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

Good afternoon, everyone and thank you for joining us to discuss Lulu’s second quarter 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 facts 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, 2023, 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 our filings with the SEC, including our annual report on Form 10-K 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.lulus.com.

Any such forward-looking statements represent management’s estimates as of the date of this call. While we may elect to update such forward-looking statements at some point in the future, we undertake no obligation to revise or update any forward-looking statements or information, except as required by law.

During our call today, we will also reference certain non-GAAP financial information, including adjusted EBITDA, adjusted EBITDA margin, net debt and free cash flow. We use non-GAAP measures in some of our financial discussions as we believe they more accurately represent the true operational performance and underlying results of our business.

The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP. Our non-GAAP measures may be different from non-GAAP measures used by other companies.

Reconciliation of GAAP to non-GAAP measures, as well as the description, limitations and rationale for 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 Landsem; our CFO, Tiffany Smith; our President and CIO, Mark Vos; and our Executive Chairman, David McCreight.

Following our prepared remarks, we’ll open the call for your questions. With that, I’ll turn the call over to Crystal..

Thank you, Naomi, and good afternoon, everyone. Thank you for joining us today. Before I jump into our results, I’d like to thank our team for their tireless efforts and dedication to building our brand and delivering the best experience to our brand fans.

During the second quarter, like many others, we experienced continued choppiness in consumer demand, a shift from the early signs of stabilization we observed at the beginning of the second quarter. Top line demand fell short of our expectations and return rates worsened compared to our forecast, leading to the disappointing Q2 results.

More specifically, revenue was $106 million, representing a 19% decline compared to Q2 2022. Similar to the first quarter of 2023, the continuation of a challenging macro environment led to softer consumer demand.

We also faced tough comparisons in the first half of 2Q, following last year’s benefit from the return to events, where we saw a 27% year-over-year net revenue growth in 2Q 2022. Our adjusted EBITDA for Q2 2023 was $4.2 million compared to $15 million in Q2 2022, primarily due to lower top line demand and higher returns.

We continue to be surgical with promotions and markdowns and are focused on optimizing full-price sales in spite of the highly promotional environment around us. We believe a more normalized and balanced approach to promotions is best for the longer-term health of the brand, and it reinforces our attainable pricing for high-quality products.

Despite the shortfall in the quarter, our balance sheet remained strong, and aside from our revolver, includes no long-term debt. We believe that, along with our capital-light operating model, positions us well to continue investing in long-term growth opportunities and weather continued macro uncertainty.

Net cash provided by operating activities was $4.6 million in the second quarter of 2023 compared to $9.7 million of net cash used by operating activities in the second quarter of 2022, a roughly $14 million improvement year-over-year, showcasing the flexibility of our business model.

Our active customer count was 3.1 million at the end of Q2 2023, down 3% from Q1 2023 and down 5% from Q2 last year.

While the current macroeconomic conditions present near-term challenges, we are confident in our belief that our strong foundation and strategic vision will enable us to weather the storm and ultimately resume our goal of double-digit growth and best-in-class profitability over the long term.

Given the health of our balance sheet, we view this environment as an opportunity to lean in by investing in our brands where others are pulling back, which allows us to further reinforce Lulu’s as an attainable luxury lifestyle brand.

Thanks to the near-term volatility, we continue to remain focused on closely managing costs and driving efficiencies across our operations. We are making great progress on several key optimization initiatives that we believe will benefit our brand long term.

First, last quarter, we highlighted that we were starting to build out our product costing teams to better leverage our buying scale.

We are pleased with our progress towards building out our team and continue to add capabilities to further evaluate and prioritize margin expansion through product cost reduction initiatives, which we believe will result in substantial product margin benefits over the long term.

Next, we continue to realize the benefits of the recent moves of our creative studio to a location adjacent to our Southern California buying office. As a result of the stronger collaboration, we’ve seen new product conversion that gives us confidence in our future reorder product pipeline.

We are encouraged by the new styles that are performing well, where we can build a reorder funnel to further improve on product adoption rates. In particular, during Q2, we saw strength in new special occasion, bridesmaids and new separates.

During the quarter, we also made technology investments and added functionality and data insights around product returns. As we are seeing across many B2C retailers, we’ve also been impacted by increasing product returns, and we’ll continue to invest in ways to mitigate return costs, while preserving customer satisfaction and loyalty.

