Good afternoon, and welcome to Lulu's First Quarter 2022 Earnings Conference Call. Today's call is being recorded and we have allocated one hour for prepared remarks and Q&A. At this time, I'd like to turn the conference over to Naomi Beckman-Straus, General Counsel at Lulu’s. Thank you. You may begin.
Good afternoon, everyone, and thank you for joining us to discuss Lulu’s first quarter 2022 results. Before we begin, we would like to remind you that this conference call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements, including but not limited to statements regarding management’s expectations, plans, strategies, goals, and objectives and their implementations.
Our future expectations regarding financial results, references for the second quarter ending July 3, 2022, and outlook for the year ending January 1, 2023, market opportunities, product launches and other initiatives, and our growth, these statements, which are subject to various risks, uncertainties, assumptions, and other important factors could cause our actual results, performance or achievements to differ materially from results, performance, or achievements expressed or implied by these statements.
These risks, uncertainties and assumptions are detailed in this afternoon’s press release as well as our filings with the SEC including our Annual Report on Form 10-K for the fiscal year ended January 2, 2022 filed with the SEC on March 31, 2022. All of which can be found on our website at investors.lulus.com.
Any such forward-looking statements represent management’s estimates as of the date of this call. While we may elect to update such forward-looking statements at some point in the future, we undertake no obligation to revise or update any forward-looking statements or information, except as required by law.
During our call today, we will also reference certain non-GAAP financial information including adjusted EBITDA, adjusted EBITDA margin and net debt. We use non-GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business.
The presentation of this non-GAAP financial information is not intended to be considered in isolation or is a substitute for or superior to the financial information prepared and presented in accordance with GAAP. Our non-GAAP measures may be different from non-GAAP measures used by other companies.
Reconciliations of GAAP to non-GAAP measures, as well as the description, limitations and rationale for using each measure can be found in this afternoon’s press release and in our SEC filing. Joining me on the call today is our CEO, David McCreight; our Co-President and CFO, Crystal Landsem; and Co-President and CIO, Mark Vos.
Following our prepared remarks, we’ll open the call for your questions. With that, I’ll turn the call over to David..
Thank you, Naomi, and good afternoon, everyone. I am proud to address you today with my partners and co-presidents, Mark and Crystal. We continue to see significant moment in our business and we are extremely pleased with the progress we've made in our first two quarters as a public company.
As a reminder, since completing our IPO during the fourth quarter of 2021, we have fully paid off our long-term debt, and as a result have an exceptionally strong balance sheet, combined with a healthy cash flow from operations that we believe positions us well to execute on our growth plans.
Our LuCrew has done a tremendous job in delighting our customers and executing on our strategy. And the results from the first quarter are a testament to their impactful work. During Q1, we generated nearly $112 million of revenue, representing growth of 62% year-over-year, even as we anniversary last year stimulus in the quarter.
Our adjusted EBITDA was 9.9 million versus 5.4 million over the prior year period. We saw excellent growth and active customers in both new and repeat, reaching 3 million in the last 12 months ended April 3, 2022, compared to 1.9 million for the same period last year.
And we are driving this growth with efficient first order contribution margin profitable performance marketing spend, and compelling assortments. We were happy to see growth in both new and repeat customers for the quarter.
Based on customer demand, Lulu's brand seems robust given the broad strength in our customer related metrics for Q1, and our marketing efforts and assortments continue to build loyalty and engagement among our brand fans.
From a merchandising perspective, we were pleased by the Q1 response to our event offering and more recently to our non-event offering. Our event dressing category remains a pivotal segment of our business, and we saw a meaningful lift in demand driven by in person events resuming.
In non-event categories, our team continues to evolve our offering, planning to increase mindshare, and occupy more of our closet, which is reflected in our continued double-digit revenue growth and these classes.
Data is critical to all our decision making at LVLU, and we use data insights to optimize almost all elements of our business, particularly in our product creation and curation cycle.
Our test, learn and reorder approach supports lower markdowns and decreases fashion risks, and we view this as a key differentiator from other companies in the industry. As a reminder, roughly 70% of our revenue is from algorithmic driven purchasing.
And a leading indicator of future success for our business model is the number of new products that are tested and adopted for future reorder pipelines. Well, the new product results from Q1 looks strong, and our reorder pipeline looks robust, which gives us confidence that achieving our growth targets in 2022 and beyond.
