Lulu's Fashion Lounge Holdings, Inc.

Good afternoon, and welcome to Lulu's first quarter 2022 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 first quarter 2022 results. Before we begin, we would like to remind you that this conference call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements, including but not limited to statements regarding management's expectations, plans, strategies, goals, and objectives, and their implementation, our future expectations regarding financial results, references for the second quarter ending July 3, 2022, and outlook for the 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. 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 January 2nd, 2022, filed with the SEC on March 31st, 2022, 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 filings. Joining me on the call today is our CEO, David McCrite, 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'm proud to address you today with my partners and co-presidents, Mark and Crystal. We continue to see significant momentum in our business, and we are extremely pleased with the progress we've made in our first two quarters as a public company. As a reminder, since completing our IPO during the fourth quarter of 2021, we have fully paid off our long-term debt And as a result have an exceptionally strong balance sheet combined with a healthy cashflow from operations that we believe positions us well to execute on our growth plans. Our Lew crew has done a tremendous job in delighting our customers and executing on our strategy. And the results from the first quarter are a testament to their impactful work. During Q1, we generated nearly $112 million of revenue, representing growth of 62% year-over-year, even as we anniversaried last year's stimulus in the quarter. Our adjusted EBITDA was $9.9 million versus $5.4 million over the prior year period. We saw excellent growth in active customers in both new and repeat, reaching $3 million in the last 12 months and at April 3, 2022. compared to $1.9 million for the same period last year. And we are driving this growth with efficient first-order contribution margin profitable performance marketing spend and compelling assortments. We were happy to see growth in both new and repeat customers for the quarter. Based on customer demand, the Lulu's brand seems robust, given the broad strength in our customer-related metrics for Q1 and our marketing efforts and assortment continue to build loyalty and engagement among our brand fans. From a merchandising perspective, we were pleased by the Q1 response to our event offering, and more recently to our non-event offering. Our event dressing category remains a pivotal segment of our business, and we saw a meaningful lift in demand driven by in-person events resuming. In non-event categories, Our team continues to evolve our offering, planning to increase mind share and occupy more of our closet, which is reflected in our continued double-digit revenue growth in these classes. Data is critical to all our decision making at LVLU, and we use data insights to optimize almost all elements of our business, particularly in our product creation and curation cycle. Our test, learn, and reorder approach supports lower markdown, and decreases fashion risks. And we view this as a key differentiator from other companies in the industry. As a reminder, roughly 70% of our revenue is from algorithmic-driven purchasing. And a leading indicator of future success for our business model is the number of new products that are tested and adopted for future reorder pipelines. Well, the new product results from Q1 look strong, and our reorder pipeline looks robust. which gives us confidence in achieving our growth targets in 2022 and beyond. These exceptional first quarter results highlight the massive potential of our affordable, fresh fashion model among millennial and Gen Z women. We continue to engage her 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 incredible customer service team. Our Lu Crew works every day to make our customer touch points 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. We believe 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, building awareness capability, and encouraging more word-of-mouth introductions, we are optimistic about our growth for years ahead. Analytic data shows that while millennials remain our largest cohort spend, the rate of adoption by Gen Z gives us confidence in our long runway. We attribute the apparent embrace of Gen Z to the appeal of our product offer and our evolving ability to interact with them in ways and platforms that they find appealing. On supply chains, we are continuing to monitor developments in China, the new coronavirus strains, as well as other supply chain risks. As we've highlighted in prior earnings call, we now place orders about four to six weeks earlier than we did during pre-pandemic times to continue meeting our customers' needs, as well as to mitigate pressure and avoid scrambling for costly air freight. As a reminder, this slightly longer lead time does not significantly impact our brand because the vast majority of our orders are for previously tested product. Also, we are not a fast fashion brand, so we have less product trend risk and are therefore less sensitive to a slightly longer lead time. That being said, we have not yet noticed nor been informed of any major changes in our product lead times from prior quarters. As a new company, we've been sharing with you much of the LVLU growth story. our beginnings, our roots in digital and analytics, our passions for our customers. But one of the perhaps underappreciated elements of our business model is the resilience. So I thought it a good time to highlight today what gives us structural resilience compared to others in our industry. We have a loyal and growing customer following, supported by our accessible price points and affordable luxury positioning. branding broad range of ages at income levels across millennials and Gen Z. The durable appeal of our product styling. We are not a fast fashion brand and have a data-driven product development approach, which reduces risks. So shifting demand does not always mean massive inventory obsolescence or excessive markups. We have a very nimble cost structure and the largest components of our overhead, specifically in marketing and staffing. And in the future, product costs will be further rationalized. We believe we have amongst the fastest inventory turns in the industry, which enables the ability to flex our position more quickly than most. We have a capital light model with some periods approaching negative working capital. And as a result of the recent debt reduction, we now have a strong balance sheet and are well positioned to fund continued growth due to our strong free cash flow generation ability. Of course, we are not immune to industry-wide cost pressures in the areas of inflation, labor, materials, shipping, and digital marketing costs throughout all of 2022. The guidance we're providing today incorporates some of those anticipated cost pressures. Our frequent testing indicates we continue to have product pricing power which we believe provides us with strong gross margin cushion, even with increased inflationary pressures. And if inflationary pressures were to move beyond transitory to structural, we still have ample room in our future business model to reduce product costs in 2023 and beyond to offset much of any structural increases. In closing, we are quite pleased with our Q1 results and how Q2, Historically, our largest and most profitable quarter is unfolding. Crystal will provide more context in a few minutes, but based on the trends we've seen thus far, we have updated our guidance. We are now raising net revenue growth expectations to 30 to 33% growth for FY22 and adjusted EBITDA to reach 50 to 51 million, even while continuing to invest for future growth. and incurring the incremental cost of being a public company. So now, I'd like to turn the call over to Mark Voss, our Co-President and Chief Information Officer. He will share with you an update on key operational and analytical efforts to further support our continued growth, as well as increasing customer insight and engagement. I'll let Mark discuss some of those key initiatives with you now in greater detail.