Third, one of the key initiatives we’ve undertaken over the last several quarters is continued diversification of our global carrier networks.

By partnering with multiple carriers, we’ve been able to leverage a broader range of shipping options, rates and delivery times, further optimizing our costs and continuously seeking ways to improve the customer experience.

This approach not only reduces our dependencies on a single carrier, but also enhances our ability to adapt to strictly changing market dynamics and enables us to better navigate disruptions that may arise from external factors. In addition to our optimization initiatives, we are driving forward new customer engagement strategies.

In the second quarter, we accelerated efforts to adapt to changing consumer behaviors and meet our customer where and how she shops. Looking towards the second half of the year, we continue to explore new opportunities for visibility and growth, focusing on strategies that strengthen our digital channel as a key driver of our future success.

We remain committed to providing our customers with new ways to engage with our brand, and our customer insights have shown they are seeking additional channels to connect with us.

After taking a break from in-person activations post-COVID, we are so very excited to announce that in July, as part of our strategy to explore new brand visibility and growth opportunities, we signed a short-term lease for a retail location on Melrose Avenue in Los Angeles to create a space to engage with our customers in person.

We are thrilled with the location, which sees good foot traffic and puts us in proximity to other aspirational brands that helps to reinforce our attainable luxury positioning. Like everything else we do, we are taking a test, learn and react approach to physical retail.

And the store will not only allow us to showcase our brand, product quality and fantastic customer service in a more connected and elevated way, but also to test and learn how we can apply our fast-turning buying model to a brick-and-mortar experience.

We expect our doors to open in a few months, and we look forward to updating you on our progress on our next earnings call.

On the wholesale partnership front, we recently implemented and launched a partnership with an online wholesale B2B platform, which allows us to share a range of products that potential partners can order from us in an effort to expand our presence and reach in brick-and-mortar and attract new customers through an omni-channel approach.

While only launched weeks ago and still small in volume, we are very encouraged by the feedback we’ve received and the enthusiastic interest in carrying our products.

While we’ve not included any P&L impact for incremental wholesale sales in our forecast, we are encouraged by the opportunity this channel will provide next year and onward as an additional channel for our customers to interact with our products in person.

We will continue to be opportunistic around wholesale partnerships that will fuel brand awareness in a profitable and brand-accretive way and allow our customers to experience the quality and feel of our products in person, while leveraging existing infrastructure to expand reach in a capital-efficient way and build synergy between digital and physical channels.

We will continue to update you on our progress over the next several quarters as it relates to all our growth initiatives.

In the near term, as a result of our expectation of continued choppiness in consumer demand related to ongoing macro pressures like inflation, interest rates and student loans, as well as elevated return rates, we are reducing our full-year 2023 guidance in anticipation of ongoing volatility.

While we are disappointed with our Q2 results and lowered outlook, we remain focused on adapting to changing customer behaviors, closely managing inventory, discretionary expenses and continuing to drive brand awareness.

As sales volumes recover, we expect to see a stabilization of trends and a corresponding improvement in profit margins as our fixed costs begin to leverage. Now, I’d like to turn the call over to Mark Vos, our President and Chief Information Officer.

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

Mark?.

Thank you, Crystal. First, I’d like to start by providing an update on our customer and how she interacted with us during the quarter. New and repeat customer counts were down in Q2 year-over-year, while units per transaction was up sequentially from Q1 2023, a decrease compared to Q2 of last year.

At the end of Q2 2023, we had 3.1 million active customers compared to 3.3 million at the end of Q2 2022 and 3.2 million at the end of Q1 2023, representing a 5% and a 3% decrease, respectively.

We have redoubled our efforts to capture and retain customers in this more challenging and dynamic macroeconomic environment, leveraging the strength of the Lulu’s brand, the affordable quality of our products and the effectiveness of the Lulu’s brand hug.

To that end, from a marketing perspective, we are continuing to shift more of our marketing spend from direct response performance marketing to brand awareness marketing, while keeping 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 Lulu’s to more consumers and to improve the overall efficiency of our marketing investments over the long term.