These exceptional first quarter results highlight the massive potential of our affordable, fresh fashion model, among millennial and Gen Z women.
We continue to engage her online through digital channels and social media, as well as on our own platforms, through reviews, feedback surveys, and one-on-one interactions with our incredible customer service team.
Our LuCrew every day to make our customer touch points special, which ultimately leads to stronger customer engagement and loyalty and increases word of mouth introductions to a growing community of Lula's brand stands. We believe there are vast pools of untapped customers who have yet to meet our brand.
And by mining insights learned from our rigorous performance marketing, testing, building awareness capability, and encouraging more word of mouth introductions, we are optimistic about our growth for years ahead.
Analytic data shows that while millennials remain our largest cohorts spend the rate of adoption by Gen Z gives us confidence in our long runway. We attribute the apparent embrace of Gen Z to the appeal of our product offer and our evolving ability to interact with them in ways and platforms that they find appealing.
On supply chain, we are continuing to monitor developments in China, the new coronavirus strains as well as other supply chain risks.
As we've highlighted in prior earnings calls, we now place orders about four to six weeks earlier than we did during pre-pandemic times, to continue meeting our customers' needs, as well as to mitigate pressure and avoid scrambling for costly airfreight.
As a reminder, this slightly longer lead time does not significantly impact our brand, because the vast majority of our orders are for previously tested product. Also, we are not a fast fashion brand. So we have less product trend risk and are therefore less sensitive to a slightly longer lead time.
That being said, we have not yet noticed nor been informed of any major changes in our product lead times from prior quarters. As a new company, we've been sharing with you much of the LVLU growth story, our beginnings, our roots in digital and analytics, our passion for our customers.
But one of the perhaps underappreciated elements of our business model is the resilience. So, I thought it a good time to highlight today what gives us structural resilience compared to others in our industry.
We have a loyal and growing customer following supported by our accessible price points and affordable luxury positioning, spreading broad range of ages and income levels across millennials and Gen Z. The durable appeal of our product styling. We are not a fast fashion brand and have a data driven product development approach which reduces risks.
So shifting demand does not always mean massive inventory obsolescence or excessive markdowns. We have a very nimble cost structure and the largest components of our overhead specifically in marketing and staffing. And in the future, product costs will be further rationalized.
We believe we have amongst the fastest inventory terms in the industry, which enables the ability to flex our position more quickly than most. We have a capital light model, with some periods approaching negative working capital.
And as a result of the recent debt reduction, we now have a strong balance sheet and are well positioned to fund continued growth due to our strong free cash flow generation ability. Of course, we are not immune to industry-wide cost pressures in the areas of inflation, labor materials, shipping and digital marketing costs throughout all of 2022.
The guidance we're providing today incorporates some of those anticipated cost pressures. Our frequent testing indicates we continue to have product pricing power, which we believe provides us with strong gross margin cushion even with increased inflationary pressures.
And these inflationary pressures were to move beyond transitory to structural we still have ample room in our future business model to reduce product costs in 2023 and beyond to offset much of any structural increases. In closing, we are quite pleased with our Q1 results, and how Q2, historically, our largest and most profitable quarter is unfolding.
Crystal will provide more contexts in a few minutes. But based on the trends we've seen thus far, we have updated our guidance.
We are now raising net revenue growth expectations to 30% to 33% growth for FY '22 and adjusted EBITDA to reach 50 million to 51 million, even while continuing to invest for future growth and incurring the incremental costs of being a public company. For now, I'd like to turn the call over to Mark Vos, our Co-President and Chief Information Officer.
He will share with you an update on key operational and analytical efforts to further support our continued growth, as well as increasing customer insight and engagement. I'll let Mark discuss some of those key initiatives with you now in greater detail.
Mark? Mark?.
Thank you, David. And thank you everyone for joining us today. Starting with our customers, we are very proud of the record engagement of our repeat customers in Q1 that repeat engagement, together with healthy numbers of new customers acquired in 2021. And in Q1 of 2022 sets us up for continued momentum for the year and beyond.
In the 12th month ended April 3, 2022, we serve 3 million active customers, compared to 1.9 million active customers in 12 months and April 4 2021. Record AOV for the quarter, fueled by more items per basket, as well as lower discounts and markdowns showed our customers growing desire for Lulu's assortment.
We are very proud of our customer support team that is always 100% focused on providing our customers with the best possible experience whether we are responding to shipments related questions, or providing style and fit advice.
