Q4 2023 Lulu's Fashion Lounge Holdings Inc Earnings Call

Participants

Naomi Beckman Straus; General Counsel and Corporate Secretary; Lulu's Fashion Lounge Holdings Inc

Crystal Landsem; Chief Executive Officer and Director; Lulu's Fashion Lounge Holdings Inc

Mark Vos; President and Chief Information Officer; Lulu's Fashion Lounge Holdings Inc

Tiffany Smith; Chief Financial Officer; Lulu's Fashion Lounge Holdings Inc

Brooke Roach; Analyst; Goldman Sachs & Company, Inc.

Janine Stichter; Analyst; BTIG

Dana Telsey; Analyst; Telsey Advisory Group

Ryan Lountzis; Analyst; Jefferies

Presentation

Operator

Good afternoon, and welcome to Lulu's fourth quarter and fiscal year 2023 earnings conference call. Today's call is being recorded, and we have allocated one 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.

Naomi Beckman Straus

Good afternoon, everyone, and thank you for joining us to discuss Lulu's fourth quarter and fiscal year 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, plan, strategy, goals and objectives and their implementation are expectations around the continued impact on our business of the macroeconomic environment, consumer demand and return rates. Our future expectations regarding financial results references the fiscal year ending December 29, 2024, including our financial outlook for full year 2024 market opportunities, product launches and other initiatives and our growth.
These statements, which are subject to various risks, uncertainties, assumptions and other important factors that 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 December 31st, 2023, filed with the SEC this afternoon, all of which can be found on our website at investor dot glu.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, NetCache 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 are 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.
Looking back at 2023, I'm proud of the strides we made to adjust our business quickly to a highly dynamic consumer and macro economic landscape. The initiatives we have implemented in recent quarters and the early progress we've made against them to reinforce our position as one of the most beloved women's brands for attainable, luxury fashion, curated exclusive products, superior customer service, and a personalized shopping experience supporting our customers through all of life's moments.
In 2023, our primary focus was on the following- rebalancing inventory assortment between newness, novelty and core reorder products, improving internal processes through optimization and automation, leading to reduced operational expenses, establishing the foundation for accelerating brand awareness through new marketing initiatives and product distribution channels and maintaining the cash flow positive year while not sacrificing on investments in strategic initiatives that support future growth, combined with revolver balance reductions to further position the company for success.
We believe we've executed well on all of our key focus areas in 2023. Positioning us for strong growth and profitability once inflationary pressures abate and consumer spending normalizes. Our strategy has been and continues to be focused on customers who seek out quality over quantity and enduring styles that lasts beyond a moment in time, allowing us to optimize inventory without the same obsolescence risk that other retailers face.
Additionally, traction with broader price ranges, including higher priced items in our legacy categories throughout Q4, reinforce this as reflected in our Q4 gross margin expansion of 180 basis points, combined with an 18% year-over-year reduction of inventory balances. As a business focused on enduring quality versus relying on predicting trends, it can take a few quarters to adopt a more meaningful trend changes. As a result, we expect to continue rebuilding our assortment in 2024, we believe we will benefit from early assortment updates during the year. We have already seen encouraging sequential upward revenue momentum, building at the end of 2023 with further improvements into the first two months of 2024.
I'll now briefly touch on our fourth quarter results before discussing the full year in more detail, followed by our 2024 priorities as our business is not driven by seasonal gifting, Q4 results were consistent with seasonal trends for lose, which is typically our smallest quarter in terms of both sales and profits, our special occasion segment continued to be a steadfast driver of sales, constituting a large component of our diversified product mix. We saw positive performance in our new and reorder dresses. With notable success and special fabrications and new holiday silhouette occasion, dresses have continued to outperform other categories with particularly strong demand for new and novelty dresses and is historically a leading indicator of future growth momentum with shoppers craving more out-of-home experiences.
The December opening of our first retail location in decades is a start towards bridging the gap between URL. and IRL. Our Melrose Avenue location in Los Angeles underscores our presence among premium retailers. It helps position us as a quality first attainable luxury brand. To that end, in the latter half of January, we opened our first ever bridal boutique within the loose on Melrose location. Rounding out a full end to end shopping experience, positive customer response to the bridal store launch instills confidence in the brand activation potential for 2020. For Furthermore, lose on Melrose has affirmed the opportunity for new customer engagement and marketing strategies with potential to drive interesting new growth prospects.
We will continue to take a disciplined and calculated approach to physical retail, applying our test, learn and optimize philosophy to the lose on Melrose store, seamlessly, integrate our D to C E com customer experience across all sales channels and optimize how we apply our industry-leading inventory turns in a physical Thanks.
The Melrose store opening has also been a great catalyst for momentum in our potential wholesale partnership opportunities. Major retailers, both international as well as domestic, have proactively expressed interest in carrying loose products, in-store and online. We expect interest to lead to long-term growth opportunities, brand awareness and broader customer reach via these omnichannel opportunities.