Despite the challenges in customer discretionary spending and the year-over-year increase in the cost of new customer acquisition, we continued our investments in more top-of-the-funnel brand marketing, and our influencer and ambassadors generated brand reach, impressions and earned media value to support Lulu’s word-of-mouth marketing.

Based on our social media and brand’s data tracking, we have seen continued gains in the Lulu’s share of voice across multiple channels and improved brand familiarity, which provides us with the confidence that we’re on the right growth path.

Kudos goes to our marketing and creative teams, who have successfully attracted many new customers to the Lulu’s brand, as witnessed by a higher quarter-over-quarter new customer acquisition rate in 2023 compared to 2022.

We see much growth potential ahead of us and plan to 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 Lulu’s.

Last quarter, we discussed the launch of our improved international shopping experience where our international customers can shop in their local currency and local preferred payment method in over 30 languages.

Since its launch in mid-February, our data indicates that removing friction for our international customers in many countries has improved conversion rates, and we expect this to continue to improve over time as we test and iterate on their shopping experience.

In the second quarter in particular, we made some adjustments to add a standard shipping option at a lower cost to customers abroad. With the introduction of standard shipping, we also lowered various free shipping thresholds to provide our international customers opportunities for more cost savings.

Bringing the international shopping experience more in line with our domestic Lulu’s shopping experience is the first step to capitalize on the encouraging demand signals we see from abroad.

While it is still early days, we are also exploring more targeted efforts to expose the Lulu’s brand hug abroad, improve search rankings and prudently test into influencer and other paid activations in select regions. We look forward to keeping you updated on our progress there.

Moving on to product return behavior, as Crystal noted earlier, Q2 year-over-year, we have seen an increase in our return rate.

And in comparison to last year, the majority of this increase can be attributed to a shift in product mix towards products that inherently have a higher return rate like dresses, which tend to contribute more in Q2 due to seasonality.

Increased return rates are not unique to Lulu’s, and we believe that there are multiple external factors at play, leading to a higher propensity to return products industry-wide. Customers appear to have a higher level of comfort around being less selective in their purchases and using the home as the fitting room.

Furthermore customers within our target demographics are under more macroeconomic pressure and have become more discerning in their decision of which items to keep.

We have and will continue to embrace returns for product selection, and we see it as an opportunity to showcase more of Lulu’s quality and value, understand our customers’ style and taste better, and generally consider it an integral part of the online shopping experience.

That said, there are also actions we are taking and improvements we are making to counter the increases in returns and the related costs. We will continue to focus on improving the customer experience and providing more relevant products and fit information so that our customers can make the best product selections for themselves.

We also continue to monitor our return policy for further improvements, while keeping the barriers to get introduced to the Lulu’s brand low.

Additionally, where possible, we are working to increase the flexibility of fit and working to optimize our fit expression across various product sizes, which we believe could impact return rates and customer satisfaction in a positive way.

Since Lulu’s brand makes up to 90% of our sales, depending on the product category, we are in a good position to effect these changes across the vast majority of our sales. From an operational perspective, we have continued working to improve our operational efficiency and performance.

In May, we went live with robotics in our Northern California distribution center. And since launch, we have seen their variable fulfillment labor productivity improve, and we are on track to achieve our productivity improvement goals.

In Q2, we also further diversified our outbound shipping carrier network, which allows us to offset some of the increases in outbound shipping costs by other carriers. We are also actively working to reduce return shipping costs across our network to optimize margin.

Given the excitement around AI, I would be remiss not to speak about how Lulu’s uses AI to support and drive our business. For many years, Lulu’s has been successfully using AI across various aspects of our business, and we believe it has been a critical contributor to our competitive advantage.

For example, predictive AI has been core to our data models around customer lifetime value, product and fit recommendations, our reorder model, as well as our inventory allocation and replenishment optimizations.

With the rapid evolution of generative AI capabilities, we see opportunities ahead of us to further improve the customer experience, for example, by offering our customers creative outfitting inspiration during the product discovery and enhancing our customer support interactions.

We also see opportunities for productivity enhancements, ranging from improving efficiencies in our product development process, summarizing customer feedback and generating marketing campaigns.

We also follow the ever evolving legal landscape surrounding generative AI, specifically as it relates to intellectual property, to both avoid issues as well as to protect our own IP. Several of the examples I gave are areas where we are testing and learning to see how our customers, our employees and our investors can benefit.

