Lulu's Fashion Lounge Holdings, Inc.

Good afternoon, and welcome to Lulu's fourth quarter and full year 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 Naomi Beckman-Strauss, General Counsel at Lulu's. Thank you. You may begin.

Good afternoon, everyone, and thank you for joining us to discuss Lulu's fourth quarter and full year 2021 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, or future expectations regarding financial results. outlook for the quarter and year ending January 1, 2023, market opportunities, product launches, and other initiatives, and our growth. These statements, which are subject to various risks, uncertainties, assumptions, and other important factors, could cause our actual results, performance, or achievements to differ materially from results, performance, or achievements expressed or implied by these statements. 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 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 our call today, we will also reference certain non-GAAP financial information, including adjusted EBITDA, adjusted EBITDA margin, and net debt. 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 filing. Joining me on the call today is our CEO, David McCraece, our co-president and CFO, Crystal Lansom, and co-president and CIO, Mark Voss. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn the call over to David.

Thank you, Naomi, and good afternoon, everyone. I am proud to address you today with my partners and co-presidents, Mark and Crystal. We've had an exceptional first quarter as a newly public company. As you know, we completed our IPO during this past fourth quarter and fully paid off our long-term debt. With that milestone behind us and a strong balance sheet, we are well positioned to build on our momentum and success through 2022 and beyond. During Q4, we generated $96.7 million of revenue, a growth of 77% year over year. And our adjusted EBITDA was $6.4 million versus a deficit of about $100,000 over prior year's fourth quarter. For the year, our revenues increased 51% to $376 million, and our adjusted EBITDA amounted to $41 million, which represented a 119% gain from 2021. We are thrilled by the tremendous growth in active customers from both new and repeat customers reaching 2.8 million. All achieved with appreciably more efficient performance marketing spend and even more impressive is that it was accomplished despite a dramatic reduction in promotional activity. Clearly, our brand experience combined with our efficient marketing efforts and relevant assortment is resonating with our brand fans. From a merchandising perspective, we continue to be encouraged by the broad-based response to our product offerings in FY21, with both event and non-event categories again delivering double-digit demand growth. We have identified material ways to further expand our pivotal event dressing category, and our team continues to make inroads in our closet by evolving our non-event categories. We're in a strong moment for LVLU, where both the fashion direction and her return to pre-pandemic social activities are providing helpful tailwinds. And the vital new product pipeline KPI is robust and on plan for achieving our future growth targets for 2022 and beyond. These excellent results in FY21 underscore the attractiveness of our digitally native model, which offers fresh fashion to millennial and Gen Z women at an affordable price point. We win brand fans and deliver strong results by using data to optimize almost all elements of our business. The use of data and technology guides decision-making throughout the company, from logistics to product planning to marketing placement. but nowhere is this more pronounced than in our product creation and curation cycle. About 70% of our revenue is from algorithmic-driven purchasing. Our test, learn, and reorder approach, where nearly 100% of the assortment enters as a test in small order quantities, then successful styles graduate to our reorder algorithms. Our model, refined over years, decreases fashion risks, reduces markdowns, and drives increased profitability. We stay connected with the pulse of our customer by engaging her where she is online, throughout digital channels and social media, as well as on our own platforms through reviews, feedback surveys, and one-on-one interactions with our exceptional customer service team. The Lu Crew works every day to make our customer touchpoint special. which ultimately leads to stronger customer engagement and loyalty and increases word-of-mouth introductions to a growing community of Lulu's brand fans. I still will delve into 2022 guidance in greater detail, but I wanted to express my excitement about our outlook for this year, both from financial and capability perspectives. For FY22, we are targeting net revenue growth north of 28%, and adjusted EBITDA to rise above $48 million, even while continuing to invest for growth and incurring the costs of being a newly public company. We are keenly aware of the uneasiness in the markets due to Russia's invasion of Ukraine, the ever-present headlines about new coronavirus strains, and the mounting impact of supply chain pressures on inflation. If you don't mind, I'd like to address a few of the clouds over the market and how they relate to Lulu's. Firstly, the coronavirus. We recognize