Next, there are a few of the areas where we saw positive momentum throughout 2023. We saw strong customer demand for our new and novelty products, resulting in positive double digit year-over-year growth in our post return second half merchandise sales for new products, a leading indicator for our future reorder product funnel. As a reminder, our reorder products have consistently contributed over 70% of our net revenue in recent years. We're actively rebalancing our product offerings, new and reorder alike to restore revenue allocation across new and reorder to pre-pandemic levels and align with evolving yet enduring customer trend changes.
Year-end inventory balance was down 18% over year end fiscal 2022, down $7.7 million. Underscoring the agility of our data driven business model and the enduring quality of our reorder products. We believe our five times inventory turns for the year continue to be industry leading, reflecting how our strategic and informed approach to product selection is aligned with market demand. As we enter 2024, our overall inventory position is notably healthier and back in the chase mode for several of our dress products categories.
Continued investments in process automation and robotics contributed to a 15% decrease in variable payroll expenses on a volume adjusted basis compared to fiscal '22. Our business continue to generate liquidities and our balance sheet remains strong, enabling us to maintain our investments in strategic initiatives and positioning us for a return to growth. Free cash flow for the year was $11.5 million, an improvement of $10.3 million over fiscal '22.
We successfully implemented technology to better scale both international and wholesale growth as well as opened our first physical retail store to serve as a testing ground for potential future retail opportunities. The progress we've made on our initiatives over the fourth quarter and full year, supported by the strategic addition of talent to our team are starting to show positive signs as we enter 2024. 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.
A few things worth noting on trends we saw in 2023 and into the first quarter new product introductions continued to perform well, supporting our strategy to increase newness and novelty penetration back to pre-pandemic levels in preparation for retiring aging reorder product sooner and beginning to capitalize on the changing fashion cycles within our customers' closets, we are concurrently focused on diversifying product assortment and conversion in our smaller and more underpenetrated categories. With this in mind, in January we welcomed industry veteran Lauren daddy as our new Chief Merchandising Officer. And under her stewardship, we anticipate enhanced performance across all product categories and an acceleration of rebuilding newness in our reorder product funnel.
On the wholesale partnership front, we're continuing to lay the groundwork for these relationships as a way to deepen our connections with existing customers and introduce our brand to new audiences and an omnichannel setting ultimately enhancing our online presence. We are being opportunistic about brand enhancing wholesale partnerships to profitably boost awareness and in-person product experiences while also leveraging existing infrastructure to maximize cost efficiency and build synergy between digital and physical channels. Wholesale partnerships are typically on a longer lead time calendar and looking much further out in the year than loose e-commerce buying calendar. We believe that much of the progress we've made so far will positively impact future quarters into 2024 and beyond. We look forward to sharing more on our progress throughout the year.
Turning to 2024 recent macro trends and our priorities for the year as we position for the year ahead, a few industry trends come into focus. Firstly, for DTC, brands like lose a digital presence, extends beyond direct sales and also captures added benefits of improved margins and broader brand value as a brand that has spent 25 plus years supporting women during pivotal moments in their lives. We believe loose has a competitive edge over fast fashion retailers over the long term for less loyalty driven and have more transactional relationships with customers.
Secondly, the volume of engagements and special events in 2024 are increasing, as is the average cost of weddings, special occasion and bridal categories continue to be areas of opportunity for loose. As events become more prevalent and consumers become more discerning about their spending, lose has an opportunity to take market share within this environment.
Lastly, there is heightened industry-wide emphasis on more effectively managing return rates focused. It aligns with our ongoing strategic initiatives, which Mark will dive into more in his prepared remarks in 2024. We remain focused on closely managing cost and driving efficiencies across our operations to extend our momentum. We are seeing early traction with our optimizations and new customer engagement initiatives that we believe will benefit our brand long term.
This year, our primary focus will be on continued product assortment optimization, including initiatives that support margin expansion, product category diversification, geographical diversification and product sourcing to further reduce potential impacts of external factors related to geopolitical and other uncertainties that could impact our supply chain and return rate stabilization through product fit optimizations and financial impact mitigation tactics, continued investments in brand initiatives and activations that support customer acquisition and retention as well as reinforcing brand differentiation.
And lastly, further technology enablement that supports customer engagement and customer experience across multiple channels. As the year progresses, we expect to stay laser focused on adapting to the dynamic market changes, building the loose brands, driving cost efficiencies to meet our near term targets and positioning ourselves for a return to positive growth. I'm confident in our 2024 initiatives, and I'm further bolstered by our talented and experienced team which is adeptly navigated the ebbs and flow of our business for the past several years.
With that, I'd like to turn the call over to Mark Vos, our President and Chief Information Officer, he will share an update on customer engagement and a deeper dive into our 2024 priorities. Mark?