And where we can, we will keep you informed as we explore these exciting new opportunities. Our operations, customer support, data and engineering teams remain laser-focused on delivering superior customer experiences and are relentless in finding ways to drive down our unit costs.

I am proud of our talented and passionate LuCrew, who are all in, all voices and always evolving. Thank you, and well done. And now, I’ll hand it over to Tiffany Smith, Lulu’s Chief Financial Officer, to deep dive into our financials..

increased markdowns and discounts, higher return shipping costs, and slightly higher depreciation and applied materials burden related to our distribution facilities. This was partially offset by favorability in outbound and inbound freight costs.

For historical comparisons to a more normalized pre-pandemic period, markdowns and discounts in the second quarter represented 11.3% of sales compared to Q2 2019 at 12.5% of sales, reinforcing the agility of our buying model and our ability to navigate a challenging and highly promotional macro environment.

Markdowns and discounts for Q2 2022 represented 8.6% of sales when our mix of net sales at full price, were unusually high. Moving down the P&L to give some insights into expense line items.

Q2 2023 selling and marketing expenses were $24.7 million, down about $1.2 million from Q2 2022 due to lower performance marketing spend and favorability in merchant processing fees, partially offset by higher brand marketing spend as we continue to focus on increasing brand awareness.

General and administrative expenses increased by about $1 million to $24.4 million relative to Q2 2022. The increase was primarily due to $1.5 million related to equity-based awards issued through the end of Q2 and $1 million in higher fixed payroll costs for hiring in key strategic areas.

This was offset by variable expense favorability, including a $1.6 million reduction in variable labor and benefits, resulting from lower sales volumes and cost optimization initiatives across our distribution center and customer support departments. Interest expense for the quarter amounted to $426,000 versus $157,000 in Q2 2022.

For the quarter, we reported a diluted loss per share of $0.07, so the decrease of $0.22 compared to diluted earnings per share of $0.15 in the second quarter of 2022. And finally, adjusted EBITDA for the second quarter was $4.2 million compared to Q2 of 2022 adjusted EBITDA of $14.8 million.

Our Q2 adjusted EBITDA margin was 4% compared to 11% in the same period last year. Our balance sheet remains strong and positions us well to execute our long-term growth plans and manage through near-term macro uncertainty.

We ended the quarter with cash of about $6 million and a balance of $15 million drawn on our revolver, resulting in net debt of roughly $9 million. We repaid $5 million of the revolver during the second quarter and will continue to pay it down. We expect to end the year with net debt of less than $5 million.

Our inventory balance at quarter-end was $46.2 million, down about $2.3 million from the same period last year and down $5.6 million on a quarterly sequential basis.

During the second quarter, we saw our sales growth to inventory growth spread improve by approximately 30 basis points from Q2 2022, indicating that our inventories are becoming better aligned with our sales.

While we are comfortable with our current inventory position, we do want to note that it includes approximately $3 million of residual spring/summer inventory, whose sell-through at lower realized margins is contemplated within our guidance range.

We bought into a larger spring selling season that did not materialize to our expectations, and we have accounted for more aggressive markdowns for the balance remaining of new test product that have not sold by the end of the season. As we’ve highlighted before, we are a quick-turning brand with what we believe are industry-leading turns.

While that remains true, we do anticipate our LTM inventory turns this year to be a little slower than our ideal range as sales and inventory turns continue to normalize, while still prioritizing improving margin results. As a reminder, we are not a fast-fashion company, but instead a fresh fashion concept.

Approximately half of our inventory assortment is seasonless and can carry from one season to the next and be sold year round, and the remainder is multi-season, many of which can be brought back year after year.

This gives us confidence in our ability to move through the current inventory levels in a way that minimizes markdowns, further reduces gross margin risk and ultimately preserves brand integrity.

As always, we aim to be disciplined in our inventory management approach, and we will continue to relentlessly pursue further optimization of inventory levels that balances the customer experience and minimizes markdown risk.

Moving on to guidance, while we have taken actions to manage costs, drive operational efficiencies and make targeted investments to adapt to changing consumer behaviors, we continue to see choppiness in consumer traffic and demand early in the third quarter, still with notable improvement in gross margins.

