This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk08: We observed positive signals five weeks into Q2 with sequentially improving year-over-year gross revenue comparisons. Note that April 2022's year-over-year net revenue was up 43%, which was a high mark in Q2 22, so comparisons should improve. We are further encouraged that demand has improved in the first five weeks of the quarter without the assistance of significant promotions or discounting, yielding higher merchandise margins. While we remain confident in our net revenue guidance range for the year, our full year net revenue is pacing to the lower end of the guidance range given the softness observed in Q1 sales and a slower start to our peak spring selling season. As you think about modeling revenue for our business, in a normalized year, our net revenue is typically highest in our second and third fiscal quarters due to demand seasonality for event dressing. Q4 typically represents our lowest net revenue and profit quarter of the fiscal year as we are not a gifting destination and typically do not participate proportionately in holiday peak season sales volume like other retailers in our space. This year we expect Q4 net revenue to be moderately higher than Q1. As it relates to 2023 first half comparisons, please keep in mind that Q1 and Q2 last year reflected 62% and 27% year-over-year net revenue growth, respectively, as those quarters benefited from pent-up demand as our customer refreshed her wardrobe and returned to her social calendar. Our guidance contemplates that we expect the second quarter to continue with negative net revenue comps, moving into flat to positive comps in the second half of 2023. In addition to easing comparisons, our confidence in our guidance is supported by the strong performance of new products that have tested well in recent months. As a reminder, our data-driven buying model means that roughly 70% of our buys are proven sellers. We continue to forecast full-year adjusted EBITDA between $23.1 million and $25.6 million. This equates to an adjusted EBITDA margin of between 5.6% and 6%. Our adjusted EBITDA guidance captures incremental investments in support of longer-term initiatives including broadening distribution and expanding in-person activations. Offsetting these investments are expectations of moderating transportation-related costs as a result of easier fuel surcharge comparisons in the latter part of the year, coupled with our proactive carrier diversification actions. To set expectations for modeling purposes, our quarterly adjusted EBITDA margin rates have similar seasonality fluctuations as our net revenues, and will likely fluctuate above or below our full-year guidance rate, depending on the quarter. As a result of paying down our long-term debt following the IPO, we continue to expect modest levels of interest for 2023 at approximately $1.1 million in line with 2022, driven by a lower outstanding balance on our revolving line of credit, partially offset by higher interest rates. As of today, we have $15 million drawn on our $50 million revolver. We plan to pay off our revolver by the end of 2023. Stock-based compensation expense for the quarter was down $1 million from Q1 of 2022. We continue to forecast stock-based compensation expense of approximately $16 to $19 million in 2023. For 2023, we expect a weighted average fully diluted share count of approximately 40 million shares. Moving on to capital expenditures, our plan remains investing between $5 million and $6 million for the year. We're focused on setting the stage for future growth opportunities, enhancing the customer experience, and driving further operating efficiencies. For 2023, we will continue to invest in distribution center automation and robotics capabilities, which are expected to drive further labor efficiencies. And with that, I'll pass it back to Crystal for closing remarks.
spk09: Thank you, Tiffany. We'd like to take a moment to thank each of you, the Lou Crew, our brand fans, shareholders, and our board for their continued support as we continue to work towards executing our long-term strategy and delighting our customers. With that, I'll turn it over to questions now.
spk14: Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. We ask that you please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. And the first question will be from Ed Urumah from Piper Sandler. Please go ahead.
spk11: Hey, guys. Thanks very much for taking my questions. I guess first on the improvement in the trend quarter to date, you know, it seems like a fairly sharp V. I'm trying to understand, you know, as you look at obviously the macro pressures were all documented in March, but kind of what's maybe changed? Have you seen a difference in kind of what the consumer is buying? And then I guess as you kind of think about the back half of the year, do you assume when you talked about kind of some of the comp trends you're expecting, do you assume that macro improves from here or kind of what assumptions are embedded in that guide? Thank you.
spk08: Hi, Ed. This is Tiffany. I'll take your question. So I would just maybe caveat that what we've seen so far trend-wise in Q2 is not necessarily a sharp V improvement, more of a soft upward turn of the curve, I would say, but it has been noticeable week over week improvements in demand. And, you know, I think we've chopped up some of the things that we saw in Q1 to a slower turn on of our spring and summer merchandise sales and really a longer, more pronounced selling period for our fall-winter products. And so, you know, we're not meteorologists or anything of that nature. So not pointing the finger at weather, but just it was a more pronounced fall winter selling season that went longer through Q1 than what we've ever seen. And so that definitely picked up as we moved into the second quarter. So that's been an encouraging sign that we've seen continue to improve. Our normal peak season, as you know, is this time of year. And so we're sort of riding this wave here through the second quarter. We have not seen worsening trends. In fact, they're improving week over week. The other part of that that I'll say, aside from demand, we've actually seen we were able to scale back the level of promotions in the second quarter compared to where we were pacing towards A lot of Q1 and in much of March, we were highly promotional. So we pulled back and that hasn't had a negative detriment on demand. And in fact, it's had a positive outcome on margins. So far, we're pleased with what we've seen, but it's not, maybe not a dramatic upturn, but it's certainly noticeable for us. And then I think, was there one more question there? Oh, yeah. So back at- Yeah, in terms of guidance, we still view this as a very choppy macroeconomic environment. Our guidance contemplates that. We don't view what we're going through right now in terms of some improvement in trend as necessarily the macro effect is done and not affecting us for the rest of the year. We're expecting, you know, there could still be ups and downs throughout the year. Our guidance contemplates that for the full year. And that's, you know, we're still very much viewing it as a choppy environment. Yes, and then the comps also. Just one more point, as we've talked about before, the comps do ease up for us as we move through the back half of May and towards the end of Q2 and into the rest of the year.