Mark Vos

Thank you, Crystal. I'll start by providing an update on our customer and how she interacts with us during the quarter.
Although our active customer accounts experienced a decline year over year, we are optimistic about our positive quarter-over-quarter LTM repeat customer counts signaling improved customer stickiness. Additionally, in Q4, we saw year-over-year increases in units per transaction and average unit retail together driving a higher average order value, coupled with increased merchandise margins in the quarter earlier in 2023, we removed various roadblocks for our international customers. And last quarter, we reported that various countries has shown double-digit growth in unit sales year over year. That trend continued in Q4 of 2023. And we believe that we can grow international revenue into a meaningful part of our revenue mix by 2026 by optimizing our current business model of shipping from the United States with selective investments in brand activation.
Similarly, on the wholesale side, we see encouraging signals that both department stores as well as retailers are interested in augmenting their physical retail and online assortment with the loose brands in 2024, we will continue to make strategic investments in people, process and platforms to further enable this channel and also grow wholesale into a meaningful part of our consolidated revenue mix.
As crystal mentioned, there are three core areas of focus for us in 2024 priority product assortment optimization, diversifying our product assortment into casual and sportswear is a key growth strategy in Louis's long-term plan. We believe deeper penetration in these product categories will fortify the relationship with our customers through increased purchase frequency, improved loyalty incentives and broader customer appeal. Additionally, we are excited about the people investments we have made, including the recent appointment of Chief Merchandising Officer, Laura Daddy, as well as investments in tooling and insights to further support product category expansion.
Currently, we are actively refining our test, learn and reorder model by incorporating advanced machine learning and predictive AI modeling. This integration combines diverse external data sources with our product and customer data, improving our ability to predict demand, optimize inventory levels and better navigate trend cycles. On previous quarterly calls, we have spoken about our investments in a product costing team, which have resulted in initial product margin improvements. To date, we anticipate additional margin expansion in 2024, which is contemplated in our guidance.
Additionally, we are consolidating our vendor network to balance our purchasing power per vendor for improved product costs, diversify geographical product sourcing to reduce dependencies on one or more countries of origin and improved consistency in our fabrics and fit. Our goal is to improve on the modest margin expansion in 2024 guidance into 2025 and beyond. Tegic investments will be made to stabilize our return rates and reduce the financial impact of returns to our net contribution margin on the fit front, we are seeking to reduce fit related returns by implementing a holistic approach that optimizes the customer shopping experience as well as our bottom line.
We have streamlined our product fit collaboration and communication process with major vendors to reduce potential fits discrepancies and design products with enhanced fit tolerance while preserving the loose fit expression. Additionally, we have rolled out enhanced fit specifications to our vendors to further increase the fit consistency of Louis apparel, and we expect the benefits of these enhancements to begin arriving in Q2 of 2024. We are also excited about potential opportunities to use predictive and generative AI and customer community feedback to improve the communication to our customers as they shop on those platforms, enabling them to make more informed decisions.
Regarding sizing, we also continue to monitor, evaluate and enhance our return policy, including the excessive return policy to further reduce abusive return behavior and minimize unprofitable customers. Priority. Continued investments in the Luvs brand with the opening of a loose on Melrose store brand comes to life for new and existing customers alike, providing an exceptional venue for in-person brand activations. In the last few months, we have hosted various in-store events, including the bridal boutique open house and our first ever 100 dresses for 100 brides giveaway, which lead to long lines of customers around the block and many influencers and customers sharing their love and excitement for the brand on social media. In fact, December 2023, at the highest earned media value generation in recent history.
Building on the success of our brand activations at loose on Melrose, we are considering additional ways to activate the Luvs brand in person, including the possibility, perfect people and investments we have made in 2023 with SVP of brand marketing. Patrick Buchanan and VP of Communications have a go raise, have already led to higher levels of consistency in our brand communication in 2024. We look to further refine the Lucy brand in a holistic way, developing a deeper connection between our customers, our product in chooses packaging and diverse range of price points.
The goal is for Louis imagery messaging, our products to be instantly recognizable as Louis fostering a profound understanding and appreciation for the brand by building on Move's strong brand foundation, we can differentiate ourselves from other brands, including various domestic and foreign transactional shopping experiences and improve the efficiency and effectiveness of our performance marketing program, priority technology enablement as we lose activities across multiple channels, including retail, wholesale and other activation points. In 2024, our platform capabilities need to be enhanced in order to provide the Luden's brand out across these various consumer channels. As usual, make buy and rental decisions will be driven by the time to market return on investments first-party data insights and competitive advantage developments.
As I already mentioned, we will also expand our investments in predictive and generative AI to drive operational efficiencies, scale creative assets creation, improve accuracy of demand predictions and further enhance our proprietary reorder data models and algorithms. We also intend to implement various customer experience enhancements in our web and app shopping platform with the goals to improve product discovery, create additional ways customers can interact with each other and to foster Luna's community interactions, including about how our products fit. We are very excited about executing on these opportunities and the positive impact we expected will have on those customers, Lew crew and our investors going forward.
And now I'll hand you over to Tiffany Smith, who's Chief Financial Officer to deep dive into our financials.

