Lulu’s Fashion Lounge Holdings, Inc. (NASDAQ:LVLU) Q3 2023 Earnings Call Transcript

Lulu’s Fashion Lounge Holdings, Inc. (NASDAQ:LVLU) Q3 2023 Earnings Call Transcript November 10, 2023

Operator: Good afternoon, and welcome to Lulu’s third quarter 2023 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 Lulu’s General Counsel and Corporate Secretary, Naomi Beckman-Straus. Thank you. You may begin.

Naomi Beckman-Straus: Good afternoon, everyone, and thank you for joining us to discuss Lulu’s third 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 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, 2023, including our financial outlook for full-year 2023, market opportunities, product launches and other initiatives and our growth.

A fashion-forward woman trying on a pair of sunglasses in the store mirror.

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-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 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 non-GAAP financial information is not intended to be considered in isolation or as a substitute for or superior to the financial information prepared and presented in accordance with GAAP. Our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliation of GAAP to non-GAAP measures as well as the description limitations and rationale for using each measure can be found in this afternoon’s press release and in our SEC filings.

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

Crystal Landsem: Thank you, Naomi, and good afternoon, everyone. We appreciate you joining us today. Before we delve into our results, I’d like to thank our team for their steadfast commitment and nurturing our brands and delivering an exceptional experience to Lulu’s fans. I’ll begin with a recap of our third quarter results, followed by highlights of important growth and efficiency initiatives that we believe will strengthen the company’s long-term financial success and brand expansion. Setting macro headwinds aside for a moment, as we reflect on our performance in the third quarter, there are things we did well and things we needed to adjust to position us for sustained long-term success. 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 classes 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 products, net revenue growth of 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 million as intended and decreased our net debt by approximately $10.9 million, ending the quarter in a net cash positive position. 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 $11.6 million compared to prior year Q3 at $4.6 million. Year-to-date free cash flow is $18.2 million compared to year-to-date 2022, $12.6 million, reinforcing the agility of our business model. Inventory balances continued to decline with a balance at quarter end of $41.5 million, down about $7.9 million or 16% from the same period last year and down $4.7 million or 10% on a quarterly sequential basis due to efficient inventory management.

Transitioning to challenges we saw during the quarter, where there were key learnings from the team. First, as our customers look more towards newness and novelty consistent with broader retail trends, we did not capture demand fully in the third 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. Given the consumer health and macroeconomic headwinds facing many retailers, we have been more conservative in our initial product buys and warranted, resulting in less than optimal use of our highly effective buying model and leaving potential revenue opportunities untapped in the quarter. Second, 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 from aggressive fast fashion retailers seeking to expand their presence in the U.S. Third, we are experiencing a shift back to pre-pandemic levels in the lifespan of our reorder products. 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 two to three years longer than normal. More recently, we’ve realized we need to return to the multiyear reorder buying strategy that was successful pre-pandemic. This reversion was most apparent in the third quarter, where we saw softening demand in some of our legacy high-volume reorder products.

While still productive and selling at healthy volume, 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 effectively capitalize on the middle of a fashion cycle. Consequently, that 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 lifecycles 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. Fourth, 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 separate and shoes business which typically drive a larger impact in third and fourth quarter 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. 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 D2C retailer. While this may be temporarily limiting the extent of our 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 $83.1 million for the third quarter 2023, representing a 21% decline compared to Q3, 2022. Our adjusted EBITDA was $1 million for the third quarter 2023 compared to $5.4 million in Q3 2022. Our active customer count was 3 million at the end of Q3 2023, down 4% sequentially from Q2 2023, and down 8% from Q3 last year. 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 insights. We will be reimplementing a tier-based approach to our initial order quantity purchasing strategy for a subset of our new product tests, more data supports higher confidence, and larger initial order quantities.

While the increases will remain conservative and consistent with our test-and-learn approach, 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 who have recently been gaining traction with U.S. consumers. We will be increasingly focusing our assortment and marketing efforts around an offering that is further differentiated from the 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, but 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. 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 D2C 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 welcome customers 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.

