Lulu’s Fashion Lounge Holdings Inc. (LVLU) Q3 2021 Earnings Call Transcript

Lulu’s Fashion Lounge Holdings Inc. (NASDAQ: LVLU) Q3 2021 earnings call dated Dec. 14, 2021

Corporate Participants:

Alexa Pisczak — Associate General Counsel

David McCreight — Chief Executive Officer and Director

Crystal Landsem — Co-President and Chief Financial Officer

Mark Vos — Co-President and Chief Information Officer

Analysts:

Brooke Roach — Goldman Sachs — Analyst

Lorraine Hutchinson — Bank of America — Analyst

Randy Konik — Jefferies — Analyst

Mark Altschwager — Baird — Analyst

Oliver Chen — Cowen — Analyst

Ed Yruma — KeyBanc — Analyst

Dana Telsey — Telsey Advisory Group — Analyst

Erinn Murphy — Piper Sandler — Analyst

Presentation:

Operator

Good afternoon, and welcome to Lulus’ Third Quarter 2021 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 Alexa Pisczak, Associate General Counsel at Lulus. Thank you. You may begin.

Alexa Pisczak — Associate General Counsel

Good afternoon, everyone and thanks for joining us to discuss Lulus third quarter 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, including our plans to invest in a third logistics facility and a mobile app, our future expectations regarding financial results, outlook for the quarter and year ending January 2, 2022, market opportunities, product launches and other initiatives, and our growth, including with respect to our customer and community.

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 final prospectus filed with the SEC pursuant to Rule 424(b)(4) on November 12, 2021, 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 the call today, we will also reference certain non-GAAP financial information, including adjusted EBITDA and adjusted EBITDA margin. 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. 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 filings.

Joining me on the call today is our CEO, David McCreight; 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.

David McCreight — Chief Executive Officer and Director

Thank you, Alexa and good afternoon everyone. Thank you for joining us on our first earnings call as a public company. Our IPO in gaining access to the capital market is an important and exciting milestone for the team. But, we recognize it’s merely one proud step in our journey to reaching our future potential as a Company. And now, we are delighted to share our exceptional third quarter results with you all today in our first earnings call.

As a reminder for those who’ve met us recently on the IPO road shows or as an introduction for those who are new to our business model, Lulus is a customer driven digitally native fashion brand, primarily serving Millennial and Gen Z women. We focus relentlessly on meeting our customers needs. We do this by using data coupled with human insight to deliver a curated and continuously evolving assortment of on point affordable luxury fashion.

We aim to build authentic personal relationships with our customers and offer them coveted quality products, most of which they cannot purchase elsewhere. We tap into the pulse of the customer by engaging with her where she is 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 style advisors, fit experts and bridal concierge team.

Our team, the LuCrew, works to make our customer touchpoints special, which ultimately leads to strong customer engagement and loyalty with our growing community of brand sales. A key differentiator of our model is our use of data to optimize almost all elements of our business. The use of data and technology guide much of the decision making throughout the company, from logistics planning to marketing placement, but nowhere is this more pronounced than on our product creation and curation cycle.

Traditional merchandising approaches are both risk and capital intensive, characterized by extended in-house design cycles, seasonal assortment decisions, deep buys made with limited customer feedback and often high mark downs. Unlike traditional retailers, we leverage our test, learn and reorder strategy to bring hundreds of new products to market every week. We test products informed by our attribution system in small batches. We use our algorithms to gauge customer demand and then quickly reorder winning products in higher volume to optimize revenue and profitability. This strategy and use of test information enables us to convert new products into profitable sales consistently and with a high degree of accuracy, while minimizing fashion and trend risk.

Our overarching vision is to be the most beloved women’s brand for affordable luxury fashion through curated exclusive products at reasonable prices, with superior customer service and a personalized shopping experience. We want to be the category-defining apparel brand for Millennial and Gen Z women. A few key points about Lulus that I’d like to highlight. We remain focused on strengthening and deepening our relationships with customers, aspiring to address them for more occasions and every day of the week, in order to expand our space in their closet and thereby growing wallet share. By increasing Lulus’ brand awareness over the next quarters and years, we expect more customers to join the Lulus community. We launched our first ever brand awareness campaign in late Q3, focused entirely on acquiring new customers or as where we like to say, bringing more new friends to the party.

Over the next quarters, we will be laying a stronger foundation for potential international marketing that international customers are already showing their interest by visiting and purchasing at Lulus, as well as following and engaging with us on social media, even while we are not actively marketing to them. As a digitally native brand, we continue to accelerate our competitive advantages and data-driven merchandising, profitable marketing and operational efficiency, leading us down the path of future market share gain.