spk10: Got it. Thank you. Yes.
spk14: And the next question will be from Brooke Roach from Goldman Sachs. Please go ahead.
spk07: Hi, good afternoon. Thank you for taking our question. I was wondering if you could provide some additional context on the quantification of the increase in customer acquisition costs that you saw in the quarter and your outlook for that for the rest of the year. And then perhaps secondly, Can you help us understand the confidence and conviction you have in the sequential margin improvement that's embedded in the full-year outlook? And help us understand what's getting better, what's getting worse, and how does this look relative to last quarter when you spoke to us last? Thank you.
spk12: Hi, Brooke. This is Mark. I'll talk about the customer acquisition cost. We have not given specific numbers recently, but I have always spoken about how are these costs trending. And basically in Q1 of this year, because we were essentially focusing more on that and had the ability as well to invest more on the brand awareness side, top of the funnel marketing, then of course, by nature of that type of investment, the cost of customer acquisition will also go up. But at the same time, because what we've seen in the market in general and how things are trending and how Lulus is positioned there, specifically from a share of voice and how we see our engagement metrics as well, that gives us also the belief that the path that we are on is solid and that we are continuing to That shift, that's what I've spoken about in the past, right? That we want to move more dollars from the performance marketing spent into that brand awareness for the longer term play, the longer term increase of the Louis brand awareness and growing the amount of costs that the Louis products are present in. And so from that perspective, we are happy, but I did want to call out that cost obviously went up in comparison to last Q1 2022.
spk08: And, Brooke, I'll cover the margin question for you. We do have some confidence in the margin improvement through the rest of the year. Really, three main factors there. One is, as we've already seen heading into Q2, we've seen our customer be responsive to full price and being less promotional in general. So we're, you know, should that trend continue, that's going to certainly be a positive margin factor for it. There's also areas where we expect to proactively improve margin components. Product costing is one that we've talked about on prior calls. We started to make investments there in terms of staffing a team towards the end of Q1 and into Q2. to really support us there with taking sharper pencils to our product costing and working closely with our vendors to develop that. Now, that's something that will likely not pan out until probably later in the year, so I wouldn't necessarily anticipate that to have immediate impact, but that's an area where we're investing, and it's a big focus for us. And then lastly, we do include shipping. costs in our gross margin. So shipping costs is one where there'll be a little bit of moderating year-over-year impact as we start to comp the escalated fuel surcharges that were implemented last year. You know, kind of following the Ukraine war and everything, the surcharges bumped up. So we'll start to comp the surcharges at the higher rate here, you know, pretty much in Q2. And then we're also taking proactive measures ourselves around carrier diversification. We spoke to that, that we started to move forward on some of that during the first quarter. We've already seen some benefits there. Additional actions there will continue to benefit our margin throughout the year.
spk03: Thank you. I'll pass it on.
spk14: And the next question is from Jonah Kim from TD Cowan. Please go ahead.
spk06: Thank you for taking my question. I'm just curious on the customer behavior across different income brackets. Are you seeing any more pullback or softness during the quarter from certain income group than others? And if you can give any color on the new customers acquired during the quarter, was it more through promotions or full price? And sort of how do you plan to retain those customers? Thank you very much.
spk12: Hi, Jonah. Thank you for your questions. So as it relates to from an income bracket perspective, our affordable luxury positioning offers and serves essentially a very broad group of income brackets. And from what we've seen in the first quarter was similar to last quarter, the Q4 of 2022, is where we were actually very delighted to see that the, let's say, the middle to lower income brackets were, from a new customer acquisition perspective, doing, comparatively speaking, to their quarter year over year. And so that really speaks for us as it relates to our affordable luxury concept and how that is resonating. And then as it relates to the new customers, we offered a variety of promotions in Q1. I would not want to characterize that it was purely the promotions that were driving new customer acquisition. That is always a mix, so to say. So there's certainly those that were intrigued by Lulus or tried us out for the first time as a result of a promotion. But I would also say that in general, our collective brand marketing and also our performance marketing are driving that customer acquisition. And don't forget that word of mouth is one of the strongest advertisers for Lulus. The family and friends is a critical component in that as well. And what we do, what we see over, you know, and that hasn't changed is that oftentimes new customers join the Lulu's family with, you know, whether for event wear or dresses. And from there on, we build out. that relationship with our customers, not just through our loyalty program, but also just by exposing and introducing the other categories that we offer. And from that perspective, you know, grow broader into her closet and also give her more opportunities and more opportunities to buy Google's products.
spk01: Got it. Thank you so much.
spk13: Again, if you have a question, please press star, then one.
spk14: The next question is from Alice Xiao from Bank of America. Please go ahead.
spk05: Hi. Thanks for taking my question. Following up on the gross margin details, can you give more quantifications of what you expect for each component just as we go through the year, whether it's markdown levels, lapping of higher freight surcharges and higher return rates, you know, offset by the carrier diversification efforts? you know, what could be a tailwind? What might still be an incremental headwind? You know, how big can each piece be? And any other components I may have missed. Thank you. Sure. Hi, Alice.
