What happened

Shares of Lulu's Fashion Lounge Holdings (LVLU) were trading down 17.5% as of 11:28 a.m. ET on Wednesday. The company reported revenue growth of 27% over the year-ago quarter, but lower margins put pressure on profitability, sending the stock down. 

Year to date, the stock has fallen 37%, underperforming the broader market. 

So what

Overall, Lulu's business is performing relatively well, given the macroeconomic headwinds. Management credited higher shipping costs and a higher level of returns for sending gross profit margin down nearly 4 percentage points to 45.8% during the quarter. Lower margins sent earnings per share down to $0.15 from $0.28 in the year-ago quarter.

There were plenty of positives, however. Active customers surged nearly 53% year over year (YOY) to 3.2 million, and average order values increased 13%. These numbers indicate that the brand remains strong and is continuing to win new customers in a challenging economic climate.

Now what

Management reiterated its previous guidance, calling for full-year revenue to increase between 17.1% and 27.8% over 2021.

One of Lulu's competitors, Revolve Group, reported the same level of revenue growth in the last quarter but reported a lower rate of increase in active customers. This puts Lulu's in a stronger position to win market share.

However, consumer spending on fashion apparel took a dive in July. Revolve reported that sales growth decelerated to about 10% YOY. Lulu's management said it is taking a cautious approach with respect to the outlook but noted that things were looking better toward the end of July. 

The stock is trading at a much lower valuation than a year ago, so very low expectations are priced in already. This sets up the potential for a sharp rebound once the economic environment stabilizes.