discounts to drive better conversion and inventory sell throughs in various product classes and to manage the seasonal shifts. Our primary focus remains on expanding brand awareness marketing to keep overall marketing, efficacy And spend as a percent of revenue within our targeted ranges to remain first order contribution margin profitable. This strategy allows us to introduce Lulus to more consumers and improve the overall efficiency of our marketing investments, including the cost of new customer acquisition over the long term.

Speaker 4

To that point, in Q3 2023, We continue the expansion of marketing investments in more top of the funnel brand marketing and our influencer and ambassador generated brand reach, Impressions and earned media value to support Volusia's word-of-mouth marketing. Based on our social media and brand data tracking, We saw continued year over year gains in brand familiarity, including with Gen Z, which gave us confidence that we're on the right brand growth path. We see much growth potential ahead of us, especially fueled by dedicated brand marketing and communications resources With our new Senior Vice President of Brand Marketing and Vice President of Communications, who will continue to be on the offense And build out these programs consistent with the test and learn data driven approach used for everything we do at Lewes. Throughout 2023, we made strategic investments to improve the international shopping experience, resulting in less friction and improved conversion rates, which we expect will continue to improve over time as we test and iterate On their shopping experience, in the Q3, we were able to broaden our marketing reach abroad I have now seen year to date double digit unit sale growth numbers in 12 out of the top 15 countries we've shipped to.

Speaker 4

And while it's still early days and a small portion of our overall revenue, we are exploring more targeted efforts To share the Lugus brands internationally, improve international search rankings and prudently test into influencer and other paid Notably, we launched an updated mobile app in September, which we are eager to build upon to drive customer engagement and retention. After the launch of the new app We have seen improvements in customer exit survey ratings and increases in conversion rate and average order value, leading to a meaningful increase in revenue persisted. By bringing app development in house, We are not only better able to expand our customer insights, analytics, promotions and deep linking capabilities, but also to develop app first and app only functionalities quicker. Moving on to product return behavior. We saw a slight increase in return rate compared to Q3 2022 and a slight improvement in return rate over Q2 2023.

Speaker 4

As mentioned in earlier commentary, we continue to embrace returns as we see returns as an opportunity to showcase more of the Lulu's quality and value, gain insights into our customers' style preferences and generally considered an integral part of the online shopping experience. That said, we are rolling out fit process changes with our vendor base, which we believe will contribute to enhancements in our fit and improved grading consistency of Lulu's branded products, affecting most Lulu's products by Q2 2024. We also made improvements in the fit information displayed At the product level and continue to consider additional return policy enhancements to counter abusive increases in returns and the related costs. From an operational perspective, in Q3, we further expanded our outbound shipping carrier network, which allowed us to offset some of the increases in outbound shipping costs by other carriers. To optimize margin, We are actively working to reduce return shipping costs across our network.

Speaker 4

Additionally, in Q3, automated order packing went live In our Northern California fulfillment center and due to the learnings acquired from the automated order packing implementation in our Pennsylvania fulfillment center, The team quickly scaled to expected efficiency improvements. As a result of our order packing automation, Our fulfillment order packing labor costs per unit has structurally decreased. Last but not least, our operations, customer support, data, marketing and engineering teams As always, have worked exceptionally hard to deliver superior customer experiences and are relentless in finding ways to drive down our unit costs. We are proud of everything the Lucrew has accomplished and we would like to thank all the Lucrew teams. And now, I'll hand you over to Tiffany Smith, Luluz' Chief Financial Officer to deep dive into our financials.

Speaker 3

Thanks, Mark, and good afternoon, everyone. We consider the current macroeconomic pressures as temporary headwinds and acknowledge the impact of shifting consumer spending and purchase behavior on our Q3 results. Our net revenue of $83,100,000 was down 21% year over year falling short of our expectations for the quarter. The decline was primarily driven by a decrease in total orders of 19% compared to the prior year as well as markdowns and return rates that were higher in the quarter. While our overall return rate in the Q3 was 50 basis points higher than the prior year, primarily due to product mix shifts and final sale ratios, It was 50 basis points lower on a sequential basis.