Turning to a few of our third quarter highlights. We had another excellent quarter delivering growth in net sales and profitability, achieving record results for any third quarter in our history. Comparable net sales increased 95% year-over-year and adjusted EBITDA increased 126% year-over-year. Crystal will walk you through the finer points shortly.

We are also thrilled by our growth in active customers with sequential year-on-year and double AOV growth in both new and repeat customers, with appreciably more efficient performance marketing spend as a percentage of gross sales versus last year and double AOV. Clearly, our affordable luxury brand experience combined with the reach of our marketing efforts is bringing new fans to the brand.

From a merchandising perspective, we are encouraged by the broad based response to our product offerings, with both event and non-event categories, delivering double-digit demand growth as compared to 2019. We saw maintained momentum in dresses and even faster growth in separate sales, as compared to 2019.

Our operating results reflect our disciplined approach to spend and efficiency. It’s a testament to our model and team that we’re able to achieve meaningful revenue growth with inventory turnover at a rate north of 8 times. And Mark’s team has been busy implementing plans to not only expand our logistical capabilities to facilitate our fast growth, but also to find new ways to optimize an already efficient logistics system.

Finally, before Crystal walks you through our financial performance for the quarter, I wanted to provide commentary on COVID and supply chain issues. We all can bear witness to how our daily lives have been disrupted. And our product supply chain endured some delays, but it was not to the degree you read about daily in the business headlines. Where we have been affected mostly is our reduced ability to chase in season, not being able to maximize the upside in periods of exceptional demand and while few can confidently speculate on how variants might impact the economy, what we can say is, Lulus is better prepared for a disruption. Our balance sheet is now healthy, our product offering is increasingly balanced with fastest revenue growth coming from our non-event segment and with approximately 70% of our revenue from algorithmic-driven purchasing. We are able to confidently take positions in future orders with low risk.

Again, thank you for your time. We are thrilled about our future prospects and look forward to executing on our vision. I’d like to take a moment to thank the LuCrew for finding new ways daily to efficiently delight our brand sales. Without you all, none of this would be possible. And now, let me introduce my colleague, Crystal Landsem, Co-President and CFO.

Crystal Landsem — Co-President and Chief Financial Officer

Thanks, David, and good afternoon everyone. Before we dive into our results, I would just like to say how grateful I am to be part of such an amazing company and team that continues to execute on a daily basis. As David mentioned, we delivered a very strong quarter, highlighted by growth on all fronts, including net revenue, gross margins, profitability and cash flows. We had a record number for third quarter active customers engaging with us as our customer returned to their social calendars and continue to come back to us for their everyday fashion needs. With that said, we’re very pleased with our third quarter financial results. So, let’s dive right in.

During Q3, we grew our net revenue by 95% to $106.3 million, a $51.8 million increase over the same period in the prior year. And Q3 year-to-date net revenues were up 43.6%, an $84.7 million increase over the same period in the prior year. 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 third quarter. We’re very proud of our large diverse community of loyal customers.

In the 12 months ended October 3, 2021, we served 2.5 million active customers, compared to 2.3 million active customers in the 12 months ended September 27, 2020. In spite of the industry-wide supply chain challenges, our business model has enabled us to continue our path of strong growth and profitability as you can see from our successes in Q3.

Gross margins for the third quarter increased 290 basis points to 47.7% driven by lower markdown in discounts compared to last year, as well as a shift in sales mix to higher gross margin products. Strong customer demand drove fast inventory turns and a high level of net sales at full price. The re-acceleration of event dressing demand coupled with accelerated demand in non-events dressing drove year-on-year improvements in gross product margins across nearly all product classes. Our AOV reached an all time high of $125 driven by increased items per cart, as well as lower discounts in markdowns due to lower promotional activity, with AOV increasing 22% over 2020 and 12% over 2019.

Moving down the P&L to give some insights into our expense line items. Selling and marketing expenses consist primarily of online performance marketing, payment processing fees and other advertising. Q3 selling and marketing expenses were $20.5 million up a $11 million from the same period in the prior year due to the return of online performance marketing spend to a more normalized state. Spend was suppressed in 2020 in response to lower customer demand due to the pandemic and an increased focus towards liquidity and cash flows.

Towards the end of Q3 this year, we also launched our first ever brand awareness campaign. Our free organic and low cost initiatives coupled with profitable performance media, drive traffic to our platform, which is custom built to allow for continuous updating and personalization for each customer. And our unified cross-platform strategy consistently reinforces the same brand values with our marketing approach resulting in an attractive customer acquisition and strong retention.