We continue to enjoy strong CSAT or customer satisfaction scores and have improved our already high CSAT scores year-over-year. Tough CSAT scores are not only a wonderful measurement of the Lulu's brand hug we provide our customers, but they're also a leading indicator for high net promoter scores, and continued customer word of mouth advertising.
We are also expanding resource allocation for further to further improve our customer insights. Lulu's is a company that is built on customer feedback. And customer feedback already drives much of our product assortment, and our shopping experience.
We are in conversations in many channels with our customers every day, and we see more opportunities to share continuous customer insights throughout our organization.
By broadening the channels through which we engage with our customers and applying technology to large amounts of conversational, structured and unstructured data that is collected, we aim to ensure that our customer's voice is and remains central to all rules, conversations and decisions.
In March of 2022, we re-launched our Love Rewards loyalty program, whereas our previous reward program was a coupon discount program. The new Love Rewards program is focused on rewarding customers for their engagement with Lulu's.
Customers can earn points through purchases, providing us with first party data and following Lulu's on various social media channels. Points earned counts towards for customer loyalty levels, and each level as increased customer engagement benefits, like priority back in stock notifications and exclusive deals.
The flexibility of a points program offers us more ways to deepen the relationship with our customers to increase a customer's lifetime value and to occupy a larger share of her closet.
Our early reports indicate that the program is off to a strong start with favorable customer engagement trends right off the bat, and we are looking forward to further enhancing our loyalty program in 2022 and beyond. From a marketing perspective, as a reminder, Lulu's has been and continues to be first order contribution margin profitable.
In other words, our cost of acquiring a new customer is below the first order contribution margin after selling and fulfillment expenses.
Despite the changes and challenges that iOS tracking limitations and privacy regulations in general have introduced Lulu's remains effective and efficient in attracting new customers and reengaging existing customers.
Our proprietary data sets, tooling and analytics have continued to provide us with effective lines of sight, on what spent in which channel for each audience is incrementally beneficial.
And as a result, our selling and marketing expenses as a percentage of net revenue remained in line with recent years, and we will continue to iterate and adapt to try to keep it that way.
Switching to our operations, the key enabler of our affordable luxury positioning and customer the line is continuous improvement in our service levels and efficiency across our supply chain.
In Q1 2022, we successfully and seamlessly transitioned our vendor inbound inventory receiving and product quality control activities from our 3PL partner back in house. We also improved our shipment efficiency from Southern California to our Northern California and Eastern Pennsylvania fulfillment centers.
We have already observed higher units per trailer shipped to our fulfillment centers, which reduces the transportation cost per unit. We also have observed shorter dock to available for sale cycle times, which further improves our in-season selling window and ultimately lower seasonal markdowns.
In the coming quarters, we expect to add additional logistics capabilities to our Southern California facility to further optimize inventory across our entire network, as well as order fulfillment to the California, Arizona and that Nevada regions, thereby improving our service levels, while also reducing shipping expenses.
In March of 2022, we started our implementation of robotics in our Eastern Pennsylvania fulfillment center. I'm very pleased with our operations team's ability to implement the new robotic system, while ramping up into our important spring peak season and to do so without negative impact to our customers.
Robotics is already driving productivity gains, and it's helping us better attract and retain warehouse associates. Reasonably, we improve our warehouse associate retention rate significantly compared to the same period last year, which also reduces training expenses and loss of new associate productivity.
And it also enables us to provide our customers with high level of service they have come to appreciate from us. With these early successes, we will consider a robotics rollout in our northern California logistics centers as well, for which we have allocated CapEx budget as reflected in our full year 2022 guidance.
And now, let me introduce my colleague, Crystal Landsem, Co-President and CFO who will discuss the quarter in greater detail.
Crystal?.
Thanks, Mark, and good afternoon everyone. The first quarter of 2022 has been a strong indicator of the robust momentum in our business. And as expected, we're pleased to be reporting continued strong financial results.
As David mentioned, we delivered an outstanding quarter highlighted by year-over-year growth across key financial metrics including net revenue, gross margins, profitability and cash flows. We also saw record performance across our customer health metrics as we saw many active customers engaging with us in the first quarter.
Our customers continue to engage with us at increasing levels as they return to their busy social calendars and continue to come back to us for their everyday fashion needs as reflected by the increases and average units per order over, average order value and average spend per customer.