Speaker 3

Gross margins for the Q3 declined by about 180 basis points From the same period last year to 40.3%. Elevated markdown rates during the quarter drove the margin decline compared to prior year As our customers sought value and we leveraged more markdowns to move through spring and summer inventory that was heavier coming into the 3rd quarter due to the late start to spring. We were more aggressive with markdowns on these products resulting in a cleaner transition out of the 3rd quarter From a spring and summer inventory perspective, which was approximately 40% lower compared to the prior year. Moving down the P and L to give some insights into expense line items. Q3 2023 selling and marketing expenses We're $16,800,000 down about $2,500,000 from Q3 2022 due to lower performance marketing spend and favorability in merchant processing fees, partially offset by higher brand awareness investments.

Speaker 3

As already noted, we invested more heavily in markdowns and discounts, which was offset with lower performance marketing spend. General and administrative expenses decreased by about $2,800,000 to 21,600,000 a 12% decline compared to Q3 2022. The decrease was primarily driven by $2,600,000 decrease in Fixed and variable labor costs due to delayed hiring of fixed headcount as well as the impact of lower sales volume and increased operational efficiencies on our variable labor costs. Interest expense for the quarter was approximately $400,000 compared to $300,000 in Q3 2022. For the quarter, we reported a diluted loss per share of $0.10 which is a decrease of $0.12 compared to diluted earnings per share of $0.02 in the Q3 of 2022.

Speaker 3

And finally, adjusted EBITDA for the 3rd quarter was approximately $1,000,000 compared to Q3 2022 adjusted EBITDA of $5,400,000 Our Q3 adjusted EBITDA margin was 1.2% compared to 5.1% in the same period last year. Our balance sheet remains strong and we believe we are still positioned well to execute our long term growth plans and managed through the ongoing near term macro uncertainty. Our net cash provided by operating activities for the quarter was $12,700,000 compared to $5,700,000 in Q3 of 2022. We also generated $11,600,000 in free cash flow in the quarter compared to $4,600,000 in Q3 of 2022. We ended the quarter with cash of about $12,900,000 With a balance of $11,000,000 drawn on our revolver resulting in a net cash balance of $1,900,000 We repaid $4,000,000 of the revolver during the Q3 and plan to continue to pay it down through the end of the year.

Speaker 3

Our inventory balance at quarter end was $41,500,000 down about $7,900,000 from the same period last And down $4,700,000 on a quarterly sequential basis. During the Q3, we meaningfully reduced the sales growth The inventory growth spread indicating that our inventories continue to be better aligned with our sales. With respect to inventory, I would like to elaborate on some points that Crystal raised earlier in the call. Our seasonal transitions have proven to be challenging this year, which put some pressure on gross margins in the 3rd quarter and may pressure 4th quarter margins given the late start for sales of fall and winter products. That said, we ended the 3rd quarter with lower fallwinter levels compared to Q3 of last year.

Speaker 3

Also note that approximately half of our inventory assortment is seasonless, which maintains relevance from season to season and can be sold year round as it is not as impacted by seasonal transitions. We are also seeing the impact of more accelerated fashion cycles, which may impact the lifespan of our reorder merchandise. As we've highlighted in prior quarters, our data driven buying model results in roughly 70% of our buys being reorder products. We remain confident in our buying model that centers around these proven sellers with lower markdown risk given the following points. First, there continues to be optimism around the new products that are resonating with our customer as these products will become the foundation for larger reorder programs in future quarters.

Speaker 3

2nd, our existing reorder inventory continues to be productive as evidenced by our still healthy which we believe are industry leading. Furthermore, much of our seasonal reorder product is multi season and can be brought back year after year, which means we are not forced into aggressive markdowns of this product at the end of the season, even if it is turning a bit slower than in the past. And lastly, as we've noted on prior calls, we are a fresh fashion concept, not a fast fashion business. We see an opportunity to evolve our business to further capture the newness and novelty our customers seem to desire, but we by I no means intend to transition into a fast fashion buying model or short term unproven trends are chased. Overall, we remain confident in our buying model and our continued ability to move through inventory levels in a way that minimizes gross margin risk and ultimately preserves brand integrity.

Speaker 3

As always, we aim to be disciplined in our inventory management approach and will continue to relentlessly pursue Further optimization of inventory levels that balances the customer experience and minimizes markdown risk. Moving on to guidance. With 3rd quarter results below our expectations and continued choppiness early in the 4th quarter, We are tightening our full year 2023 guidance ranges. We will continue to take actions to manage costs, drive operational efficiencies and make targeted investments to adapt to changing consumer behaviors. Our guidance anticipates that our customer will continue to be discerning with our spend through the balance of the year and reflects continued macroeconomic headwinds.