General and administrative expenses amounted to $21.2 million for the quarter, an increase of $10.3 million compared to 2020. It reflects increases in payroll and benefits in line with higher sales volumes, higher bonus expenses due to improved business results and higher fixed headcount cost, as the previous year’s costs were suppressed due to furloughs related to the pandemic. It also includes a $1.7 million increase in equity-based compensation related to stock options and special award.

We reported earnings per share of $0.13, up from $0.01 in the third quarter of 2020, which is the result of our top-line growth combined with efficiently managed costs and operations. And finally, adjusted EBITDA for the third quarter was $11.9 million, up from $5.2 million in the same period in 2020. Our Q3 adjusted EBITDA margin was 11.2% up from 9.6% in the same period in 2020. We believe these non-GAAP metrics are important supplemental measures for understanding our results. We refer you to our 10-Q and earnings release issued earlier today for the required disclosures and reconciliations.

Moving to the balance sheet. Our cash and equivalents amounted to $40.9 million as of October 3. For inventory, we ended the quarter with $23.4 million, an increase of $9.9 million and 73% higher compared to $13.5 million at the end of Q3 2020. We completed our IPO in November 15, 2021 with net proceeds of $85.6 million. We repaid the long-term debt balance and borrowed $25 million against the new revolving facility. Just as a reminder, we operate a highly capital-efficient business that positions us to generate positive free cash flow. In the third quarter, we generated $12.7 million in cash flow from operations.

As it relates to guidance, since this is our first earnings call as a public company, I wanted to provide a framework for our key performance metrics and how we will evaluate the business. Outside of the core financial statements, we will provide annual guidance to the updated quarterly on revenue, adjusted EBITDA, average order value and active customers. We will also provide annual updates on capex. And just as a quick reminder, we’re not a Q4-dependent business and Q4 typically represents a smaller quarter compared to the rest of the year. Historically, our net revenue is highest in our second and third quarters due to higher demand for event apparel and spring and summer fashion.

Our guidance range for 2021 is net revenues between $370 million and $372 million, which represents growth of 49% and 50%. Adjusted EBITDA is expected to be between $38 million and $39 million, which represents growth of 101% and 106% over 2020. This equates to an adjusted EBITDA margin of 10.3% and 10.5% compared to 7.6% in 2020.

As a result of paying down our long-term debt following the IPO, we expect interest expense of $4 million in Q4, which includes the amortization and write-off of loan fees related to the term loan payoff versus $4.1 million in last year’s Q4. On an as adjusted basis for the pay down of the debt, interest expense would amount to approximately $1.5 million versus $3.5 million in Q4 of 2020. We expect that the impact of non-recurring amortization and write-off of loan fees captured on interest expense for Q4 2021 will be $2.5 million.

Moving on to capital expenditures. I’d like to highlight the following investment areas for us going forward. Firstly, we’re planning on continuing to invest in our logistics capabilities, so we’re prepared to continue to serve our customers as we grow in scale. These initiatives include plans to invest in a third logistics facility starting in Q4 2021. We are also planning on continuing to improve our platforms to ensure that we maintain our customer-centric shopping experience. Our near-term initiatives on this front include the launch of a new mobile app in Q4 2021. With the rollout of these initiatives, we expect capital expenditures of roughly $3.5 million for the full 2021 fiscal year.

We believe that this guidance that we’re sharing today should provide a strong sense of where we’re aiming as a brand and we will share more information including 2022 guidance when we report on Q4 earnings.

Thank you. We’re looking forward to hearing your questions.

Questions and Answers:

Operator

At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Brooke Roach at Goldman Sachs. You may proceed with your question.

Brooke Roach — Goldman Sachs — Analyst

Good afternoon and thank you so much for taking our question. David, Crystal, I was wondering if you could talk a little bit to the sequential trends that you’ve seen in customer engagement and purchase activity throughout the third quarter and into the holiday period. How are your newly acquired customers engaging with the brand today and have you seen any impact from these results as COVID trends have started to shift nationwide?

David McCreight — Chief Executive Officer and Director

Crystal, why don’t you take the COVID trends portion? And Mark, maybe you could talk about the customers’ sequential?

Crystal Landsem — Co-President and Chief Financial Officer

Yes, sure. It’s a good question, Brooke. So from a COVID impact perspective, I would say that we’ve not really experienced any noticeable changes. And just to highlight, our performance through Q2 and even into Q3, we had 69% and 95% growth respectively. So, what’s really great about our buying model and our business model in general is that we’ve been able to mitigate some of those risks and still put up some really strong numbers, and that’s been largely driven by new and repeat customer engagement, where we’ve seen an acceleration sequentially for both.