During Q1, we grew our net revenue by 62% to 111.9 million, a 42.9 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 first quarter.
Total orders increased by 51% and average order value increased by 20% to $133 in part reflecting fewer markdowns and lower discounting.
We're very proud of our large diverse community of loyal customers and the 12 months ended April 3, 2022, we serve 3 million active customers, compared to 1.9 million active customers in the 12 months ended April 4, 2021, representing growth of 58% and up to 200,000 active customers compared to our 2021 year ending active customer count of 2.8 million.
Despite industry wide supply chain challenges, our business model has enabled us to continue our path of strong growth and profitability. Gross margins for the first quarter increased 220 basis points to 47.3%, driven primarily by two key factors. First, fewer markdowns and discounts compared to last year driving more sales at full price.
And second, three acceleration of higher margin event dressing demand, coupled with demand and non-event everyday dressing categories. Along with strong customer demand, our agile merchandising process facilitated inventory churn rates at an annualized rate of over eight times.
Moving down the P&L to give some insights into expense line items, Q1 selling and marketing expenses were 21.9 million, up 8.5 million from the same period in the prior year, due to the return of online performance marketing spend to a more normalized state modestly ahead of the increase in net revenue, as well as some increase spent on top of funnel brand awareness marketing.
General and administrative expenses amounting to 27.8 million for the quarter, an increase of 12.7 million compared to the prior year. The increase reflects higher fixed headcount costs and associated payroll and benefit costs to support business growth and our obligations as a public company.
Recall, we did not have any public company expenses last year in Q1. We continue to drive efficient results and operations in spite of inflation pressures, labor shortages, including for distribution center labor, increasing pressure on logistics costs and rising return rates.
Investments in our distribution network have offset some of these headwinds and enabled us to drive favorable year-over-year operating margins. Interest expense fell by 3.6 million to 200,000 as a result of paying off our long-term debt last year with proceeds from the IPO.
For the quarter, we reported a diluted earnings per share of $0.05 compared to a diluted loss per share of $0.08 in the first quarter of 2021. And finally, adjusted EBITDA for the first quarter was 9.9 million compared to 5.4 million in the same period in 2021. Our Q1 adjusted EBITDA margin was 8.9% compared to 7.8% in the same period in 2021.
Moving onto the balance sheet and cash flow statement. Our balance sheet remains strong and positions as well to execute on our long-term growth plans.
One key change over last year to note on the balance sheet, we adopted accounting standards under ASC 842 at the beginning of fiscal 2022, resulting in the recognition of operating lease liabilities recorded on the balance sheet offset by a corresponding lease right of use asset.
The resulting impact to the balance sheet is roughly 29 million and offsetting long-term lease liabilities and right of use assets. Our strong cash flow model enabled us to pay down our revolver by 10 million, leaving a balance of 15 million at quarter end with quarter ending cash balances of 19.4 million.
For inventory, while we continue to turn quickly at over an eight times on an annualized basis, we ended the quarter with 42.1 million on hand, an increase of 19.3 million compared to 22.8 million at the end of Q1 2021, setting us up well to meet our customer demand in Q2.
We continue to maintain our fast inventory turns reflecting our strong customer demand as well as our data driven approach to buying for both new and reorder products. In Q1, we once again believe our inventory turns were industry leading.
However, as we've said in the past, over time, we'll incrementally test our way into slower returns in order to better keep up with our customer demand for Lulu’s products while still keeping laser focused on the macro environment and making sure we hold firm to our lead inventory management principles while continuing to pursue profitable growth.
We continue to operate a highly capital efficient business that positions us to generate significant positive cash flow. For the quarter, we generated 20.2 million in cash flow from operations.
Moving on to guidance, based on the strong results of the first quarter, early reads on the second quarter, and our confidence in the future, we're raising our expectations for the full year. We continue to have deep conviction in our product merchandising model and remain confident in our ability to navigate the current macro environment.
Therefore, we're raising our 2022 full year net revenue expectations to a range of 490 million to 500 million, which represents a year-over-year growth rate of 30% to 33%, up from our previous guidance of 480 million to 490 million.
Adjusted EBITDA is now expected to be between 50 million and 51 million, which represents growth of 21% to 23% over 2021 and an increase from our prior range of 48.5 million to 50 million.
We continue to expect product gross margin expansion in 2022 as we benefit from our data driven model and continued high levels of full price selling, as well as pricing leverage on our high volume reorder products.