Speaker 3

We expect 2023 full year net revenues between $350,000,000 $360,000,000 Compared with the prior range of $355,000,000 to $375,000,000 we expect 2023 full year adjusted EBITDA to be between $4,500,000 $5,500,000 compared with the prior range of $5,000,000 to $10,000,000 reflecting the impact of the lower net revenue range. To set expectations for modeling purposes, our quarterly adjusted EBITDA margin rates Have similar seasonality fluctuations as our net revenues and will likely fluctuate above or below our full year guidance rate depending on the quarter. As we have noted previously, historically Q4 has been our smallest revenue quarter as we are not a holiday gifting destination. As a reminder, as a result of paying down our long term debt following the IPO, we incur modest levels of interest expense associated with our revolver and equipment We anticipate interest expense for full year 2023 to be approximately $1,600,000 consistent with our previous outlook and an increase compared to 2022 levels, which reflects the impact of higher interest rates offsetting lower average revolver balances. As of today, we have $11,000,000 drawn on our $50,000,000 revolver.

Speaker 3

We plan to continue paying down our revolver and anticipate Ending 2023 with a net debt balance of less than $4,000,000 As a reminder, we anticipate that we will be able to maintain positive free cash flow for the full fiscal year as well as an increase over the previous year. We expect our stock based compensation expenses and our weighted average fully diluted share count to be unchanged from what was reported last quarter. Moving on to capital expenditures. We expect between $4,500,000 $5,000,000 for the year Compared with the previous range of $5,000,000 to $6,000,000 which includes capital expenditures for our new retail store as well as other investments. We believe investing in our future growth opportunities, driving efficiencies and enhancing the Customer experience are key to our long term success.

Speaker 3

And with that, I'll pass it back to Crystal for closing remarks.

Speaker 2

Thank you, Tiffany. On a final note, I'd like to reaffirm our confidence in our long term growth as we strengthen our business model amidst these near term headwinds. For the past 2 decades, we prioritized timeless quality versus being excessively trend driven and we believe our ability to test, Learn and optimize positions us well for enduring growth. This wouldn't be possible without the incredible work of our new crew, Our brand fans and our stakeholders who support us in our mission to deliver attainable luxury to our customers and be the online destination for all of life's fashionable moments. With that, I'll turn it over to questions

Speaker 5

now. We

Operator

will now be conducting a question and answer And the first question comes from the line of Brooke Roach with Goldman Sachs. Please proceed with your question.

Speaker 6

Good afternoon and thank you for taking our question. Crystal, I was hoping you could discuss what you're seeing in the competitive environment More broadly and how that has impacted your view of sales trends in the quarter versus your expectations relative to other exogenous factors that we saw in the quarter Like a weather transition or macro headwinds on the consumer. Further, can you elaborate on what actions you plan to take to differentiate your brand and product from some of these fast Growing online fast fashion retailers. Thank you.

Speaker 2

Hey, Brooke, thanks for the question. So I think I'd like to just address This in a very, very direct way where we don't believe that Sheehan or Timu or any of the other fast fashion giants that are out there caused our negative comp in the quarter. They probably nibbled on the edges of our customer base, but it's not what drove the negative comp for us in the quarter. And outside of obvious macro headwinds, Being under invested in newness and over reliant on our older reorder products that have been driving so much of our business for us over the last 2 years is really the biggest driver of our negative comps. And in our opinion, that's really easy to fix.

Speaker 2

It just might take a couple of quarters to fix it. We do, however, recognize a shift in the competitive environment as aggressive Fast fashion retailers are gaining more traction with U. S. Consumers, especially over the last few years, as well as more dynamic shifts in general within our customer base and for spending. In Q3 compared to Q2, for example, our customers shifted to a larger percent of spend from full price products towards promotionally priced products.

Speaker 2

That's probably more macro within our customer set. And while we possess the agility to adapt to consumer demand changes, We're not looking to compete in the fast or disposable fashion race at all. We believe in the resilience of our business model and we're dedicated to upholding the quality and Our strategy has been and continues to be very focused on customers who are seeking quality over quantity and enduring styles that last Our existing customers recognize the value not only in our quality product offering, but also in our brand and in our community. So So we see this as a competitive advantage over fast fashion retailers who are less loyalty driven and have more of a transactional relationship with their customers. To that end, we're focused on continuing to cost effectively build awareness for our attainable luxury product offering and further set ourselves Given the increased demand for our new and now fresh styles, we're leaning into those designs in a very measured and thoughtful And we believe that's going to continue to be a differentiator for us.