Tiffany Smith

Thanks, Mark, and good afternoon, everyone. Our net revenue for the fourth quarter was approximately $75 million, down 18% year over year which was in line with our expectations for the quarter.
Our fourth quarter adjusted EBITDA loss of $2 million fell short of our Q4 guidance expectations. While we were encouraged to see occasion wear resonate strongly with our customer and comprise a larger part of our sales mix in Q4, we saw higher return rates due to the sales mix shift toward these products with higher return rates, which increased our return related costs. We also saw a higher concentration of expedited orders, which drove up our outbound shipping costs.
Lastly, marketing costs as a percentage of net revenue skewed higher due to the impact of higher return rates, but this was offset by disciplined management of general and administrative expenses.
Moving on to the Q4 P&L, line comparisons to last year. The 18% decline in net revenue year over year was driven by a decrease in total orders of 22% compared to the prior year. Coupled with an increase in return rates that was offset by higher AOVs this quarter. As our customers' preferences in Q4, leaned more toward newness and novelty and in particular occasion wear the resulting product mix and lower final sale ratios drove our overall return rate in the fourth quarter above that of the prior year. However, return rates were lower on a sequential basis in line with typical trends from Q3 to Q4.
Gross margin ended the quarter at 39.1%, an increase of 180 basis points compared to the same period last year, driven by higher margin product mix as newness, novelty and our occasion wear continued to resonate very well with our customers.
Moving down the P&L to give some insights into expense line items. Q4 2023, selling and marketing expenses were $15.3 million, down about $1.1 million from Q4 2022 due to lower performance, marketing spend and merchant processing fees, partially offset by higher brand awareness investments, including activation spend for the Melrose store opening. As noted, we have increased our investments in more top of funnel brand marketing, including our influencer an ambassador program.
General and administrative expenses decreased by about $1.7 million to $21.8 million, a 7% decline compared to Q4 2022. The decrease was primarily driven by a reduction in variable labor costs, driven by the impact of lower sales volumes and increased operational efficiencies as well as lower professional services and insurance costs, partly offset by higher stock-based compensation expense, software expenses and costs associated with our newly opened Melrose store.
Adjusted EBITDA loss for the fourth quarter was approximately $2 million compared to Q4 2022 adjusted EBITDA loss of $1 million. Our Q4 adjusted EBITDA margin was negative 2.6% compared to negative 1.1% in the same period last year.
Interest expense for the quarter was approximately $337,000 compared to $409,000 in Q4 2022. For the quarter, we reported a diluted loss per share of $0.18, which is a decrease of $0.04 compared to a diluted loss per share, $0.14 in the fourth quarter of 2022. Throughout the fourth quarter of 2023, our balance sheet remained resilient, positioning us to execute our long-term growth plans with agility while adeptly navigating any new or lingering macro economic headwinds.
Our net cash used in operating activities for the quarter improved by $4.4 million on a year-over-year basis, with $5.7 million of net cash used in operating activities in Q4 of 2023 compared to $10.1 million used in Q4 of 2022. Similarly, free cash flow for the quarter improved by $4.7 million on a year-over-year basis. We repaid $70 million of our revolver during 2023 and plan to continue to pay it down. We ended the year with cash of about $2.5 billion and total debt position of $8 million, which was the amount drawn on our revolver, resulting in a net debt balance of $5.5 million.
Our inventory balance at year end was $35.5 million, down about $7.7 million from the same period last year, bringing our fourth quarter inventory decrease in direct alignment with our sales. As always, our goal is to remain disciplined in our inventory management approach, and we strive to enhance efficiency and optimizing inventory levels, balancing markdown risk, and prioritizing customer experience. Upholding brand integrity and preserving gross margin levels remain our top priorities as we build upon an already successful buying model.