We do expect increased oil prices to continue to be a headwind to gross margins, and increasing shipping and logistics costs for the balance of the year. We plan to reinvest some of our upside into marketing and continuing to build customer awareness, which typically generate strong returns longer term.
These expenses are expected to occur primarily in the second and third quarters of 2022. 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 2021.
Our updated guidance also accounts for the potential for increasing return rates, which we've already experienced in Q1, as well as a higher mix of event based dressing as our customer returns to her social calendar, and we continue to meet pent up demand for weddings and wedding related events.
Well not reflected in our Q1 results, our guidance also reflects our expectation for a normalization of markdowns and discounts to pre-pandemic levels for the remainder of the year, likely more apparent in the second half of the year. Our guidance targets are for the full 2022 year.
That said to set expectations for modeling purposes, and a normalized year our net revenue is typically highest in our second and third quarters due to demand seasonality for event dressing, with our lowest revenue coming from the first and fourth quarters.
We would also like to remind you that our quarterly adjusted EBITDA margin rates have similar seasonality fluctuations as 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 second and third quarters 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 roughly 700,000 for the year dramatically down from 12.8 million in 2021. For 2022, we expect the weighted average fully diluted share count of 40 million shares.
This year share count includes a full year of higher post-IPO share counts weighted across all four quarters. Moving on to capital expenditures, I'd like to reiterate the following investment areas we are focusing on throughout the balance of the year.
Once we've completed a successful robotics implementation, and our East Coast fulfillment center will evaluate the return on investment and consider launching robotics and our Northern California facility.
We plan to continue improving our platforms to ensure that we maintain and improve our customer centric shopping experience and marketing personalization with investments in our customer data platform and customer insights. Lastly, we plan to further invest in internal and external software and technology to enhance our operational efficiencies.
With the rollout of these initiatives, we continue to expect capital expenditures of between 5 million and 7 million for the full 2022 fiscal year. And with that, I'll pass it back to David for closing remarks..
We would like to thank the LuCrew brand fans, board, and of course, our shareholders for helping us deliver these outstanding results in the first quarter.
We continue to believe that Lulu's high growth capital light business, combined with fast inventory turns of strong balance sheet and unique merchandising model clearly differentiates us from the apparel and fast fashion companies we see competing in the e-commerce space.
Moreover, we think the customer experience we provide is unmatched and positions us well to benefit from long-term growth trends in our industry. We are very pleased with the start of the year and look forward to executing on our strategy and continuing to deliver on our targets in 2022.
Thank you for your time, and we look forward to hearing your questions..
Thank you. And ladies and gentlemen, at this time, we will conduct our question-and-answer session. Our first question comes from Randy Konik with Jefferies. Please state your question..
I just wanted to explore the event and non-event product categories that you spoke of that had strengths. So because it appears that your business is getting or the brand is getting more and more recognition as a destination for events, but you're also talking about that added strength and non-event category.
So can you talk about some of the wins you're seeing in the non-event area and maybe some of the purchase behavior by the consumer? Is she getting, in the transaction, are you seeing kind of UPTs wise where she's buying event plus non-event stuff at the same time? Just kind of curious of what kind of behaviors you're seeing from the consumer there?.
So from any events versus non-events versus separate versus stresses, we've seen double digit comps across all of the above. Because we're so well known for our event and we were able to chase into and kind of capitalize on a lot of pent up demand, we did see an even larger reacceleration on the event side.
But we're still very impressive what our team has been able to do on the non-event side with a double digit concert last year. So, we're making good headway, still testing and learning into what she's interested in, and really impressed with the team has done across all product classes.
From a customer behavior perspective, Mark, I think you can add more color there..
Like we witnessed also last quarter, for example, is that we see that certainly increases in frequency of our customers. And over time, as even when some when a customer starts with Lulu's strong event side that she certainly migrates into the other categories overtime. And so, that's also what we observed in Q1 of this year..
And, Randy, we love it because what Crystal and Mark has outlined sort of indicates the great bones for being an excellent lifestyle brand, the idea that we have sort of gateway products, and that those gateway products lead to other, explorations across the brands. And that also speaks to future lifetime value and customer stickiness.
So all very good signs..
Just last question is just your thoughts on the general health of the consumer? How does she feel to you guys, these days?.
I think we're pretty pleased with all of the metrics around our customer, and it's our AOB and reductions in Markdown and discount are a testimony to that she said a lot of value in our products. She's putting more in our shopping cart. She's engaging with us more often.
