Lulu's Fashion Lounge Holdings, Inc.

Good afternoon, and welcome to Lulu's second 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 Lulu's general counsel and corporate secretary, Naomi Beckman-Strauss. Thank you. You may begin.

Good afternoon, everyone, and thank you for joining us to discuss Lulu's second 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, consumer demand, and return rates on our business, our future expectations regarding financial results, references to the year ending December 31, 2023, including our financial outlook for full year 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, performances, 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.lindsay.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 GAAP to non-GAAP measures, as well as the description, limitations, and rationale for 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 Lansom, our CFO, Tiffany Smith, our President and CIO, Mark Voss, and our Executive Chairman, David McCrae. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn the call over to Crystal.

Thank you, Naomi, and good afternoon, everyone. Thank you for joining us today. Before I jump into our results, I'd like to thank our team for their tireless efforts and dedication to building our brand and delivering the best experience to our brand fans. During the second quarter, like many others, we experienced continued choppiness and consumer demand a shift from the early signs of stabilization we observed at the beginning of the second quarter. Topline demand fell short of our expectations and return rates worsened compared to our forecast, leading to the disappointing Q2 results. More specifically, revenue was $106 million, representing a 19% decline compared to Q2 2022. Similar to the first quarter of 2023, the continuation of a challenging macro environment led to softer consumer demand. We also faced tough comparisons in the first half of 2Q following last year's benefit from the return to events, where we saw a 27% year-over-year net revenue growth in 2Q 2022. Our adjusted EBITDA for Q2 2023 was $4.2 million compared to $15 million in Q2 2022, primarily due to lower top line demand and higher returns. We continue to be surgical with promotions and markdowns and are focused on optimizing full price sales in spite of the highly promotional environment around us. We believe a more normalized and balanced approach to promotions is best for the longer-term health of the brand, and it reinforces our attainable pricing for high-quality products. Despite the shortfall in the quarter, our balance sheet remains strong, and aside from our revolver, includes no long-term debt. We believe that, along with our Capital Light operating model, positions us well to continue investing in long-term growth opportunities and weather continued macro uncertainty. Net cash provided by operating activities was $4.6 million in the second quarter of 2023 compared to $9.7 million of net cash used by operating activities in the second quarter of 2022, a roughly $14 million improvement year-over-year, showcasing the flexibility of our business model. Our active customer count was 3.1 million at the end of Q2 2023, down 3% from Q1 2023, and down 5% from Q2 last year. While the current macroeconomic conditions present near-term challenges, we are confident in our belief that our strong foundation and strategic vision will enable us to weather the storm and ultimately resume our goal of double-digit growth and best-in-class profitability over the long term. Given the health of our balance sheet, we view this environment as an opportunity to lean in by investing in our brand where others are pulling back, which allows us to further reinforce Lulu's as an attainable luxury lifestyle brand. Despite the near-term volatility, we continue to remain focused on closely managing costs and driving efficiencies across our operations. We are making great progress on several key optimization initiatives that we believe will benefit our brand long-term. Last quarter, we highlighted that we were starting to build out our product costing teams to better leverage our buying scale. We are pleased with our progress towards building out our team and continue to add capabilities to further evaluate and prioritize margin expansion through product cost reduction initiatives, which we believe will result in substantial product margin benefits over the long term. Next, we continue to realize the benefits of the recent moves of our creative studio to a location adjacent to our Southern California buying office. As a result of the stronger collaboration, we've seen new product conversion that gives us confidence in our future reorder product pipeline. We are encouraged by the new styles that are performing well, where we can build a reorder funnel to further improve on product adoption rates. In particular, during Q2, we saw strength in new special occasion, new bridesmaids, and new separates. During the quarter, we also made technology investments and added functionality and data insights around product returns. As we are seeing across many D2C retailers, we've also been impacted by increasing product returns and will continue to invest in ways to mitigate return costs while preserving customer satisfaction and loyalty. Third, one of the key initiatives we've undertaken over the last several quarters is continued diversification of our global carrier networks. By partnering with multiple carriers, we've been able to leverage a broader range of shipping options, rates, and delivery times, further optimizing our costs, and continuously seeking ways to improve the customer experience. This approach not only reduces our dependencies on a single carrier, but also enhances our ability to adapt to swiftly changing market dynamics and enables us to better navigate disruptions that may arise from external factors. In addition to our optimization initiatives, we are driving forward new customer engagement strategies. In the second quarter, we accelerated efforts to adapt to changing consumer behaviors and meet our customer where and how she shops. Looking towards the second half of the year, we continue to explore new opportunities for visibility and growth, 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 they are seeking additional channels to connect with us. After taking a break from in-person activations post-COVID, we are so very excited to announce that in July, as part of our strategy to explore new brand visibility and growth opportunities, we signed a short-term lease for a retail location on Melrose Avenue in Los Angeles to create a space to engage with our customers in person. We are thrilled with the location, which sees good foot traffic and puts us in proximity to other aspirational brands that helps to reinforce our attainable luxury positioning. Like everything else we do, we are taking a test, learn, and react approach to physical retail, and the store will not only allow us to showcase our brand, product quality, and fantastic customer service in a more connected and elevated way, but also to test and learn how we can apply our fast-turning buying model to a brick-and-mortar experience. We expect our doors to open in a few months, and we look forward to updating you on our progress on our next earnings call. On the wholesale partnership front, We recently implemented and launched a partnership with an online wholesale B2B platform, which allows us to share a range of products that potential partners can order from us in an effort to expand our presence and reach in brick and mortar and attract new customers through an omnichannel approach. While only launched weeks ago and still small in volume, we are very encouraged by the feedback we've received and the enthusiastic interest in carrying our products. While we've not included any P&L impact for incremental wholesale sales in our forecast, We are encouraged by the opportunity this channel will provide next year and onward as an additional channel for our customers to interact with our product in person. We will continue to be opportunistic around wholesale partnerships that will fuel brand awareness in a profitable and brand-accretive way and allow our customers to experience the quality and feel of our products in person while leveraging existing infrastructure to expand reach in a capital-efficient way and build synergy between digital and physical channels. We will continue to update you on our progress over the next several quarters as it relates to all our growth initiatives. In the near term, as a result of our expectation of continued choppiness and consumer demand related to ongoing macro pressures like inflation, interest rates, and student loans, as well as elevated return rates, we are reducing our full year 2023 guidance in anticipation of ongoing volatility. While we are disappointed with our Q2 results and lowered outlook, we remain focused on adapting to changing customer behaviors, closely managing inventory, discretionary expenses, and continuing to drive brand awareness. As sales volumes recover, we expect to see a stabilization of trends and a corresponding improvement in profit margins as our fixed costs begin to leverage. Now, I'd like to turn the call over to Mark Voss, our President and Chief Information Officer, He will share an update on key operational, technological, and analytical efforts throughout the last quarter and currently underway. Mark?