Brooke Roach — Goldman Sachs — Analyst

Great. That’s really helpful. And as we think about the — as we think about the initial learnings that you’ve had so far from your brand awareness campaign and I think I heard in the prepared remarks, plans for maybe some new international marketing. Can you talk to us a little bit about how you’re thinking about marketing going forward and engaging that new customer? Thank you.

David McCreight — Chief Executive Officer and Director

Sure. Mark, do you want to start with international and then I’ll address the general marketing questions?

Mark Vos — Co-President and Chief Information Officer

So in the near-term revenue outlook, we did not contemplate any material increases in revenue from international sources. Based on our platform traffic and social following data, we do see interest in Lulus from international customers — consumers. And so therefore in the near term, we are focusing on improving the international visitor experience to bring this up to par with our domestic brand experience. And then from there on, we were looking to possibly expanding marketing activities in select territories and/or possible international partnerships in order to increase our ability to test and learn what works for us in international markets.

David McCreight — Chief Executive Officer and Director

Right. And following on Mark’s comments internationally, that will then set us up to, as we discussed during the road shows, to explore that our potential in foreign markets with potential most likely, initially some third-party partnerships using their platforms and traffic to learn and test our product, test our product appeal, test pricing, a number of things before we consider what we’re going to do it on our own and build — build infrastructure in the country.

As it relates to the brand awareness campaign. As we’ve talked about in the past, we really are a culture built on testing and learning, whether it’s our test, learn and reorder model or how we approach marketing and it goes on — we’re very, very good at it, advance with performance marketing and we know, like we talked about earlier that we have this large addressable market and we’re always looking for new ways to introduce new people to the brand and new brand fans. And so, brand awareness is a different discipline and some of it’s different. We’ve been doing and been working with social awareness platforms, social media for quite a while, but we think we’re going to be learning quite a bit from this and we’ll continue to test it in the near future, the best way to bring our message to new audiences.

Brooke Roach — Goldman Sachs — Analyst

Thank you very much. I’ll pass it on.

Operator

Our next question comes from the line of Lorraine Hutchinson with Bank of America. You may proceed with your question.

Lorraine Hutchinson — Bank of America — Analyst

Thanks. Good evening. I wanted to follow up on your comments around the success in the non-event, outpacing success in event dressing. Can you talk about what categories have been working and then how that informs for buying decisions on a go-forward basis?

David McCreight — Chief Executive Officer and Director

Crystal, did you want to speak to the product performance and category performance?

Crystal Landsem — Co-President and Chief Financial Officer

Sure. So we won’t go into specific product classes. But, what we can say is that not only do we see a re-acceleration in our events business, but there is definitely been continued momentum in our non-events business, especially in the separate classes and while our buying model is driven such that we’re buying and investing into what our customer tells us that she wants, our assortment is going to continue to evolve to support that and we are seeing this nice acceleration and even outperformance of our dress classes in our non-events product categories, even more so pronounced in Q3.

Lorraine Hutchinson — Bank of America — Analyst

Thank you.

Operator

Our next question comes from the line of Randy Konik with Jefferies. You may proceed with your question.

Randy Konik — Jefferies — Analyst

Yes. Thanks a lot. I wanted to kind of unpack AOV growth, it’s been growing nicely. Can you just give us some perspective on the drivers of that perhaps mix, EQT, etc., and how you think about AOV opportunity over the next few years and drivers of that? Thanks.

Crystal Landsem — Co-President and Chief Financial Officer

Sure, David. You want me to take that one?

David McCreight — Chief Executive Officer and Director

Sure thing.

Crystal Landsem — Co-President and Chief Financial Officer

So, our AOV growth has been a combination of an increase in units per transaction, just as well less markdowns in discounts and promotional activity over time, and I would say on a go-forward basis, we expect that to be a balance of increasing units over time, of course pricing related to inflation, but only as our price value generates, that it would be more so driven from her increasing her cart size, especially as we grow in our non-events classes in the separates categories as well.

Randy Konik — Jefferies — Analyst

Understood. And then I want to ask a follow-up around systems and technology and talk to kind of where the Company may — had been a few years ago, where you kind of got till today and how you — that’s improved your productivity and efficiency in the business and kind of any kind of systems and technology items reflected on over the next years. So, it’s kind of continue to enhance those productivity measures and efficiencies within the organization? Thanks.