So across the board, we think our consumer is very healthy, both new and existing..
Our next question comes from Oliver Chen with Cowen. Please go ahead..
Hi, the inventory turns continue to be really impressive. How are you balancing that against markdown normalization that you're seeing as well as maintaining the right and stock levels to ensure that the net promoter score is optimized? And a follow-up, as you think about marketing spend, you mentioned top of funnel.
What's in your strategy in terms of thinking about performance marketing and attribution analysis, top of funnel relative to first and third-party and what you're seeing in the marketplace?.
I'll take the inventory turns questions. And generally speaking, we've been really focused on improving our size and stock ratios and maybe less so on what we were speaking previously about slowing turned, it's more about optimizing that size and that stock availability. Our UPT I think per testimony that we've made dramatic improvements.
We've doubled our size and stock across our reorder products this quarter, which has allowed us to continue turning quickly. But still meeting that customer we're getting closer to meeting our customers' demands. It's not to say we don't have room to improve and continue to optimize precise completion.
But we've done a really great job again, just doubling that size and talk ratio across our reorder. From an NPS perspective, I think that always remains an opportunity. But I'll ask Mark to further advise this..
Just as it relates to the NPS and we have pointed out in the past that they one of the areas of improvement is indeed that product availability and specifically the size availability. And what we've observed in the data, in our NPS data is that, she indeed is noticing a better position for us still there.
So that is, so that's good, but like still, opportunities there to further expand on that.
But then as it relates to your question around the top of the funnel marketing, last time spoke about our, basically, our increased efforts on the brand awareness side, and so, we are continuing to be testing and learning as it relates to our top of funnel marketing how we, because it's different from performance to direct response marketing is how are the metrics there shaping up? And how can we correlate that to further downstream down the line revenues.
And that is, remains in progress. We have some interesting approaches there that we are currently implementing and proceeding with.
And so, we feel overall that as a -- we're confident in switching, we're more of a, basically if our marketing expense to force that brand awareness in order to accelerate that word of mouth marketing that we have grown historically with, as well as to further improve the efficiency of our direct response..
And lastly, the gross margin and revenue comparisons from a modeling perspective get more challenging.
Just some thoughts around what gives you conviction there? And it sounds like you expect more markdowns, given your commentary Crystal?.
Yes. So, we didn't experience that in Q1, where our markdowns and discounts were still at a kind of a historic low, but just given the current macro backdrop or wanting to be conservative in terms of the balance of the year. We haven't experienced it yet, but that's not to say that we wouldn't. David, I don't know if you want to add any color to that..
Yes. We just want to be overall just cautious about it. As Crystal said, we're halfway through our largest quarter of the year, things look good, but we wanted to be a little more cautious as other initiatives in the driving good part of the back half as well..
I would also say that as our base for revenue growth gets bigger, it's reasonable to expect that that percentage overall will get smaller, but we still plan to put up some impressive comps for the balance of the year..
Our next question comes from Brooke Roach with Goldman Sachs. Please go ahead..
I was wondering, if you could discuss the costing and inflationary pressures that you're seeing and a little bit more detail relative to what we were talking to a few months ago? And then on pricing, it sounds like that's an opportunity for you.
Can you discuss your plans to raise price this year as a result of those inflationary cost pressures? And how much is that pricing contributing to your top line growth plan for the year?.
So, we think a pretty surgical approach to our pricing and IME targets in general. So, as there has been cost increase, we can and have taken prices up. But on the flip side, we've also taken prices down and it's all driven based off a sell through an optimization with our customer.
In area where we're trying to grow more strategically and take it more of a competitive position, we're not being as aggressive with those margins. All of that factored into our guidance and what our expectations are, as well as what we have experienced so far year-to-date..
In the inflationary side, it's still in the single digit range, mid single digits, the increases we're seeing, but we also like to talk about costing we're facing, but also we have opportunities in our throughout our system that continue to sort of optimize.
And so, it's not like we have to turn around and say, where do we find these mid single negative digit increases. And Crystal said, we go sort of surgically across the organization only looking for opportunity to become more efficient to offset some of that.
And then what I was alluding to in the future is, as you know, we've talked about the Company hasn't necessarily rationalized its product purchasing behavior, with lots of opportunities in the coming years and towards the back half of the coming year..