The continuing promotional environment in the industry, as well as mounting pressure on consumers from a series of macroeconomic factors, including pockets of continued inflation, higher interest rates and risks related to resuming student loan interest and payments, combined with less predictable consumer purchasing behavior, have made it increasingly difficult to forecast near-term trends.

As a result of the continued volatility, we are reducing our full-year 2023 guidance. We now expect 2023 full-year net revenues between $355 million to $375 million, which represents a 19% to 15% decline compared to 2022.

We expect 2023 full-year adjusted EBITDA to be between $5 million and $10 million, which represents an 83% to 66% decline compared to 2022. This equates to an adjusted EBITDA margin rate of between 1.4% and 2.7%.

Our revised adjusted EBITDA guidance captures incremental investments in support of longer-term initiatives, including broadening distribution channels and expanding in-person activations.

We expect to see continued improvement in our gross margin rate year-over-year comparisons in the second half of the year, attributed to higher merchandise margins and continued outbound shipping cost favorability, partially offset by higher return shipping costs.

With that expectations for modeling purposes, our quarterly adjusted EBITDA margin rates have similar seasonal fluctuations as our net revenues and will likely fluctuate above or below our full-year guidance range, depending on the quarter.

In the past, we have explained that Q4 is typically our smallest net revenue quarter as we are not a holiday gifting destination, and we don’t expect this year to be an exception. However, unlike prior years, we anticipate net revenues and adjusted EBITDA margins in Q3 to be more in line with Q4 than with Q2.

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 leases for our distribution facilities.

We anticipate interest expense for full-year 2023 to be approximately $1.6 million, an increase compared to 2022 levels, which reflects the impact of higher interest rates offsetting lower average revolver balances. As of today, we have $20 million drawn on our $50 million revolver.

We plan to continue paying down our revolver and anticipate ending 2020 with a net debt balance of less than $5 million. We anticipate that we will be able to maintain positive free cash flow in 2023 despite the macroeconomic challenges. Stock-based compensation for the quarter was up $1.6 million from Q2 2022.

We continue to forecast stock-based compensation expense of approximately $16 million to $19 million in 2023. For 2023, we expect a weighted average fully-diluted share count of approximately 40 million shares.

Moving on to capital expenditures, our plan remains to invest between $5 million and $6 million for the year, which includes capital expenditures for our new retail store, as well as other investments. We remain focused on setting the stage for future growth opportunities, enhancing the customer experience and driving further operating efficiencies.

We will continue to invest in distribution center automation and robotics capabilities, which are expected to drive further labor efficiencies. And with that, I’ll pass it back to Crystal for closing remarks..

Thank you, Tiffany. I’d like to take a moment to thank each of you, the Lulu crew, our brand fans, shareholders and the Board for their continued support as we continue to work towards executing on our long-term strategy and delighting our customers. With that, I’ll turn it over to questions now..

Thank you. [Operator Instructions] And our first question comes from the line of Brooke Roach with Goldman Sachs. Please proceed with your question..

Good afternoon. And thank you so much for taking our question.

Crystal, I was wondering if you could update us on what you’re seeing in the competitive environment broadly and how that’s influenced the trends that you’ve seen both quarter-to-date and your view of consumer engagement with the brand? And then secondly, for Tiffany, I was hoping you could provide a little bit more detail regarding the assumptions that you’ve made in the second half sales guide regarding the macro and your own idiosyncratic initiatives that you have in place to drive sales.

Thak you very much..

Hey, Brooke. Thanks for the questions. See, the competitive environment has certainly changed even just from a few years ago, and we are seeing more competition or intensive competition, especially for those looking to compete in more of an entry price point, albeit at a lower quality than Lulu’s.

That said, we’re not really looking to compete in that fast fashion or disposable fashion race to the bottom and we are really willing candidly to change our business model to accommodate any business practices that would enable that type of business mix.

What we’re really focused on now and hyperfocused, I would say, is continuing to build awareness and brand awareness for our attainable luxury products and reinstating that positioning for our customers. And we see it every day in our exit surveys from our customer base, where they can’t believe the quality for the price.

And I think that’s really where we’re going to win in the long-term. So in the near-term, that’s where our focus will be in reinforcing that value proposition for our customers..