spk08: So I would say the The shipping-related items, the fuel surcharges should start to ease up here soon. In the second quarter, we should start to at least lap what we saw last year increase-wise. I do think during my prepared remarks, I did comment on the carrier diversification action. as being in the seven-figure ballpark on an annualized basis. We did implement, I would say, a good portion of those towards the end of mid to late Q1. So we didn't get a full benefit of that during the first quarter. And so that will be in place for the rest of the year. We also have some other diversification actions underway in the second quarter. So those are going to kind of stack and I think increase throughout the year as we go, but with most of the implementation done in the first half of the year benefiting us for the full second half. In terms of markdown rates and considering how that impacts margin, Generally speaking, I would say normally for us, second, third quarter being our kind of peak season, we're typically leaning less heavily into discounting during that period. So I would expect those two, Q2, Q3, to be lighter in terms of discounts in general. And then we pick it back up generally in Q4 just because marketing. tends to be very, performance marketing areas tend to be more expensive at the end of the year. So that's just sort of a little bit of how the markdown discounts will lay out. In terms of return rates, those are, again, somewhat follow a seasonal flow for us. And we've modeled those out fairly consistent with how they were in 2022. As we've talked about before, we had all-time low return rates during 2020 and 21. They ratcheted up during 22, and we're modeling them pretty consistent with 22. And those will also follow along with our level of promotional discounts, because typically the more price-sensitive people are, if they're paying full price, their tendency is to return. generally expect to have higher return rates in our Q2, Q3 periods, and then lower return rates during the quarters one and quarter four, where we're being more promotional and there's a higher mix of final sale. So hopefully that gives you some sense on timing.
spk05: That's super helpful. Thank you. Thank you.
spk14: And again, if you would like to ask a question, please press star, then what? Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Crystal Lansom for any closing remarks.
spk09: Just wanted to thank everyone for your time today and your continued support, and we're looking forward to updating you on all of our progress on our next call. Have a great evening.
spk14: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. you Thank you. Thank you. Thank you. Good afternoon, and welcome to Lulu's first quarter 2023 earnings conference call. Today's call is being recorded, and we have allocated one hour for the prepared remarks and Q&A. At this time, I'd like to turn the conference over to Naomi Beckman-Strauss, General Counsel and Corporate Secretary at Lulu's. Thank you. You may begin.
spk17: Good afternoon, everyone, and thank you for joining us to discuss Lulu's first quarter 2023 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 expectations around the continued impact of the macroeconomic environment on our business, our future expectations regarding financial results, references to the year ending December 31, 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 1, 2023, filed with the SEC on March 14, 2023, all of which can be found on our website at investors.loses.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, net debt, and free cash flow. 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. Reconciliation of gap to non-gap 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 are our CEO, Crystal Lanson, our CFO, Tiffany Smith, our President and CIO, Mark Voss, and David McCreight, our Executive Chairman. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn the call over to Crystal.
spk09: Thank you, Naomi, and good afternoon, everyone. Thank you for joining us today. Before I discuss the quarter, I'd like to express my gratitude to our team and their relentless dedication to building our brand and continuing to create value for our brand fans and our stakeholders. We continue to make great progress on several key initiatives that we believe will benefit our brand long term. And despite the current macro challenges, we are able to do so given our healthy balance sheet and capital efficient, cash flow positive business model. Like many companies, we are managing a diverse range of challenges from external factors. However, we view these challenges as temporary and continue to be laser-focused on our long-term growth initiatives while managing expenses judiciously. Jumping into the highlights from Q1, revenues amounted to $91 million, representing a 19% decline compared to Q1 2022 and a 32% increase compared to Q1 2021. and in line with our expectations heading into the quarter. Recall, we faced tough revenue comparisons as we were up against the 62% gain in Q1 last year due to pent-up demand as our customer refreshed her wardrobe and returned to her social calendar as COVID-related restrictions eased, including an anomalous spike in weddings and wedding-related events. Our adjusted EBITDA was a break-even versus $9.9 million last year. Like others, we were impacted by the continuation of a challenging macro environment, which required us to be more promotional year over year. But I would highlight that promotions were down sequentially. Similar to prior quarters, we chose to reallocate marketing spend into promotions as this was a more efficient use of capital. For historical comparisons, markdowns and discounts represented 13.4% of sales compared to Q1 2019 at 15.6% of sales. This underscores the value of our fresh fashion assortment and our data-driven buying model and our ability to navigate a challenging and highly promotional macro environment. Our balance sheet remains strong without any term loan debt, and we believe that, along with our Capital Light operating model, positions us well to continue investing in long-term growth opportunities and navigate continued macro uncertainty. Our active customer count increased year-over-year to 3.2 million, up 6% from Q1 last year, demonstrating our customers' brand loyalty even during a challenging macro environment. We began building out our product costing teams during the quarter to better leverage our buying scale, with a few key hires starting over the last few months, which should result in substantial product margin benefits over the long term. We also completed phase one of our international replatforming initiatives during the quarter, laying the groundwork for future investments in international growth. Our consumer insights indicate increasing international interest in the Lulu's brand, and we believe that setting the foundation for international growth now will allow us to continue to benefit from and to build on already strong demand signals. We continue to realize the benefits of the recent move of our creative studio, a location adjacent to our Southern California buying office. As a result of this stronger collaboration, we've seen strong new product conversion that gives us confidence in our future reorder product pipelines. We were particularly pleased with the gains we experienced in some of our non-occasion categories. These gains reinforce our conviction in the potential to occupy more space in our closet beyond the core occasion wear categories. Denim, sweaters, outerwear, and wear to work were especially strong during the quarter. Performance in our dress category was consistent with expectations, and we saw particular strength in our non-wedding related special occasion categories. Our wedding-related events product classes performed as expected, with results in line with our projections that reflected tough comparisons with last year's exceptionally strong and extended wedding season. For historical comparisons, bridal, bridesmaids, day events, and special occasion dresses net sales in Q1 2023 were up roughly 80% to Q1 of 2021 and up 29% compared to Q1 of 2019. an indication to us that we are gaining share in these categories and that Lulu's remains a destination for our customers when shopping for these events. As we look ahead to the rest of the year, we continue to explore new opportunities for growth to meet our customer where and how she shops, focusing on strategies that strengthen our digital channel as a key driver of our future success. We remain committed to providing our customers with new ways to engage with our brand, and our customer insights have shown that they are seeking out additional channels to connect with us. We are confident that they will help us enhance our brand's reputation, delight our customers, and further support our digital platform. Now that the first phase of our international re-platforming is complete, we are going to continue to optimize the customer experience to further close the gap on the international website experience for customers with the goal to be more aligned with our domestic customers' experience. We believe this is a critical step towards expanding our global customer base and establishing ourselves as a trusted brand in the international market. After taking a break from in-person activations post-COVID, we are taking a fresh new look at how to meet our customer where she is, exploring additional channels to connect with her in real life through pop-ups and other product-led in-person experiences. We will continue to be opportunistic with wholesale partnerships that will fuel brand awareness in a profitable way and allow our customers to experience the quality and feel of our products while leveraging existing infrastructure to expand reach in a capital-efficient way and build synergy between digital and physical channels. Consistent with everything we do at Lulu's, we will follow a data-driven, test-and-learn, capital-light model when pursuing growth strategies, which is further supported by our strong balance sheet. We look forward to updating you on our progress over the next several quarters as it relates to our growth initiatives. We continue to move ahead with key infrastructure improvements as we position ourselves for future growth strategies. We implemented further automation in our East Coast distribution center and are launching robotics in one of our West Coast distribution centers this week, driving further operational efficiencies, cost savings, and increasing employee morale. We are reiterating our guidance for revenues of $410 million to $430 million for the year. As articulated previously, our guidance reflects the need to maintain flexibility in product pricing to meet customer demand in the near term, as well as maintaining investments in order to catalyze future growth and expansion of our brand across both digital and physical distribution channels. We are also reiterating our guidance for our full year adjusted EBITDA, which we expect will be between $23.1 million and $25.6 million. Due to quarters to date, we have seen sequential improvement in business for both revenue and margin trends and expect to see these trends continue to improve throughout the quarter and the balance of the year. So now I'd like to turn the call over to Mark Voss, our 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. Mark?
spk12: Thank you, Crystal. Our customers in Q1 2023 showed similar patterns to Q4 2022 as it relates to year-over-year new customer acquisition being strongest in the lower household income brackets. a broad customer segment where Lulu's affordable luxury positioning resonates well with her particularly. Order frequencies trended as expected quarter over quarter, and our repeat customers marginally increased units per transactions compared to Q1 2022. At the end of Q1 2023, we had 3.2 million active customers, compared to 3.0 million active customers at the end of Q1 2022, a 6% increase year over year. We are encouraged by our ability to retain customers in a more difficult macroeconomic environment, which confirms the strength of the Lulu's brand, the affordable quality of our products, and the effectiveness of the Lulu's brand hub. From a marketing perspective, we continue towards our strategy to shift more of our marketing spend from direct response performance marketing to brand awareness marketing, while keeping overall marketing efficacy and spend as a percent of revenue within our targeted ranges to remain first order contribution margin profitable. This strategy leads to higher aided and unaided brand awareness, resulting in improved ability to introduce Lulus to more consumers and to improve the efficiency of our marketing investments overall. We have continued to expand investments and improve efficiency of our influencer and ambassador-generated brand reach, impressions, and earned media value to support Lulus' word-of-mouth marketing. Based on our social media data, we have seen meaningful gains in the Lulus share of voice which provide us with the confidence that we are on the right growth path, which should benefit Lulus in the future. Kudos to our creative, content, brand, and marketing teams for delivering in Unison this forward brand momentum. We see much growth potential ahead of us and will continue to build out these programs, consistent with the test and learn data-driven approach used for everything we do at Lulus. With our ability to increase investments in top of the funnel and brand awareness marketing, we have seen an increase in our Q1 2023 cost of new customer acquisition and believe that these investments, by their non-direct response nature, will pay off over the next several quarters. Through our brand tracking tools, we see confirmation of increases in Lulu's brand familiarity and brand equity. We are looking forward to continue investing in Lulu's brand awareness and to stimulate valuable word of mouth marketing, to improve our overall marketing efficiency further, and to broaden the number of closets with Lulu's products. Mid-February, we went live with a technology partner who vastly improved the shopping experience for our international customers. Our international customers can now shop in their local currency with, in many cases, import duties, tariffs, and taxes included in the product pricing or otherwise clearly communicated in their cart and checkout process. Shoppers can pay with their local preferred payment method and are supported in their checkout process in over 30 languages. Early data indicates that removing friction for our international customers has the potential to meaningfully improve conversion rates and the overall international opportunity. Bringing that experience more in line with our domestic Lulu shopping experience is the first step to capitalize on the encouraging demand signals we see from abroad. We will continue to test and iterate on improving the international shopping experience to expose the Lulu's brand hug abroad, to improve search rankings, and to prudently test into influencer and other paid activations in select regions. Mid-March, we rolled out an update to our returns policy, which was aimed at countering excessive and abusive return behavior, while continuing to support our free returns within a 10-day window for non-abusive customers. We launched the update policy in late Q1, and thus far, we have not seen a negative impact from the returns policy change. From an operational perspective, we have continued our drive to improve our operational efficiency and performance. In our Eastern Pennsylvania distribution center, we successfully introduced and launched outbound shipment packaging automation. this packaging automation not only increased efficiency and higher unit throughput, but also reduced packaging material usage, which is beneficial for both waste reduction as well as cost reduction. We will add and expand packaging automation within our other facilities. This week, we also went live with robotics in our Northern California distribution center. As I mentioned on the previous call, We have seen variable fulfillment labor productivity gains of over 20% in our eastern Pennsylvania facility, and we aim to accomplish similar results in our northern California distribution center. In Q1, we have also further diversified our outbound shipping carrier network, which allowed us to immediately offset some of the increases in outbound shipping costs by other carriers. We believe this carrier diversification will also put us in a better position to mitigate the delivery reliability issues in the carrier networks, as well as strengthen our position. I would like to express my gratitude and compliments to our operations, data, and engineering teams who in Q1 2023, as compared to Q1 2022, meaningfully reduced our cost per inbound and outbound unit. through continuous improvement processes, better predictive modeling, reduced cycle times, and successful automation implementations. Well done. And now, I'll hand it over to Tiffany Smith, BlueLuz's Chief Financial Officer, to deep dive into our financials.
spk08: Thanks, Mark, and good afternoon, everyone. As we've previously shared, we face difficult comparisons to last year, where net revenue in Q1-22 increased 62% as our customer refreshed her wardrobe and fully returned to her social calendar. In addition to the tough comps, Q123 softened further in mid to late March, which we attribute to macroeconomic pressures. Five weeks into Q223, we've observed improving demand trends with sequentially improving weekly year-over-year gross revenue comparisons. During Q123, we noted a better than normal selling season for fall and winter related products well through March, coupled with a slower than normal start to our spring and summer related product sales that typically begin to build during Q1. As a result of these factors, we decided to shift spending into promotions and discounts from marketing during Q1. The combination of these factors impacted both our top line and margin results for Q1. Yet the strength of our cash flow generative business enabled us to continue paying down our revolver and generate net cash provided by operating activities of $3.7 million and free cash flow of $2.6 million for the quarter. With respect to the first quarter results, our net revenue of $91 million was down 19% year over year, in line with our expectations of year over year comparisons in the negative mid to high teens. Compared to the first quarter of 2021, net revenue grew by approximately 32%. Compared to the prior year period, total orders decreased by 14% and average order value decreased 3% to $129. Growth margin for the first quarter declined by about 560 basis points from Q1-22 to 41.7%, but improved sequentially by 440 basis points. Compared to Q1-22, gross margin declined primarily as a result of several factors, higher markdowns and discounts, product costs, as well as continued higher shipping costs. The impact of higher markdowns and discounts to gross merchandise margin compared to last year was roughly 310 basis points. The impact of higher shipping costs compared to last year was roughly 190 basis points, which included the impact of fuel surcharges that were less elevated in Q1 of 2022. And finally, 60 basis points of depreciation and cost allocations related to our distribution centers. On a positive note, we have already seen a sequential improvement as a result of our carrier diversification actions implemented mid-quarter, which we expect to drive meaningful seven-figure savings and is contemplated in our guidance for the year. Moving down the P&L to give some insights into expense line items. Given that Q122 was a remarkable quarter with unusually high pent-up demand related to weddings and wedding-related events, the following comparisons will include some expense ratio comparisons against Q121 as a more normalized period. Q123 selling and marketing expenses were $19.5 million, down about $2.4 million from Q122. This was partially due to shifting some performance marketing spend into discounts, a component of net revenue, as we have done in the past. The net impact of our discounts and selling and marketing expenses in combination as a percentage of net revenue was approximately 120 basis points above the Q1-21 level, which we believe is reasonable given the current macroeconomic pressures in Q1-23. General administrative expenses fell by about $3.5 million to $24.3 million relative to Q1-22, driven by lower variable labor costs and lower stock-based compensation expenses. We are pleased with the resilience that our highly variable cost structure offers us. Our general administrative expenses for the quarter adjusted for stock-based compensation and public company costs as a percentage of net revenue were approximately 100 basis points above Q1-21 levels. driven primarily by parts of our cost structure that are characterized by higher fixed headcount and payroll costs that do not decline commensurately with declines in net revenue. Interest expense for the quarter amounted to $500,000 versus $208,000 in Q1 of 22. For the quarter, we reported a loss per share of 14 cents, which is a decrease of 19 cents compared to earnings per share of 5 cents in the first quarter of 2022. And finally, adjusted EBITDA for the first quarter was breakeven compared to positive adjusted EBITDA of $9.9 million in the same period in 2022. Our Q1 adjusted EBITDA margin was 0% compared to a positive 8.9% in the same period of 2022. Our ability to generate $3.7 million in cash from operations and $2.6 million in free cash flow is indicative of the cash flow generation opportunities inherent in our business model. We believe our balance sheet remains strong and positions us well to execute our long-term growth plans and manage through near-term macro uncertainty. We ended the quarter with cash of about $8 million and a balance of $20 million drawn on our revolver, resulting in net debt of roughly $12 million. We repaid $5 million of the revolver during the first quarter, and our plan remains to pay the remaining outstanding balance on our revolver by year end. In light of recent disruptions in the banking industry, we wanted to again highlight that we maintain our corporate banking relationship with Bank of America. Our inventory balance at quarter end was $52 million, up about $10 million from the same period last year and up $9 million on a sequential basis. Much of this growth was planned and intentional to better support our fast-turning model. Also, our inventory balances are typically at their highest levels in Q1 in preparation for our peak spring and summer selling season. With respect to the year-over-year growth in inventory, we had previously indicated that Q1-22 inventory was turning over eight times on an LTM basis and that we needed to chase more inventory, better serve our customers, and to help insulate us from supply chain risks specifically from China. During the first quarter, we saw our sales growth to inventory growth spread improve by approximately 60 basis points from Q4-22, indicating that our inventories are becoming better aligned with our sales. We expect Q1 to be the last quarter with both positive inventory growth and negative sales comparisons. With the improved sales trends observed in the first five weeks of Q2, we have already seen a $2 million decline in inventory levels since the end of Q1, which gives us confidence that we'll be able to align our inventories in a productive, brand-appropriate, and margin-accretive manner. We expect our inventory levels to decline sequentially as well as year-over-year by the end of Q2, with further normalization of sales and inventory trends extending into the back half of the year. On an annual basis, we feel a target year-end inventory balance in the mid $30 million range is reasonable and achievable dependent on our continued sales trajectory. As we've highlighted before, we are a quick inventory turning brand with what we believe are industry leading turns. While that remains true, we do anticipate our LTM inventory turns this year to be slower than our ideal range of six to seven turns per year. as sales and inventory trends continue to normalize while still prioritizing improving margin results. We are not a fast fashion company, but instead a fresh fashion concept. Approximately half of our inventory assortment is seasonless and can carry from one season to next and be sold year-round, and the remainder is multi-season, which can be brought back year after year. This gives us confidence in our ability to move through current inventory levels in a way that minimizes markdowns, further grows margin risk, and ultimately preserves brand integrity. As always, we aim to be disciplined in our inventory management approach and will continue to relentlessly pursue further optimization of inventory levels that balances the customer experience and minimizes markdown risk. The final point about inventory is that our data-driven buying model results in roughly 70% of our buys being proven sellers with lower markdown risk. We were encouraged to see our new styles during the quarter resonate particularly well, which fuels and strengthens our future reorder pipeline. Moving on to guidance, we continue to expect 2023 full-year net revenues between $410 million and $430 million. We observed positive signals five weeks into Q2 with sequentially improving year-over-year gross revenue comparisons. Note that April 2022's year-over-year net revenue was up 43%, which was a high mark in Q2 2022, so comparisons should improve. We are further encouraged that demand has improved in the first five weeks of the quarter without the assistance of significant promotions or discounting, yielding higher merchandise margins. While we remain confident in our net revenue guidance range for the year, our full-year net revenue is pacing to the lower end of the guidance range given the softness observed in Q1 sales and a slower start to our peak spring selling season. As you think about modeling revenue for our business, in a normalized year, our net revenue is typically highest in our second and third fiscal quarters due to demand seasonality for event dressing. Q4 typically represents our lowest net revenue and profit quarter of the fiscal year, as we are not a gifting destination and typically do not participate proportionately in holiday peak season sales volume, like other retailers in our space. This year, we expect Q4 net revenue to be moderately higher than Q1. As it relates to 2023 first half comparisons, please keep in mind that Q1 and Q2 last year reflected 62% and 27% year-over-year net revenue growth, respectively, as those quarters benefited from pent-up demand as our customer refreshed her wardrobe and return to her social calendar. Our guidance contemplates that we expect the second quarter to continue with negative net revenue comps moving into flat to positive comps in the second half of 2023. In addition to easing comparisons, our confidence in our guidance is supported by the strong performance of new products that have tested well in recent months. As a reminder, our data-driven buying model means that roughly 70% of our buys are proven sellers. We continue to forecast full-year adjusted EBITDA between $23.1 million and $25.6 million. This equates to an adjusted EBITDA margin of between 5.6% and 6%. Our adjusted EBITDA guidance captures incremental investments in support of longer-term initiatives, including broadening distribution and expanding in-person activations. Offsetting these investments are expectations of moderating, transportation-related costs as a result of easier fuel surcharge comparisons in the latter part of the year, coupled with our proactive carrier diversification actions. To set expectations for modeling purposes, our quarterly adjusted EBITDA margin rates have similar seasonality fluctuations as our net revenues, and will likely fluctuate above or below our full-year guidance rate depending on the quarter. As a result of paying down our long-term debt following the IPO, we continue to expect modest levels of interest for 2023 at approximately $1.1 million in line with 2022, driven by a lower outstanding balance on our revolving line of credit, partially offset by higher interest rates. As of today, we have $15 million drawn on our $50 million revolver. We plan to pay off our revolver by the end of 2023. Stock-based compensation expense for the quarter was down $1 million from Q1 of 2022. We continue to forecast stock-based compensation expense of approximately $16 to $19 million in 2023. For 2023, we expect a weighted average fully diluted share count of approximately 40 million shares. Moving on to capital expenditures, our plan remains investing between $5 million and $6 million for the year. We're focused on setting the stage for future growth opportunities, enhancing the customer experience, and driving further operating efficiencies. For 2023, we will continue to invest in distribution center automation and robotics capabilities, which are expected to drive further labor efficiencies. And with that, I'll pass it back to Crystal for closing remarks.