The other piece to remember too is that 70%, roughly 70% of our revenue is coming from reorder products where our order volumes are growing. And we're able to negotiate more aggressively from a price positioning perspective. So, it's another beautiful part about our model where we do get more leverage as we grow..
And then just a follow-up on the brand momentum and the awareness that you have today.
Where do you see the biggest opportunity to move the needle on unaided brand awareness over the course of the next year? And what customer cohort are you seeing the most momentum among right now?.
I will see momentum in both the Millennial as well as Gen Z cohorts. What I do and also called out the last time we spoke is that, for example, with a lot of the brand campaign we did last year, and that type of messaging that really resonated very well with Gen Z as well. So, I would say that the focus is on both, so to say.
And in that sense, from a runway perspective, I feel that we can have that double benefit of increasing that brand awareness in both the Millennial as well as Gen Z..
Let me add some color to what Mark was saying. So as you know, we began to test as a company that was very strong, very sophisticated, even beyond our scale and performance marketing. As we came closer to the IPO and new debt wasn't going to be an issue, but knew we had strategic opportunities to learn that to bring our message out.
Marketing team started to work on ways to explore building our awareness through other vehicles beyond performance marketing, we have the sort of smaller tests we did in Q3. And that combined with a number of things has given the team a lot more conviction to move in that space.
And that's gone from considering platforms, media approaches, as well as restructuring the Company and restructuring the organization around enabling that be more important and powerful. So, it's really -- we're still in very early innings with the effort. We're really enthused by what we're seeing so far..
Our next question comes from Dana Telsey with Telsey Advisory Group. Please go ahead..
As you think about the consumer and the health of the consumer, in what you're seeing returns or markdowns, how does it differ from last year? And then with the manufacturing and product optimization, are you bringing goods into manufacture closer to the U.S.? How does that change and how long would you say that takes in order to get where you want it to be? And I have one follow-up..
I would say from a consumer health perspective, we've seen quite a lot of games, especially when you compare against last year, both new and repeat customers are engaging, more frequently, they're spending more money with us.
And overall, we haven't seen any sort of compression, quite the opposite, it's all up and to the right and very positive for us. So in that sense, this year, compared to last year, we've seen quite a lot of improvements across all of our customers.
From a production of goods, shifting from one location to another, I would say that that's more in our vendors control versus in our control. It's been fairly consistent and we haven't really seen any disruptions or delays and have been kind of steady as she goes from an inbound perspective. It's not improved over previous years.
So in that sense, there's nothing new or interesting really to report on our side..
Got it. And then the AOV at $133 is very impressive in terms of the increase.
Are you seeing that come from an increase in the -- from the price of the item, are people buying more items? What's the change that you noticed there? And what do you expect go forward?.
But there's going to be balance between pricing and lower markdowns and discounts. And it's not been heavily weighted one way or the other. We would expect that that trend to continue as we move through year, and we've not seen any reactions where we have taken prices, there's been little to no reaction from our customer.
And there's no reason to believe that we would take initiative..
We have seen an increase in our units per transaction..
Hi, Dana. So when you think about big macro moves, what they start to rebalance over time and the offset with the growth of the non-event business, you end up with different purchases over time. These will be substantial moves ..
And your next question comes from Mark Altschwager with Robert W. Baird. Please go ahead..
I guess first Crystal, just a follow-up on the EBITDA margin guidance. I think you called out that you expect to see pressure in Q2 and Q3 year-over-year given a several factors. I guess can we take away from that, but you expect EBITDA margin to be up year-over-year in Q4.
Just trying to get a better sense of the seasonality you're pointing us to with that commentary? Thanks and I have follow-up..
So around Q2 and Q3, I wouldn't say pressure is how I would describe it. It's more about us being opportunistic from a marketing investment perspective.
There's could be some operational inefficiencies as we're expanding our Southern California facility, but it's more so around being opportunistic around taking our upside to more awareness, marketing and driving more top of funnel as well as public company costing, fully burden this year versus last year, which is expected to be over $4.5 million.
So, it's more of those things versus using operational efficiencies or deleveraging..
And then kind of a bigger picture question. Current momentum clearly excellent, a lot of opportunity ahead, but curious if you could talk about your approach to the business in the scenario where the macro consumer backdrop where the slow a bit.
How flexible can you be on costs? How do you think about managing costs versus investing behind the market share opportunity, and just overall, kind of the durability of a 10%-ish EBITDA down margin in a less robust sales environment?.
