Lulu's Fashion Lounge Holdings, Inc.

Good afternoon, and welcome to Lulu's second 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 second 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 and outlook for the second half and year ending January 1st, 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 2, 2022, filed with the SEC on March 31, 2022, all of which can be found on our website at investors.luluz.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 are our CEO, David McCrite, our co-president and CFO, Crystal Lanson, 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 joined today with my partners and co-presidents, Mark and Crystal. Before I speak about the quarter, I wanted to thank the LOO crew, who continue to do a tremendous job executing on our strategy and delighting our many customers. In this challenging macroeconomic period, we delivered year-over-year revenue growth of 27% at a healthy adjusted EBITDA margin rate of over 11%, a true testament to the power of our brand and strength of our business. We feel our broader customer metrics continue to be exceptional and at record levels for LVLU, which reinforce our confidence in our longer term trajectory. Our fresh fashion assortment is clearly resonating with our millennial and Gen Z brand fans, and we're continuing to acquire new ones. Our active customers increased by 53% year over year, which included a 22% gain in new customers as we continue to grow awareness. Average order value increased 13% on a 12-month basis with double-digit gains from both new and existing customers. We believe these positive customer metrics demonstrate that LVLU continues to occupy more space in her closet and take share from the broader apparel industry. That being said, after a very strong start to Q2, in late May, after our Q1 earnings call, and like many others, we began to see volatility in traffic trends and conversion rates, which were likely driven by increasing macro pressures that impacted our customer spending behavior. We saw higher level of returns, as well as shipping surcharges, which had a disproportionately negative impact on our EBITDA margins. As a result of this change in consumer behavior, we are actively managing our inventory and discretionary expenses with a more cautious outlook because of the macro environment. We view these challenges as temporary and have conviction in our long-term opportunity for continued profitable growth. Our business model is resilient and adaptable. Let me remind you of the unique characteristics which enable us to execute through these uncertain times for the consumer and achieve our goals for long-term profitable growth. First, we have a very loyal and growing customer following, as evidenced by strong trends amongst new and existing customers, supported by our accessible price points and affordable luxury positioning. which spans broad age and income levels across millennial and Gen Z. Second, we are not a fast fashion brand, and unlike many in the apparel industry, shifting demand does not necessarily mean obsolete inventory and excessive markdowns. The majority of our inventory can be carried from one season to the next. Also, our data-driven product development reduces risks, So we're able to respond appropriately from an inventory perspective when preferences do change. Third, we have a nimble cost structure in the largest components of our operating expenses, specifically in marketing, staffing, and product costs for the future. So we're in a position to adjust our cost structure as needed for the future. Fourth, We believe we have amongst the fastest inventory turns in the industry. Fifth, we have a capital light model with some months approaching negative working capital, which enables us to generate strong free cash flow. Finally, we have a solid balance sheet as a result of our debt reduction, and we believe we are well positioned to fund continued growth and navigate through evolving business conditions. we are reiterating our updated guidance that was issued on July 28th. Please note, contained within this guidance range are investments necessary to focus on our larger mission of future brand and company growth at LVLU. And 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