Moving on to guidance, we are expecting full year 2024 net revenue to be between $350,000 and $370,000 dollars. Our baseline guidance anticipates that our core customer with heavily positioned within the $50,000 to $150,000 income range will continue to face macro headwinds throughout 2024. With that in mind, the lower end of our net revenue guidance range contemplates a slight year-over-year decline in net revenue, which is reflective of our returns initiatives in 2024 potentially taking longer to materialize with our customer base and return rates remaining elevated compared to our guidance midpoint. Continued efforts to actively rebalance our product offering to restore pre-pandemic revenue allocations across new and reorder products, potentially taking more time than expected, which could impede our top-line growth and initiatives to grow top line by diversifying product category mix, including separates and casual wear not materializing by the second half of the year as anticipated.
The midpoint of our net revenue guidance range assumes healthier inventory position coming into 2024 allows us to focus on improving margins and profitability without replicating the same levels of sales driven through markdowns and promos observed in 2023. Current trends in purchasing behavior across a wider price point range, including higher AUR items continues throughout the year, partly the result of higher drug concentrations persisting in the first half. Returns initiatives result in a deceleration in year-over-year return rate increases by the second half of 2024.
Wedding and wedding related events recover back to pre-pandemic levels and top-line growth stemming from product category diversification efforts, agro casual or casual wear and separates transpires in the back half of the year. The high end of our guidance range assumes awareness and brand marketing return on investment has a shorter lead time for top-of-funnel traffic and conversion than conservatively modeled in our guidance. Top line growth for casual wear and separates recovers more quickly than anticipated and returns initiatives drive more significant improvement in return rates and potentially earlier in the year.
When modeling revenue for our business, seasonality of demand plays an important role in a normalized year, our net revenue typically peaks in the second and third fiscal quarters, driven by heightened demand for event dressing with Q4 typically representing the lowest net revenue and profit quarter of our fiscal year. Adjusted EBITDA is expected to be between $5 million and $8 million. This equates to an adjusted EBITDA margin of between 1.5% and 2.2%, a modest improvement compared to 2023. We make progress on our previously highlighted initiatives, including continued product assortment optimization and supportive margin expansion, product category diversification, return rate stabilization and product sourcing diversification. Our guidance range assumes benefits resulting from our product costing initiatives and rebalancing of inventory to support more full-price sales. As noted previously, our guidance also anticipates a deceleration in a year-over-year increase in return rates by the second half of the year.
Secondly, our guidance considers continued investments in brand initiatives and activations to support customer acquisition and retention as well as reinforcing brand differentiation. Also contemplated our increases in performance marketing ad spend due to the election year, partly resulting in approximately a 20 basis point increase over 2023 levels in total marketing expense as a percentage of net revenue. Modest investments in creative are being made to support our brand initiatives as well as testing various elements to improve our site and shopping experience.
Lastly, our guidance includes investments to support our technology enabled. As such, our general and administrative expense guidance anticipates higher technology spend compared to 2023. As a result of the technology investments as well as general and administrative expenses more broadly, we will continue to prudently manage these expenses and we further expect these costs deleverage over time as our sales increase.
In order to set expectations for modeling purposes, our quarterly adjusted EBITDA margin rates have similar seasonality fluctuations as our net revenues and will likely fluctuate above or below our full year guidance rate, depending on the quarter. We incur modest levels of interest expense associated with our operating revolver and equipment leases for our distribution facilities. With the impact of lower expected revolver balances, we expect interest expense for the full year 2024 to be approximately $600,000. We expect our stock-based compensation expense in 2024 to be roughly half of what it was in fiscal 2023, and our weighted average fully diluted share count at the end of 2024 is expected to be approximately $40 million shares.
Moving on to capital expenditures. We expect between $5 million and $6 million for the year, which includes capital expenditures for technology enablement that supports customer engagements, customer experience across multiple channels as well as additional automation capabilities in our distribution centers. We believe investing in our future growth opportunities, driving efficiencies and enhancing the customer experience, our key to our long-term success.
And with that, I'll pass it back to Crystal for closing remarks.

