Lulu's Fashion Lounge Holdings, Inc.

Good afternoon and welcome to Lulu's third 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 third 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 in 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 31st, 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, 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 in 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.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, net cash, 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 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, Crystal Lanson, our CFO, Tiffany Smith, and our President and CIO, Mark Foss. 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. We appreciate you joining us today. Before we delve into our results, I'd like to thank our team for their steadfast commitment in nurturing our brand and delivering an exceptional experience to Lulu's fans. I'll begin with a recap of our third quarter results, followed by highlights of important growth and efficiency initiatives that we believe will strengthen the company's long-term financial success and brand expansion. Setting macro headwinds aside for a moment as we reflect on our performance in the third quarter, there are things we did well and things we needed to adjust to position us for sustained long-term success. Let's jump into the things that we did well in the quarter. Our new product introductions continue to resonate with our customer during the quarter. With single to double-digit positive net revenue comps across many product classes, including wedding-related apparel, most dress classes, as well as a few other smaller but growing product classes, resulting in our total new product net revenue for the quarter comping up high single digits compared to Q3 last year, giving us further confidence in our future reorder funnel. Of the previously mentioned growth product classes, we're most proud of reaccelerating growth metrics across wedding, special occasion, and event apparel, with new product net revenue growth up high double digits over Q3 last year. New technologies and investments in site experience across the website, mobile app, and mobile web resulted in increased engagement metrics across all device platforms. We successfully reduced our revolving line of credit by $4 million, as intended, and decreased our net debt by approximately $10.9 million, ending the quarter in a net cash positive position. Our business continued to generate liquidity, and our balance sheet remained strong. enabling us to maintain our investments in strategic initiatives and sustainable long-term growth. Free cash flow for the quarter was $11.6 million compared to prior year Q3 at $4.6 million. Year-to-date free cash flow is $18.2 million compared to year-to-date 2022 $12.6 million, reinforcing the agility of our business model. Inventory balances continue to decline with a balance at quarter end of $41.5 million. down about 7.9 million or 16% from the same period last year, and down 4.7 million or 10% on a quarterly sequential basis due to efficient inventory management. Transitioning to challenges we saw during the quarter where there were key learnings from the team. First, as our customers looked more towards newness and novelty, consistent with broader retail trends, We did not capture demand fully in the third quarter due to our conservative initial test order quantities being too small compared to the demand for many of the products we introduced during the quarter. Given the consumer health and macroeconomic headwinds facing many retailers, we have been more conservative in our initial product buys than warranted, resulting in less than optimal use of our highly effective buying model and leaving potential revenue opportunities untapped in the quarter. Second, In response to shifting consumer behavior during the quarter, we reallocated resources from planned performance marketing investments towards markdowns and promotional pricing in order to compete for some of this demand. We attribute pressure for more promotional pricing to the general elevated promotional retail environment and intensified price competition from aggressive fast fashion retailers seeking to expand their presence in the U.S. Third, We're experiencing a shift back to pre-pandemic levels in the lifespan of our reorder products. Over the last few years, catalyzed by the pandemic, we have benefited from extended lifespans of our reorder products with many products maintaining high productivity for two to three years longer than normal. More recently, we've realized we need to return to the multi-year reorder buying strategy that was successful pre-pandemic. This reversion was most apparent in the third quarter where we saw softening demand in some of our legacy high volume reorder products. While still productive and selling at healthy volumes, demand for these products are tapering sooner than expected. Our business model is built around testing and prioritizing timeless quality versus being excessively trend driven, which sets us up to effectively capitalize on the middle of a fashion cycle. Consequently, it can take a few quarters to test and optimize for shifting consumer preferences for more enduring and lasting trends, leaving us more exposed at the beginning and the end of a fashion cycle shift. With reorder product life cycles returning to averages more consistent with longer-term historical levels we've seen, we're confident about our ability to deliver a recalibrated reorder strategy going forward. Fourth, we saw a delay in the demand for fall products similar to trends we experienced in the spring. Demand for fall products only recently started to gain momentum, leaving our separates and shoes business, which typically drive a larger impact in third and fourth quarter revenue, falling short of our original expectations. While we did not effectively anticipate the seasonal weather shift, we have reinforced our internal planning and operating procedures to better address these shifts going forward. Lastly, we believe shoppers are currently craving more out of home, in-person experiences than has been the case for the last few