Brooke, hi, it’s Tiffany.

With regard to your question about the revenue guidance for the balance of the year, the biggest, I would say, change that we contemplated and factored in relative to where we were prior to lowering the guidance is taking into account the current faster macro environment and factoring in the impact that we’re expecting with regard to the student loan payments and interest resumption starting in September is something that we think we needed to wait a little more heavily in our guidance, given that our customers is a Gen Z, millennial, largely college educated, we do think that they are going to feel that that in terms of their discretionary spend, and so we’ve assume that will be an impact for us towards the latter part of Q3 and into Q4.

So that’s certainly factored in with regard to just lower demand overall. Given what we saw in the second quarter with regards to higher return rates, we do attribute that partly to product mix that we saw with a higher dress mix in the second quarter.

But to be extra conservative there, we did also layer in a higher than originally estimated return rate for the balance of the year as well..

Thank you very much. I will pass it on..

Thank you. And our next question is from Janine Stichter with BTIG. Please proceed with your question..

Hi, thanks for taking my question. A question for Tiffany. I want to hear more about how you’re thinking about the back half gross margin.

Are we still looking for the gross margin to be roughly flat to the back half of the year? And then philosophically, I know sometimes you – when you’re a little bit more cautious on the promotions or you pull back on the promotions, do you ramp up the marketing spend to compensate? So how do you just think about the balance of marketing versus pulling the promotional lever into the back half of the year? Thank you..

Sure. Thanks, Janine. Good question. So for the back half of the year, we are – we continue to be, already 5 weeks into Q3, pleased with our overall gross margin performance. We did see good sequential improvement from Q1 into Q2, as noted on the call, and we expect the back half gross margin to improve on a year-over-year basis for each of Q3 and Q4.

We expect to see some continued gains in regards to the shipping cost rationalization that we’ve done this year that definitely affected us positively in Q2. That will continue to affect us in Q3, Q4 since those initiatives were not in effect last year.

With regards to promotions and discounts and the balances that we make and the trade-off with marketing spend, we do expect, as always, to sort of lean into our data-driven model in order to determine the right mix of those.

So I’m not going to provide an explicit breakout or percentage between those – the mix of those, but we do continue to react to what’s going on in the market.

And historically, Q4 has been a more expensive marketing quarter, and that’s been a time when we’ve, in the past, leaned a little more heavily into promotions and discounting, which may be the case this year as well. But generally, we try to keep that somewhat nimble in terms of being able to flex on that as needed..

Great. And then just one more on gross margin. You alluded earlier to some of the costing initiatives that you’re working on.

Just where are we in that? And when will we start to really see the impact on gross margin?.

I think the expectation should be that will be more pronounced into next year. It’s not something that we want to swing too hard overnight. And it’s going to be incremental as we kind of test and learn our way into optimizations there. We have a great team in place. We’re really excited about the progress we’ve made so far.

But given our buying cycles and our current business model, we want to be cautious. So I would say Q2 and into Q3 and Q4 next year, we will start to see some real benefits there. But in the near-term, it will be small and gradual..

Great, thanks. Best of luck..

Thank you..

Thank you. Our next question comes from the line of Garrett Greenblatt with Jefferies. Please proceed with your question. .

Hi, thanks for taking my question, guys. I’d like to get some more color on the wholesale partnership you mentioned. I’m kind of curious about the longer-term opportunity for that and just how you’re thinking about that strategy overall..

In the near-term, we look at it as a profitable brand awareness channel and an opportunity for our customers to engage with our product in person. I don’t want to share the specifics or the details because it’s still very new and recent for us.

But I will say we’re pleased with the acceptance and the excitement that we’ve received from partners that are looking to carry our products. And we will continue to update you guys as this matures a little bit. But again, it’s been a fairly positive, very exciting initiative for us internally..

Okay, thank you..

Thank you. And our next question comes from the line of Jonna Kim with TD Cowen. Please proceed with your question..

Thanks for taking my questions. Just curious about – I know you talked about it a little bit about month-to-month trends that you saw during the quarter. And did you see any outsized slowdown in one customer group versus other? And I know 2Q is seasonally heavy dress season, but just curious how the non-dress performed during the quarter.