Crystal Landsem

Thank you, Tiffany. Before we turn to questions, I want to emphasize our confidence in our ability to return to profitable growth. We firmly believe that our fresh now fast DTC business model, coupled with our indebtedness and testing learning and optimizing within the dynamic retail landscape and a healthy balance sheet, positions us well to navigate the near-term instability and trends. Thank you to our brand fans, Blue crew and shareholders for supporting us in our mission to deliver attainable luxury to our customers. And we look forward to updating you all on our next earnings call.
With that I'll turn it over to questions now.

Question and Answer Session

Operator

(Operator Instructions) Brooke Roach with Goldman Sachs.

Brooke Roach

Good afternoon, and thank you for taking our question. I was hoping you could elaborate on the most important drivers on your confidence in returning the loose brand to growth in 2024, what contribution from new channels such as international wholesale and physical retail are you expecting within this outlook versus like-for-like growth in the direct online business? And then perhaps for Tiffany, can you help had some guardrails on how you're thinking about the cadence of that revenue growth throughout the year?

Crystal Landsem

Hey, Brooke, thanks for the question. As it relates to wholesale and international, as we've indicated previously, these are still very small segments of our business and not ready to guide yet. While the growth has been positive and we're excited about the momentum, it's still not meaningful to guide on big numbers on small bases. We are optimistic about the early traction that we're seeing and the price of interest through the channels and the opportunity to engage and convert with new and existing lose brand fans has been very encouraging and significant white space ahead of us, but we're going to be tempering expectations in the near term. While these are still small numbers in comparison to our total base. So our guidance is contemplating more of a normalization to our DTC business and momentum that we're seeing within the new side that will eventually return the reorder side of the business to growth.