Grand opening is scheduled for December 1, 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. Consistent with all our endeavors, we believe the test, learn and reorder approach also applies to physical retail, and 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 multichannel strategy.

We’re confident in our ability to facilitate wholesale growth with select retailers following our nearly seven years of wholesale partnerships with retailers such as Nordstrom and Stitch Fix. We believe wholesale relationships will 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 partnerships to profitably boost awareness and in-person product experiences, while leveraging existing infrastructure to maximize cost efficiency and build synergies between digital and physical channels. We’ll continue to update you on our progress over the next several quarters as it relates to our growth initiatives.

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 Lulu’s brand, optimizing inventory turnover, and driving cost efficiencies to meet our near-term targets and position ourselves for a return to positive growth trends and creating shareholder value. As noted last quarter, as we see our sales volumes recover, we expect to see reciprocal improvement in profit margins as our fixed costs begin to leverage. 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, will return us to a path of double-digit revenue growth and EBITDA margins. 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?

Mark Vos: 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 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 retail at slightly lower units per transaction compared to Q3 2022, resulting in a near identical $133 average order value compared to Q3 2022.

Although the active customer count declined 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 the 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 markets 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 Lulu’s to more consumers and improve the overall efficiency of our marketing investments, including the cost of new customer acquisition over the long-term. With that point in Q3 2023, we continued the expansion of marketing investments in a more top of the funnel brand marketing and our influencer and ambassador generated brand reach, impressions, and earned media value to support Lulu’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 GNC, 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 a test-and-learn, data-driven approach used for everything we do at Lulu’s. 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 third quarter, we were able to broaden our marketing reach abroad and have now seen year-to-date double-digit unit sales growth numbers in 12 out of the top 15 countries we’ve shipped to.

And while it’s still early days, and a small portion of our overall revenue, we are exploring more targeted efforts to share the Lulu’s brands internationally, improving international search rankings and prudently testing the influencer and other paid active activations in select regions. Notably, we launched an updated mobile app in September, which we’re eager to build upon to drive customer engagement and retention. After the launch of the new app version, 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 per visit. 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 to 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. As mentioned in earlier commentary, we continue to embrace returns as we see returns as an opportunity to showcase more of Lulu’s quality and value, gaining 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 creating 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. Additionally, in Q3, automated order packing went live in our Northern California fulfillment center. And due to the learnings required 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 cost per unit has structurally decreased. Last but not least, our operations, customer support, data, marketing, and engineering teams has 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 LuCrew teams. And now I’ll hand you over to Tiffany Smith, Lulu’s Chief Financial Officer, to deep dive into our financials.

Tiffany Smith: 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 third quarter results. Our net revenue of $83.1 million 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 mark downs in return rates that were higher in the quarter. Our overall return rate in the third quarter 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. Gross margins for the third quarter 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 third 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 third quarter from a spring and summer inventory perspective, which was approximately 40% lower compared to the prior year. Moving down the P&L to give some insights into expense line items. Q3 2023, selling and marketing expenses were $16.8 million, down about $2.5 million from Q3 2022, due to lower performance marketing spend and favorability in merchant processing fees, partially offset by higher brand awareness investments.

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 $2.8 million to $21.6 million, a 12% decline compared to Q3 2022. The decrease was primarily driven by a $2.6 million 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 third quarter of 2022.

And finally, adjusted EBITDA for the third quarter was approximately $1 million compared to Q3 2022 adjusted EBITDA of $5.4 million. 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 manage through the ongoing near-term macro uncertainty. Our net cash provided by operating activities for the quarter was $12.7 million compared to $5.7 million in Q3 of 2022. We also generated $11.6 million in free cash flow in the quarter compared to $4.6 million in Q3 of 2022. We ended the quarter with cash of about $12.9 million with a balance of $11 million drawn on our revolver, resulting in a net cash balance of $1.9 million.