Thank you very much..

Hi, Jonna, this is Tiffany. I’ll just speak just with regard to the progression that we saw throughout Q2 on a monthly basis. While overall, our Q2 net rev comps were down about 19% year-over-year, we did see monthly year-over-year comp improve very gradually as we progressed through the quarter. So April, for example, we were down 20.5%.

May, we were down just under 19%. And June, we were down about 17.5% on a year-over-year basis. So, some improvement there as the quarter progressed. I don’t know, Mark, if you have any specific customer additions..

So when we look at that from the perspective of, let’s say, household incomes, then we did not see any specific segment stand out and that it was more across the board, similar changes in behavior. And so there was nothing to report there that has been called out..

From a product assortment perspective, separates more specifically, our more casual end use and our more basic essentials underperformed to our expectations, where our customers are really looking for newness and novelty. There are a couple of months that underperformed to what we had expected from a separate and casual end use.

So as we pivoted our assortment towards more novelty and more newness, especially in the more recent weeks, if not month, we’re actually very encouraged by the team’s ability to pivot more towards what our customer is seeking right now. That’s not to say those other products aren’t performing.

They just weren’t performing up to our expectations for the quarter. So we’re happy about the progress we’ve made in Q3 towards pivoting more of the assortment towards what she is actually looking for..

Alright. Thank you..

Thank you. Our next question comes from the line of Alice Xiao with Bank of America. Please proceed with your question..

Hi, thanks for taking my questions. I think international seems to be an interesting opportunity.

Can you talk about what conversion rates look like right now internationally versus domestically? Is there a structural margin difference between international and domestic sales? And also how big do you think international can get over time?.

Great questions. So we do – so international as a percent of revenue for us right now is still very small. And we’ve spoken about – really about removing the barriers and the friction that we had. And so we feel that we’re now in a good place that we can start building that revenue.

As it relates to the experiences and the data that we see thus far, then yes, between international and domestic, there is certainly a difference in conversion rate with international at this point being lower than the domestic, and that’s also where the opportunity for us lies to focus and iterate because we have not spent a lot of time over the last several years on that international component.

So we look forward to growing that and build out over time the revenue opportunity, as you pointed out..

Got it. And then over time, how....

In terms of just the overall size of the opportunity?.

Right, right..

At this point, we have not put any targets or stakes or communicated that externally. We are assessing what that opportunity is and then to look at how do we best capture that. And we feel that we needed to get first to a position that we could look at that holistically without all the friction that was in place.

And from there on, we will assess the opportunity. And if we feel comfortable how we – how that would look like, we will communicate that..

Alright, thank you..

Thank you. And our next question comes from Dana Telsey with Telsey Group. Please proceed with your question..

Hi, good afternoon, everyone. As we look at the AOV, which was – the AOV, which was down around 1%, I think that’s a slight improvement from the down 3% in the first quarter. What are you seeing in AOV? How you’re planning it and balancing the level of markdowns with return rate? Thank you..

Hi, Dana, this is Tiffany. Thank you for your question. Yes. So we were pretty pleased with where AOV ended during the quarter. We would typically expect to see it come down a bit as we progress through the balance of the year. Largely, as we move particularly into Q4, we start to be a bit more promotional.

And typically, the AOVs are lower based on the product mix as well of that quarter. So we planned it accordingly, similar to what we’ve seen in prior years in terms of the cadence there.

And I may have missed your other question, was it around return rate?.

Yes, exactly..

Tiffany Smith:.

[45:33]such [indiscernible]:.

Got it.

And then as you plan for the back half of the year, basically to drive conversion, anything we should be watching for, whether it’s product introductions? Mark, as you’ve mentioned, brand awareness marketing campaigns that you’re doing? How do you think of parsing out third quarter and fourth quarter and what may be the same or different as compared to last year’s execution? Thank you..

I would say it’s going to be more of the same, but potentially, a reallocation of monies from the performance side towards awareness specifically to support the store and some of the other initiatives that we have. But similar to what we’ve always done, it will be in a very test and iterate kind of way.

I’d not model out meaningful increases in our overall marketing spend when compared to the first half of the year..

Thank you..

Thank you. We have reached the end of our question-and-answer session. And with that, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation..