Lulu's Fashion Lounge Holdings, Inc.

Good afternoon, and welcome to Lulu's third 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 third 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 leadership transition, management expectations, plans, strategies, goals and objectives, and their implementation, our future expectations regarding financial results, references and outlook for the fourth 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. 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.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 our call today are our CEO, David McCrae, 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 joined today by my partners and co-presidents, Mark and Crystal. Before I speak about the quarter, I wanted to thank the Lu Crew who continue to do a tremendous job executing on our strategy and delighting our millions of brand fans. First, I want to spend a few minutes discussing the leadership transition announcement we made this afternoon. As announced, effective March 6, 2023, I'll be transitioning from CEO to Executive Chairman of the Board. Crystal Lanzum, our current CFO and co-president, will transition to the CEO role. We plan to announce Crystal's successor as CFO in early 2023. Mark Voss, who is currently co-president and CIO, will become the president and CIO. This transition is the result of extensive internal discussions, evaluation, and planning to ensure a successful handoff to the next generation of leadership. Several years ago, I came out of retirement after a long and fulfilling career in the apparel and home industry to help lead Lulu's through their transition to the public market. What drew me to Lulu's was the potent combination of an emerging and profitable business model, early stage growth potential, as well as a talented leadership team with Crystal and Mark being key components. Since then, together, we've worked closely to position the company for success. I am proud of what we've accomplished over the past two years and have conviction the future is bright under the new leadership structure. With a talented leadership team and long-term vision in place, as well as a strong balance sheet, I feel now is the appropriate time for me to transition into the role of executive chairman. In this role, I'll be tasked with the duties of board chair, providing guidance to the CEO and board during the transition, participating investor relations, and advancing our ESG roadmap. I could not be more excited to see Crystal assume the role of CEO. Crystal has been a wonderful partner who has consistently demonstrated that she can successfully lead Lulu's as we continue to scale and develop the company. Since Crystal joined Lulu's seven years ago, she has made many noteworthy contributions that have helped advance the company from a strategic, operational, and financial perspective. Crystal has been instrumental in the development of our unique merchandising model, implementing our long-term growth strategy, and managing numerous operating teams. Her deep understanding of the company, the Lulu's brand, and connectivity with the Lu crew makes her uniquely qualified to take on this role. Not only is she a proven executive, who's helped shape our business model, delivering profitable results through economic cycles. Crystal is a leader who embodies the Lulu's core values of all voices, all in, always evolving, and has the respect of key internal and external stakeholders. Moving on to the quarter. Despite this challenging macroeconomic period, we continue to deliver profitable financial results and records in key customer metrics, both of which are a testament to our brand and reinforce confidence in our long-term brand trajectory and opportunities. We generated revenues of $105 million and produced adjusted EBITDA of $5.4 million. Our LTM active customer count continues to grow as this number increased 29% from last year to $3.2 million. Average order value increased 6% on a 12-month basis, with 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 over the past year. Our fresh fashion assortment is clearly resonating with our millennial and Gen Z brand fans, and we're continuing to acquire new ones. That being said, like others in the industry, we witnessed inconsistent consumer behavior during the quarter, characterized by volatile traffic trends and conversions, which are most likely due to macro pressures that are negatively impacting her desired spend. Similarly, we responded by increasing promotional activity. Like others in the industry, return levels remained elevated during the quarter, which also hurt our top line and had a disproportionately negative impact on adjusted EBITDA. We continue to actively manage our inventory and discretionary expenses with a more cautious outlook because of this macroeconomic environment. We view these challenges as part of a temporary economic cycle and have conviction in our long-term opportunity for continued profitable growth. As I've highlighted in the past, Our business model and brand are resilient and adaptable because they're supported by our affordable luxury brand promise, a focus on fresh, not fast fashion, the use of data to guide key decisions, a capital light model, and a solid balance sheet. Given the macroeconomic uncertainties, we believe it is prudent to reduce our revenue and adjusted EBITDA guidance range. We now expect revenues of $425 to $440 million versus our prior forecast of $440 to $480 million. Our new adjusted EBITDA forecast is in the range of $25 to $31 million compared to our prior guidance of $35 to $45 million. Captured in our guidance range are investments necessary to focus on our larger mission of future brand and company growth at LVLUF. And now, I'd like to turn the call over to Mark Voss, our Co-President and Chief Information Officer. Mark has been an important member of the leadership team, and like Crystal, has been a major contributor to building the business we have today. He will provide an update on key operational and marketing efforts to further support our continued growth. I'll let Mark discuss some of these key initiatives in greater detail.