David McCreight — Chief Executive Officer and Director

Mark, do you want to jump in there?

Mark Vos — Co-President and Chief Information Officer

Cool. That’s a broad question. I would say that in all aspects. So, especially if you look over the last couple of years, I think in all aspects of our business, whether that is from a — the — we talk about our data-driven decision making and making sure that we empower and inform ourselves with all insights that we need in order to make the right decisions, we have been continuously invested in that over the last several years. We have optimized from a logistics perspective, specifically in the fulfillment centers, how do we essentially allocate our orders for the multiple fulfillment centers, both from an inventory balancing perspective, as well as from reducing shipping zones and shipping costs.

Then on our products creation cycle, I think we actually talked about that in several ways. But really, again it’s that particular aspect or as it relates to those insights as to how can we derive, what’s the — how can we reduce that fashion risk and make sure that we get the products in on time. And then obviously purely from a tech stack perspective as it relates to our website, mobile app was mentioned, we switched platforms there. So, we are on a better and more advanced technical platform to basically be able to continue to build off there to engage with our customers to increase conversions and increase parts — part sizes and that is essentially always ongoing of course and we have teams dedicated to that.

And then lastly, I think that what I can speak to is that we have started robotics in our fulfillment centers, where we are currently in the process of implementing that which is also with the purpose of increasing future units per hour efficiencies.

Randy Konik — Jefferies — Analyst

Super helpful. Thanks guys.

Operator

Our next question comes from the line of Mark Altschwager with Baird. You may proceed with your question.

Mark Altschwager — Baird — Analyst

Thanks for taking my question. You sound very pleased with a lot of the marketing initiatives. I’m curious, are you seeing any impact from some of the iOS changes and more general it’s, what are you seeing in terms of customer acquisition cost trends as we head into the holiday period?

David McCreight — Chief Executive Officer and Director

Mark, you want to jump in?

Mark Vos — Co-President and Chief Information Officer

Yes. I’ll take that. As it relates, there had been various iOS changes, so obviously iOS 14 changes we have been able to recalibrate essentially the impacts on how things are being viewed and so we’ll deal all that together with the platforms. We have been able to continue our finding that — that efficiency as it also shows in our numbers. The more recent changes as it relates to email impacts, the machine system that they’ve opened that obviously has impacted certain segments of our email as it relates to having a reliable open data and we are currently assessing that impact and triangulating essentially the performance of our email in various ways.

And even though the open rates are going for a subset of the email had been impacted, other key metrics like traffic of emails or clicks or revenue per email are still visible and it still allows us combined with continuous content testing, to continue to optimize our email program. So in that sense, that’s adapting to the new reality, and continue to find ways to do it offline. We feel that as of — as of today that we have what we need in order to be successful.

Mark Altschwager — Baird — Analyst

Okay. Okay. Thank you. And then separately here, could you give us a brief history on how stimulus affected the business earlier this year and just your thoughts on sort of the puts and takes of lapping stimulus as we look into early 2022? Thank you.

Crystal Landsem — Co-President and Chief Financial Officer

I think it’s safe to say that we experienced a rapid re-acceleration earlier on in 2021 related to the stimulus, but we also we’re turning inventory so quickly that it’s difficult to say how much of that affected our business versus having further upside and just a natural return to normal business and normal growth rates. So, I think our internal view is that we certainly had a benefit early on from a stimulus perspective, but when those money stopped coming, our business still continued to grow and in some cases accelerating. So, it’s difficult to say what the actual impact was. But, I think we’re optimistic, we could have had further upside had we had more inventory and the stimulus is may be less impactful or noticeable within our financials.

Mark Altschwager — Baird — Analyst

Okay. Thanks again.

David McCreight — Chief Executive Officer and Director

Yeah. We could say that — we could say that, that upside in not only Q1, Q2 and Q3.

Mark Altschwager — Baird — Analyst

Best of luck.

Crystal Landsem — Co-President and Chief Financial Officer

Yeah. Thank you.

Operator

Our next question comes from the line of Oliver Chen with Cowen. You may proceed with your question.

Oliver Chen — Cowen — Analyst

Hi, thank you. The merchandise margins and the momentum there was also very impressive. What do you see ahead in terms of maintaining the merchandise margin and also you have low levels of clearance and markdown, so wondering about that. Also the mobile app innovations sounds quite positive, would love your take on what are some of the key changes you will make there, especially as you pursue more context and personalization?

And then lastly on the net promoter score frontier, you have a high net promoter score relative to competitors, but there could be opportunity for upside here. What would you articulate as key drivers to improve your net promoter score? Thank you.

David McCreight — Chief Executive Officer and Director

Yes. Look, why don’t we unpack those three questions. And Mark, do you want to start with app and then Crystal you can talk about margins?

Mark Vos — Co-President and Chief Information Officer

Yes we — we, as mentioned, we launched — relaunched our app on a new platform and the primary reason to do so is that the old platform that we were on, we have some limitations as it relates to what we could do from a brand experience perspective as well as from a personalization perspective. I would say where we are today is that step one was essentially a lift and shift, so that we did not lose functionality, so to say, but make the switch so that we can now on this new foundation work towards improving that brand experience, get that real feel of the Lulus just like when you’re on the website that we can also have that in our app, as well as have better, a more real-time personalization going forward. So, that is I think to answer your question, that is absolutely the reason why we made that — made that switch.

David McCreight — Chief Executive Officer and Director

Yes. Oliver, I’ll jump in on the net promoter score then. I’m sorry, Mark. You continue.

Mark Vos — Co-President and Chief Information Officer

No, please David. [Speech Overlap] so go ahead.

David McCreight — Chief Executive Officer and Director

Jumping in on the net promoter score before we get to Crystal addresses your margin questions. Yes. So, as you had highlighted, we’ve had terrific net promoter scores, particularly as we compare ourselves to the core market is at and we look at it and we scored very well for value, style, a number of things, wonderful customer service. We do know there is opportunities that we can look to improve and the call outs we tend to hear from our primarily the largest hands down outside of some requests for additional free shipping is to be in stock.

The second would be a size range offering and we — when you’re growing to the pace Lulus is growing and with these kind of turns, we know we have an opportunity to increase our service levels with inventory, but yes, we’re both thrilled with the pace and the sell-through and like you said it’s not leaving a much hangover for clearance. But, at the same time, we’re going to have to balance that in the future with capturing and making sure that the on-site shopping experience or engagement with the customer in that space, that we don’t risk losing any customer engagement to that, because that has been the largest area of complaints by far. And so what we’re planning to look at that and find ways to do that in 2022.

Crystal Landsem — Co-President and Chief Financial Officer

And as it relates to — to margin and the sustainability. Sorry, David, were you going to say?

David McCreight — Chief Executive Officer and Director

No. I’m good.

Crystal Landsem — Co-President and Chief Financial Officer

Okay. As it relates to margins and just our overall sustainability of the margins that we’ve experienced, I would say that our affordable luxury price points, our fast inventory turns as well as our buying model approach, really allows us to be more methodical and intentional with our inventory purchases and in our ability to drive consistent margins over time. The only caveat to that, I would say is that as we’re expanding into other less mature businesses and trying to invest in growth and scale and prioritizing that versus trying to get every last margin dollars, there could be some fluctuation in that, but it would be small and material changes there. So, I would say we’re fairly optimistic about our ability to drive consistent margins over time specifically.

Oliver Chen — Cowen — Analyst

Okay. That’s all very helpful. On the interplay between inflation and pricing, what are you seeing in terms of your product cost inflation and labor materials and overall, and then how does that interplay with how you’re thinking about pricing, just to make sure you continue to offer your customer a clear value, etc.? Thank you.

Crystal Landsem — Co-President and Chief Financial Officer

So, we take a pretty surgical approach to pricing across all of our products and we find that there is quite a bit of elasticity there and we’ve been slightly less impacted, I would say than — than others in the space have talked about, and I think that really comes from our already affordable luxury price point. So, where we’ve experienced price pressures, we’ve been able to flex and adjust our pricing with minimal if not any impact to our customer or her perceived value of our products. That said, I wouldn’t want to give the impression that we’re going to be increasing prices across the board. So, it’s really more of a SKU by SKU demand and price value question and we’re evaluating in on a real-time basis.

Oliver Chen — Cowen — Analyst

Thank you. Best regards. Happy holidays.

Crystal Landsem — Co-President and Chief Financial Officer

Thanks, Oliver.

David McCreight — Chief Executive Officer and Director

Thank you.

Mark Vos — Co-President and Chief Information Officer

Thank you.

Operator

Our next question comes from the line of Ed Yruma with KeyBanc. You may proceed with your question.

Ed Yruma — KeyBanc — Analyst

Hey guys. Thanks for taking the question. I guess first on the product delays, you guys obviously navigated difficult environment pretty well. I guess what are the knock-on effects? Are you having to change temporarily test and react? Are you seeing certain classifications where you’re seeing lighter than expected inventory I guess in the next quarter or two? And then just as a housekeeping question, how should we think about share count in the fourth quarter? Thank you.

Crystal Landsem — Co-President and Chief Financial Officer

David, I can jump in on the timeliness and just as a reminder to everybody, for the first half of 2021, we actually saw our best on-time delivery rates that we’ve had at the company. So in that sense, it’s been a bit of a unique year for us compared to others in the space and we saw some modest impacts from the timelines and deliveries in Q3, mostly driven by smaller product classes where the impacts to revenue would be smaller and less noticeable from a P&L impact. Just given the data driven nature of how we manage our buying, we’ve been able to mostly navigate through a lot of these delivery timeliness issues, just by putting our in-house dates with our vendors, who’ve been great partners for us and have always worked with us to optimize our inventory flows and really we’ve been able to consistently receive most of our product during desired selling windows.

So in that sense, we’ve — we’ve contemplated in the model that there would be more delays than we’ve been experiencing. But crossing our fingers, that that’s not going to be the case for us.

Ed Yruma — KeyBanc — Analyst

And then share count?

Operator

Our next question comes from the line of Dana Telsey with The Telsey Advisory Group. You may proceed with your question.

Dana Telsey — Telsey Advisory Group — Analyst

Good afternoon. Nice to see the progress. Just touching on pricing again, have you taken price before, how much price you’ve taken, how do you think about price, and does it differ by category and the percentage you would take? And then also you mentioned in the opening remarks that you’re not as affected by supply chain, can you expand on that a little bit and how you are thinking about supply chain for the first half of the new calendar year? Thank you.

Crystal Landsem — Co-President and Chief Financial Officer

From a pricing perspective, it certainly does differ by product class and it’s difficult to say how much we’ve done in total or to provide guidance on that. I will say we’ve taken prices up on products, we’ve taken prices down on products and we’re really evaluating every single product based on sell-through and overall margin targets are really driven by the maturity of the business. So, dresses where we’ve been the key leader in that space for a while, might have higher markup than maybe a newer category that we’re trying to expand in and we’re more focused on growth.

So, it’s a difficult question to answer, because we’re looking at pricing on a real-time basis. Outside of COVID, normal business environment, we’re looking at it pretty regularly across each individual SKU. And would you mind repeating your other question? Sorry about that.

Operator

Our next question comes from the line of Oliver Chen with Cowen. You may proceed with your question.

Oliver Chen — Cowen — Analyst

Hi, thanks again. On your inventory composition, as you think about international and also non-event, what are your thoughts on breadth versus depth of the assortment and how it should manifest to generate consistent attractive growth? And then second, on your comments earlier on categories that you’re unable to chase, could you be more specific about which categories or was that broad-based? Thank you.

David McCreight — Chief Executive Officer and Director

Sure. Thank you, Oliver. So regarding the assortments, internationally as like we talked about, it will be a completely test environment and as Crystal has articulated nicely in the past, we look for our customers to sort of dictate the assortment to us. We’ll start off with our edit that’s shaped based on attributes and learnings from other customers and will not take deep positions, because in my experience, internationally, the assortments and the responses by country can vary by season as well.

So, it is optimal environment really for Lulus to enter it in our test, learn and reorder model is perfect in some ways versus many countries when they try whether they’re coming to United States or United States going to Asia or going to Europe often stub their toe or actually stumble quite severely by trying to project what those markets want and desire. So, our model is perfect for that.

As we look at the non-event dressing, our — the whole flywheel to the test, learn and reorder model works by finding new styles that we bought in small batches and learn from them and quickly chase and reorder into them. And so, we will continue to do that with our non-event categories and the goal there is getting products, new products that are adopted. That is the leading indicator for us.

So, if you were to watch our business model, that success is the best predictor of future growth for those categories. So, when we actually are reporting progress and growth in many ways it’s a lagging indicator of success we’ve seen earlier. And then, remind me of the other part of your question, sorry?

Oliver Chen — Cowen — Analyst

Thanks, David. It was just about regarding the inability to chase upside?

David McCreight — Chief Executive Officer and Director

Right, right. Yes, yes, absolutely, absolutely. So that was more broad based. When you’re turning as quickly, so one of the things we can often do and the team has worked on, has had the ability in season, let’s say, beginning in spring getting a re-chasing into summer, or seeing something that’s tracking in summer and quickly chasing and adjusting sleeve length, handling the shape of the product into getting some early fall performance from it. And so, with what’s gone in the marketplace, it’s — we can’t be as nimble right now with that and we can’t necessarily get that additional upside. Now still with a 95% year-over-year growth, we’re getting some quite strong performance there.

As it looks to Chinese New Year, the team as Crystal talked about, had placed orders and tried to anticipate potential slides with the dating and delivery gating going on our product and plus, if we’re able to actually buy the deeper quantities, then we should have an extra week supply of product which could also provide some upside. But that’s what we’re still working through as we forecast in the near term. So, it was broad based inability to necessarily take that last little bit of incremental upside.

Oliver Chen — Cowen — Analyst

Thank you very much.

Operator

Our next question comes from the line of Erinn Murphy with Piper Sandler. You may proceed with your question.

Erinn Murphy — Piper Sandler — Analyst

Great. Thank you. Good afternoon. A couple for me. First, I was curious if you could speak to what you’re seeing in terms of return rates now versus pre-COVID levels? And then secondly just on the promotional backdrop, as we kind of head into the final stages of the holiday season, what are you seeing from your competition out there versus kind of a lower markdown levels that you’ve talked about, within your own business? Thanks so much.

David McCreight — Chief Executive Officer and Director

We’ve seen [Speech Overlap] Crystal, go ahead. No go ahead, after you.

Crystal Landsem — Co-President and Chief Financial Officer

I was just — just quickly on the returns front, I would say we’ve seen return rates normalize back to rates consistent with where we were pre-COVID. So nothing interesting to report there really, of course they are downwards.

Erinn Murphy — Piper Sandler — Analyst

And then on the promotional landscape, just what you’re seeing out of your competition here?

David McCreight — Chief Executive Officer and Director

Yes. So, Erinn. Thank you for the question. So what we saw interestingly was, particularly as the winter, let’s say, Black Friday, Cyber Monday going into it, we saw people still continue to pull promotions forward. As you know, Lulus actually was reducing the number of promotional days during that time period compared to last year and the year before that. So it was interesting to see how much people sort of sought to pull it forward. Don’t know if that was driven based on concern to grab share early or whether that was concerns about logistics from UPS, FedEx and other shipping challenges. But it’s probably similar to in certain areas, you can see some people who were actually a little more promotional even with the scarcity of goods out there.

We expected some of the stronger players to actually have less — less promotions than last year. So overall when we look at within at our end, we were able to be much less — have many fewer promotional days than we did the prior year.

Erinn Murphy — Piper Sandler — Analyst

Great. Thank you. And then just last question for me is just on, can you just share what you saw during the third quarter from a traffic perspective versus last year and then conversion as well, would love to hear those metrics. Thanks so much.

Mark Vos — Co-President and Chief Information Officer

I can speak to that in general terms, I don’t have the actual numbers off hand, but certainly our traffic was significantly — but are you specifically talking about Black Friday and Cyber Monday or you’re talking about Q3?

Erinn Murphy — Piper Sandler — Analyst

Sorry. Just for the third quarter. Just for the third quarter in totality. Yes.

Mark Vos — Co-President and Chief Information Officer

Yes. So both traffic [Speech Overlap] Yes. Yes. So both traffic and conversion rates were up compared to last year.

Erinn Murphy — Piper Sandler — Analyst

Thank you.

Operator

Our next question comes from the line of Dana Telsey with The Telsey Advisory Group. You may proceed with your question.

Dana Telsey — Telsey Advisory Group — Analyst

I just wanted to follow up on the supply chain, are there — it sounds like you don’t have many headwinds as others from what you said in the opening remarks. Can you expand on that please? Thank you.

Crystal Landsem — Co-President and Chief Financial Officer

It’s really not that we don’t have the headwinds, it’s just that our buying model and the way we approach merchandising, it is different, in the sense it’s very data driven and meticulously calculated. So, we’re able to strategically pull inventory forward or put some buffer around on-time deliveries, so that we can get product on the site in the optimal selling season. So, I would say, there certainly are delays, everyone is experiencing it. But for us, we’ve been able to get ahead of it and just mitigate it, so that we’re not as affected in our ability to meet our plan.

Dana Telsey — Telsey Advisory Group — Analyst

Thank you.

Operator

At this time, we have reached the end of the question-and-answer session. And I will now turn the call back over to David for any closing remarks.

David McCreight — Chief Executive Officer and Director

Well, thank you all for joining us on our first quarterly call. I know many of you will be spending time with follow-up questions in the coming hours and look forward to presenting our Q4 results in the next few months, and also giving insight into our goals and strategies for FY ’22. Have a great holiday season. Thank you.

Operator

[Operator Closing Remarks]