We repaid $4 million of the revolver during the third quarter and plan to continue to pay it down through the end of the year. Our inventory balance at quarter end was $41.5 million, down about $7.9 million from the same period last year and down $4.7 million on a quarterly sequential basis. During the third quarter, we meaningfully reduced the sales growth to inventory growth spreads, 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 puts some pressure on gross margins in the third quarter and may pressure fourth quarter margins given the late start for sales of fall and winter products.

That said, we ended the third quarter with lower fall winter inventory levels compared to Q3 of last year. 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 buyers being reorder products. We remain confident in our buying model that centers around these proven sellers with lower markdown risks 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.

Second, our existing reorder inventory continues to be productive as evidenced by our still healthy inventory turns, which we believe are industry-leading. Furthermore, much of our seasonal reorder products 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 no means intend to transition into a fast fashion buying model where 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 risks and ultimately preserves brand integrity. 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 third quarter results below our expectations and continued choppiness early in the fourth 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 their spend through the balance of the year and reflects continued macroeconomic headwinds.

We expect 2023 full-year net revenues between $350 million and $360 million compared with the prior range of $355 million to $375 million. We expect 2023 full-year adjusted EBITDA to be between $4.5 million and $5.5 million compared with the prior range of $5 million to $10 million, reflecting the impact of a lower net revenue range. To set expectations for modeling purposes, our quarterly adjusted EBITDA margin rates have similar seasonality fluctuations in 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 incurred 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, 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 million drawn on our $50 million revolver. We plan to continue paying down our revolver and anticipate ending 2023 with a net debt balance of less than $4 million. 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 $4.5 million and $5 million for the year compared with the previous range of $5 million to $6 million, 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. And with that, I’ll pass it back to Crystal for closing remarks.

Crystal Landsem: 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 two decades, we prioritize 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 LuCrew, 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 moment. With that, I’ll turn it over to questions now.

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Q&A Session

Operator: We will now be conducting a question-and-answer session. [Operator Instructions]. And the first question comes from the line of Brooke Roach with Goldman Sachs. Please proceed with your question.

Brooke Roach: 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.

Crystal Landsem: 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 Shian or Timo 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 underinvested in newness and overreliance on our older reorder products that have been driving so much of our business for us over the last two years is really the biggest driver of our negative comps. And in our opinion, that’s really easy to fix. It just might take a couple of quarters to fix it. We do, however, recognize the 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. 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 faster disposable fashion race at all. We believe in the resilience of our business model and we’re dedicated to upholding the quality and integrity that we’ve built over the last two decades. Our strategy has been and continues to be very focused on customers who are seeking quality over quantity and enduring sales that last beyond the moment in time. Our existing customers recognize the value not only in our quality product offering, but also in our brand and in our community.

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 apart from excessively trend chasing brands. Given the increased demand for our new and now fresh styles, we’re leaning into those designs in a very measured and thoughtful way, and we believe that’s going to continue to be a differentiator for us.

Brooke Roach: Thanks, Crystal. And secondly, for Tiffany, there’s 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.

Tiffany Smith: 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 third quarter, 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 spring summer inventory coming into Q3 and move through that, so that we ended the season with 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 marketing spend 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 and the most on contribution margin positive way. 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 promotion, markdowns, and how we want to leverage those.

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

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

Tiffany Smith: Sure. Hi, Amy. This is Tiffany. I’ll start with just the quarterly cadence that we typically provide. The quarter itself ended on a stronger note from a year-over-year comp basis. We were weakest in the early part of the core — early to mid-part of the quarter end started to see improving comps towards through September. Also, I can just give a little highlight on sort of our view of the first five weeks into Q4. We’ve continued to see some gradual continued improvement in our overall transacted comps year-over-year starting to improve there on that on a pre-return basis, just because we haven’t fully rolled up all of our return estimates yet through the first five 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 in cohort question.