Speaker 6

Thanks, Crystal. And Secondly, for Tiffany, there was a lot of discussion about the engagement that customers have with promotions Recently and indeed you leaned into markdowns as a driver this quarter. Can you talk about your Expectations for promotions and investing in markdown dollars for the next couple of quarters as you look to reposition some of the merchandising assortment In the next year? Thank you.

Speaker 7

All right. Thanks for the question, Brooke. So As we oftentimes say, we do look at markdowns and discounts as one of our levers alongside of performance marketing spend, Where we're able to shift back and forth as needed based on what the customer is telling us. So for the Q3, as you all heard, that was an important Moment for our customer to be seeking out value, we also leverage the opportunity to take what was a heavier springsummer inventory coming into Q3 and move through that so that we ended the season with a cleaner 40% less in fact spring summer balance compared to the prior year. So as always, I think we don't want to give out specifics on markdown rates going forward or performance And anticipation going forward, we'll continue to leverage sort of our internal models to ensure that we're working Through all of those avenues and those levers in the most contribution margin positive way.

Speaker 7

I think historically, if you look back On prior years, you'll see Q4 is typically a time, particularly in December, where we'll pull back on Performance marketing relative to competitors, just given we aren't a gifting destination in Q4, we may follow suit with that this year. But again, I'm Not going to give any real specifics around that because I think we are going to continue to follow where the customer is leading us in terms of promotions, markdowns and how we want to leverage those.

Speaker 6

Thank you so much. I'll pass it on.

Speaker 1

Thanks, Brook. Thank you.

Operator

And the next question comes from the line of Mark Altschwager with Baird. Please proceed with your question.

Speaker 7

Hi, this is Amy on for Mark. Thank you for taking her question. To start, can you please speak a bit more to the month Month top line cadence for the quarter and give us any color on differences in shopping behavior by income group? Hi, Amy. This is Tiffany.

Speaker 7

I'll start with just sort of the quarterly cadence that we typically provide. The quarter itself ended on a stronger note from a year over year comp basis. We were We guess in the early part of the early to mid part of the quarter and started to see improving comps towards Through September. Also, I can just give a little highlight on sort of our view the 1st 5 weeks into Q4, we've continued to see some gradual continued improvement in our overall transacted comps year over year Starting to improve there, that's on a pre return basis just because we haven't fully rolled up all of our return Through the 1st 5 weeks, but we have continued to see some good top line growth year over year improvement on the comp. And I'll hand it to Mark to talk a little about the household income and cohort questions.

Speaker 4

Yes. When reviewing the Various customer household income segments and their purchasing behavior across multiple price tiers in our assortment. We actually did not see clear trading up or down between the segments and the revenue contributions in each price tier across those Household incomes remain stable compared to Q3 of 2022. So from that perspective, There were no specific shifts there. As I mentioned, our new customer acquisition was compared to existing Customers there what we saw is that the new customers as a percent of our total active customers were slightly lower compared to Q3 22, but over time that is obviously expected when you see when we are successful in retaining customers.

Speaker 4

But from an absolute perspective, we did see that new Compared to Q3 2022 were lagging compared to our existing customers and shifting a portion of our performance marketing expense into markdown and discounts Certainly played a role into that. I hope that answers your question.

Speaker 7

Yes. Thank you for the detail. Very helpful. I'll pass it

Operator

The The next question comes from the line of Janine Stitchter with BTIG. Please proceed with your question.

Speaker 3

Hey, Janine.

Speaker 5

Hey, you got Ethan Sagee on for Janine. Thanks for taking our questions. First off, just on increasing newness and novelty to pre pandemic levels, just Curious how quickly we should expect that to take?

Speaker 2

I would expect it to evolve over the next several quarters. We want to Remain true to our test, learn and react model and we don't want to over swing in any direction. So I would say that could take a couple of quarters, if not 2 to 3.

Speaker 5

Got it. Okay. And then next question, just going back to returns, I know you guys talked about the new return policies in place. Sounds like it's good to hear the sequential improvement. I'm just curious how your customers are responding to those?

Speaker 5

If you could give any color there? Thanks.