years, causing what we believe to be temporary headwinds for us as a primarily D2C retailer. While this may be temporarily limiting the extent of our customer engagement and acquisition opportunities, we remain confident in our D2C positioning and approach while remaining opportunistic with our test, learn, and reorder approach to other physical retail channels. The end result was our financial results deviated from our initial projections. Net revenue was $83.1 million for the third quarter of 2023, representing a 21% decline compared to Q3 2022. Our adjusted EBITDA was $1 million for the third quarter of 2023, compared to $5.4 million in Q3 2022. Our active customer count was $3 million at the end of Q3 2023, down 4% sequentially from Q2 2023, and down 8% from Q3 last year. We are actively pursuing strategic initiatives and optimization efforts to drive efficiencies in the near term, while also laying the groundwork and making key investments so that we are well positioned to drive growth for the long term. These are a few of the actions we are taking in response to our Q3 insights. We will be re-implementing a tier-based approach to our initial order quantity purchasing strategy for a subset of our new product tests, where data supports higher confidence and larger initial order quantity. While the increases will remain conservative and consistent with our test and learn approach, we expect to reduce the occurrence of stock outs, capture demand from initial test orders, and increase customer satisfaction. We believe a subset of our customers across all income levels have shifted spend to low priced, aggressive fast fashion retailers who have recently been gaining traction with U.S. consumers. We will be increasingly focusing our assortment and marketing efforts around an offering that is further differentiated from these fast fashion retailers. Additionally, in anticipation of retiring aging reorder products sooner, we will be increasing our newness and novelty penetration back to pre-pandemic levels where we have already seen encouraging performance from our test and learn orders. Finally, we will be making measured investments in our merchandising leadership, expanding expertise specifically in separates and non-event apparel, shoes, and accessories, as well as elevating experience and merchandising strategy across multiple customer interaction points. Alongside our optimization initiatives, our focus extends to new customer acquisition and engagement strategies that unlock fresh opportunities for visibility and growth and further support our core D2C business. As we approach 2024, we remain committed to offering innovative means for customers to interact with our brand which is driven by customer insights indicating their desire for additional channels to connect with us. To that end, we are excited to welcome customers to our new retail location on Melrose Avenue in Los Angeles this December, where they will be greeted with an immersive brand experience that we believe showcases Lulu's exceptional product quality and unparalleled customer service. Brand opening is scheduled for December 1st, with brand activations planned in the week leading up to the opening. The launch timing positions as well for holiday events with particular emphasis on dress and special occasion products for holiday and New Year's parties. Consistent with all our endeavors, we believe the test, learn, and reorder approach also applies to physical retail as this store will allow us to experiment with various brand engagement strategies in 2024 while we evaluate how to apply our fast-turning buying model to a brick-and-mortar experience. On the wholesale partnership front, As highlighted on our Q2 call, our partnership with an online wholesale B2B platform broadened our product offerings for potential partners, deepening our reach into brick-and-mortar retail and attracting new customers through a multi-channel strategy. We're confident in our ability to facilitate wholesale growth with select retailers following our nearly seven years of wholesale partnerships with retailers such as Nordstrom and Stitch Fix. We believe wholesale relationships will provide a brand and customer halo effect that will deepen our relationships with our existing customers and introduce our brand to new customers, which will ultimately be accretive to our online presence. We will continue to be optimistic about brand enhancing wholesale partnership to profitably boost awareness and in-person product experiences while leveraging existing infrastructure to maximize cost efficiency and build synergies between digital and physical channels. We will continue to update you on our progress over the next several quarters as it relates to our growth initiatives. In response to the temporary macro headwinds impacting our business and our softer year-to-date performance, we are adjusting our full year 2023 guidance to be more in line with our latest expectations. We are laser focused on adapting to the dynamic market changes, building the Lulu's brand, optimizing inventory turnover, and driving cost efficiencies to meet our near-term targets for a return to positive growth trends and creating shareholder value. As noted last quarter, as we see our sales volumes recover, we expect to see reciprocal improvement in profit margins as our fixed costs begin to leverage. We are confident that the investments and actions we have taken and are taking now will position us well to emerge on a strong path to our goal of double-digit growth and profitability over the long term. We believe we are well equipped to reinforce our business with a healthy balance sheet strong foundation and strategic vision for our future. We remain optimistic about our calculated growth levers and believe our long-term investment thesis is still intact. We believe that increasing brand awareness and attracting new customers, retaining and enhancing existing customer relationships, continuing category expansion and expanding into new and existing channels to engage with our customer where she is will return us to a path of double-digit revenue growth and EBITDA margins. 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?