I think that's the beauty of our merchandising model where we can pivot really quickly and because we're such a the science pretty early on. I mean, we're in it every day. And so, there's if you look at our performance to COVID, you can see to back out some of the noise from stock-based comp adjustments and all of that.
We actually had a relatively flat EBITDA dollar with a 33% lower revenue. We're just a highly variable cost driven business. So if we needed to flex up or down we've got a lot of ability to do so. So we're certainly watching it we haven't experienced it so far but we're keeping a close eye on it.
But again, the way we manage our inventory it allows us to be very, very flexible and pivot really quickly..
And it's interesting for us Mark because we have this right now office, all signs as Crystal said up into the right. So, we want to be smart about it and be nimble, but this team rehearsed it in a very dramatic way during 2020. So it does deliver and things have been impacted really quickly..
Thank you. Next question comes from Lorraine Hutchinson with Bank of America. Please go ahead..
I wanted to follow up on your comments around gross margin for the year. Personally, you talked about some product gross margin expansion. But then also highlighted the risk of increased shipping and logistics, higher return rates, and then maybe introduced the potential resumption of some promotional activity in the second half.
So, I was just hoping, as you step back, your outlook for gross margin for the rest of the year, any help you could give us on how all of these puts and takes combined, would be appreciated?.
Yes, so our guidance contemplates pressure from logistical costs but from a margin perspective and a product level, we're not anticipating any sort of pressure there that would cause us to be negative to lash where we're gaining product margin offsets from a logistical cost perspective. It's mostly being driven currently by fuel surcharges.
And you can see that in Q1 as well..
But that's comprehended in the used item..
That's comprehended in the used item..
Thank you. Next question comes from Oliver Chen with Cowen. Please go ahead..
The loyalty program sounded quite powerful and flexible, which we know about the impact that may have to the financials and timing and implementation? And then second, on the robotics and your DC, just would love some understanding of the impact that will have I imagine, it will mean getting packages faster and also rationalizing a labor as well?.
Thanks, Oliver. As it relates to loyalty, as I mentioned started in March, so everything is still very fresh. And we were looking at first insights into our customers' behavior about this. And we see alternative parts, we have not specifically whether as of 2022, calculated any extra benefits of the loyalty program.
And so from a process perspective, if you will, and growing that program out, it's a really test and learn going forward, we tested different types of content, we did different types of call to action, and we will continue to go to really look at how we can build that broken house going forward.
As it relates to robotics, there we are fully up and running. And from that perspective have a good line of sight as it relates to the productivity gains that we anticipated. What we anticipated also came to fruition. So in that sense, we are on that path, I would say checkmark. But still, as usual, there's always ways to improve.
So, we're -- that is obviously contemplated in our guidance reminder of the year. Overall, it's really impressive to see how the team executed because as you know, this time period is one of our big peaks. But to see us installed new technology operational processes.
With those deadlines right in front of us, it was really terrific example of how this company executes..
And lastly, a product question. Weddings have been a key theme for a lot of people.
What are your thoughts on what's ahead for that in terms of the trends that you're seeing and in the back orders and or the longevity of that momentum? And also, as you think about that category, are there any inventory characteristics we should know about in terms of how you can test read and react to that category in particular?.
I think given our current momentum, there appears to be quite a lot of upside to continue chasing into that area. I think there are a lot of events that were postponed from the last couple of years that we're definitely capitalizing on.
Those are also products that tend to be less seasonal and lower risk from an inventory perspective with pretty healthy sell through rates. So in that sense, I think there's opportunity that's fairly low risk to continue capitalizing on that demand..
Yes, the dynamics of that business, it's high ticket for us, but also higher return in terms of the processing and handling on the DC. But it's sort of natural loves in the air, love Lulu's, a lot of similarities, we can play off..
There are no further questions at this time. I'll turn it back to David McCreight for closing remarks..
Well, again, thank you all for your time this evening. As you can tell, we're thrilled with the direction of the business. And we think about us being just two quarters into being a public company. There are a lot of really good signs about the fundamental aspects of strategy in the way the team is executing.
And we're aware of what we read about in the press in terms of what's going on in the rest of the market and the general concerns and keeping those in mind as we reissued guidance throughout the year. So look forward to talking and answer your questions further. Thank you..
Thank you. This concludes today's conference. All parties may disconnect. Have a great day..