Brooke Roach

And then Tiffany, I mean, guardrails that you can provide on how you're thinking about cadence in the revenue throughout the year, perhaps in concert with the comments that you provided on the upward sequential momentum with improvement in the first two months of 2020 for sure.

Tiffany Smith

Yes, sorry. But I thought your question was regarding wholesale and international, but just revenue more broadly, I would say for the for the guidance that we've put out there, and I think I can kind of talk to some of the cadence thing that we've seen to date and kind of just give you a sense of how it looks to progress through the balance of this year on one of the things that we saw during Q4 that was particularly encouraging is revenues did start to some pace with comps improving each month, particularly in the back half of Q4. We've continued to see on top line transacted revenue. So pre returns in January and February continuing to improve on a post return basis, though we were a little bit more tempered there and our expectations just because we have seen so much prominence in the mix around especially occasion wear, which typically is our higher return rate product.
But with that said, we are still seeing improvements in the rep comp and moving from the end of Q4 into the first two months of Q1 of this year. So we are expecting to see the comps steadily improve as we progress through the year, I would say the comps start to move into more like positive comp territory towards mid to late Q2 and then beyond into Q3 and Q4.

Brooke Roach

Great. Thanks so much. I'll pass it.

Operator

Janine Stichter with BTIG.

Janine Stichter

Sir, I wanted to ask a bit about the expansion into casual sportswear. Love your thoughts on how big this could be and what the timing might look like and just kind of what drove you to expand in these categories? Is that something your customers been asking for? And then on the return rates and how you think about potential for expansion into casual to drive down the return rate percentages?
I would assume that the lower return rate category versus the dress category? Thank you.

Crystal Landsem

Thanks for the question, Jeanine. We do absolutely see a lot of opportunity in the casual and sportswear and when our customer has shown us over time, as that does typically have a lower return rate than our dresses and specifically into our event where that we're very much known for so we're very enthusiastic about the addition of Laura to our team. She comes with a wealth of knowledge in the separates areas that I think we've been lacking. And just for guidance and oversight in that area is going to be, I think, an accelerator within those product classes. And to that end, what we've seen in our store is a lot more resonance in our separates with our customers in a brick-and-mortar setting. And that's giving us confidence not only in actual performance but also doubles with the feedback we get online and their desire to see more of our Scott novelty and you need to lose separates and core where.
So where we're actually really excited about that opportunity. It is where we suffer And candidly, most in Q4 in terms of concentration of business where our consumers a little bit more pressure economically and is really focusing our spend on just the newness got to have a novelty. We're being very cautious about how we guide towards future Cypress growth. But we're optimistic about what we're seeing specifically in that positive growth in our newness that we've been introducing.

Janine Stichter

Okay. Great. And then just one more question on that. From the new benefits that you've been seeing, it sounds like you're starting to see those benefits. Any more color on just how meaningful that could be and how we should think about it flowing through that and next several quarters?

Mark Vos

Yeah. So we started the enhancements from a costing perspective towards the second half of last year, and we saw initial improvements there as it relates to for this year, various activities there are going to be deployed mostly around the vendor consolidation and increasing our pencil with each individual vendor so that we can be in a better position to negotiate, but also to or to orchestrate, I think about the ultimate fit suffer from a fabric perspective or otherwise. So we have some moderate improvements or are part of the guidance. I really think that we will be punching through deeper, so to say, into 25 and beyond because these efforts are not immediately reflective of the existing inventory that you have that we have or the time that it takes to get additional inventory in. So that will just be rolling through the rest of the year into 2025.

Janine Stichter

Great. Thanks so much.

Operator

Dana Telsey, Telsey Advisory Group.

Dana Telsey

Hi, good afternoon, everyone. As you think about the AOV., which ticked up from the third quarter, ticked up from last year with the new category that you're putting in, how do you think about the AOV and what it looks, what it could look like?
And then on the return rate with the categories that you're introducing, how do you what's your forecast return rates or what should be a new normal in terms of return? And then just a follow-up.