spk09: Thank you, Tiffany. We'd like to take a moment to thank each of you, the Lou Crew, our brand fans, shareholders, and our board for their continued support as we continue to work towards executing our long-term strategy and delighting our customers. With that, I'll turn it over to questions now.
spk14: Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. We ask that you please limit yourself to one question and one follow-up. At this time, we will pause momentarily to assemble our roster. And the first question will be from Ed Yeruma from Piper Sandler. Please go ahead.
spk11: Hey, guys. Thanks very much for taking my questions. I guess first on the improvement in the trend quarter to date, you know, it seems like a fairly sharp V. I'm trying to understand, you know, as you look at obviously the macro pressures were all documented in March, but kind of what's maybe changed? Have you seen a difference in kind of what the consumer is buying? And then I guess as you kind of think about the back half of the year, do you assume when you talked about kind of some of the comp trends you're expecting, do you assume that macro improves from here or kind of what assumptions are embedded in that guide? Thank you.
spk08: Hi, Ed. This is Tiffany. I'll take your question. So I would just maybe caveat that what we've seen so far trend-wise in Q2 is not necessarily a sharp V improvement, more of a soft upward turn of the curve, I would say, but it has been noticeable week over week improvements in demand. And, you know, I think we've chopped up some of the things that we saw in Q1 to a slower turn on of our spring and summer merchandise sales and really a longer, more pronounced selling period for our fall-winter product. And so, you know, we're not meteorologists or anything of that nature. So not pointing the finger at weather, but just it was a more pronounced fall winter selling season that went longer through Q1 than what we've ever seen. And so that definitely picked up as we moved into the second quarter. So that's been an encouraging sign that we've seen continue to improve. Our normal peak season, as you know, is this time of year. And so we're sort of riding this wave here through the second quarter. We have not seen worsening trends. In fact, they're improving week over week. The other part of that that I'll say, aside from demand, we've actually seen we were able to scale back the level of promotions in the second quarter compared to where we were pacing towards A lot of Q1 and in much of March, we were highly promotional. So we pulled back and that hasn't had a negative detriment on demand. And in fact, it's had a positive outcome on margins. So far, we're pleased with what we've seen, but it's not, maybe not a dramatic upturn, but it's certainly noticeable for us. And then I think, was there one more question there? Oh, yeah. So back at- Yeah, in terms of guidance, we still view this as a very choppy macroeconomic environment. Our guidance contemplates that. We don't view what we're going through right now in terms of some improvement in trend as necessarily the macro effect is done and not affecting us for the rest of the year. We're expecting, you know, there could still be ups and downs throughout the year. Our guidance contemplates that for the full year. And that's, you know, we're still very much viewing it as a choppy environment. Yes, and then the comps also. Just one more point, as we've talked about before, the comps do ease up for us as we move through the back half of May and towards the end of Q2 and into the rest of the year.
spk10: Got it. Thank you. Yes.
spk14: And the next question will be from Brooke Roach from Goldman Sachs. Please go ahead.
spk07: Hi, good afternoon. Thank you for taking our question. I was wondering if you could provide some additional context on the quantification of the increase in customer acquisition costs that you saw in the quarter and your outlook for that for the rest of the year. And then perhaps secondly, Can you help us understand the confidence and conviction you have in the sequential margin improvement that's embedded in the full-year outlook? And help us understand what's getting better, what's getting worse, and how does this look relative to last quarter when you spoke to us last? Thank you.
spk12: Hi, Brooke. This is Mark. I'll talk about the customer acquisition cost. We have not given specific numbers recently, but I have always spoken about how are these costs trending. And basically in Q1 of this year, because we were essentially focusing more on that and had the ability as well to invest more on the brand awareness side, top of the funnel marketing, then of course by nature of that type of investment, the cost of customer acquisition will also go up. But at the same time, because what we've seen in the market in general and how things are trending and how Lulus is positioned there, specifically from a share of voice and how we see our engagement metrics as well, that gives us also the belief that the path that we are on is solid and that we are continuing to That shift, that's what I've spoken about in the past, right, that we want to move more dollars from the performance marketing spent into that brand awareness for the longer term play, the longer term increase of the Louis brand awareness and growing the amount of costs that the Louis products are present in. And so from that perspective, We are happy, but I did want to call out that, you know, that cost obviously went up in comparison to last Q1 2022.