the status of the coronaviruses ever evolving and perhaps due to increased confidence in immunities from vaccines or previous infection or general fatigue with safety precautions. Unlike early in the pandemic, we did not notice a material change in traffic or conversion during the Delta and Omicron variant outbreak stages. the supply chain. As many others have articulated in recent weeks, supply chains remain constrained, and we expect these constraints to continue for the balance of the year. What is so great about our market position and model is that we are not scrambling for air freight. To compensate, we now place orders about four weeks earlier than pre-pandemic times. The additional lead time does not impact our brand as much as others, because the vast majority of our orders are placed for previously tested product. Moreover, we are not a fast fashion company, so we have less product trend risk and are less sensitive to delays. The current state of the global supply chain does, however, impede our ability to chase the small quantity of in-season reorders for longer lead time products. But this was also the case for most of 2021, where we still posted exceptional results despite this constraint. Inflation. We are aware of and have a decent line of sight into inflationary pressures impacting most lines of our P&L for the first half of 2022. We expect there to be continued pressure on shipping, labor, materials, and digital marketing costs throughout 2022. The guidance we're providing today is informed to the degree visible and accounts for those anticipated headwinds. And though we are a brand positioned in affordable luxury, our frequent testing indicates we continue to have strong product pricing power, which provides some protection for near-term inflation. And were these inflationary pressures to move from transitory to structural We still have ample room in our business model to reduce costs in FY23 and beyond to offset much of any increases. Notwithstanding those macro concerns, we are quite pleased with how the first quarter of 22 is shaping up. Demand looks robust. Many of the metrics we monitor indicate the consumer continues the disruptive shift to digital shopping channels. and the apparel, footwear, and accessory sectors seem to have regained momentum. We are pleased with the quality of our customer file and our basket economics. Based on the trends we've seen thus far, we have confidence in our 2022 guidance. To deliver on our guidance and continue to delight our brand fans, I'd like to share a few of our key initiatives for the year. Customer insights. We will dedicate more resources this year to helping our decision makers better understand her mindset and desires, and find new ways to delight our existing brand fans, increasing lifetime value, and our first-party data collection. Next, introduce new customers to our brand. We know there are vast pools of untapped customers who have yet to meet our brand, and by mining insights learned from our rigorous performance marketing testing, cautiously building awareness capabilities, and encouraging more word-of-mouth introductions, we are optimistic about our file growth for years ahead. Product expansion. Many a fan's introduction to Lulu's has come through event dressing. And while event dressing continues to dominate mind share when discussing our brand, based on the work started in 2019, accelerated in 2020, and the results seen in 2021, we know we can continue to expand successfully into non-event dressing. Not only will this provide meaningful revenue opportunity, but it will shape her engagement with Alulu's brand as she moves from less frequent to more frequent brand engagement occasions. Said differently, we're even better positioned to own more of her closet and engagement. Conversion. We will invest even more in our on-site experience to improve conversion and overall customer satisfaction with deeper and more frequent conversion funnel analysis and a goal of reducing our size out-of-stock ratios. ESG. Whether it is support for women or reducing waste, social and environmental issues have always been important to our internal stakeholders at Lulis. In 2022, we are committed to increasing insights into our social and environmental impacts. We have already engaged third-party partners to evaluate our current practices and identify ways we can become better business stewards. We look forward to sharing our progress as we advance in our ESG journey. Technology and innovation. We already have an impressive tech stack. And analytics is part of Lulu's DNA, driving much of the decision-making. But in 2022, we will invest even more in analytics, technology, and machine learning to open new opportunities for revenue growth and increase our efficiency in areas like distribution, allocation of marketing spend, and better modeling of future product demand. Mark Voss, our co-president and chief information officer. and his team have architected much of our approach to technology, algorithmic decisioning, and distribution strategies. He will share with you our plans for further optimizing an already efficient logistics system and support our continued growth, as well as increasing customer insight and engagement. I will now turn the call over to Mark to discuss some of the key initiatives in greater detail. Mark?