Tiffany Smith

Great. Great question, Dana, Mr. Tiffany. So with regards to the AOV question, we do expect to see it will be continue to grow throughout 2024 on a full year basis relative to 2023. However, there's expected to be kind of typical seasonality around AOV, where it's typically more dress oriented or occasion wear is more heavily concentrated in the first the middle two quarters of the year. So typically that's where the AOVs will be at our highest point, but sort of sprinkled out throughout the whole year.
AOV expectation is the assumption that we're coming into this year with a even healthier inventory position, which is going to mean lower markdowns and discounts for us throughout the throughout the balance of the year of overall expectations around AOV are that they'll continue to increase. But we do like to also maintain some flexibility in our assumptions, just assuming whether or not we do more shipping related promotions or other things just because shipping rep is a component of our AOV as it relates to return rates.
We have spoken to and quite a few things on the call, but one of one of the factors that's baked into the guidance is that we expect our return rate to start to improve a bit in the back half of the year. So we expect to see sort of decelerating year-over-year growth and the return rate as we progress into Q3 and Q4 of this year.
And as you noted, that a lot of that is potentially category-specific drivers. So meaning less dresses. Getting more penetration on separates is one of the key areas where we could see mix shift start to benefit the return rate. Also, keep in mind, we've highlighted a few initiatives on the call. Marc spoke to in depth around on fit and fit, but consistency basically, we'll call it. And that's one of the factors that is also beneficial to return rate as we move through the year, and we're expecting that to have a positive benefit.

Mark Vos

And adding onto that, we're very excited about our ability because we have so much data essentially from our customers around their fit experience with our products is to really turn that into something that are that customers can use and better tailor a forward measure to make better decisions. And so we're working on not just how to present that and how to service that, but also how to intelligently and consume that through through AI and other methods to really give that advice. And so that's just I think it's very exciting opportunity there in front of us that will overtime home itself for more accurately and help our customers and subsequently, hopefully also our return on it.

Dana Telsey

But just one thing on active customers. How are you thinking about active customers given the reduced level of active customers kind of what's happening on the on that customer churn rate? And in terms of the new products, are you getting new customers also? What's the profile now? And how does that change basically Thank you.

Mark Vos

A question. So yes, there is although our active customer counts experienced a decline year over year as quarters with we have with pent-up demand to fall off the comparisons of what we do see and are very optimistic about is that, for example, quarter over quarter, our and our LTM repeat customers improved, which points to that stickiness and also the other part where we already spoken to is the increase at not just from a reservoir perspective, but also from a UPT perspective, those are signals that still that speaks to that customer engagement and nine, if we were then adding up adding to that, what we will be doing this year from a customer engagement and marketing perspective than we, I think that people put that altogether, that those efforts will support a stabilization if not a return to customer growth in 2024.

Dana Telsey

Thank you.

Crystal Landsem

Thanks, Dana.

Tiffany Smith

Thank you.

Operator

Ryan Lountzis, Jefferies. Please proceed with your question.

Ryan Lountzis

Hi. Thanks for taking my question. As it relates to rebalancing the product portfolio, I'm just curious kind of what the portfolio mix is currently across novel novelty new and core reorder products and kind of how that compares to prior years and where you would like to get this mix moving forward? Thank you.

Crystal Landsem

Our goal is to get our mix between new novelty and core reorder back towards where it was pre pandemic would say that our buying during the pandemic was guided very much by consumer demand that outpaced demand for our core reorder products, specifically our aging reorder products. So our goal is to get that mix back towards pre-pandemic levels. And candidly, it varies by product class and over time, it also varies. We have given information previously around 70% to 75% of our reorders drive our business and pre-pandemic. It was sub 60.
The right balance, though, is going to be driven based on consumer demand and how the enduring styles that we introduced, how long they last and how much volume we can drive. So I'm hesitant to give any clear guidance around that number or that target. What we do know is reverting back to more newness and novelty is what she is looking for today and over time that will ebb and flow across new and reorder and across each of our product classes.

Ryan Lountzis

Great. Thank you.

Operator

Thank you. There are no further questions at this time. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.