spk08: And, Brooke, I'll cover the margin question for you. We do have some confidence in the margin improvement through the rest of the year. Really, three main factors there. One is, as we've already seen heading into Q2, we've seen our customer be responsive to full price and being less promotional in general. So we're, you know, should that trend continue, that's going to certainly be a positive margin factor for it. There's also areas where we expect to proactively improve margin components. Product costing is one that we've talked about on prior calls. We started to make investments there in terms of staffing a team towards the end of Q1 and into Q2. to really support us there with taking sharper pencils to our product costing and working closely with our vendors to develop that. Now, that's something that will likely not pan out until probably later in the year, so I wouldn't necessarily anticipate that to have immediate impacts, but that's an area where we're investing, and it's a big focus for us. And then lastly, we do include shipping. costs in our gross margin. So shipping costs is one where there'll be a little bit of moderating year-over-year impact as we start to comp the escalated fuel surcharges that were implemented last year. You know, kind of following the Ukraine war and everything, the surcharges bumped up. So we'll start to comp the surcharges at the higher rate here, you know, pretty much in Q2. And then we're also taking proactive measures ourselves around carrier diversification. We spoke to that, that we started to move forward on some of that during the first quarter. We've already seen some benefits there. Additional actions there will continue to benefit our margin throughout the year.
spk03: Thank you. I'll pass it on.
spk14: And the next question is from Jonah Kim from TD Cowan. Please go ahead.
spk06: Thank you for taking my question. I'm just curious on the customer behavior across different income brackets. Are you seeing any more pullback or softness during the quarter from certain income group than others? And if you can give any color on the new customers acquired during the quarter, was it more through promotions or full price? And how do you plan to retain those customers? Thank you very much.
spk12: Hi, Jonah. Thank you for your questions. So as it relates to from an income bracket perspective, our affordable luxury positioning offers and serves essentially a very broad group of income brackets. And from what we've seen in the first quarter was similar to last quarter, the Q4 of 2022, is where we were actually very delighted to see that the, let's say, the middle to lower income brackets were, from a new customer acquisition perspective, doing, comparatively speaking, to their quarter year over year. well, and so that really speaks for us as it relates to our affordable luxury concept and how that is resonating. And then as it relates to the new customers, we offered a variety of promotions in Q1. I would not want to characterize that it was purely the promotions that were driving new customer acquisition. That is always a mix, so to say. So there's certainly those that were intrigued by Lulus or tried us out for the first time as a result of a promotion. But I would also say that in general, our collective brand marketing and also our performance marketing are driving that customer acquisition. And don't forget that word of mouth is one of the strongest advertisers for Lulus. The family and friends is a critical component in that as well. And what we do, what we see over, you know, and that hasn't changed is that oftentimes new customers join the Lulu's family with, you know, whether for event wear or dresses. And from there on, we build out. that relationship with our customers, not just through our loyalty program, but also just by exposing and introducing the other categories that we offer. And from that perspective, you know, grow broader into her closet and also give her more opportunities and more opportunities to buy Google's products.
spk01: Got it. Thank you so much.
spk13: Again, if you have a question, please press star, then one.
spk14: The next question is from Alice Xiao from Bank of America. Please go ahead.
spk05: Hi. Thanks for taking my question. Following up on the gross margin details, can you give more quantifications of what you expect for each component just as we go through the year, whether it's markdown levels, lapping of higher freight surcharges and higher return rates, you know, offset by the carrier diversification efforts? you know, what could be a tailwind? What might still be an incremental headwind? You know, how big can each piece be? And any other components I may have missed. Thank you.
spk08: Sure. Hi, Alice. So I would say the The shipping-related items, the fuel surcharges should start to ease up here soon. In the second quarter, we should start to at least lap what we saw last year increase-wise. I do think during my prepared remarks, I did comment on the carrier diversification action. as being in the seven-figure ballpark on an annualized basis. We did implement, I would say, a good portion of those towards the end of mid to late Q1. So we didn't get a full benefit of that during the first quarter. And so that will be in place for the rest of the year. We also have some other diversification actions underway in the second quarter. So those are going to kind of stack and I think increase throughout the year as we go, but with most of the implementation done in the first half of the year benefiting us for the full second half. In terms of markdown rates and considering how that impacts margin, Generally speaking, I would say normally for us, second, third quarter being our kind of peak season, we're typically leaning less heavily into discounting during that period. So I would expect those two, Q2, Q3, to be lighter in terms of discounts in general. And then we pick it back up generally in Q4 just because marketing performance marketing areas tend to be more expensive at the end of the year. So that's just sort of a little bit of how the markdown discounts will lay out. In terms of return rates, those are, again, somewhat follow a seasonal flow for us. And we've modeled those out fairly consistent with how they were in 2022. As we've talked about before, we had all-time low return rates during 2020 and 21. They ratcheted up during 22, and we're modeling them pretty consistent with 22. And those will also follow along with our level of promotional discounts because typically the more price-sensitive people are, if they're paying full price, their tendency is to return. generally expect to have higher return rates in our Q2, Q3 periods, and then lower return rates during the quarters one and quarter four, where we're being more promotional and there's a higher mix of final sale. So hopefully that gives you some sense on timing.
spk05: That's super helpful. Thank you. Thank you.
spk14: And again, if you would like to ask a question, please press star, then what? Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to Crystal Lansom for any closing remarks.
spk09: Just wanted to thank everyone for your time today and your continued support, and we're looking forward to updating you on all of our progress on our next call. Have a great evening.
spk14: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
Disclaimer