Speaker 7

Sure. Thanks for the question, Ethan. Yes, so returns continues to be a key area of focus for us. And frankly, it's an area that we have accepted as a very integral part of the business model in e Without physical stores, it's really important to give our customer the confidence that she needs to bring her purchases home to her at home fitting room. So We want to continue to maintain flexibility and all of our subtle, I would say, return policy changes that we've made this year Have maintained a free 10 day return period that our customer does leverage certainly.

Speaker 7

We've Continue to improve some of the back of the house metrics or data insights around returns, Adding some technology enablements as well for us to be able to learn more about our customers' return behavior, also, tackle some of the issues with Customers who have a more excessive return rate and try to work with them to improve their shopping behavior and return behavior. Overall, the policy changes that we've read, there's actually been quite a few where we see customers who are citing how they love Our flexible policy that we maintain room for them to be able to initiate a free return, where a lot of other companies are starting to take those things away. So I think that's An important element of the policy that we've maintained, we haven't experienced a significant amount of friction or Complaints on the customer's part with regards to some of the changes that we've made around changes to the shipping Return shipping costs fee structure either.

Speaker 5

Got it. Appreciate the color. I'll pass it on.

Operator

And the next question comes from the line of Dana Telsey with the Telsey Advisory Group. Please proceed with your question.

Speaker 8

Hi, good afternoon everyone. As you're thinking about the metrics, whether it's active customers orders, AOV and the AOV Increased just a tiny bit compared to last year. How are you seeing the promotional environment and how you planning going forward? And then when you look at category performance, any updates on categories as compared to last quarter or what you're seeing in the consumer? Thank you.

Speaker 7

Sure, Dana. This is Tiffany. As it relates to AOV, you're correct. There was a slight uptick actually in our AOV Year over year, which Mark broke down pretty well, I think, in his section during the call, where we did see a bit of an increase in AUR, Sort of a bit by UPT's sort of whole pretty steady or increase year over year. I think one thing to note is that AOV does Move for us in somewhat of a seasonal fashion.

Speaker 7

So when certain product classes are more predominant That carry higher AURs, we may see that impact AOV as well as during promotional timeframes That we typically see in Q4, we would typically see AOVs come down. So I'm not going to give any real specifics around that, but that's a fairly seasonal Metric for us and we continue to plan for it to react accordingly to what we've seen AOV movements look like in the past.

Speaker 8

Got it. And on the category side, anything to mention?

Speaker 2

In terms of category specifics, I would say We're very happy with the momentum that we're seeing building again across our wedding and wedding related event categories and specifically across All of our dress categories, that's been very encouraging to see some normalization there versus what we experienced in the previous quarter. And generally speaking, the newness and novelty that we've been introducing has been checking really well across the majority of our product classes.

Speaker 8

Got it. An initial framework as you think about the upcoming year, any pushes and pulls on margins that we should be thinking about as You're thinking about qualitatively 2024?

Speaker 7

So we haven't shared any expectations Yes, around 2024. In fact, we're pretty heavily focused on internally kind of building out our plans and framing the plans for the next year. So we haven't Changed anything, I think what stays true for us next year is we're continuing to lay the groundwork, make the necessary investments and adjustments We've already started on this year to position us well going into next year. We've spoken about some investments that we've made with our product, costing team getting those folks hired in this year. That we've spoken to in the past as being an opportunity for us to Improve upon our product costing, but that's going to be a multi quarter, potentially multi year Effort for us, I don't know if Mark you have anything to elaborate there, but I think that's an important lever that I think could have some effect for next year.

Speaker 4

Yes. So we were able to hire the team and we're very excited with the talent that we have. We're right now focused on, let's call it, low hanging fruit and at the same time, start working on Some medium term improvements that are going to layer on top of that. And obviously, we need to balance the needs of our buying model With the possibility of reducing those costs. I would say from an effect that, that will have, we've already seen some positive impacts there, so We're encouraged by that and we'll see how that based upon what the extra margin potential that there is, How we apply that?

Speaker 4

In some cases, we will apply that to be more price competitive, for example, so that would not immediately lead to a higher Margin per se, but more margin dollars. In other cases, it will be applied to expand the margin and we'll make those Decisions and trade offs based upon what UHUS brand needs at that moment in time.

Speaker 8

Thank you.

Operator

And at this time, there are no further questions. And that concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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